Earnings Call Transcript - HD Q4 2020

Operator, Operator

Greetings, and welcome to the Home Depot's Quarterly 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.

Isabel Janci, Host

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's Fourth Quarter and Fiscal Year 2020 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.

Craig Menear, Chairman and CEO

Thank you, Isabel, and good morning, everyone. Thanks for joining our call this morning. We hope that you and your loved ones are safe and healthy. Our thoughts are with those that have been impacted by the recent winter storms. Fiscal 2020 was a year that we certainly will not forget. It was a year of great hardship and adversity for so many, and our thoughts and prayers are with the millions of people who have been directly impacted by the pandemic. It is times like these that I have never been more thankful for the culture that our founders instilled in our business over 40 years ago. We have navigated this crisis by aligning our decisions and actions to some of our most important values to do the right thing and to take care of our people. At the end of the day, it is our people and culture that make us unique; our ability to manage unprecedented demand in the business while navigating the global pandemic and supporting our communities through multiple natural disasters and moments of crisis is a direct result of our associates' extraordinary efforts. As a result, investing in our associates during this time was one of the easier decisions we made this year. During fiscal 2020, in addition to record success sharing payouts, we invested a total of approximately $2 billion on enhanced compensation and benefits for our associates. As we announced last quarter, we transitioned from temporary COVID-19 benefits to permanent compensation enhancements for our frontline hourly associates. At the beginning of the year, I would have never thought it possible for the business to grow over $21 billion in 2020. For context, it took us 19 years as a company to achieve the first $20 billion in total sales, and we outgrew that in this year alone. This was enabled by investments we've made in the business as well as the team's exceptional execution and cross-functional alignment. COVID-19 and its impacts have forced us to change the way we live, work, and interact with one another, and there are some key learnings. The first is that the investments we have made in the business over the past decade were the right ones. And the second is that those investments enabled agility and flexibility to execute on critical business decisions in a changing and dynamic operating environment. Investments in technology and infrastructure helped us to extend our in-store BOPUS offering to curbside in a matter of days and convert a newly opened market delivery center facility to a direct fulfillment center in order to reduce online delivery lead times and improve the customer experience. The mechanization of our upstream supply chain helped us to better flow products to our stores, while investment in tools for our store associates and management teams helps to get that product to the shelves for the customers more quickly and efficiently. Our merchants leverage data analytics to collaborate with our supplier partners to make real-time adjustments to our assortments as we work to prioritize the highest demand SKUs for our customers. Despite one of the most difficult operating environments we have ever faced, we continue to make progress with regards to our strategic initiatives. Key components of our One Home Depot strategy, such as the opening of various supply chain facilities, technology investments, and enhancements to the digital experience, remain on track. We have also restarted many of the in-store investments that were paused at the outset of the pandemic. As customers engage with The Home Depot, we see a continued blend of both the physical and digital worlds. As a result, we believe that the distinct competitive advantages and overarching benefits of an interconnected One Home Depot strategy have never been more relevant. Now turning to our financial highlights. Our results for the year clearly indicate that for many customers, the home has never been more important. Fiscal 2020 sales grew $21.9 billion to $132.1 billion, up 19.9% from last year. Comparable sales were up 19.7% from last year, and our U.S. comps were positive 20.6%. Diluted earnings per share increased 16.5% to $11.94 for the year. We finished this year with another exceptional quarter as we saw the continuation of outsized demand for home improvement projects. Sales for the fourth quarter grew $6.5 billion to $32.3 billion, up 25.1% from last year. Comparable sales were up 24.5% from last year, with U.S. comps of positive 25%. Diluted earnings per share were $2.65 for the fourth quarter. Our results this quarter, once again, were 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 in local currency. As Ted will detail, both ticket and transactions were up double digits in the quarter, and we saw strong double-digit growth from both the Pro and DIY customers. We had a record holiday season, as our modified approach to Black Friday and gift center events clearly resonated with our customers. Our interconnected retail strategy and underlying technology infrastructure have continued to support record-level web traffic on a consistent basis throughout the year. For the quarter, sales leveraging our digital platforms increased approximately 83% versus the prior year, and approximately 55% of online orders were fulfilled through a store. For the year, sales leveraging our digital platforms increased approximately 86% versus last year, and approximately 60% of online orders were fulfilled through a store. We continue to invest in our digital assets, introducing new capabilities in different ways to engage with The Home Depot, all with the goal of improving the customer experience. One of the customer enhancement tools that had to be completely reimagined in the COVID-19 environment was our in-store workshop program. For years, we have offered a number of different in-store workshops, including our kids' workshops. Until COVID-19, there wasn't an online option for these workshops, but in a few short months, we were able to successfully transition 100% of our workshop content online. The live streaming platform has allowed us to go from an average of five in-store workshops per month to approximately 40 online live streaming workshops per month. These online workshops have driven a deeper level of engagement and connectivity with our participating customers. One thing that did not change in fiscal 2020 is our disciplined approach to capital allocation to create value for our shareholders. We remain committed to growing our dividend as earnings grow. As a result, today, we announced our Board approved a 10% increase in our quarterly dividend to $1.65 per share, which equates to an annual dividend of $6.60 per share. As we look to fiscal year 2021, Richard will provide some perspective into the factors that have the potential to impact the company's performance. I'm incredibly proud of all we have accomplished in this unprecedented year, and I want to close by thanking our associates for the way they have lived our values by serving our customers, communities, and each other during these challenging times. I also want to thank our supplier partners for their continued support and partnership throughout this year. In addition, I would like to welcome the associates from HD Supply back to The Home Depot family. As we close fiscal 2020, we have nearly completed our multiyear accelerated investment program that has positioned us well to serve our customers in this dynamic and changing environment. We have more conviction than ever that we have been investing in the right areas of the business, and we'll continue to invest to extend our competitive advantage and enable market share growth in any environment. We believe that our scale, combined with our low-cost position and continued focus on the customer, will help us win in a highly competitive marketplace and deliver exceptional returns for our shareholders. And with that, let me turn the call over to Ted.

