Greetings. And welcome to The Home Depot’s First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

Thank you, Christine, and good morning, everyone. Welcome to Home Depot’s first quarter 2021 Earnings Call. Joining us on our call today are Craig Menear, Chairman and CEO; Ted Decker, President and Chief Operating Officer; and Richard McPhail, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors, and as a reminder, please limit yourself to one question with one follow-up. If we are unable to get to your question during the call, please call our Investor Relations department at 770-384-2387. Before I turn the call over to Craig, let me remind you that today’s press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release and in our filings with the Securities and Exchange Commission. Today’s presentations will also include certain non-GAAP measures. Reconciliation of these measures is provided on our website. Now let me turn the call over to Craig.

Thank you, Isabel, and good morning, everyone. We appreciate you joining us on our call this morning. Fiscal 2021 is off to a strong start, as we grew the business by over $9 billion compared to the first quarter of last year. Sales for the first quarter were $37.5 billion, up 32.7% from last year. Comp sales were up 31% from last year and our U.S. stores had a positive comp of 29.9%. Diluted earnings per share were $3.86 in the first quarter, up from $2.08 in the first quarter last year. Our results this quarter were once again driven by broad-based strength across the business and geographies. All of our top 40 markets posted double-digit comps, while Canada posted comps above the company average and Mexico posted double-digit comps. Both ticket and transactions were up double digits in the quarter. We continue to effectively manage the outsized demand for home improvement products seen throughout most of the last year despite disruptions in global supply chains that were further exacerbated by port congestion during the quarter. We leveraged the scale of our supply chain and partnered with our vendors to maintain our in-stock positions and prioritized key SKUs in high-demand categories. While we continue to see strong levels of engagement across our digital platforms, we saw more of our customers return to our stores. Sales leveraging our digital platforms increased approximately 27% versus the first quarter last year and approximately 55% of online orders were fulfilled through a store. We continue to roll out new capabilities, such as mixed cart selling from store that remove friction for both our customers and associates. We also continue to drive interconnected enhancements in other areas of the business to solve customer pain points. In tool rental, for example, we will soon expand our rent online pilot chain wide enabling rent online, pickup in store capabilities for all 1,300 plus tool rental locations in the U.S. and Canada. This will enhance the experience for our busy Pro and DIY customers and complement additional investments we’re making to expand our rental footprint and increase our assortment and delivery capabilities. Our efforts will continue to support what we believe is our winning formula: deliver the best shopping experience in home improvement, extend our position as a low-cost provider with a relentless focus on productivity, and be the most efficient investor of capital in home improvement. We believe this strategy will help us deliver returns by driving growth faster than the market in any environment. The build out of our One Home Depot supply chain vision is a wonderful example of our strategy in action. Enhanced fulfillment capabilities will not only create a better customer experience, but they will also expand the breadth of our current opportunities set from both a product and customer standpoint. The ability to combine this growth potential with scale to create the low-cost network in home improvement is a formula that we believe delivers long-term value creation for our customers, supplier partners and shareholders. During the quarter, we continued to build out our One Supply Chain vision by opening several new facilities and we’re very excited with the progress we continue to make on this key strategic priority. We have now been operating in this unprecedented demand environment for over a year and continue to align around a few key learnings. First, the investments we have made in the business over the past decade were the right ones, and second, they have enabled agility and flexibility to execute on critical business decisions in a challenging and dynamic operating environment. As a result, we have managed unprecedented levels of web traffic, record levels of product flow through our supply chain while improving customer service levels in our stores. Our culture has remained our Northstar, as our decisions are anchored to some of our most important values, to do the right thing and to take care of our people. Our ability to continue investing for the future, while also managing the most fluid environment in our company’s history is a direct result of our associates and their extraordinary efforts. I want to close by thanking them for the many ways they continue to live our values by serving our customers, communities and each other during these challenging times. With that, let me turn the call over to Ted.

