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 Mark Holifield - Executive VP-Supply Chain & Product Development.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker) Michael Louis Lasser - UBS Investment Bank Katharine McShane - Citigroup Global Markets, Inc. (Broker) Chris J. Bottiglieri - Wolfe Research LLC Christopher Michael Horvers - JPMorgan Securities LLC Brian W. Nagel - Oppenheimer & Co., Inc. (Broker) Seth M. Basham - Wedbush Securities, Inc.

Matthew Jeremy Fassler - Goldman Sachs & Co. Jessica Schoen Mace - Nomura Securities International, Inc. Scot Ciccarelli - RBC Capital Markets LLC Keith Hughes - SunTrust Robinson Humphrey, Inc. Simeon A. Gutman - Morgan Stanley & Co. LLC Dolph B. Warburton - Jefferies LLC David A. Schick - Stifel, Nicolaus & Co., Inc..

Good day and welcome to The Home Depot second quarter 2015 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Diane Dayhoff, Vice President of Investor Relations. Please go ahead, ma'am..

Thank you, Derek, 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, the factors identified in the release and in our filings with the Securities and Exchange Commission.

Today's presentations may also include certain non-GAAP measurements. Reconciliation of these measurements is provided on our website. Now, let me turn the call over to Craig..

Thank you, Diane, and good morning, everyone. Sales for the second quarter were $24.8 billion, up 4.3% from last year. Comp sales were up 4.2% from last year. Diluted earnings per share were $1.73 in the second quarter, and our U.S. stores had a positive comp of 5.7%.

For the first half, sales grew over $2.2 billion, or 5.1%, exceeding our plan even in the face of a stronger U.S. dollar. We are pleased with this quarter's performance. All three of our U.S. divisions exceeded their sales plan with mid to high-single digit comps and all of our 19 regions and top 40 markets also posted positive comps in the quarter.

We had a record number of transactions this quarter and our highest quarterly average ticket going back to 2006. As Ted will detail, the core of the store continues to perform well. Our objective is to create balance in our business.

During the quarter, we continued to see growth in DIY and heavy pro categories as well as our Installation Services business. During the quarter, we announced recent actions taken to further invest in growing our pro business. We remain focused on addressing the needs of the pro customer through helping them build a better business.

This includes providing solutions to the pro in our stores and also at the job site. During the quarter, we reached an agreement to acquire Interline Brands, a leading national distributor of maintenance, repair, and operations, or MRO, products.

Interline's expertise in hospitality, multifamily, and institutional MRO, brings strong fulfillment and sales capability to The Home Depot and the residential MRO product market. We believe that we can leverage their capabilities to expand our share of wallet with our current customers as well as gain new customers currently served by Interline.

We also named Bill Lennie, a 20-plus year Home Depot veteran, to lead our newly formed Outside Sales & Service team. Through aligning our pro, MRO and Installation Services functions, we believe we can better serve our pro and consumers through a more streamlined and focused approach.

I'd like to congratulate Bill on his promotion and also look forward to welcoming the Interline team into The Home Depot family as we plan to complete the acquisition in the third quarter. Internationally, our Mexican business had another quarter of solid performance with positive comps in local currency for the 47th consecutive quarter.

And our Canadian business also posted positive comps in local currency, making it 15 consecutive quarters of positive comps. We remain on a journey to build out interconnected capabilities to meet the customers' changing needs.

We had another quarter of strong growth in our digital assets with dotcom sales growing approximately 25%, led by online orders picked up in the store through Buy Online, Pick Up In Store, BOPUS; and Buy Online, Ship to Store, BOSS. At the same time, our operations team remains focused on improving the interconnected customer experience in the store.

And as a result, we saw another quarter of year-over-year improvement in customer satisfaction scores for our BOPUS and BOSS offerings in the second quarter. Our dotcom team continues to expand our capabilities to solve our customers' needs through our online properties.

During the quarter, we improved our mobile experience, invested in content and made site improvements to take friction out for our customers. Our online channel represented 5% of sales in the second quarter. We're investing in our supply chain as well to support our online growth.

Mark Holifield and our supply chain team completed the build-out of and have begun to receive product in our third direct fulfillment center, or DFC, located in Troy Township, Ohio. We will begin shipping product to customers out of this facility in the third quarter.

This facility, along with our two other DFC's in California and Georgia, will give us the capability to reach 90% of our U.S. customers with two-day or less parcel shipping. We're pleased with the performance in the first half of the year, and while 2015 consensus U.S.

GDP growth projections are moderate, housing data remains supportive of the continued growth in home improvement industry.

As Carol will detail, we are increasing our sales and earnings per share guidance for the year to reflect the outperformance of the quarter and the expected benefit from the anticipated completion of the Interline acquisition in the third quarter.