Ted Decker, President and COO

Thanks, Craig, and good morning, everyone. I want to begin by expressing my appreciation to our associates and supplier partners for their unwavering dedication to our customers over the last year. During the fourth quarter, we continued to experience unprecedented levels of demand across our business. For the third quarter in a row, comps in the U.S. have been approximately 25%. With remarkable consistency, comps in the U.S. were at or above 20% for 36 of the past 39 weeks. And as you might expect, this level of demand pressured our supply chain, but our supply chain teams and supplier partners responded and continue making progress. Over the course of the third and fourth quarters, we made significant improvements to our in-stock positions while supporting massive sales volumes. While there's always room for improvement, and there are some current port delays, we believe we are well positioned as we head into our busy spring selling season. Moving on to comp performance in the fourth quarter, all of our merchandising departments posted double-digit comps, led by our lumber and indoor garden departments. Our comp average ticket increased 10.8%, and comp transactions increased 12.6%. Similar to the last two quarters, the growth in our comp average ticket was supported by strong project demand, customers trading up to new and innovative products, as well as continued inflation in certain commodity categories like lumber. During the quarter, we continued to experience significant volatility in lumber prices. As we exited the third quarter, lumber prices were falling sharply off the historic highs seen back in September. However, during the fourth quarter, pricing for both framing and panel lumber reversed and set new near-term highs, despite the elevated prices, unit comps in our lumber department accelerated further from the double-digit levels seen in the third quarter. During the fourth quarter, inflation from core commodity categories positively impacted our average ticket growth by approximately 220 basis points. Additionally, our comp transaction growth was supported by the same persistent strength in both online and in-store transactions that we have experienced in the prior two quarters. During the fourth quarter, big ticket comp transactions, or those over $1,000, were up approximately 23%. We saw strong performance across a number of big-ticket categories, including appliances, vinyl plank flooring, and vanities. From a customer standpoint, during the quarter, we saw double-digit growth from both our Pro and DIY customers, with sales growth from our DIY customers once again outpacing that of our Pro customers. DIY sales growth was very consistent with the strong double-digit growth experienced in the second and third quarters. Sales to our Pro customers continued to accelerate, posting the best quarter of growth in 2020. As we've mentioned all year, our smaller Pro customers maintained consistent growth and posted strong double-digit growth in every month of the quarter. Growth from our larger Pro customers continued to accelerate, also growing double digits each month of the quarter. While the operating environment is still recovering for many of our larger Pro customers, we're encouraged by what we're seeing and hearing as backlogs are growing. Shifting to our DIY customers, we continue to benefit from heightened engagement from both new and existing customers. As our customers continue to spend more time at home, they’re telling us their project lists are growing. After completing a project, we see many of our DIY customers take on additional and oftentimes more complex projects with a renewed sense of confidence. During the fourth quarter, our customers exhibited a lot of trends similar to what we saw throughout 2020. For instance, we saw continued strength in outdoor living categories like patio furniture, grills, and outdoor power equipment, as customers tried to extend the outdoor living season. We also saw strong performance from popular interior project categories like vanities, faucets, moldings, and interior lighting. Customer engagement in our annual Black Friday and gift center events was strong. As I previewed on last quarter's call, we took a different approach to our events this year to prioritize the health and safety of our associates and customers. We made deeper buys on fewer SKUs. We changed the way we use our lay-down areas and end caps, and we extended our events over several weeks to avoid driving too much traffic on any single day, and we could not be more thrilled with the results. Over the holiday season, our customers said they wanted a sense of normality. They told us they wanted to decorate for the holidays and make the most of the season while spending more time at home with family. So they bought big and they bought early, and we saw a record level of sell-through with our decorative holiday assortment. During the quarter, our interconnected and digital assets continued to perform well. Over the last several years, we've rebuilt our website and invested across our platforms to upgrade our infrastructure and improve the shopping experience. These investments allowed us to handle the enormous growth in web traffic and convert more of that traffic into sales. During fiscal 2020, homedepot.com had more than 3.6 billion visits, and our conversion rate increased double digits across all platforms, including our app, mobile, and desktop. Turning our attention to the upcoming spring season, I could not be more excited about our comprehensive lineup of products, including our number one position in outdoor power equipment. As we've discussed, the cordless outdoor power market continues to outpace growth of the gas market. Cordless tools are easier to use, more environmentally friendly, and have the power and run time to get most jobs done. Like we have done with our tool department, we are resetting our outdoor power equipment base by branded battery platform. Customers can now shop our leading and exclusive lineup by platform including Makita, Milwaukee, Ryobi, Toro, and DeWalt. We are thrilled with the results and expect these resets will be complete in the first quarter. This spring, we're excited to introduce a new lineup of outdoor power from Ryobi; the number one cordless outdoor power brand. The new Ryobi HP High-Performance Brushless product was introduced in our tool department last year. We are now expanding it into cordless mowers, trimmers, and blowers. The cordless mowers come with 70 minutes of run time and we are excited about the additional innovation coming in the product pipeline. As we look forward to spring, we know that now, more than ever, the home has never been more important. We feel great about our position as the number one retailer for home improvement, and we look forward to serving our customers in the busy spring selling season. With that, I'd like to turn the call over to Richard.