Thanks, Craig, and good morning, everyone. I want to start by also thanking all of our associates and supplier partners for their commitment to serving our customers and communities. We continue to experience unprecedented levels of demand during the first quarter, with comps accelerating to more than 30% when compared to the first quarter of last year. This elevated demand and transportation headwinds are pressuring parts of the supply chain. But our teams continue to work together with their supplier partners to manage through these pressures. Moving to our comp performance during the first quarter, 13 of our 14 merchandising departments posted comps at or above 20%, led by our lumber and kitchen and bath departments. Our comp average ticket increased 10.3% and comp transactions increased 19.1%. Similar to what we reported in our previous three quarters, the growth in our comp average ticket was driven by elevated project demand, customers trading up to new and innovative products, and continued inflation in many product categories, including lumber. This was another record-setting quarter for lumber prices. Let me give you an example of what that means for one of our core lumber SKUs. At the end of the first quarter last year, a sheet of 7/16 OSB was approximately $9.55. As we exited the first quarter this year, that same sheet of OSB more than quadrupled in price to $39.76. Inflation from core commodity categories positively impacted our average ticket growth by approximately 375 basis points during the first quarter. Our interconnected retail strategy is resonating with our customers, as evidenced by strong growth from both in-store and online transactions, and we are pleased with our ability to meet widespread demand across our selling platforms. As you heard from Craig, sales from our digital channels grew by 27% during the first quarter, which equates to more than 100% growth on a two-year stack basis. Big ticket comp transactions are those over $1,000 were up approximately 50% compared to the first quarter of last year, we saw widespread big ticket strength across our business, with notable outperformance in lumber, vinyl plank flooring and many of our installation services. From a customer standpoint, we saw double-digit growth with both our Pro and DIY customers. Growth with both customer groups accelerated during the first quarter with Pro sales growth slightly outpacing DIY. Sales to our Pro customers continue to strengthen, posting the fourth consecutive quarter of accelerating growth and the best quarterly growth rate on record. Pros continue to tell us that project demand is strong and their backlogs are growing. Shifting over to our DIY customers, the strong demand we saw during the back half of last year continued during the first quarter. From gardening to garage and organization, new and existing customers are engaging with home improvement. We were also well-positioned for the start of the spring selling season. We took decisive action earlier than usual to proactively lean into our inventory position. This paid off as spring began breaking across the country and our associates were well-equipped to serve customers across key outdoor and garden categories. The strength in gardening was more than just plants and shrubs. We posted a record quarter in categories like planters and hardscapes. Additionally, while outdoor categories exhibited significant growth during the first quarter, we’ve continued to see strong momentum with interior projects around the house. Interior projects like countertops, vanities, blinds and home décor all showed significant growth in the first quarter. As we look forward to the rest of the year, we are focused on continuing the momentum we’re seeing with our customers. We’re particularly encouraged with the strong demand we’re seeing from our Pro customers. And for our Pros, we know that brands matter. Brands like Milwaukee, Klein and Car Lawn have significant market share in their respective categories and are trusted by our Pro customers to get the job done. Milwaukee recently expanded their powerful M18 battery platform to include a full line of cordless nailers that deliver pneumatic performance with no compressors, no gas cartridges and rapid-fire rates to keep Pros productive. The M18 platform now features over 200 tools that are exclusive to The Home Depot in the Big Box Home Improvement channel. And at a time when Pros are busier than ever, we’re thrilled that we’re the destination for Car Lawns PVC electrical boxes and Klein tools. These brands are two of the most widely used by electricians. We’ve enjoyed a long exclusive partnership with Klein, being first to market with their new and innovative products and we are now the exclusive national partner of Car Lawn in the Big Box Home Improvement channel. While we don’t know how the demand environment will ultimately unfold, as we look forward to the rest of the busy spring season, we feel great about our position and we look forward to serving our customers both in-store and online. With that, I’d like to turn the call over to Richard.