Let me close by thanking our associates for their hard work, dedication, and commitment to our customers. Based on this quarter's results, over 99% of our stores qualified for our first half 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 second quarter as we saw continued strength across the store. The departments that outperformed the company's average comps were appliances, tools, plumbing, décor, lighting, kitchen and bath, hardware and flooring.

Millwork, building materials, indoor garden, electrical, lumber and paint were positive but below the company average. Outdoor garden was slightly negative. Pro heavy categories continue to show great strength and we saw double digit comps in water heaters, power tools, commercial lighting, flooring tools and materials and power tool accessories.

In addition, siding, builders' hardware, compressors, boards, gypsum, fasteners, concrete and insulation had comps above the company average. The core of the store continued to perform as well as we saw strength in maintenance and repair categories. Air circulation and hand tools had double digit comps.

While cleaning, wiring devices, circuit protectors, plumbing repair parts, pipe and fittings and light bulbs all had comps above the company average. In décor categories, tile, in-stock kitchens, recessed lighting, bath fixtures, vanities, ceiling fans, faucets, interior lighting and bath accessories also had comps above the company average.

Once again, our events delivered strong sales with the Memorial Day and Fourth of July events leading the way. Our customers responded to great values which drove double-digit comps in appliances led by cooking, dishwashers and refrigeration.

Outdoor project categories like soils and mulch, live goods and fertilizers were pressured during the quarter specifically from weather that impacted certain areas of the country like the drought in California and record rainfall in parts of Texas and the Midwest.

Total comp transactions grew by 2.5% for the quarter while comp average ticket increased 1.7%. On top of the impact with a stronger U.S. dollar, our average ticket increase was negatively impacted by commodity price deflation, mainly from lumber, copper and building materials.

The total impact to ticket growth from commodity price deflation was approximately negative 19 basis points. Transactions for tickets under $50, representing approximately 20% of our U.S. sales, were slightly positive in the second quarter and reflect the negative weather impact to outdoor project categories like live goods.

Transactions for tickets over $900, also representing approximately 20% of our U.S. sales, were up 6.3% in the second quarter. The drivers behind the increase in big ticket purchases were appliances, water heaters, windows and riding mowers. Our journey in merchandising transformation continues.

Utilizing our regional merchandising managers and our planning and assortment tools, we've recently refined our assortment in cleaning. Based on customer demand and analytical data, we expanded our offering in the category.

In addition to refreshes in subcategories like sponges, gloves, and brooms, we expanded our air care and laundry offering and are very pleased with the results. Now let me turn our attention to the third quarter. We have an exciting lineup of exclusive new products for our pro customers, led by the 20-volt MAX sliding miter saw from DEWALT.

This innovative miter saw features the integrated XPS crosscut system that allows for enhanced precision in a variety of cutting jobs. It is compact and lightweight, allowing for easy transport and storage, which will save our pros time and money on the job site. New from Commercial Electric is the LED Smart Downlight.

This easy to install recessed light system is wink-enabled, and the color temperature of the lights can be wirelessly controlled through a mobile device. This is the first color tuning smart LED downlight of its kind, and it is exclusive to The Home Depot.

For our DIY customer, we are pleased to introduce an exclusive carpet assortment called LifeProof, featuring texture, twist, loop, and patterned styles. This innovative carpet has lifetime stain protection and can withstand common household spills, including ketchup, red wine, and even soy sauce.

It offers superior softness, exceptional durability, and is perfect for families with children and pets. In addition to all the great new products, we're excited about our upcoming events.

The fall season and cooler temperatures are just around the corner, and we have an incredible lineup of great values and special buys for our customers during our Labor Day, Fall Cleanup, and Halloween Harvest events. With that, I'd like to turn the call over to Carol..

Thank you, Ted, and hello, everyone. In the second quarter, sales were $24.8 million, a 4.3% increase from last year. Versus last year, a stronger U.S. dollar negatively impacted total sales growth by approximately $365 million or 1.5%.

Our total company comps or same-store sales were positive 4.2% for the quarter, with positive comps of 2.6% in May, 3.6% in June, and 6.1% in July. Comps for U.S. stores were positive 5.7% for the quarter, with positive comps of 3.5% in May, 5.1% in June, and 8.2% in July.

Our total company gross margin was 33.7% for the quarter, an increase of six basis points from last year. The change to gross margin was driven by multiple factors. First, we had 27 basis points of gross margin expansion in our supply chain, due primarily to increased productivity in our distribution network and lower fuel costs.

Second, we had six basis points of gross margin expansion from lower shrink due to operational enhancements. And finally, we had 27 basis points of gross margin contraction, due primarily to a change in the mix of products sold and some commodity price deflation.

