Greetings and welcome to the Home Depot Second Quarter 2021 Earnings Call. At this time, all participants are in 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.

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 Investor Relations 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 presentation 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. We were pleased with our performance in the Second Quarter as we achieved over $40 billion in quarterly sales for the first time in our history. Sales from the second quarter were $41.1 billion, up 8.1% from last year. Comp sales were up 4.5% from last year with the U.S. comps of a positive 3.4%. Diluted earnings per share were $4.53 in the second quarter, up from $4.2 in the second quarter last year. The strong underlying demand across the business continues. During the second quarter, we did observe some changing consumer patterns in the U.S. as the U.S. economy opened up. This has manifested itself in several ways. We have seen a shift in pattern of sales within the week, as our weekday sales performance has actually strengthened relative to the weekend. We attributed this to consumers returning to travel and other recreational activities. And while the consumers are returning to pre-pandemic activities, we continue to see them engaged in home improvement projects. We also see customers more comfortable taking on larger projects, as evidenced by the continued strength with our Pro customer, which outpaced the DIY customer for the second quarter in a row. We remained as flexible and we're pleased with our ability to respond to strong home improvement demand and comp-the-comp in the second quarter. We had positive comps every week despite our precedent in compares last year and grew sales by $3.1 billion in the second quarter, and more than $12 billion year-to-date. Over the last 6 quarters, we have grown the business by more than $34 billion, a level unmatched in our market. From a geographic perspective, 15 of our 19 U.S. regions posted positive comps versus last year. On a two-year stock basis, all 19 regions showed strong double-digit comp growth. However, unlike the past 4 quarters, in the Second Quarter, we did experience some variability and performance from a geographic perspective. The variability in our regional performance is driven by our Northern division, where we saw a more pronounced shift in sales with stronger sales in outdoor seasonal categories during the First Quarter. Mexico posted double-digit positive comps, and despite significant customer restrictions during the quarter due to COVID-19, Canada posted comps that were essentially flat in local currency. We continue to effectively manage the strong demand for home improvement products despite significant industry disruptions in supply chains. We are leveraging the scale of our supply chain and partnership with our vendors to prioritize key SKUs and high-demand categories. And while our in-stocks are not where we want them to be, they have improved from where they were a year ago, and our network continues to flow goods remarkably well thanks to the investments we have made in our supply chain over a number of years. The team continues to make progress on building out our One Home Depot Supply Chain vision. We remain largely on track with our plans with a critical mass of buildings scheduled to come online this year and next. We believe that the network we are building is unique to the market. It will not only enhance the customer experience from a delivery standpoint but also expand the breadth and depth of our current opportunity set, drive efficiency, and leverage our scale to further extend our low-cost position in home improvement. In the near-term, we remain focused on being flexible and agile as we navigate this dynamic environment. But we also continue to leverage the momentum of our strategic investments to further enhance the interconnected shopping experience in support of our goals to drive growth faster than the market in any environment, further strengthen our position as a low-cost provider in home improvement with a relentless focus on productivity and efficiency, and deliver exceptional shareholder value. Throughout all the events of the past 18 months, our culture has remained our North Star. In fact, I recently spent time with a number of new associates that we have hired in the past year and was struck by how engaged and connected these associates were to The Home Depot culture. They were onboarded during a time when our stores and teams were busier than ever. But our associates took the time to get to know these new folks and share what it means to be part of the orange-blooded family. Our ability to invest for the future while also managing the most fluid environment in our Company 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. And 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. As you heard from Craig, during the Second Quarter we continued to see strong performance in our business, particularly as we lap the significant growth from the same period last year. We were able to meet strong customer demand despite ongoing pressures throughout the supply chain. Raw material shortages, production constraints, and pressures across modes of transportation are creating a difficult supply chain environment. That being said, our performance would not be possible without the cross-functional efforts by our supply chain, merchandising store, and operations teams as we continue to flow record volumes of goods week after week. Over the course of the pandemic, you've heard us talk about a number of initiatives we've implemented, many in concert with our suppliers to improve our in-stock positions and get product to our customers. And our teams continue to use our culture and values to guide our decisions. One of our values is entrepreneurial spirit, which is alive and well at The Home Depot. Our supply chain teams recently leveraged our scale and flexibility to arrange for several container vessels for our exclusive use. Yet another way our teams found a creative solution to better serve our customers in this dynamic environment. Our in-stock levels are still not where we want them to be, and we are maintaining the improvements we made over the last few quarters and building depth in key categories, as evidenced by inventory growing faster than sales compared to the same period last year. Turning to our comp performance. During the second quarter, 10 of our 14 merchandising departments posted positive comps; led by kitchen and bath, and lumber. During the second quarter of this year, we saw single-digit negative comps in paint, hardware, and indoor and outdoor gardening. It is important to note that these were some of our strongest performing departments during the second quarter of last year. On a two-year stack basis, each of our departments posted healthy double-digit comps. Our comp average ticket increased 11.3% and comp transactions decreased 6%. The growth in our comp average ticket was driven in part by inflation in certain categories, notably lumber. On a 2-year stock basis, both comp average ticket and comp transactions were healthy and positive. This was another historic quarter for lumber price volatility. During the first few weeks of the second quarter, prices for both framing and panel lumber reached all-time highs before quickly falling from their peaks. As an example, during the second quarter, framing lumber peaked at approximately $1,500 per thousand board feet before falling over $1,000 to approximately $500. While pricing for both framing and panel has come down from the peaks, the average price during the second quarter was still significantly higher in the same period last year. Inflation from core commodity categories positively impacted our average ticket growth by approximately 420 basis points during the second quarter. Big-ticket comp transactions are those over $1,000 were up approximately 24% compared to the Second Quarter of last year. We saw big ticket strength across many Pro-heavy categories, like lumber, vinyl plank flooring, gypsum, and pipe and fittings. During the Second Quarter, Pro sales growth outpaced DIY growth for the second quarter in a row on a two-year stack basis. Growth with our Pro and DIY customers was consistent and strong. We're encouraged by the momentum we are seeing with our Pros. Growth with our larger Pros continues to outpace that of our smaller Pros, and they tell us that their backlogs are long and growing. In fact, the National Association of Homebuilders remodeling index hit all-time highs during the second quarter. And during the quarter, we saw many of our customers turning to Pros to help them with larger renovation projects. This can be seen in the strength of several of our kitchen and bath categories, like in-stock kitchens, tubs and showers, and vanities, all of which posted 1-year and 2-year comps above the Company average. Sales leveraging our digital platforms were essentially flat during the second quarter, as we lapped digital sales growth of approximately 100% in the second quarter of last year. On a 2-year stack basis, sales from our digital platforms increased approximately 100%. We're thrilled with the customer engagement across our interconnected platforms. We know the vast majority of our customers engage with us in an interconnected manner. Whether it be through project, inspiration, and research, transacting, fulfillment, or support; our customers blend physical and digital worlds. And while customers have gotten more comfortable buying online, we've never been more confident in the importance of our physical stores as they remain the center of our customer experience due to the project nature of our business. For those customers that chose to transact with us online during the second quarter, more than 55% of our online orders were fulfilled through our stores; a testament to the power of our interconnected retail strategy. As we look forward to the back half of the year, we know our Pros are busy, and we are working hard to secure the best products to help our Pros get their jobs done. Last quarter, we highlighted several exclusive products for our Pro customers. This quarter we're excited to announce a new Big Box Home Improvement exclusive relationship with LP Building Solutions, a top provider of OSB panel boards. In addition, we are pleased with the momentum we are seeing with our Pro Xtra Loyalty Program. Several quarters ago, we relaunched Pro Xtra and we've been thrilled with the membership take-up in engagement we are seeing. Pro Xtra offers more frequent touchpoints with our Pros through convenient services like purchase tracking and volume pricing, along with other benefits. In addition, all Pro Xtra members are now able to access our B2B Pro online experience, offering Pros more personalization on homedepot.com. During the third quarter, we are also thrilled to announce the roll-out of what we believe is the most innovative paint offering in years, through our exclusive relationship with Behr. BEHR DYNASTY is a brand new, 4-in-1 interior paint that offers DIYers, Pro Painters, and design professionals a unique product exclusively from The Home Depot. It is our most stain-repellent, scuff-resistant, fast-drying, one-coat coverage paint, all in one can. With that I'd like to turn the call over to Richard.