Thank you, Ted, and good morning, everyone. In the first quarter, total sales were $37.5 billion, an increase of $9.2 billion or 32.7% from last year. During the first quarter, our total company comps were positive 31%, with positive comps of 19.8% in February, 36.2% in March and 34.3% in April. Comps in the U.S. were positive 29.9% for the quarter, with positive comps of 19.9% in February, 35.6% in March and 32% in April. During the first quarter, all 19 of our U.S. regions, as well as Canada and Mexico posted strong double-digit comps. In the first quarter, our gross margin was 34%, a decrease of approximately 10 basis points from last year. Mix pressure from higher lumber sales alone negatively impacted our gross margin by approximately 35 basis points. During the first quarter, operating expense as a percent of sales decreased approximately 390 basis points to 18.6%. We were pleased with our operating leverage during the first quarter, as it reflects disciplined expense control, along with a couple of other expense items that I’d like to highlight. First, our operating leverage in the first quarter of this year reflects the impact of several one-time expenses that we incurred in the first quarter of 2020, including additional compensation and benefits to support our associates. These expenses were partially offset by underspend in other expense items in the first quarter of last year, notably payroll as we worked to staff up labor to meet the surge in demand. Together, the net impact of these factors resulted in approximately 240 basis points of operating expense leverage during the first quarter of 2021. Second, during the first quarter of 2021, we incurred approximately $80 million of COVID-related expenses, which created approximately 20 basis points of operating expense deleverage. And lastly, our operating expense leverage during the first quarter also includes pressure from higher accrued bonus expense, primarily related to our outperformance for our store success sharing program and store and field-based management bonuses for the first half of fiscal 2021. Our operating margin for the first quarter was 15.4%, compared to 11.6% in the first quarter of 2020. Interest and other expense for the first quarter increased by $26 million to $333 million, due primarily to higher long-term debt levels than one year ago. In the first quarter, our effective tax rate was 23.9%, down from 24.4% in the first quarter of fiscal 2020. Our diluted earnings per share for the first quarter were $3.86, an increase of 85.6% compared to the first quarter of 2020. During the quarter, we opened one new store in the U.S. and one in Mexico, bringing our total store count to 2,298. Selling square footage at the end of the quarter was 239 million square feet. At the end of the quarter, inventories were $19.2 billion, up $4.2 billion from last year and inventory turns were 5.5 times, up from 5 times last year. Turning to capital allocation, our long-term principles for how we think about deploying capital have not changed. First and foremost, we will invest in our business. During the first quarter we invested approximately $525 million back into our business in the form of capital expenditures. And second, it is our intent to return excess cash to shareholders through a balanced approach of paying a healthy dividend and repurchasing shares. During the first quarter, we paid approximately $1.8 billion in dividends to our shareholders and we returned approximately $4 billion to shareholders in the form of share repurchases. Our share repurchases during the first quarter partially reflect an elevated cash balance in 2020, when we paused share repurchases to temporarily increase our liquidity levels as we navigated the pandemic. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 45.1%, up from 40.8% in the first quarter of fiscal 2020. Moving to the broader demand environment for home improvement. The strong demand that we’ve seen for more than a year now has continued. During the first two weeks of May, on a two-year stacked basis, we’ve seen comps in the U.S. above 30%. Housing remains strong, homeowner balance sheets are healthy, and our customers continue to tell us that they are planning on spending on a variety of home improvement projects. With that said, we cannot predict how the external environment will evolve and how it will ultimately impact the consumer. We will continue to execute with flexibility and focus on what has driven our successful performance. Our relentless focus on the customer and our ability to remain flexible and agile has enabled us to serve our customers and meet demand in this dynamic environment. Longer term, we remain committed to what we believe is the winning formula for our customers, our associates and our shareholders. We intend to provide the best customer experience in home improvement. We intend to extend our position as a low-cost provider. And we intend to be the most efficient investor of capital in home improvement. If we do these things, we believe we will grow faster than our market and we will deliver exceptional shareholder value. Thank you for your participation in today’s call. And Christine, we are now ready for questions.

Thank you. Our first question comes from Simeon Gutman with Morgan Stanley. Please go ahead with your question.

Hi, everyone. My first question is, is there anything that changes your view on housing more or less constructive compared to the underlying assumptions that you built through 2021 plan against?

No. Simeon, I’d say, yeah, the housing environment continues to remain very strong. So, it’s only strengthened, I think, from last year, and the current shortage of new housing clearly is helping to drive improvements in home values, which is a good thing for spending in the home.