For fiscal 2015, we continue to expect our gross margin rate to be about the same as what we reported in fiscal 2014. In the second quarter, operating expense as a percent of sales decreased by 15 basis points to 19%.

Our second quarter expenses include $153 million of gross expenses incurred as part of our data breach, the majority of which were for an accrual for estimated probable losses that we expect to incur in connection with claims made by the payment card networks. Our net breach-related expenses after insurance were $92 million.

Excluding the net breach-related expenses, our expenses grew at 35%, the rate of sales growth, better than our plan, reflecting solid expense control and sales leverage.

One more comment on our breach-related expenses, beginning in the third quarter of last year and through the second quarter of this year, our gross breach-related expenses totaled $232 million, and our net breach-related expenses after claiming reimbursement from our $100 million insurance policy were $132 million.

Looking ahead, we expect to have some ongoing expenses related to the breach. Our operating margin for the quarter was 14.7% and for the first six months of fiscal 2015 was 13.7%. Interest and other expense for the second quarter was $84 million, down $107 million from last year. The year-over-year change reflects two items.

First, interest and investment income increased by $132 million, due primarily to a pre-tax gain of $144 million on the sale of HD Supply common stock, as during the quarter we liquidated our remaining position in HD Supply. Second, interest expense increased by $25 million from last year, due primarily to higher long-term debt balances.

At the end of May, we raised $2.5 billion of new senior notes. In the second quarter, our effective tax rate was 37.3%, and we expect our income tax rate to be approximately 36.5% for the year. Our diluted earnings per share for the second quarter were $1.73, an increase of 13.8% from last year.

Our diluted earnings per share for the second quarter included a $0.07 benefit related to the gain on sale of HD Supply common stock as well as a $0.05 detriment related to the net expenses incurred as part of the data breach. Total sales per square foot for the second quarter were $420, up 4.1% from last year.

And at the end of the quarter, inventory was $11.9 billion, up slightly from 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 $435 million. Inventory turns were 5.1 times compared to 4.9 times last year.

Payables were up $330 million from last year, but our payables were also distorted by the impact of a stronger U.S. dollar. On a currency neutral basis, payables were up $459 million from the prior year. In the second quarter, we repurchased $2 billion or approximately 16.1 million shares of outstanding stock.

This included 4.1 million shares repurchased in the open market and 12 million shares repurchased through an accelerated share repurchase, or ASR, program. For the shares repurchased under the second quarter ASR program, this is an initial calculation.

The final number of shares repurchased will be determined upon the completion of the ASR in the third quarter. Now, you may recall we planned to repurchase $4.5 billion of our outstanding shares in fiscal 2015 using excess cash.

In the second quarter, we raised $2.5 billion of incremental long-term debt and we will use the proceeds from that debt offering to increase our share repurchases to $7 billion for the year, of which $3.9 billion will occur in the back half of the year.

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%, 300 basis points higher than the second quarter of fiscal 2014. One more comment on capital allocation.

As you know, we signed an agreement to purchase Interline and expect the closing to occur in the third quarter. We expect to fund the acquisition immediately with cash on hand but do plan to tap the long-term debt markets in the fall and raise incremental indebtedness in support of this acquisition.

As a result, and after giving consideration to the long-term debt we raised in the second quarter, our adjusted debt to EBITDA ratio will be slightly over two times. Now, moving to our guidance, we continue to see positive signs in the housing market.

Home prices continue to appreciate and housing turnover and household formation are now slightly ahead of the assumptions we use to build our plan. While strength in the U.S. dollar continues to be a headwind, our reported sales in the second quarter were better than our sales plan.

Our earnings per share were also stronger than our plan for the second quarter. Further, the acquisition of Interline will add sales and earnings that were not included in our previous guidance. As a result, we are raising our sales and earnings per share growth guidance.

We now expect our fiscal 2015 sales to grow by approximately 6% with comps of approximately 4.9%. If the U.S. dollar remains at current foreign exchange rates, we would expect our fiscal 2015 sales growth rate to be 5.2% and comps to be approximately 4.1%.

Based on our year-to-date performance which includes breach-related costs that have been incurred this year and including the impact of the Interline acquisition, we now expect our fiscal 2015 expenses to grow approximately 48% of our sales growth rate.

Excluding breach-related costs, we expect our fiscal 2015 expenses to grow at approximately 39% of our sales growth rate. For earnings per share, remember that we guide off of GAAP. We now expect fiscal 2015 diluted earnings per share to grow by approximately 13.8% to $5.36.

But if exchange rates remain where they are today, our projected fiscal 2015 diluted earnings per share would be approximately $5.31. Our updated earnings per share guidance include our outperformance for the second quarter and about $0.01 of earnings per share attributable to the Interline acquisition.

Our earnings per share guidance also include the impact of the new capital allocation items I previously mentioned. So, we thank you for your participation in today's call. And, Derek, we are now ready for questions..