Richard McPhail, CFO

Thank you, Ted, and good morning, everyone. In the face of what was a difficult year for many, including many of our associates, I am proud of the actions we took to take care of our people, our customers, and our communities. In the fourth quarter, total sales were $32.3 billion, an increase of $6.5 billion or 25.1% from last year. Our total company comps were positive 24.5% for the quarter with positive comps of 24.4% in November, 22.4% in December, and 26.5% in January. Comps in the U.S. were positive 25% for the quarter with positive comps of 24.3% in November, 21.8% in December, and 28.4% in January. All 19 of our U.S. regions as well as Canada and Mexico posted double-digit positive comps in local currency. For the year, our sales totaled a record $132.1 billion, with sales growth of $21.9 billion versus fiscal 2019. For the year, total company comp sales increased 19.7%, and U.S. comp sales increased 20.6%. In the fourth quarter, our gross margin was 33.6%, a decrease of approximately 30 basis points from last year. Gross margin was negatively impacted during the quarter by several factors, including product mix, shrink, and pressure from rising transportation costs. Mix pressure from lumber alone negatively impacted gross margin by approximately 30 basis points in the fourth quarter. For the year, our gross margin was 34%. During the fourth quarter, operating expenses were approximately 20.9% of sales, representing an increase of approximately 25 basis points compared to last year. Let me take a moment to comment on a few of our expense items. First, we incurred approximately $110 million of non-recurring expenses related to the completion of the HD Supply acquisition, creating approximately 30 basis points of operating expense deleverage. Second, during the quarter, we continued to support our associates with enhanced benefits in response to COVID-19 and transitioned our temporary support programs to permanent compensation enhancements, which we announced last quarter. These expenses totaled approximately $340 million during the fourth quarter, resulting in approximately 105 basis points of expense deleverage. Third, we incurred approximately $55 million of operational COVID-related expenses, including personal protective equipment for our associates and customers and enhanced cleaning of our stores, resulting in approximately 20 basis points of operating expense deleverage. Fourth, we recorded expenses related to our strategic investment plan of approximately $325 million, an increase of approximately $45 million compared to last year. And finally, during the fourth quarter, we showed strong expense control in other areas of the business and drove approximately 130 basis points of expense leverage. Included in this 130 basis points of leverage is approximately 80 basis points of pressure driven by accrued bonus expenses primarily related to our outperformance for our biannual store success sharing program and store- and field-based management bonuses for the second half. Our operating margin for the fourth quarter was approximately 12.7%, and for the year was approximately 13.8%. Excluding the one-time expense associated with the completion of the HD Supply acquisition, our operating margin would have been 13% for the fourth quarter and 13.9% for the year. Interest and other expenses for the fourth quarter grew by $35 million to $327 million due primarily to higher long-term debt levels compared to one year ago. In the fourth quarter, our effective tax rate was 23.9%, and for fiscal 2020 was 24.2%. Our diluted earnings per share for the fourth quarter were $2.65, an increase of approximately 16% compared to the fourth quarter of 2019. The one-time expenses related to the completion of the HD Supply acquisition of approximately $110 million negatively impacted our fourth quarter diluted earnings per share by approximately $0.09. Diluted earnings per share for fiscal 2020 were $11.94, an increase of 16.5% compared to fiscal 2019. During the year, we opened two new stores and ended the year with a store count of 2,296. Retail selling square footage was approximately 239 million square feet. For the fiscal year, total sales per retail square foot were $544, the highest in our company's history. At the end of the quarter, merchandise inventories were $16.6 billion, an increase of $2.1 billion versus last year, and inventory turns were 5.8x, and up from 4.9x from the same period last year. Moving on to capital allocation, our long-term principles for how we think about deploying capital have not changed. We will continue to invest in the business. After investing in the business, it is our intent to return excess cash to shareholders through a balanced approach of paying a healthy dividend and through share repurchases. During fiscal 2020, we invested approximately $2.5 billion back into our business in the form of capital expenditures. We also invested approximately $8 billion in the acquisition of HD Supply to enhance our capabilities and drive accelerated sales growth in a highly fragmented MRO space. We completed this acquisition on December 24. During the year, we paid approximately $6.5 billion of dividends to our shareholders. We look to grow our dividend every year as we grow earnings. And as you heard from Craig, today, we announced our Board of Directors increased our quarterly dividend by 10%. In mid-March, we suspended our share repurchases as part of several steps we took to further enhance our strong liquidity position. Prior to that suspension, we repurchased approximately $600 million or 2.5 million shares of outstanding stock in fiscal 2020. We expect to resume share repurchases in the first quarter of fiscal 2021 and we will also maintain an enhanced cash position of at least $4 billion during fiscal 2021. During fiscal 2020, we raised approximately $8 billion of staggered maturity, long-term debt to enhance our liquidity position, partially fund the acquisition of HD Supply, and repay approximately $2.75 billion of senior notes. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 40.8%, down from 45% in the fourth quarter of fiscal 2019. This decrease primarily reflects our decision to temporarily enhance our liquidity position, including the suspension of our share repurchases back in March. Now I'll turn to our outlook for 2021. The strong and consistent demand environment we've seen over the past nine months has continued into February. Our customers tell us that their home has never been more important and that they will continue to take on home improvement projects. The housing environment remains strong as increased demand for single-family homes has driven housing turnover and home price appreciation. However, significant uncertainty remains with respect to the course of the pandemic, the distribution of vaccines, short-term fiscal policy, and how these developments will impact the broader economy and ultimately, consumer spending. Given these uncertainties, we are limited in our ability to forecast demand for the year, particularly as it relates to the back half. For this reason, we are not providing guidance for fiscal 2021. While we are not able to predict how consumer spending will evolve, if the demand environment during the back half of fiscal 2020 were to persist through fiscal 2021, it would imply flat to slightly positive comparable sales growth. We calculate this by assuming the sales dollar level of demand that we saw in the fourth quarter continues throughout 2021, adjusting for historical seasonality. In this demand environment, we calculate our fiscal 2021 operating margin would be at least 14%. Let me give a little more color around the drivers of our operating margin and investments for fiscal 2021. During fiscal 2020, we experienced pressure to gross margin, notably from product mix and shrink. For fiscal 2021, we expect continued pressure to our gross margin from higher transportation costs and shrink. In addition, we will experience some pressure in gross margin as we continue to build out our One Supply Chain network. Remember that the majority of the costs associated with opening and operating our supply chain facilities are accounted for in our cost of goods sold. As we transition from 2020 into 2021, our operating expenses will reflect the move away from temporary COVID-related pay and benefits to permanent wage investments, the continuation of strategic investments in the business, and the impact of lapping areas of underspend, such as understaffed stores that we realized last year. In fiscal 2020, we incurred approximately $2 billion of expense related to enhanced pay and benefits for our associates. Last quarter, we transitioned away from our temporary support programs in response to COVID and increased permanent compensation for our frontline hourly associates by approximately $1 billion on an annualized basis. In addition, we also incurred approximately $240 million of expense related to COVID operational costs during fiscal 2020, primarily in the form of personal protective equipment for our associates and customers and for enhanced cleaning of our stores. As long as the COVID environment persists, we would expect to incur approximately $250 million of COVID-related operating expenses on an annualized basis for fiscal 2021, primarily related to PPE, additional cleaning, as well as extended leave for associates who were directly impacted by COVID-19. During fiscal 2020, we chose to defer some of our in-store strategic investments, both capital and expense, to prioritize the safety of our associates and customers. We expect to complete these investments in fiscal 2021. As we look back on our investments from 2018 to 2020, we believe that we focused on the right areas, improved the customer experience, and grew significantly faster than our market. As we move forward, we are committed to investing in our business to stay ahead of customer expectations and further enhance the customer experience with two main objectives in mind: first, to deliver returns by driving growth faster than the market in any environment; and second, to further strengthen our position as the low-cost provider in home improvement, with a relentless focus on productivity and efficiency. This approach will result in a steadier level of investment in both capital and expense going forward. For fiscal 2021, we estimate capital expenditures of approximately 2% of sales. It is our intent to make those investments on a steadier cadence and to drive operating expense leverage while preserving the ability to adjust our investments as needed. We estimate that our fiscal 2021 effective tax rate will be similar to what we reported in fiscal 2020. As we begin 2021, we believe that we've positioned ourselves to meet the needs of our customers in any environment. The investments we've made in our business have enabled flexibility in our operating model as well as our financial model. As we look forward, we will continue to invest to strengthen this position and extend our scale and low-cost position to drive growth faster than the market, regardless of what the environment may look like. Thank you for your participation in today's call. And Christine, we are now ready for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley.