Okay. And then my follow-up is actually more on operating profit and margin. And I think your message is very clear that you’re focused on growing faster than the market, and I think Richard told us last quarter, you’re managing operating profit dollars and margins fall where they fall. Can I ask about the two, I think, about the incremental drivers going forward, it’s about interconnected retail and then somewhat in MRO and Pro, because some of the investments and acquisitions you’ve made? Is there anything about the margin structure of those businesses and incremental growth that would hold back margins?

No, when we evaluate the overall business, we take an interconnected and portfolio approach, and 55% of the orders are processed through our stores. Regarding the Pro segment, as we have mentioned before, its margin profile is quite similar to that of the DIY customer when examining a complete project, so there isn't anything significantly different in that regard.

Okay. Thank you.

Our next question comes from line of Michael Baker with D.A. Davidson. Please proceed with your question.

Hi, thank you. I appreciate that you didn't provide a lot of updates in your outlook, as mentioned in your press release. However, I'd like to ask if there are any updates regarding the expected trends in volume, which seem to be ahead of your initial projections. Is there any new information about the margins, which I believe were projected to be flat to slightly up at around 14%? Additionally, in terms of comparisons for this quarter and the year, would it be reasonable to assume a comparison rate somewhere around 30% based on your stacked rate for modeling purposes for the remainder of the year?

Let me share with you. I mean, clearly, the first quarter performance was stronger than what we anticipated. We did not think that we would deliver a 30% comps. And as it relates to the framework that we provided, Richard, you might want to speak to the framework.

Sure. And just to remind everyone, we actually, at the end of the fourth quarter last year, we felt unable to provide an outlook due to level of uncertainty in the environment. So we did not provide an outlook. We did feel that given the significance of non-recurring expenses in 2020, we could provide our view on our margin profile at a hypothetical level of sales. So, looking forward, we continue to believe that the environment and the consumer response to it is difficult to predict. With respect to Q1, we’re very pleased with the operating expense leverage and earnings flow through that we drove. And we’re going to keep operating the business with discipline and keep a focus on driving operating expense leverage.

Okay. Thank you. I appreciate the commentary.

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

If we look at your month of May and April, your two-year stacks were running around or even better than 40%, and now you mentioned, May so far is up about 30%. So do you think that we’re starting to see the stimulus impact to your comps dissipate and such that and I know was asked a couple of different ways, but 30% run rate and a two-year stack that could ways to move forward or is it better for us to expect that that 30% two-stack run rate on an arithmetic basis should flow from here?

Well, Michael, we can’t predict future results. It's too challenging to foresee how the environment and consumer responses might change. When considering the changes from March to April, and reflecting on the impact of stimulus, quantifying that influence is difficult. We do know that the government announced $402 billion to be distributed directly to individuals as part of the American Rescue Plan, with $325 billion hitting bank accounts in March. While we can’t determine the exact impact, it likely had some effect on the transition from March to April.

Michael, I’d say, why we really can’t extrapolate to future periods. The one thing that we’re very encouraged about is when you look at the overall kind of backdrop for home improvement on a longer-term basis, we feel very good about that.

If anything do you want to point these specifically, Craig, from a longer-term basis that you…

Well, when you…

... expect?

Mike, when you think about we’re at post-World War II housing availability. So two months of supply versus historical average of six, that situation won’t be resolved in near-term, it’s going to take time for that to be resolved. So I think that supports home values and the continued growth in home values, which we know. As home values grow, people feel good about investing in their home overall. So that alone is, I think, a very positive outlook for home improvement as you move forward.

Okay. My follow-up question is, how do you think your market share unfolded in the first quarter from an online perspective, recognizing that you had a very difficult comparison? Do you think you’ve kept pace with the overall market and is this the right run rate for the online growth to think about moving forward?

We view this as a whole and manage it as a portfolio due to its interconnections. According to the March data released by the government, it seems we have gained approximately 170 points in overall market share.