Thank you, Ted. And good morning, everyone. In the second quarter, total sales were $41.1 billion, an increase of $3.1 billion or 8.1% from last year. Foreign exchange rates positively impacted total sales growth by approximately $385 million. During the second quarter our total Company comps were positive 4.5% with positive comps in all 3 months. During the quarter, we saw total Company comps of 4.7% in May, 3.9% in June, and 4.9% in July. Comps in the U.S. were positive 3.4% for the quarter, with comps of 3.1% in May, 2.7% in June, and 4.3% in July. In the Second Quarter, our gross margin was 33.2%, a decrease of approximately 80 basis points from the same period last year. While there are many factors that impact gross margin, the year-over-year change during the Second Quarter was primarily driven by lumber, which accounted for approximately 60 basis points of pressure. In addition, several other factors negatively impacted our gross margin, including rising transportation costs, One Supply Chain investments, and lapping a benefit from canceled events in the second quarter of last year. During the second quarter, operating expense as a percent of sales decreased approximately 100 basis points to 17.1%. Our operating leverage during the second quarter reflects significant COVID-related expenses that we incurred in the second quarter of 2020 to support our associates. These expenses were partially offset by underspending in other expense items in the Second Quarter of last year, most notably payroll, as we staffed up to meet strong demand. Our operating expenses during the Second Quarter of this year also include wage investments that we made at the end of 2020. Our operating margin for the Second Quarter was 16.1%, an increase of approximately 20 basis points from the Second Quarter of 2020. Interest and other expense for the second quarter decreased by $16 million to $321 million. In the second quarter, our effective tax rate was 23.9%, down from 24.4% in the second quarter of fiscal 2020. Our diluted earnings per share for the second quarter were $4.53, an increase of 12.7% compared to the second quarter of 2020. At the end of the quarter, inventories were $18.9 billion up $5.4 billion from last year, and inventory turns were 5.7 times compared with 6.1 times this time last year. Turning to capital allocation, after investing in our business is our intent to return excess cash to shareholders in the form of dividends and share repurchases. During the Second Quarter, we invested approximately $520 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $1.75 billion in dividends to our shareholders. And we returned approximately $3 billion to shareholders in the form of share repurchases. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 44.7%, up from 41.1% in the second quarter of Fiscal 2020. As you heard from Craig, we're very pleased with the strong performance we saw during the second quarter, particularly as we lap the unprecedented growth we saw this time last year. And while these challenging compares continue into the back half of the year, we are encouraged by what we are seeing. During the first 2 weeks of August, we've seen comps in the U.S. consistent with the Second Quarter. Customer engagement and demand for home improvement is healthy. Housing remains strong, and we see a supportive environment for home improvement spending as we look out over the next several years. That said, there's still a significant amount of uncertainty in the broader environment as it relates to the evolution of the COVID-19 pandemic and the new and spreading variants. As we've previously shared, we do not believe we can accurately predict how the external environment will evolve and how it will ultimately impact consumer spending. We will continue to execute with flexibility and focus on what has driven our successful performance. 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 the 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 continue to grow faster than our market and we'll deliver exceptional value to our shareholders. Thank you for your participation in today's call. And Christine, we will now open the call for questions.