Simeon Gutman, Analyst

Thanks. Good morning, everyone. My first question is about the expense line. Richard, if I heard correctly, you mentioned there were approximately $2 billion in costs in 2020, with about $1 billion becoming permanent. You also mentioned $250 million in temporary costs related to equipment, among other things. Additionally, you indicated we should consider expenses that weren't incurred in 2020, particularly for HD, that will reappear in 2021. Can you provide any quantification of that? Does that imply there is around $500 million to $750 million in costs that could potentially be removed from the P&L?

Richard McPhail, CFO

Well, Simeon, thank you for your question. There are a lot of ins and outs. And so that was actually the intent behind the sort of margin case that we put forward. And so, again, just to sort of recap how you get to a 14% margin in that case that we provided. Let's start with the operating expense side. You have a few primary drivers, and I'll tick through those. First, you have the permanent investment in wage for our hourly associates as we transition from temporary support programs in the fourth quarter. You have the continuation of COVID-related operational expenses to keep our stores and our associates safe. You have the overlap of some expense benefits from understaffing in the first half last year as sales ramped up. So the period, as we were growing staff to meet the sharp acceleration in sales, so that is the year-over-year overlap that you asked about. And then if you look on the cost of goods side, just to cover and come all the way down to 14, we're expecting to see continued pressure from transportation costs, continued pressure from shrink. You'll see pressure reflecting the opening up of our One Supply Chain buildings as we ramp up capacity utilization in that network and a return to a more normal stance with respect to events. And finally, the last comment, getting us to the 14 in that case, is that you'll see slightly higher non-cash amortization related to the HD Supply acquisition. That's about 10 basis points of an impact to operating margin, but that's non-cash. So that's the bridge to 14.

Simeon Gutman, Analyst

Okay. That's helpful. For my follow-up, I would like to address Craig and Richard. Looking back to 2017, while many things have changed, the One HD investments were projected to have a 20 basis point impact on margin, with potential benefits reaching up to 40 basis points. If that remains accurate, along with COVID-related costs decreasing, it seems that margins might be somewhat constrained and could be significantly higher. Have your commitments or philosophies changed regarding the investments necessary to sustain growth ahead of the market? Or will you allow margins to improve, particularly in terms of SG&A leverage, if you can maintain a significant portion of the sales generated during this period moving forward?

Craig Menear, Chairman and CEO

Simeon, our overall philosophy has not changed since we began our accelerated investment strategy. We recognized the need to do this to stay ahead of our customers' demands. This is why we invested $11.1 billion. The goal was twofold: firstly, to grow faster than the market and gain market share, and secondly, to enhance our operating margin dollar growth. Since launching the program from fiscal 2017 through to 2020, market share has been somewhat elusive. However, based on the best data available, we believe we have achieved approximately 275 basis points of share growth in that period. Throughout this investment phase, we have been increasing our market share. Moving forward, our strategy will focus on steady investments in the business to ensure we remain ahead of customer needs and continue to seize accelerated share growth opportunities. Our priority is to optimize operating margin dollars, and if we can achieve that and drive incremental operating margin dollars, we will allow the rate to settle naturally.