We'll take our first question from Seth Sigman with Credit Suisse..

Great, thanks very much. Congrats, guys, on a great quarter..

Thank you..

I was wondering if you could elaborate on how Interline addresses the needs of the pro as you alluded to in your commentary.

And I guess, in general, how will that tie in and support the existing pro initiatives that you have in place such as delivery and credit extension? And then I realize it's early and the deal hasn't closed yet, but if you could maybe just walk through the integration plans and where you see some of the opportunities?.

So from a strategic standpoint, we think about Interline and the capability to really take an end-to-end approach with our customers. In today's environment, we have the ability in many of these faces to handle the remodel portion of the business. But don't do as well on the maintenance and repair portion.

If you think about Interline, they actually do that side and don't have the capability to do the remodel. So we can take an end-to-end look at how we service the customers and grow our share of wallet with them overall.

So, we're excited about the opportunity that we have to not only grow with our current customers by giving them this new capability but also with the customers – the new customers that Interline brings to the business..

Okay. And I guess from a financial perspective, embedded in the guidance is some small accretion from the deal.

But how should we be thinking about some of the financial parameters around the opportunity here related to this over the next year or so?.

Yes. Perhaps I can give you a little bit more color about the guidance that we've prepared.

Included in our growth guidance for the year is about $750 million of sales related to Interline in the back half of the year and about a $0.01 of EPS accretion, but that $0.01 is after the financing costs because we are going to tap the long-term debt markets and raise financing in support of the deal.

So the operating profit for the back half of the year is around $50 million and when you add the interest expense and after tax, it's about a $0.01. Looking ahead, we would expect synergies coming off of this deal in a couple of different fashions. First, as Craig mentioned, is the ability to get more sales.

We are both selling the customer and we are not satisfying that customer's needs completely. So with an end-to-end process, we believe we will get more sales. That's the first synergy. The second synergy is on the cost of sales. We have 42% overlap with our supplier base. We think there is margin accretion just by leveraging a common supplier base.

And then clearly there is SG&A opportunities as well. So, we didn't buy the deal just for – or not buying the deal just for the synergies, however. It's really about the opportunity to serve our customer that we're currently serving today but not serving completely..

Okay, great. Thanks very much..

We'll take our next question from Michael Lasser with UBS..

Good morning. Thanks a lot for taking my question. A couple of different things. First, the industry growth was quite a bit slower in the second quarter than where it had been trending.

Can you give some perspective on what do you think the flavor of that growth was? Was it just due to some of the weather that impacted maybe the nurseries in certain parts of the country and what precipitated the share gain for Home Depot during the time?.

In the industry, again I think depending on if you're looking at census data or some of the callouts from folks that have reported, I think there were certainly some impacts in certain categories from what happened with weather as it relates – as Ted called out, the drought in California certainly hurt categories like live goods and mulch and then heavy rains clearly in parts of the country as well.

In large part, we obviously were able to offset that and that came through strength across the store and continued strength and balance in our business with our DIY as well as our pro customers as well our services business.

And share gains are something that we've been focused on for a number of years now and it's all about staying focused on the value proposition that we give to our customers and understanding their needs. So I think we were able to take share across many categories in the store..

And, Craig, on the flow throughout the quarter, do you see some of the sales that were lost early in the period fall into the later period given the monthly breakdown? Or was it different categories that contributed later in the period such as air conditioning given the heat?.

So, we did – so air conditioning is a great point. We did see a more normal summer from an air standpoint in comparison to a year ago. If you look at outdoor garden for us, which was negative in this quarter on the half we had a positive comp. So it's the bathtub effect that usually happens with spring.

You never know when it's going to break and what parts of the country. But pleased with the half performance on that overall..

And then let me just add one last question on the acquisition activity during the period.

Do you look at this as kind of a one-time deal or do you look at it as a platform to build those capabilities even further into the maintenance and repair market and perhaps even other areas of the industrial supply sector given some of the history that the company has with that sector?.

No, we don't have any intent at this point to continue to acquire more capability. We believe with the acquisition that we've made that we've actually acquired the capabilities that we want to have and we'll now focus on how we serve our customers in both sides of the organizations and grow them..

Awesome. Thank you so much..

Yep..

Our next question comes from Kate McShane with Citi Research..

Thank you, good morning..

Good morning..

My question is on the direct fulfillment centers.

Now that you've opened your third one and you are reaching a majority of your customers with two-day delivery, do you think you need anymore and how much more efficient can those centers get over time?.

Well, obviously, we're just in the stages of opening our third one and receiving product into that building. So it's very, very early days, but Mark Holifield is here. I'll let him comment..

As Craig mentioned, the third one is now in the process of stocking. We think that three will do us fine for the stated goal of getting the customers on two-day parcel delivery.