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star then one on your telephone keypad. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Thanks, everyone. Good morning.

Good morning.

Hi, Craig, Hi, Richard. I wanted to ask if Home Improvement demand needs to stabilize over the next couple of years or if we can continue to see growth. I think Richard mentioned expecting healthy demand for several years ahead. I'm curious if your views on the next couple of years have changed, considering the significant growth we've experienced over the past two years.

Simeon, when we look at the overall backdrop for support and Home Improvement from a housing perspective, from the remodeling index, we feel pretty good about the long-term outlook for Home Improvement. Hard to predict the short-term, but the longer-term outlook looks solid. Richard, I don't know if you want to.

We believe that the increase in home prices fundamentally supports home improvement activity and demand. As the value of your home rises, you're more inclined to invest in it. Currently, the housing stock in the U.S. is over 20% more valuable than it was two years ago. Looking ahead, not only have we experienced home price appreciation, but homeowners also have very healthy balance sheets. The state of mortgage finance is strong, which contributes to our optimism.

That's helpful. I have a question about the second-half outlook for gross margin. Did the dynamics we observed in the second quarter ease up, allowing for an improvement in the rate of change for gross margin in the latter half of the year?

I'd say we're focused on executing week-to-week here. There are certainly cost pressures in the environment and I think we're all dealing with that. But we've dealt with that throughout our history and we're comfortable with our ability to manage through the cost environment effectively.

Simeon, I think there are some very unique scenarios obviously in the quarter, lumber being the one as Richard called out. Unprecedented level of drop and unprecedented speed with which it drops. Normally the only impact you have is from mix. But with the rapid decline in the extent of the decline, we always have a philosophy that we want to lead the market down and lag going up, to remain as competitive as possible for our customers. And that actually created an impact, which, in this quarter, was unique, that we normally don't see. And I'd make another comment which is the shape of the business given the volume that is coming through our system is not predictable, but we know we're confident that we are taking share and we're there to meet the demand that we see from our customer. That mix may have an impact but when we look at the operating profit dollar growth we're generating as a company, we feel great about it. We're looking more at driving market share capture and driving that operating profit dollar growth.