E-commerce is a capability, not a business. It's crucial to always consider the overall demand in the environment and our deliveries. We don't break the business down that way. Our goal is to be available for customers in whatever way they prefer to shop. There has been a lot of change over the past year, but we believe we've met their needs thanks to the investments we made in interconnected retail in recent years.

And Michael, as you think of last year in the first quarter, the interest in buy online pickup in store and we stood up curbside, again our customers chose to shop that way in a contactless or as least contact as possible in the early days of the pandemic. So that’s returning to some more natural run rates.

Got it. Thank you very much and good luck.

Thank you.

Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Hey. Good morning. I’m curious if you guys are surprised that your basket trend is holding so strong even as your traffic has improved so much?

We are observing customer engagement across all segments of our business, as we have detailed over the last four quarters. Our Pro business has been gaining strength as customers become more at ease allowing people into their homes. Additionally, our services business has shown consistent improvement for three consecutive quarters. These factors are significant drivers of our performance. Furthermore, as Ted mentioned, innovation has contributed to an increase in our ticket size, along with inflation. Ted, do you have any additional comments?

Yeah. I think it also speaks to projects. Again, people are engaged in projects and they’re engaged in projects across the whole store. So with projects comes basket and ticket and we’re certainly enjoying that.

Got it. And then just a quick follow-up for me would be, we talk about the big increase in lumber prices, curious what you’re seeing on the demand side unit volume if it’s starting to compress a little bit as those prices rise?

Well, the lumber environment is certainly unique and in the way we’re thinking about it right now, Chuck, it’s really a storm environment. It’s very tough to look at traditional elasticities. Certainly, prices are up, as I referenced in the call, sheet of OSB is quadrupled in price and it’s up even more since the end of our fiscal quarter. But at the same time, demand has kept pace. And when we bring the product into the store itself and the mills are at capacity. We have plenty of wood fiber in the supply chain. The relative bottleneck is in the sawmill cutting capacity. We don’t see a lot of capacity coming online. So we’re probably not going to see a lot of finished lumber product in distribution. So as soon as that product hits our stores, it sells, certainly prices up and you would think there’d be a supply and demand in our traditional elasticity equation there, but it’s hard to determine the impact given the storm nature of the demand.

Thanks a lot.

Our next question comes from the line of Scot Ciccarelli with RBC. Please proceed with your question.

Good morning. So we know that you’re working on your Home Depot supply chain almost for a couple of months now. Obviously, the overall industry is extremely strong. But I’m curious, are there any examples you can share regarding how these new capabilities may be enabling you to either increase penetration rates in existing markets or penetrate new markets where maybe you couldn’t compete as well in the past?

I’d say a couple of things and I’ll turn it over to Mark. So, first of all, the ability to meet the kind of demand we’ve seen on direct fulfillment, I think has been a direct result of the investments that we’ve made in the business. Customer satisfaction and efficiency that we’re seeing through our new flatbed distribution centers indicates to us that we’re making real progress with the customer there. And Mark, I don’t know if you want to add to that?

Sure, Craig. Yeah. We had a great first quarter in our supply chain development, and we’re on track based on that to continue to increase our fulfillment square footage over 70% this year. Specific to the results we’re getting, in terms of the flatbed delivery centers, maybe I’ll highlight that, that was really designed to provide store relief, increase our customer satisfaction and service to customers, and expand our available assortment and delivery capabilities. Now we have four flatbed DCs open now in various stages of ramping. Dallas is the furthest along. It’s ahead of our plans in terms of the flatbed sales comp, which are very strong and not just in dollars, but also in units and in number of deliveries. Our customer satisfaction has improved by 11 percentage points. We’ve improved that on time and complete. And notably, our Pro penetration is very strong; in fact, the preponderance of sales out of that facility are in fact Pro. So, really helping us to capture the Pro there in Dallas.

I would like to follow up on my understanding that the new HD Supply supply chain capabilities should help you enter markets where you previously lacked the competitive edge. Can you provide examples of progress you are making in that area?