The thing to keep in mind about The Home Depot is, in addition to the three direct fulfillment centers, we have 2,000 stores that are conveniently located, and we're working on delivery capability from the stores. So we look at the stores to really be the expedited capability to put product in the hands of customers.

We think that these three will do us fine as we look to get the second day delivery of parcels.

And, Kate, if I could just jump in on the financial side, as you heard, we had great productivity in our supply chain in the second quarter. We did in the first quarter as well.

As we look at the back half of the year, we wouldn't expect to see that kind of productivity because as we go into the back half of the year, we have a higher penetration of imported products, and international shipping comes at a higher cost.

So while we're going to drive productivity, don't expect to see the kinds of gains that you've seen recently..

We'll take our next question from Aram Rubinson with Wolfe Research..

Hi, this is actually Chris Bottiglieri on for Aram..

Hi..

I was wondering if you could talk about conditions out West with the drought that has occurred for a few years now. I just wonder if you're seeing any shift in consumer behavior.

Are people throwing more money at the problem into adjacent categories as they try and tackle the drought, or is it shifting into unrelated categories?.

What we're doing in the live goods category specific, we've definitely shifted the assortment into water-tolerant or drought-tolerant species, so a lot more cactus and succulents.

We're also diminishing the size of live goods in a number of stores and expanding pavers and the like, as we see people definitely taking grass, diminishing the size of their lawn, and putting in more pavers and succulents..

Got you, okay.

And then how about related, I guess, just general severe rainfall and weather, how does that usually impact the consumer behavior? Is that just you lose those sales or do you see people prioritize other projects around the house?.

I don't think we see a loss in sales. But certainly, as Craig said, in timing and the bathtub effect, if you take the rain that we had in Texas and the Midwest, for example, in the earlier part of the spring, certainly sales suffered, and that's part of the pickup you see in our comp in July.

The rain finally stopped and all the grass and weeds started to grow. So we had a very strong July in those markets with outdoor garden and indoor garden..

Okay, cool. And not to hit weather too hard, but just one last one. As you anticipate El Niño coming around this time of year, it looks like it's going to be pretty severe.

Anything you're doing to prepare for it based on past experiences with it?.

That's something that we do on an ongoing basis. We have plans that we put together as, if you will, anticipation of events. We're actually pretty good at this, and so we're prepared for any adjustments we need to make as a result of that..

Okay, great. Thanks for the help..

Thank you..

Our next question comes from Christopher Horvers with JPMorgan..

...on the seasonal shift.

Can you talk about the core business, say, ex-outdoor seasonal comp in the second quarter and compare that to what that level was in the first quarter?.

Chris, we couldn't hear you when you began your question..

So I'm trying to figure out what the underlying growth in the core business ex-the seasonal shift is in the second quarter relative to what you saw in the first quarter..

I think the performance of the core of the store, as we call it, is similar. It remains very, very strong. Our hardware business, our plumbing business, appliance business, flooring business, the categories that have been strong continue strong. Our hard set, for example, in flooring, tile and tile set, and wood and laminate, remains very strong.

Our power tools and power tool accessories and hand tools remain very strong, plumbing, water heaters, pipe and fitting, et cetera. So that core DIY product and pro heavy product, the rate of sale has continued strong into Q2..

Okay, understood. And then on the SG&A expense growth rate versus the sales growth rate, Carol, it looks like it picks up in the back half of the year.

Is something changing? Does any of it have to do with the timing of bonus accruals and perhaps wage pressures in the business?.

It does kick up in the back half of the year for a couple of reasons. First, we have the Interline acquisition in our guidance, and Interline has a different cost structure than our core retail business.

Also, we have some expense good guys that will not repeat themselves we do not believe in the back half, particularly in relation to some casualty reserve adjustments that were taken last year that we don't think will repeat this year..

Okay. And then last question is given the early good spring sales and then this shortened season in the second quarter, did you change your planned promotional posture during the quarter, and what did you see out in the market? Thanks..

No, we really didn't change any promotional cadence on our part. Ted, I don't know....

I don't think it was any more or less promotional than prior years..

And really don't see a ton of change in the marketplace..

No..

Thanks very much..

We'll take our next question from Brian Nagel with Oppenheimer..

Hi, good morning, nice quarter..

Good morning..

Thank you..

A question on the pro and I know some other questions already addressed the pro. But as I look at it and as a listen to the call today and maybe a couple of your past calls, it seems to me Home Depot is putting a bigger and bigger emphasis on attacking this pro customer with maybe more directed merchandise numbers and such.

As you're doing this and with the Interline or some of the merchandise numbers, are you seeing an almost immediate pickup in that pro business? In other words, is the pro sales inflecting higher? And that's the first question.