Thank you.

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

Good morning. Thanks a lot for taking my question.

Morning.

How should the trend that you outlined with diversion performance on the weekdays versus the weekends inform how we think about the DIY business moving forward? Do you attribute that to more of a temporary condition, where consumers had pent-up demand to go on vacation this summer, and they'll return to projects in the fall, or alternatively, as families return to traditional activities like social events, watching College and Pro sports, and gradually returning to the office, it's going to put accelerating pressure on the DIY business? And do you think there's enough strength and pent-up demand for the Pro segment that it can offset that?

Hey, Michael. It's a great question and something we're watching carefully as the consumer gets back to a more normal environment. What we did see is consumers, and our research would suggest this as well, consumers are taking on more projects. They have larger projects and have a tendency to hire a pro to do them. And as a result, we've seen our Pro-business strengthen for several quarters in a row with the last 2 quarters where the Pro outperformed the DIY customers for the first time since the pandemic started. And so we're very optimistic about where the Pro business goes and the strength of that Pro business. And we're focused on making sure that we can take care of those Pros along with our DIY customers, but I feel like there is solid opportunity to continue to grow. Pros tell us their backlogs are bigger than ever. Consumers continue to tell us the home is more important than ever, and that they have a laundry list of projects.

That's all helpful, Craig and you're gonna have this funky dynamic where maybe the Pro business is good, maybe the DIY business decelerates from here. And how is that going to impact your labor model, which is activity-based? So if comps do turn negative in the back half, how quickly can you flex that, and how well is it fine-tuned for this dynamic where you might have a decline in DIY transactions that you may actually not need as much labor so you can save some SG&A dollars on that.

Michael, you hit it on the head in terms of our labor model is an activity-based model, which has a component in there of transaction. We can adjust relatively quickly. It's a short-cycle model, and we'll make the appropriate adjustments as we go. We plan out a few weeks in advance.

Okay. 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 just wanted you guys to elaborate a little bit more on some of the benefits you expect to see once the One HD Supply Chain gets built out sometime in 2022?

Sure, the whole purpose of the supply chain is really our ability to deliver all of our products, parcel and big and bulky, to 90% of the U.S. population same and next day. And we're 3 plus years into this build-out. We have multiple facilities up of each type that we're building. They're all performing well in fulfilling that expectation of being able to deliver and satisfy the customers. Speed and reliability is what's required, particularly with our Pro customers. In addition, it's allowing us to expand our assortments from what we carry in our stores. So not only can we get the product in a quicker, more reliable fashion to our customers, but we can get a broader assortment to our customers. And lastly, we're up to $660 a square foot of sales this past quarter in our stores. And it's just a tremendous amount of activity in cubing that building. So to be able to get deliveries, particularly the big and bulky deliveries out of the store, that helps our customer flow and our associate activities in the store. And we're just thrilled with that in particular. Our FDCs have opened up. We're relieving a tremendous amount of delivery activity in cube flow out of our stores, in delivering directly out of the new facilities exactly the way the Supply Chain Team has planned it.

That's great. And then just on lumber, I'm curious what you're seeing from a unit volume perspective as prices dropped throughout the quarter.

Well, clearly, when we hit $1,500 plus for 1,000 board feet, people backed out of the market for sure and waited. And it wasn't until we got a tremendous amount of new supply in the marketplace. I think once you hit that tipping point where people backed off on the margin and prices started to fall, and as Craig said, it was falling so quickly. $100, $150 even $200 a thousand board feet per week. People just stepped back even further. That's now settled at about $430 for framing lumber. And for sure, at those high levels, we saw an impact on units. Our units had turned negative. And as prices have come down, units are still negative, but on a sequential basis, improving in responding to that lower price. So we're very pleased, supply and demand dynamics worked as expected.

Thank you.

Our next question comes from the line of Karen Short with Barclays, please proceed with your question.

Hi. Thanks very much. Just wondering, with respect to inventory. You're up against your comparisons from last year, but looking at overall areas of inventory, is there any area where you think you're still lacking product? And then how to think about inventory growth in the second half of the year?