Yeah. I mean, the focus of the capabilities that we’re building out is to be able to expand our reach into the pool of customers. We’ve been very strong over the years with the smaller Pro and the unplanned purchase with a larger Pro. What we’re building is capabilities to actually extend into that planned purchase, and we’re seeing that beginning to play out. So we’re very pleased with what we’re seeing in the early stages.

Our next question comes from the line of Karen Short with Barclays. Please proceed with your question. Ms. Short your line is live.

Oh! Sorry. Hi. Can you hear me?

Yeah, Karen.

I wanted to ask a couple of questions about the market overall. Could you provide some insight into how you see the size of the DIY market compared to the Pro market in the post-pandemic period versus before the pandemic? Also, I have another question from a different perspective.

Yeah. I mean, we really don’t have data as it relates to what we think the growth in the market is; that’s a pretty tough number to come by at this point.

Okay.

I mean, obviously, we play in a big market straight out of the blocks. It’s a $600 plus billion market in the MRO space that we play in, which is largely focused on multi-family, as another $55 billion. So, but I have no way of knowing how much that’s expanded as a result of the pandemic.

Okay. And then, Richard, I am going to ask a question on the actual that 14% framework that you had given and I realized that was just an attempt to give a framework. But when you look at your sales growth this quarter versus your EBIT growth, EBIT grew more than double sales growth, whereas when I look at prior quarters even if I add back COVID costs you won’t be kind of had it like 10% spread. So I’m wondering if that is the right relationship to think about going forward, especially because even in 1Q, as you noted, you had higher bonus accruals.

What I want to emphasize is that we established the 14% target because we anticipated a year where COVID-related expenses were decreasing and investment costs were also declining. This year marks our return to a level of operating expense leverage that can be seen in the profit and loss statement. We believe we achieved that in Q1 and are pleased with the operating expense leverage and the flow-through in relation to sales. As mentioned, we will continue managing the business with discipline and maintain our focus on enhancing operating expense leverage.

Like we…

Oh! No. Oh! No.

There is absolute leverage still tending to the business with volume.

I understand that. It's all related to sales, but there is definitely a wider gap between the two, which suggests that the full year numbers could be too low depending on how that relationship evolves.

Well, just I think you, one of the other reasons that we laid out a hypothetical was because it is harder to read through on a one year or a two-year comparison in operating expense because of the fact that we were still in the middle of an investment program in 2019 and exiting it at the end of 2020. So, again, the best comment I can give is we were very happy with Q1 and how we drove operating expense leverage and flow-through.

Great. Thank you.

Our next question comes from the line of Christopher Horvers with JP Morgan. Please proceed with your question.

Thanks. Good morning, everybody. So my first question is, do you think stimulus helps the DIY side of the business more than the Pro? And not sure if you looked at it this way, but on a two-year basis, did Pro accelerate more than the DIY side of the business?

Yeah. I’d say, Chris, on the stimulus situation, it’s all consumer demand, whether it is the Pro buying for the consumer, because the consumer is doing something or the consumer buying for the Pro. So we kind of look at it as total demand.

And then, I guess, anything on a two-year. I guess, my thought on that is, Pro you got to get them in your house and there’s a lot of backlog. So it seems like there could be a near-term bump on DIY versus Pro. So, and you also had some Pro comparisons last year where the Pro was not essential. So I was just curious if you add teased out what it was done on a two-year basis?

The two-year comparison clearly shows that consumer demand has outpaced Pro demand slightly over this period. However, I’m not sure that this comparison offers more insight than noting that the Pro has returned to the job site. It appears that demand can now be more readily met through the Pro compared to a year ago. As Craig mentioned, it's important to focus on top-line demand. Ultimately, the majority of the demand we're seeing is coming from consumers but is being met in various ways. We are pleased that the Pro now has easier access to the job site and is getting there more efficiently.

Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question.

Hey. Good morning. Richard, could you talk about performance at the gross margin line versus your initial plan and to what extent was lumber an incremental headwind? And when you think about the other moving parts around promo underlying comp leverage maybe mixing in HD Supply, is there anything in Q1 that changes your thinking for the full year gross margin framework?