The second question, as you look further down the road, how big do you think now the pro opportunity is for Home Depot?.

As it relates to the reaction, if you will, of the pro, we've been focused on the pro, as you know, for quite some time. It's a very important customer base of ours. But we do believe that we have a fair amount of opportunity to expand our share of wallet penetration with this customer.

We have obviously not completed the acquisition, so we haven't seen any benefit as a result of our intended acquisition of Interline, but believe it's an opportunity for us to expand the share of wallet. As Ted detailed, we are very pleased with the performance that we are seeing in pro categories.

And that's I think a reflection of the continued rebound in the economy, the continued rebound in home values where customers are more willing today to invest in their home than what they were obviously during the economic downturn..

And if we look at our managed accounts and those pro customers who tend are using our private label credit card, those two groups of pro customers make up about 20% of our sales. We saw that their growth rate was higher than the company average.

So to your question, are seeing a bang for your buck, well, yes, we see sales performance that's outperforming the company average..

Got it.

And then as a follow-up separately, Carol, any comment on, I know it's early in the third quarter but any comment on sales, sales quarter to date?.

I'm happy to comment on quarter to date performance. We're very pleased..

I appreciate that. Thank you..

You're welcome. Thank you..

Next, we will hear from Seth Basham with Wedbush Securities..

Good morning..

Good morning..

My first question is around big ticket, it seemed like you had pretty good big ticket performance this quarter.

I was wondering whether you could attribute to anything specifically that you guys did or more of a macro trend?.

I would say yes, we've talked a lot about the pro but the consumer business performed very well in Q2 and really was the driver of our ticket performance. So appliances was very strong again and that was driven by our Red, White and Blue event around the Fourth of July.

The stores really get behind this and drive the business, and I think that's a distinction for Home Depot. Our kitchen and countertop business likewise was very strong in the quarter. I mentioned flooring. We saw strong sales across the flooring category, but particularly in hard surface.

And then we even saw things like special order window coverings as we leverage the Blinds.com acquisition. We are seeing nice sales out of Blinds.com platform and the work they've done for our business in The Home Depot is driving that business.

And then the riding mower business and walks and all outdoor power performed very well and we have a lot of new programs like the new Cub Cadet tractor that's performing very well for us this year in our lineup of all the top brands and walks.

So, very strong consumer and I think in each of those examples are things where The Home Depot is driving the business..

We get a little bit from the economy too. Home price appreciation continues to progress nicely, prices are up 4% and as we talked about, when consumers believe their home as an investment and not an expense, they spend differently and we're seeing that spend pattern..

That's helpful.

As you look at the outlook from a macro standpoint with a good likelihood of rising interest rates, do you think that might quell some of the demand for big ticket items going forward over the next year?.

Yeah, I think when you look at historical trends, we've been so far below the market that at this point we don't think we'll see a major impact to the business..

Got it. Thank you and good luck..

Yes, thank you..

Thank you..

Our next question comes from Matthew Fassler with Goldman Sachs..

Thanks a lot, good morning..

Good morning..

My first question relates to same-store sales. So last quarter you gave us some fairly fine tune commentary about the relationship of the two halves from a sales perspective.

And in particular just triangulating what you've been saying for the past several quarters, it sounded like you'd originally expected the second quarter to be the softest same-store sales quarter of the year.

So given that you outperformed your plan for Q2, do you continue to expect that to mark the low end of the comp range for the year? Or is there a new cadence that you have in mind?.

If we look at the high end of our guidance which is basically currency neutral for Q3 and Q4, we would still expect the second quarter to be the lowest comping quarter because it had the FX impact in it.

So – but there's not a lot of difference, Matt, between the first half and the second half, again, using that high end of our guidance, we would expect the second half to be slightly under the first half, but not materially different..

Got it. And then just as a quick follow-up, Carol, you talked about the leverage ratio going above two times to get the Interline deal funded.

As you think about going forward into 2016 and beyond just theoretically are you comfortable living at that level of leverage, i.e., maintaining it and continuing to buy back stock and fund it as you have? Or you would you want to work that back down below two times as the cash flow continues to come in?.

Well, as we continue to earn more, that ratio will naturally decline and it's not our intent to let it decline. Keeping it at around the two times is our intent..

Got it. Thank you so much..

Our next question comes from Jessica Mace with Nomura Securities..

Hi, good morning..

Good morning..

In an earlier question you talked a little bit about your performance versus the overall market and I was wondering if you could mention maybe any competitive dynamics that there might be to call out any categories where you're seeing big opportunities or maybe the competitive environment is intensifying?.

No, I think as I referenced earlier, we're not seeing a major shift in competitive environment in total. I can tell you paint is a pretty competitive market. It's probably as competitive as it has been. It seems like a lot of folks are focusing there. But overall, I wouldn't say that we're seeing big changes in the competitive environment..