Richard McPhail, CFO

To build on Craig's comment about capturing market share, the 275 basis points translates to an additional $10 billion in annual sales compared to 2017. As Craig mentioned, scale is important, our status as a low-cost provider is crucial, and our investments enable us to enhance both aspects.

Simeon Gutman, Analyst

Okay. Thanks, guys. Take care. Good luck.

Operator, Operator

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

Scot Ciccarelli, Analyst

Good morning, guys. I hope everyone is well. Can you provide some incremental details regarding HD Supply, specifically, how do you guys plan to integrate it with Interline or your existing MRO business? And then how are you guys thinking about kind of the market opportunity from here?

Craig Menear, Chairman and CEO

First of all, we're thrilled with the acquisition of HD Supply. They are clearly a leader in the MRO space. And it really strengthens our position in a $55 billion fragmented market opportunity. And so, we're super excited about that. We're going to take our time and look at how we encompass all the assets that exist between the formerly Interline and now HD Supply, and we'll put a plan together that will allow us to use all that asset base to be able to grow and capture share in the MRO market. We're super excited about that opportunity.

Scot Ciccarelli, Analyst

But given the fragmentation of that market, now that two of the larger operations are joining forces, we estimate that we will have about 10% market share in MRO. Does your growth potential actually accelerate because you can better serve many more customers?

Craig Menear, Chairman and CEO

I mean, that's clearly why we made the acquisition. We want to accelerate growth in that space. And it's a great space and allows us to penetrate into a housing segment that was more difficult to penetrate with the orange box. So, we're super excited about the opportunity.

Ted Decker, President and COO

Yes. Scot, the capability set of those two combined companies, far and away, the strongest distribution network. I mean, this is a distribution business in looking at integrating the two supply chains to, by far, the leading national distribution network. And then increasingly digital, transacting digitally and being able to put the capabilities that we have built with our digital assets for the consumer business, our B2B assets, and HD Supply starts with a very healthy and well-performing site as well. And then add the sales force in thousands of folks on the street with, by far, the largest distribution sales force in this space. So you put all that together, you have a much stronger calling card when you go to see new and prospective customers.

Scot Ciccarelli, Analyst

Excellent. All right. Thanks a lot, guys.

Operator, Operator

Next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question. Mr. Grom, your line is live. Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Michael Baker, Analyst

A couple of follow-ups. First, on the gross margin, you talked about a lot of pressures. I didn't hear anything necessarily that would improve year-over-year. So can we infer from that, that you expect gross margins to be down next year? And then, I wanted to ask you about inventory, I think it was up about 14%, which clearly shows a better in-stock position than it had been, but how does that compare to where you had planned it to be at the end of the quarter? Thanks.

Ted Decker, President and COO

So on the inventory position, Michael, as I made comments in my prepared remarks, we feel great about going into the spring. Our in-stock positions have been gaining ground while supporting that $21 billion of comp growth. You just think of the physics of moving that much cube through our network, we were able to do that while continuing to improve our in-stock levels. Our store inventories are, as you see in our release, about $2 billion over, and we have plans to increase that further. As we went into the pandemic last year, we took some very aggressive actions, as we've said, with a focus on safety for our customers and our associates. We backed off a lot of promotions. And when we backed off those promotions, we also backed off inventory. We are now preparing for a more normalized spring, and we're putting that inventory back into our forecast. So, we'll have an even stronger inventory position where we sit today as we go into the height of spring. So, we just feel great. The supply chain teams, our supplier partners, our merchants have worked hand-in-hand to get that type flow into our building to the spring season, and we'll be in a much better position than we were last year to capture that demand.

Richard McPhail, CFO

And on gross margin, Michael, today, we're not providing guidance. And I can tell you, we're focused on driving gross profit dollars and driving operating expense leverage.

Operator, Operator

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

Christopher Horvers, Analyst

Thanks. Good morning. I have a follow-up regarding investments. You mentioned allocating 2% of sales for capital expenditures, which amounts to roughly $2.7 billion in 2021 based on my calculations. Will you maintain that 2% sales level as you move beyond 2021? Additionally, concerning operating expenses related to investments, will investment dollars in operating expenses decrease in 2021 and further reduce in 2022? To put it another way, how are you approaching the core ex-COVID selling, general, and administrative expenses in relation to sales growth as you plan for 2021 and 2022?