First of all, Karen, I’d like to say we’re very pleased that we have continued to build our inventory while achieving strong productivity with a turnover rate of 5.7. We’re quite satisfied with that. However, we are still not at the ideal level in terms of in-stock position. Our suppliers are putting in a lot of effort, and our merchants have collaborated with them to concentrate on key SKUs. There is still room for improvement in bringing in more products across our assortments. For now, we are focusing on the most critical items.

It's been a situation where we've had varying outcomes across different categories. As Craig mentioned, we're focusing on expanding our inventory for our best-selling products and increasing availability in bulk for our professional customers. This is particularly true for building materials, lumber, and electrical and plumbing fixtures. We've seen a strong recovery in these areas, but it remains a category-specific situation. Challenges like COVID outbreaks in factories, shipping delays, and domestic transportation constraints have affected our progress, leading to some setbacks. However, we are seeing improvement, which is why we're confident in increasing our inventory. We have strong financial resources and our products are mostly non-perishable, which limits the risk of becoming obsolete, especially for our core items. The performance of our supply chain and merchants has played a significant role in helping us capture a larger share of the market despite the current environment.

Okay. That's helpful and I just was wondering on the Pro Xtra loyalty. I was wondering if you'd be willing to give a little update on the number of members in the program. And then any color, if you can provide, on average spend of members versus the non-member Pro or just any metrics that you could provide.

Yeah. Won't get into details. But, you know our rough dynamic, about 4% or 5% of our customer base being the Pro makes up 45% of our sales, so this is a number in the mid-millions of our core Pros. A very strong number of those, percentage of those are in the Pro Xtra program. And now, as I mentioned in my prepared remarks, we're building a B2B website and all of our Pro Xtra members now have been transferred over to that B2B experience. So with the combination of the benefits that you're getting with Pro Xtra we've stood up a separate Pro Xtra app that those Pros are using, and the ability to engage on the B2B website which has all sorts of functionality build-out specifically for the Pro. So think of builds and material for jobs, tracking jobs, quotes, building quotes, reorder capability, tracking all receipts, preferred pricing in certain instances. All of that is coming together as well as personalization in building relevance on that Pro B2B website so think of something like search results. If you or I would put in 'pliers', we have thousands of pliers that could be returned in that search result. We're getting to the point now that we know an electrician is performing that search so we're going to provide relevance and we're going to provide our electrical pliers as the first results in that search query. So this is just another great add to our Pro ecosystem and just been tremendous engagement with the Pro Loyalty app, the Pro Xtra program, and now B2B website.

Great, thanks very much for all the color.

Our next question comes from the line of Brian Nagel with Oppenheimer, please proceed with your question.

Good morning.

Good morning.

Thank you for taking my question. A couple of questions with regards to sales, and pretty quick ones. First off, just with respect to lumber, I know you talked about it in your prepared comments and in response to the questions, but could you say to what extent lumber was a benefit to comps this quarter?

About $1.3 billion.

Sales were significantly stronger in the first half of the quarter, particularly early on.

Yes, Brian, for sure. It was an unbelievable fast fall. But yes, it was heavily geared towards the 1st part of the quarter.

Okay. And then the 2nd question I have, and I know this is awful nuanced, but you talked about the strength in the Pro business in your conversations, your connections with your Pro customers. Do you think that the jobs are being taken on now? Were those jobs that were started during the pandemic and are only now being able to be fulfilled because the Pros are available to work or are these projects that are actually starting right now?

I think you've probably have a combination, would be my best guess. I don't know that for sure, but we know, for example, when we talk to Pros, that they've had a backlog for some time. And so I think, clearly, there's probably some that have been in the works where they've been waiting for a Pro to start a job, and then I think there's probably scenarios where it's a quicker cycle but we don't really have a way of knowing that.

The National Association of Homebuilders index has a lot of interesting survey data within it. One of the survey components is consumer optimism and intent around projects. And we have actually seen intent, check-up for small projects, medium-sized projects, and large projects, really sort of sequentially through the year. So I think if you take the question off of the backlog and you say, what's the intent, it does seem that homeowners are leaning into projects. And you know, whether it's a Pro or consumer customer, all eventually connects to the same customer demand. So it looks like the trend is strengthening in project demand.

And I think if you look at our services, businesses or proxy, we're certainly seeing that as well as our service business think of these large projects, carpet installation, cabinet installation, refacing, and bath, HVAC. Those all are strong and accelerating.

I appreciate all the color. Thank you.