In comparison to last year, we experienced a decline of about 10 basis points in gross margin, partly due to the higher share of lumber in our sales, which indicates that margins are actually improving. While there is certainly cost pressure in the economy, I want to commend our merchants and supply chain for navigating through these challenges. Ted, could you provide some additional insights?

No. The merchants in the supply chain team did a fantastic job. Over the years we’ve built tools and processes that give us some terrific visibility in great partnership with our finance teams. And as Craig has always said, we run the business as a portfolio and we’re a project business and we’re always looking to provide the best value to our customers on a project basis. Having said that, we certainly saw transportation pressure shrink on a relative basis was slightly improved, but we are still seeing shrink pressure. And then we’re seeing some commodity, in lumber in non-commodity cost pressures, but the team has worked through that. Believe it or not, there is still cost out in the portfolio, so we still work on cost out and optimization of supply chain flows. And given the strong demand, our promotional cadence was slightly higher than last year; there were some early spring participation that we had completely canceled last year. And so we were up in some activity on promotions. The overall level of promotions in any required clearance activity was down meaningfully. So that is what gave the balance of the offset of the cost and mix pressures.

Got it. That’s helpful color Ted. Another one for you, and also, Craig, as you think about all the drivers of home improvement spending today. Could you comment on how much of the industry you would quantify as repair and maintenance spending? How much is being driven by housing turnover and then what would you call discretionary?

Honestly, we haven't focused on breaking that down in the current demand environment, so I can't provide a detailed breakdown. We understand that repair and remodel are central to our business. We're here to assist customers in bringing their dreams of home updates to life. Over the past year, as customers have spent more time at home, they’ve expressed that their homes are more important than ever. Many customers, including myself, have noticed numerous tasks that need attention around the house and have been addressing those. During the tough times of 2007 and 2008, repair became more significant than remodel, but we're not experiencing that kind of situation today. Therefore, I can't provide insights into the expansion by those specific categories at this time.

Got it. Appreciate the time.

Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.

Great. Thank you. Can you just talk about new customer growth and whether you’re seeing a greater degree of growth in new Pros versus new DIYers?

Yes. We are very happy with our overall customer portfolio both DIY, Pro, and aging in capabilities. While I won’t give any specific numbers in breakouts, I can tell you that our customer files of both Pro and consumer have grown to help those file are very strong with a repurchase rate of developed customers growing faster than the new customers. So the new customers gain last year, we’ve been able to keep package in our media with that terrific rates. In our Pro customers, I will let Bill Lennie comment on the activity we’re seeing and engagement with our Pro customers with our B2B website, delivery capabilities, our new loyalty program, all of those are also adding to the stickiness of the Pro customer.

Great. And just on the services side. I mean how big is that now as a percent of sales? I know it’s probably relatively small. But, I mean, are there areas where you think you can expand into services without competing with your Pro customers?

Yeah. That business is in the 4% to 5% range. We are very pleased with the results that we have seen in that business and we think we can do that without getting into competing.

Our next question comes from the line of Steven Forbes with Guggenheim. Please proceed with your question.

Good morning. Maybe just start with a quick follow-up on the broader supply chain initiatives. Ted, I think you mentioned, 70% increase in distribution footage this year. So, maybe if you can update us on how many facilities that correlates to and any color on the cadence or the planned cadence of openings?

Mark, do you want to take that?

Sure. We were on our way to 35 FDCs flatbed delivery centers. We have four open today. We’re opening several more through the end of the year. We’ve got a very solid pipeline there. Our MDOs we ended 2020 with 39, we opened eight in Q1 and we’re opening more there on our way to roughly 100. And then MDCs we’ve got two of those open; we open Houston during Q1. We have a healthy pipeline there, opening several more through the year as well and on our way to 20th or so on our MDCs.

Thank you. And then maybe just a quick follow-up for Richard, I think, I don’t believe you called out the incremental strategic investment spend impact when you walk through the expense line items. So maybe if you can just remind us on where we are right in terms of the trajectory of that strategic investment spend that’s captive within the model.

Well, at the end of Q4 last year, we announced that our strategic investment program that stretched from 2018 to 2020 was materially complete. And so going forward, our stance is that we will look to invest approximately 2% of sales every year in the form of CapEx. There’ll be associated expense with that, but I would just consider that part of our expense structure going forward.