Craig Menear, Chairman and CEO

Chris, we’re using the CapEx expense of approximately 2% of sales is kind of a rule of thumb. We clearly have flexibility in that, but the most important thing is we know that in today's world, retailers have to continue to invest to be able to stay with customer needs and expectations and those that haven't done that over the years, unfortunately, the road is littered with retailers that didn't do that. And so we’ll never put Home Depot in that position. And we believe that, that 2% is a good rule of thumb for us to think about. And then, embedded in our operating margin going forward is the associated expense with capital spend, and that varies depending on what type of expense you have, but our focus is now that we're past our large part, past our accelerated investment period, we're going to get back to operating leverage.

Richard McPhail, CFO

From this point going forward.

Christopher Horvers, Analyst

That's very helpful. I have a quick follow-up on the gross margin. How are you considering the potential impact of lumber? Are you accounting for a headwind there, given our current pricing? Also, is Home Depot Supply a potential offset as we evaluate the factors affecting gross margin?

Ted Decker, President and COO

So Chris, on supply, the margin actually isn't a good guy. I mean, it's...

Richard McPhail, CFO

It's on a like-for-like basis. This is immaterial to the company.

Ted Decker, President and COO

It's immaterial.

Richard McPhail, CFO

What they've been reporting, they don't include the supply chain expenses. So we'll make that like Home Depot with supply chain and four-wall distribution in the gross margin, not as an operating expense. And then the other one on lumber, on lumber, we don't plan lumber commodity price moving up or down. It's obviously been a huge impact in 2020. It's about $1.7 billion of sales that was attributed to lumber price inflation over the course of 2020, but we don't even shoot at what that might do. We just assume that the levels will stay as they are as we exit the year. And as you know, we have a very flexible supply chain, particularly in lumber. We have our bulk lumber distribution centers where we're taking product in from our supplier partners and shipping those real-time daily lumber deliveries to the stores. So we never have huge quantities of inventory to get trapped with a good guy or a bad guy. So it's pretty fluid in mark-to-market. And again, don't make any sort of predictions of whether that's going to go up or down in help or hurt.

Operator, Operator

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

Steven Forbes, Analyst

Richard, I wanted to concentrate on the outlook for strategic spending. Both of my questions will focus on the $325 million in quarterly spending you mentioned, which has remained consistent over the last two quarters. Can you provide any insights on how we should be modeling the quarterly investment spend, especially considering your earlier comments about expecting the absolute level to remain neutral compared to the previous year?

Richard McPhail, CFO

I'll return to Craig's earlier point. With the investment program largely completed, we will shift to a more stable and consistent investment approach. Regarding modeling, we experienced a three-year timeframe where expenses outpaced sales due to the plan's expense component, and capital expenditures were notably high. Moving forward, we are committed to a steady and consistent investment rhythm. As Craig mentioned, capital expenditures will be around 2% of sales, with related expenses incorporated into the margin case we presented. From here on, we anticipate consistently delivering operating expense leverage.

Operator, Operator

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

Zach Fadem, Analyst

Craig, could you talk a bit more about the 220 basis points of share gains you called out as 2020 was clearly a big year, and you called out the impact of your strategic initiatives. But given that your investments are ongoing and the benefits are still early days, could you talk about why you think share gains can further accelerate in 2021? And where you think the most opportunity is across your various DIY, Pro, and MRO customer bucket?

Craig Menear, Chairman and CEO

Sure. So from '18 through '20, it was roughly 275 basis points of share gain that we saw. And again, the intent of the investments, both the previous three years where we needed to kind of jump-start and get ahead of the customer and what we're building out and the capabilities going forward, we believe will position us well to continue to gain share really in all of the segments that you just called out, DIY, Pro, and in the MRO space. That's our focus. That's what we're trying to get done. We are investing in what we believe the interconnected element of how the customer is engaging in retail today is hugely important, particularly in our space, the project business, where the customer is blending both the physical and digital worlds to be able to complete their projects. We're seeing that ongoing. We are excited about the engagement that we've had with new customers into the business with the expansion of the millennial generation in home improvement and home ownership. And we believe that these investments ongoing will allow us to be in a position to continue to capture outsize share. That's why we made them. That's what we're focused on and what we see going forward.

Zach Fadem, Analyst

Got it. That makes sense. And then for Richard and Ted, can you talk about your base case for inflation this year, both in terms of pass-through commodity prices and that impact on ticket, but also what you anticipate from vendor cost increases and how you think about passing on these increases versus offsetting via portfolio pricing and other productivity initiatives?