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

Hey, good morning. You're lapping a period of very low promotional activity, as you know, and given the 3 major holiday events in Q2 with Memorial Day, Father's Day, July 4th, could you talk about to what extent these events were a material topline driver in the quarter? And then, with respect to gross margin, to what extent did this have an impact in Q2, and how should we think about the promotional impact as that mixes into the gross margin line in the second half?

I would say our promotions increased compared to last year, but this was mainly due to the fact that we had reduced promotions last year. We were less promotional than we were in 2019. While we are pleased with our events and our sell-through, achieving record sell-through in nearly all of our programs, these events did not significantly contribute to our comparable store sales. Additionally, the factors Richard mentioned regarding our margin impact were not particularly significant.

It wasn't meaningful.

Got it. That's helpful. And then Richard, could you talk about how your Pro versus DIY trends performed through the quarter? And if there was any variability in trend from one versus the other. And then for Q3, does the commentary that trends are in line during the first 2 weeks of August, does that also hold for both Pro versus DIY?

Well, so we're not gonna break out intra-quarter. It was the second quarter where we saw our Pro customer grow faster than our DIY customer. I'd say in the 1st 2 weeks of the quarter, not much has changed with respect to the direction of our business.

Got it. Appreciate the time.

Welcome.

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

Great, thank you. Could you just give an update on the MRO market and the trends you're seeing there? And you mentioned that your big Pros we're outpacing small Pros so was MRO growth even above that of those big Pros given relatively easier comparisons against last year?

Liz, we're very pleased actually with our MRO business and the acquisition of HD Supply. The business there is very solid. What we're excited about, candidly, with that business, is the opportunity to much better serve 50 million households in the multi-family space. Not only can we serve them with MRO products, but obviously as we have relationships and build that through our MRO business, the opportunity to then participate in capital refreshes for those property owners on those 50 million households that are in the multi-family market, is a huge opportunity for Home Depot going forward. So we're super pleased with the business and the progress that we're making there.

Wait, and I'm just checking in to Zach's question a little bit. I mean, it may be early to be thinking about this, but how are you approaching the holiday season this year from a procurement standpoint and a promotional standpoint? Should we expect it to look more like last year where marketing started early and extended longer, but the promotions were a bit shallower than a normal year or do you think it will go back to a shorter and deeper promotional cadence like pre-pandemic seasons?

Well, as you can imagine, with the international supply chain involved in those type events, the merchants and supply chain teams made the bulk of those buy decision sometime ago. So it's a fixed buy. We're not expecting huge growth in those programs. But to your point, it's deeper buys, stronger values, fewer items, and we think we have great programs. In terms of marketing early, I think we're going to follow all our normal trends. We had a sneak peek with opening up Halloween online and just sold out of our pre-release Halloween product almost immediately. That's a very strong indication that people are still going to engage in decorating, and we look forward to setting our decorative holiday later in October.

Great, thank you.

Our next question comes from the line of Christopher Horvers with JPMorgan, please proceed with your question.

Thanks. Good morning, everybody. It's been a long time since the weather was a potential question, but during the second quarter, do you think it was a net headwind that the major DIY holidays had record rain in some of the Northern geographies? And so was it beyond just the bathtub effect of 1Q versus 2Q?

I wouldn't say it was beyond it, but we certainly saw it. So we think that it may have accounted for a low single-digit comp impact, call it 100 to 200 basis points of comp pull-forward from Q1, I'm sorry, from Q2 into Q1 particularly in the Northern division. As Craig called out, while we did see a difference in divisional performance, that really was the primary driver in our view.

Got it. And then on the lumber side, as prices stand now, would lumber be a modest headwind comp for the balance of the year and is that reflected in the quarter-to-date commentary?

Yeah. Lumber just the market pricing of lumber, Chris, right now, framing is approaching 40% under LY, and panel is 10% under LY. With neutral units, there would be a negative comp impact. As I said, unit progression is going in the right direction with these lower prices and that all speaks to the project nature, but from a price perspective, not expecting any tailwind in lumber.

Got it. And then the last question, Richard, is as you think about how transportation costs and I assume some of that gets hung up in inventory, so do you think the transportation cost pressure actually gets worse as you look in the back half? So as much as the re-pressure from lumber doesn't repeat itself, you could have higher transportation cost pressures on gross margin.

The back half is a long period of time. I'm not going to speculate on what transportation costs might look like. I will just tell you that I would bet on our team every single day to be able to manage through that dynamic. Our supply chain team is exceptional and creative. And I think that they have reinforced our position as the low-cost provider in the market. So regardless of where the market goes, I think we'll be in an advantaged position.