Thank you. Best of luck.

Thanks.

Our next question comes from the line of Dennis McGill with Zelman. Please proceed with your question.

Hi. Thank you. Ted, on the lumber side, when we think about, I guess that’s the biggest driver of the commodity inflation. Is it fair to assume that impact accelerated through the quarter and was largest in April? And then as we think about that impact so far in May, it would be similarly above what you experienced in the first quarter?

Yes. It literally week-on-week, it’s gone up and as we sit last week framing and panel are effectively quadrupled in the market index pricing, and again, each of those went up last week.

Okay. Perfect. And then anything else to learn from the category performance, as you look at passing the April comp of last year and looking at that on a two-year basis? Any categories actually accelerating on a two-year basis versus decelerating? And I guess, just on the quarter itself, the one category that wasn’t 20%. Just curious on what that was?

So the category that was not 20% was paint. We are very pleased with the performance in paint, but last year I think everyone stayed home and painted. So we had incredibly tough compares. So we didn’t quite hit the 20% mark. Overall on what’s accelerating, I would say, continued outdoor living has been very strong. So if all of you are interested in things like grills and patio sets, those are going to be in shorter supply as we get into the spring, because the demand is incredibly strong and things like patio. We do a fixed buy because most of that is important and we had to make the decision on the buy level quite some time ago. So that’s been particularly strong.

Anything else on the other side, besides paint that you can call out as being a decelerating trend?

No.

All right. Much appreciate it. Thank you, guys.

Our next question comes from the line of Greg Melich with Evercore. Please proceed with your question.

Hi. Thanks. Richard, considering the operating leverage compared to 2019, you’re up 180 basis points. As we look ahead, is it reasonable to expect this to be our target moving forward? Typically, in the second quarter, sales are a few billion higher, and operating margins tend to be better than in the first quarter when we look back over the last five years. Should we assume that kind of flow-through now?

Well, with respect to sales, we’re not going to extrapolate what we’ve seen into the future. Obviously, there is a degree of uncertainty on how the consumer is going to respond to this year. I’ll just say it again, Greg, when you compare the first quarter of this year to the first quarter of last year and you adjust for non-recurring expenses, we feel very pleased with the operating expense leverage that we drove and the flow-through that we drove at this level of volume.

Got it. If I could follow up on inflation and the mix, was the increase in the commodity part just related to lumber, or did it also include copper and other commodities, or was it specifically lumber?

Lumber and copper primarily, yes.

Got it. And so then if we look at that average basket up 10%, is it fair to say that overall inflation or average AUR was 500 bps, 600 bps of that basket increase?

No.

No.

It was also driven by project nature of the business. The innovation that the merchants have brought to the market.

Yeah.

You’ve got as a percentage of the basket; I mean, it’s a…

We are not…

Got it. Thanks a lot. Good luck, guys. Great job.

Thanks, Greg.

Christine, we have time for one more question.

Thank you. Our final question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question.

Hey, guys. Thanks. Thanks for taking my question. So I was just wondering if you could talk about labor inflation and just the overall installation as you guys think about the back half of the year. So that’s number one question?

We converted part of our COVID expenses into permanent labor costs in November 2020, which is reflected in our recent performance. As for our labor situation, we’re in spring hiring season, and we've managed to bring on more staff this year compared to last, despite ramping up last year to meet demand. We're continuously adjusting weekly to remain flexible and agile. Our primary focus areas, without knowing how things will unfold, are inventory flow and labor. These factors are critical for our short cycle planning as we aim to meet the existing demand.

And do you guys having any trouble getting labor and having wage rates or labor rates a lot in certain markets or is that really not an issue for you guys at this stage?

I mean, there are always variances by market and some markets are more challenging than others in any given year. But as I said, we’ve actually hired more folks this year than we did last year.

That’s great, guys. That’s all my questions. I appreciate the answer.

Thank you, Ms. Janci, I would now like to turn the floor back over to you for closing comments.

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

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.