Richard McPhail, CFO

On general inflation, again, today, we're not providing guidance. Economists' views vary, and so the case that we laid out to you today is simply a mathematical extrapolation. Ted, maybe you'll talk about on the vendor side?

Ted Decker, President and COO

Yes. I'd say that there's no doubt commodity prices are on a tear right now. We were just talking about lumber prices, and we hit all-time record highs, over $1,000, 1,000 board feet last week, which is up a staggering 140-odd percent from the prior year. A stick of lumber that was $2 odd dollars is now over $5. Similarly, copper hit 4 11. Yesterday, I believe that's a 12-year high. Those type products, copper and wire, lumber, obviously and all stick goods, those are priced to market by virtually everyone in the marketplace. So, we don't have a lot of anxiety around managing the commodity flows. As it comes to transportation and which are real transportation costs and suppliers who are obviously seeing some cost pressures, we've managed that for 41 years. There have been periods of hyperinflation. There have been periods of muted inflation. We run this as a portfolio. We work closely with our supplier partners to be the advocate for value for the customer. And as I think about all that's going on now, I reflect back to the tariffs, and I guess I want for that was our biggest issue when we were managing tariffs. But tariffs and now the commodity environment is just one more in a string of market dynamics that our merchant teams have worked through for 41 years.

Craig Menear, Chairman and CEO

I don't know if it's helpful, but just in the context of kind of the market-to-market moves, that represents roughly 18% to 20% of our volume that moves as commodities move on an ongoing basis.

Operator, Operator

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

Michael Lasser, Analyst

So can you calibrate the scenario that you laid out for the year ahead? If your comp is flat to slightly up, you would have at least a 14% operating margin. What happens if your comp is down 5%, can you still have a 14% operating margin?

Richard McPhail, CFO

We're not going to speculate, Michael. We do retain a good degree of financial flexibility, but our actions will truly depend on the circumstances that are present at the moment.

Craig Menear, Chairman and CEO

Our largest expense in the business is related to payroll, which varies based on transaction volume.

Michael Lasser, Analyst

Okay. A more longer-term question. Prior to 2018, Home Depot typically had a 20% to 30% incremental margin on additional sales. In the last few years, owing to the tariffs, owing to the strategic investment plan, and owing to COVID, the contribution margin has been in single digits, maybe low teens range. Looking past 2021, do you think you can get back to an incremental margin that's in line with your historical experience? Or for whatever reason, is the ability to gain share in home improvement just more expensive today than it's been in the past? And why would that be the case?

Richard McPhail, CFO

I would disagree with your last statement, but I can tell you that our focus is driving incremental operating profit dollar growth and earnings growth, and we do that. Everything we do eventually directs itself towards driving sales productivity or cost productivity. And so that's what we're focused on. At the end of the day, it's about operating profit growth. And that's what we're focused on.

Isabel Janci, Host

Christine, we have time for one more question.

Operator, Operator

Thank you. Our final question will come from the line of Karen Short with Barclays. Please proceed with your question.

Karen Short, Analyst

A big picture kind of question and then just a follow-up on some of the components of guidance, but I guess is there any way to quantify the Pro backlog? And then is there any way you could frame how you think about the DIY versus the Pro comp in 2021? And then on your guidance with respect to shrink lingering in 2021, I guess, I was under the impression that, that would be something that you would cycle as we got to the end of this year. So any color on that would be great.

Craig Menear, Chairman and CEO

Yes, Karen, it's really difficult to try to quantify a Pro backlog. The only thing we can share with you is what our Pros tell us and that their jobs are building. We've seen an acceleration of the Pro business from quarter to quarter. And as it was called out in the fourth quarter, we actually had our best quarter of the rolling 12 with the Pro. I think the thing that is really interesting is the fact that on the DIY side, we've seen the acceleration of the millennial generation engagement with home improvement and home ownership. And over time, the thing that will be interesting to watch is, has that, in fact, expanded the market? That's an interesting question that we don't know the answer to, but we're watching carefully. So we think there's a lot of opportunity as we go forward.

Richard McPhail, CFO

Yes. And on shrink, we saw pressure on a year-over-year basis in 2020, and that pressure was pretty consistent across the quarters. At this elevated level of sales, though, it's harder to tell the degree of the impact we've made. So, we're going to keep watching it and working the problem.

Isabel Janci, Host

Thank you, Christine, and thank you all for joining us today. We look forward to speaking with you on our first quarter earnings call in May.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.