All right, thanks.

And then on your strong performance in big ticket as you said earlier, anything on the 1.7% growth in average ticket, anything to call out other than FX and deflation to keep in mind about different dynamics going on there?.

No, you've got it..

All right, thanks so much for taking the questions..

Thank you..

Next, we we'll hear from Scot Ciccarelli with RBC Capital Markets..

Hey, guys, Scot Ciccarelli. I guess my first question is I know you guys have been running some tests on the pro side with credit extension and, let's call it, tighter delivery windows of the new system.

Is there any way to provide some color regarding what you guys are currently seeing and when might we hear whether this is a full rollout on these two programs?.

I can start on the credit side. We've been in pilot now for a while, we're in a pilot at about 262 stores. We really like the results. We're optimizing our sales performance and our expense performance, we really like the results. But as you know, we had a data breach last year that we needed to get through. We're rolling out EMV this year.

So we've just got a lot of changes going on in terms of the front end of our store and accepting credit. So it puts a decision to roll that out on hold until we get through really EMV and EMV deadline, as you know, is October 1. So stay tuned for more to come in that regard.

And, Mark, maybe you want to talk about delivery?.

Sure. We're in four markets with our Buy Online, Deliver From Store implementation. Something to keep in mind is virtually all of our stores are in the delivery business, it's just that we're now enabling the buy online component of that. And as part of that, we're enabling tighter delivery windows. So we're in four markets now.

We're working to really perfect that and make that a flawless customer experience. I would say that tighter time windows are harder to meet than all-day windows, so we want to be absolutely certain that we can meet those before we roll further, but we would expect to roll that through 2016..

Well, I know you guys have – obviously, you're testing a lot of different things as somebody – Brian mentioned before. You guys have continued to add brands, you've just bought Interline.

Are there any big holes in your capabilities now with serving the pro? It sounds like you're not necessarily going out to acquire anything but can you identify anywhere where you feel like you really need to improve on the pro or do you think you have that blanketed at this stage?.

I mean, I think the number of these things that we're working on, as you've heard, around the credit, around delivery and continuing to narrow the windows, the ability with the acquisition to have a dedicated sales force that can hit to the job site, and candidly, the organizational change that we made with Bill are important pieces to allow us to begin to drive change and improvement in the share of wallet with our customer base and to expand our customer base.

So we feel like we are working towards all the right capabilities that we need to have and look forward to getting them all in place across the organization and then really looking to leverage that and provide a better experience for our pro customers..

Excellent. Thanks a lot, guys..

Thank you..

Our next question comes from Keith Hughes with SunTrust..

Thank you and yet another Interline pro customer question.

If you look several years down the road with Interline, will you try to integrate the service function, the delivery function that is so important at least in the MRO piece of that business with what you just described with more of the deliveries coming out of the orange box stores?.

Yeah, I think you could probably assume that'll be part of the plan as we go forward..

And would you take that and then bolt-on to other pro submarkets beyond the reach of Interline currently?.

I doubt it..

The addressable market is $50 billion. Between Home Depot and Interline, we have less than 5% market share. Just growing in that addressable market of a customer we already serve is a lot of growth opportunity for us..

Second question and final question, you had called out flooring as above the comp, you talked about hard surface growing. You appear to be doing a lot better than the industry at this point. Is there any one specific promotion that's working a (47:06) product, just any sort of detail there would be helpful..

No. I think we continue to bring newness and innovation into that space, both in terms of the product as well as the way we go to market. In the store, we have a number of different sets and configurations in our stores where we're emphasizing based on clustering work where we're emphasizing hard surface versus soft surface.

And then the new LifeProof carpet that we just launched, we're very excited about that, that stain-resistant guarantee. We're seeing very strong early results with the LifeProof. So it's all about innovation and go-to-market in the stores..

I would say that it's leveraging the capabilities that we've built over the last few years in terms of our assortment planning capabilities and really clustering to get it right..

Thank you..

Our next question comes from Simeon Gutman with Morgan Stanley..

Thanks and nice quarter as usual, a question about the shape of the housing recovery. I'm not sure if it's my words or yours, but we've been characterizing it as mid-cycle, and you've been telling a story of a pretty balanced comp from a category perspective.

But can you discuss anything you're seeing geographically by market that can inform the shape of the recovery, whether maybe it is earlier than mid-cycle or even later in some markets based on what you're seeing projects being done?.

We're seeking to understand that as well. We looked at the comp variability by region, and we have 19 regions in the United States. And interestingly, if you look at the high to low, there's a 6.5 percentage point difference. That's exactly what it was a year ago.

So we're not seeing any regional differences that really help us inform the shape of the housing recovery. So then we go back to the overall macro, and here's where we see that home price appreciation is continuing. Home prices are up 4%. They have not fully recovered. Housing turnover is higher than what we had anticipated at the beginning of the year.