I'm sorry. One last quick one. In July, how would you characterize the competitive promotional environment? There are some questions out there that maybe some of your competitors got more promotional, although it was for you just more of a comparison to a low level last year?

I didn't see anything majorly different.

I didn't notice that much, Chris.

Got it. Thanks so much. Best of luck.

Thank you.

Our next question comes from the line of Kate McShane with Goldman Sachs, please proceed with your question.

Hi. Good morning. Thanks for taking my question. Just a couple of housekeeping-type questions. I wondered if you could address, at all, the trend of trading up by the customer, if that was something you continued to see during the quarter? And any commentary you can give, specifically around appliances and what you saw in Q2?

I would say yes, we continue to see the trading up. It's not as clear as I used to report on it just because of the inventory situation or we're seeing lots of substitution of goods depending on what's in stock on the shelf that particular day. But if you look at power tools, for example, outdoor power equipment, the appliance category, grill category, riding lawnmower, and zero-turn categories, just as a few examples, Kate, people are trading up to innovation in all those categories. More powerful, longer run time on batteries, that's moving over to outdoor power equipment. The design aesthetic, and the features of modern appliances. People are happily trading up to quite strong price points in appliances. LED lighting, it's going through not just light bulbs but integrated into ceiling fans and fixtures. That trade-up is innovation and newness driven, and we're seeing that as strong as ever.

Does that complete your question?

Yes. Sorry. Thank you.

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

Thanks. I had a follow-up on comps and then SG&A. I guess I'd start with SG&A. So you had 100 bps of leverage in the first half. And you guys had talked about getting back to leveraging the way that Home Depot did in the past. Should we expect the second half to have similar type leverage or is there something unique about what happened last year that means that would be less?

Well, Greg, 2020 was such a unique year and comparisons from 2021 to 2020 are difficult for a number of factors. You think about the amount of COVID expense that we put in place in support of our associates last year. You think about expense underspend as we worked to bring staffing up to levels to meet demand. And then you think about the wage investment that we made towards the end of 2020. All these make comparisons difficult. We are committed to generating operating expense leverage over the long term. We feel great about the operating expense leverage that we've delivered in Q2 and in the first half. You're always going to see fluctuations quarter-to-quarter. Leverage is a function of topline sales; it can be a function of seasonality and other factors. In any given quarter, you may see volatility, but over a period of quarters, you're going to see from us operating expense leverage. And again, we're very happy with how the quarter and a half played out.

And my follow-up, maybe linked to that, is on comps. If the trend, I just want to make sure I got it right. If the trend is similar in the Second Quarter but there is no inflation in lumber, is it fair to say that that 2-year comp is stable on the mid-20s without inflation? Am I interpreting that correct?

Well, two-year comp is similar in its consistency to one-year comp in the first couple of weeks of the month.

Got it. Right. I appreciate it. Thanks a lot and good luck.

Thanks, Greg.

Our next question comes from the line of David Bellinger with Wolfe Research, please proceed with your question.

Hey, good morning and thanks for taking the question. I wanted to ask in regards to supply chain. You alluded in the prepared comments working through a difficult environment. Are you seeing incremental pressures now versus just a few months ago? Is there some level of sales that you missed out on in the Q2 period? And maybe a bigger-picture question, through all the recent supply chain issues across the industry, is there anything now that you're re-evaluating or making some type of change within the One Home Depot build-out?

I'd say the first comment that I'd have is as it relates to the potential sales impact, really, really hard to tell. And the reason that's so hard to get a gauge on that is the fact that there is a high level of willingness of substitution on the customer's parts since this pandemic began, much more so than pre-pandemic. Is there some level of impact? The logic tells you there probably was, but it's really hard to gauge and we think we captured most as a result of substitution.

And any change in regard to your larger build-out plans of One Home Depot?

No, not at all. We're focused on where the customer has taken us and how they want to engage with The Home Depot, so it has no impact at all.

Got it. And just my follow-up here, you mentioned a new exclusive relationship with LP Building Solutions. Can you expand upon that any further? Does that reflect some type of shift in the business where maybe you lean more into Pros tied to more new home construction as the next level of Pro sales growth and just give the Company more exposure on the new home construction side. Can you just expand upon that any further?