We see some interesting dynamics happening with household formation. And in fact, 1.6 million households were formed in the second quarter. This is something that we have been hoping for. Now, not all those households are going into single-family units. They're going into rental units, but that's okay because we can serve those rental units.

It's really interesting to note that of the 135 million housing units in the United States, 44 million of those are rental units; and of those, 13 million are single-family homes. So we can sell that customer and now we can sell with the acquisition soon to be completed of Interline, we can sell the MRO customer in ways that we've never sold before..

In comparison, if you think back during the difficult times of the economic downturn, the variability by market was significant in comparison to what Carol just described, where basically the spread is the same as what it was a year ago. So it's for sure stable..

And household formation data, that doesn't come out regionally.

Do you have a sense to see how that shapes up by geography?.

We don't. We are trying to get behind the covers....

Right..

... but we don't have that today..

Right, okay. And my follow-up, a question on wage inflation. And this applies to HD but maybe also a bigger generic question for the industry. Because I think the conversation is evolving a little bit where initially it was about just rising minimum wages, and now we're starting to hear retailers talk about wage creep across their cost structures.

And so I'm curious how, I guess curious how you think of that.

Is that fair, and how is Home Depot planning to deal with it?.

We look at wage obviously on a market-by-market basis. We are constantly and have been for years adjusting based on the market dynamics. We've made thousands and thousands of adjustments this year, as we would in previous years.

We pride ourselves on trying to make sure that we have compensation overall that is above market, and that's something that we will continue to focus to do. But clearly, there are markets where we've had to make adjustments, and we've done so..

Okay, thanks..

Our next question comes from Dan Binder with Jefferies..

Hi, this is Dolph Warburton on for Dan..

How are you doing?.

Good. Good.

Can you talk a little bit about your ad spend for the year and how this will look versus last year as well as the mix of digital versus print?.

So our ad spend is pretty flat year over year. And we have been for numerous years now in an effort to shift our spend to new mediums and platforms. As an example, if you step back, several years ago we had on average over 50 print pieces that hit the street in a year. I think this year we'll do something like 11.

So we've made a pretty hard shift to new platforms in the digital space..

That allows us actually to have more impressions....

Correct..

...than we had year on year. By the way, we've changed the mix..

And more targeted messages, if you will, based on what the customer is looking for. So we are actually very pleased with the productivity of our ad spend and what our marketing team is doing to reach the customer and provide information around what it is the customer is looking for..

Okay, great. Thanks. And if I could ask one last question on the piloting of the auto supply products and how that's going. Thank you..

We are pleased with that. Ted, I don't know if you want to comment..

Yeah. So we're very pleased with that. We have a one or two-bay set in all stores. And then in 500 odd stores at the end of the second quarter, we had an extended set of up to six bays. And we're looking at the different locations in the store.

If the category is more productive in the front ends or in bay, so we have various tests going on with those six-bay sets and very pleased. Again, this is very much a DIY auto. It's a traffic driver and a convenience for our customer..

Great. Thank you..

Derek, we have time for one more question..

We'll take our final question from David Schick with Stifel..

Hey, look at that. Thank you. So home automation, you mentioned in some of the products, even in pro enabled products around home automation, you see it when you land on your page online. We see it in the stores as we walk the stores. Obviously, you're talking about hard flooring which is not a home automation product yet.

But talk about home automation and how it's driving the business at all with new customers. Or any color you can give around home automation and if it's how it's changing your view to driving the business..

I'd start with our key focus around home automation is around product. And it starts with making sure that we're giving the customer choice around product that is enabled. And, Ted, I don't know if you want to provide any specifics..

Yes, so we have hundreds of products now that are in some sense interconnected or smart enabled. We're very happy with our Wink platform that is an agnostic platform in that any and all products can link into the Wink system. And I would say that we're focused on functionality versus gimmickry.

So the use cases are maturing for the customer and we're seeing products fulfilling use cases, so say in a water heater where if you're away on vacation and you forgot to turn down the water heater, from your phone you can turn down the temperature. You can obviously dim lights.

I mentioned the LED light that we're able to change the color temperature of the light. So we're actually starting to see nice features that benefit real-life use cases and we're investing in that product across the store and seeing great lifts in all categories we introduce relevant smart products..

I think the other....

Sorry, go ahead..

Just the other comment would be you will continue to see products over the next several years, I think, being integrated into more and more technology. So I think this is an opportunity as we go forward..

And do you think that's a different new customer or it's your same customer is discovering these capabilities?.

Same customers finding this new product to be very convenient..

Thank you..

Thank you all for joining us today, and we look forward to joining you next quarter..

That does conclude today's conference. Thank you for your participation..