The intention was not to change our position regarding new home construction, which is not a market we actively pursue. LP is similar to our previous work with Carlon electrical boxes. Just as Carlon is the largest provider in PVC electrical boxes for professionals, LP is among the leading OSB providers and has a strong brand. This involves The Home Depot collaborating with top suppliers to streamline their supply chain for our benefit, allowing us to maintain a solid inventory in these essential professional categories. The exclusives with Carlon and LP are focused on meeting the needs of our professional customers.

Got it. Appreciate the color.

Our next question comes from the line of Laura Champine with Loop Capital. Please proceed with your question.

Thanks for taking my question. I just wanted to get some context around the commentary that you should be able to lap the difficult comparisons given the strong macro drivers and home prices, and comparing that to the outcome in Q2 of transactions that were down. Is the thought there that the transactions were down largely because of lumber inflation and other sort of onetime issues? And the transaction should tick back up as we move through the rest of this year and next?

Well, our first comment would be we didn't really provide any outlook going forward. We don't believe we can take past performance and project that forward due to the uncertainty in the environment that exists today. As it relates to the transactions, I mean, huge transactions last year as a result of PPE. Ted, if you want to comment.

Yeah. I mean, that was one of our single biggest drivers of the fall-off. Is people coming in for masks and hand sanitizers. And of the four departments that we did see negative sales, hardware, outdoor and indoor gardening paint, those are can tend to be more consumer-oriented. Lots of units and mulch and soil and things and paint is a DIYer was home, not doing other activities on the weekend. We're not alarmed by that fall-off at all. We'll get through that. I'd say that take a category like paint, paint had been a 1 or 2 unit grower for several years up until the pandemic. And painting is one of the initial home improvement projects that a customer engages in and starts to build confidence in home improvement. And while we saw a dip in Q2, the levels in unit volume that we're seeing in paint is well above 2019, and I've talked about the millennials before. Millennials are engaged in housing. They are engaging in home improvement. They've done that first project which is painting and some gardening work, generally. So we're just thrilled that they are engaged in the category, and moving on to bigger projects.

Got it. And then as a follow-on, do we have a better sense now on where digital should be in terms of longer-term sustainable growth rate and/or the percentage of sales? Hopefully, things are settling out there.

I mean, we really look at this as an interconnected experience. Our customers are clearly blending the physical and digital worlds together because of the project nature of our business. Certainly from pre-pandemic levels, we've seen an accelerated rate of engagement in terms of sales through our digital channels, but that's not how we focus on that or look at it. We view it as a capability for our customer to engage with The Home Depot.

All right, thank you.

Christine, we have time for one more question.

Thank you. Our final question comes from the line of Eric Bosshard with Cleveland Research. Please proceed with your question.

Thanks. Two things. First of all, perhaps for Richard, some clarity on lumber. You talked about leading on the way down with price to do what's best for the customer. Does that necessitate more gross margin pressure from lumber in Q3 or am I thinking about that wrong?

By and large, the pressure from lumber, at least what the prices we've seen in the market has been recognized to date, so no. And now it depends on future lumber price. But at the moment, the precipitous decline had its impact in Q2 for the most part.

Yeah. Eric, the key for that, normally, you don't see any pressure from gross margin as a result of lumber. It's all about mix. The reason we saw it this time was the steep decline that happened in price in a very compressed timeframe. And again, we weren't going to change our approach to the market. We want to be incredibly focused on driving the best value for our customer. We always try to lag the market when it's going up and lead it when it's coming down.

Perfect. That makes sense. And then secondly, the sales growth over the last couple of years now is exceptional, as you pointed out. You've obviously invested to take care of your associates and take care of your customers. The margin leverage has been less than what we would have expected with nearly a $50 billion, 50% increase in sales in the last three years. Is there some embedded operating margin improvement that can get released over the next couple of years if things return to normal or is the cost of doing business and other investments you've made, taken some of that away? Trying to figure out if the operating margin of the enterprise can lift incrementally in the next couple of years or if more of the focus is on sales growth and a little bit less on releasing operating margin.

I think so. I think that we have to go back to the central focus that we have from a financial performance perspective, which is growing operating profit dollars as fast as possible and generating an exceptional return on investment on those dollars. And so we feel very pleased with the market share that we've captured over the last 3 to 4 years, and we feel exceptionally pleased with the shareholder value that we've created as well. We think that the formula of having the best experience in home improvement retail, being the lowest cost provider and being the best investor of capital in the market is a formula that can't be beaten, and that's what we're going to continue to do.

Great. Thank you very much.

Thank you.

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

Thanks, Christine. And thank you, everyone for joining us today. We look forward to speaking with you on our Third Quarter Earnings call in November.

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