Q3 2004 Home Depot Inc Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day everyone and welcome to today's The Home Depot third quarter earnings conference call. As a reminder, today's call is being recorded. Beginning today's discussion is Ms. Diane Dayhoff, Vice President of Investor Relations. Please go ahead.

DIANE DAYHOFF, VICE PRESIDENT, INVESTOR RELATIONS, HOME DEPOT INC: Thanks Laura. Good morning everyone. Welcome to The Home Depot third quarter earnings conference call. Joining us today on our call are Bob Nardelli, Chairman, CEO and President of The Home Depot; Carol Tome, Executive Vice President and Chief Financial Officer; and John Costello, our Executive Vice President of Merchandising and Marketing along with other Home Depot executives. Bob Nardelli will begin today's discussion with a review of our business, John will provide insight into our merchandising efforts and Carol will completed our prepared statements and discuss our financial results. Following our prepared statement we will open the line for questions. Questions and answers will be limited to analysts and investors and as a reminder we would appreciate it if the participants would limit themselves to one question with one follow-up, please. This conference call is being broadcast real time on the internet at homedepot.com with links on both our home page and under the Investor Relations section. The replay will also be available on our site.

Before I turn the call over to Bob let me remind you that our discussion today will include forward-looking statements relating to, among other things, our estimates and expectations for sales and earnings growth, new store openings, store initiatives and capital expenditures for fiscal 2004. These statements are subject to various risks and uncertainties that may cause actual results to differ materially from the company's historical experience and its present expectations. These risks and uncertainties include, but are not limited to, fluctuations in and the overall condition of the U.S. economy, stability of costs and availability of sourcing channels, conditions affecting new store developments, the company's ability to integrate the businesses it acquires, our ability to implement new technologies and processes, the company's ability to attract, train and retain highly qualified associates, unanticipated weather conditions and the impact of competition and regulatory and litigation matters. Undue reliance should not be placed on such forward-looking statements as such statements speak only as of the date on which they are made. Additional information regarding these and other risks is contained in the company's periodic filings with the Securities and Exchange Commission. Now let me turn the call over to Bob.

ROBERT NARDELLI, CHAIRMAN, PRESIDENT, CHIEF EXEC. OFFICER, HOME DEPOT INC: Thanks, Diane, and good morning, everyone. Our third quarter results reflect a continuation of our strategy to enhance the core, extend the business and expand our markets. In this quarter we are reporting record sales and earnings and I would like to thank all of our associates who worked so hard to deliver this very strong financial performance. Our associates and our suppliers spent countless hours helping those impacted by a record number of hurricanes and subsequent flooding and power outages. In the midst of the substantial damage our associates worked tirelessly to serve our customers and our communities. In support of their colleagues, more than 2,600 associates arrived from around the country to Florida and Alabama to take shifts in our stores. In some communities we were the only store open,. Dedicated associates served our customers from stores with no power and in makeshift tented stores in our parking lots. We also pledged more than $4 million in charitable contributions to the hurricane relief and rebuilding efforts, aiding customers and associates affected by storms. I'm really proud of our associates. They shown their brightest when others were experiencing their darkest hours.

Now sales for the third quarter increased by 2.2 billion, or 13% over last year to 18.8 billion. Gaining market share our same store sales of 4.5% were a solid gain on top of comp sales of 7.8% in the third quarter of last year. In addition to Florida, sales increased in all geographies with strong comps in markets like Sacramento and Los Angeles, California; Wichita, Kansas; San Antonio, Texas; Washington, D.C.; and New York metro. Both Mexico and Canada had a solid quarter. And in addition our Home Depot supply business achieved double-digit sales growth and are well-positioned for continued growth.

Strong sales growth along with gross margin expansion helped us achieve record third quarter net earnings of 1.3 billion. Earnings per share were 60 cents, an increase of 20% over last year. Uh, Carol Tome will take you through our financial metrics later on in the call. You will hear from John Costello a little later in the call about our merchandising accomplishments. We saw strength across the store and increasing financial returns from our investments in both store modernization and technology. Our commitment to store modernization is paying off.

Self check out systems is close to 880 stores and new lighting and flooring and signage programs are improving the convenience and shopping experience for our customers. Compared to one year ago our customer survey data shows that The Home Depot is performing significantly better in our key customer satisfaction categories with the strongest gains in speed of check out, helpfulness and availability of store associates and the general shopping experience. Beyond building momentum in our stores we are also extending our business and expanding our markets by developing new channels for growth. Our service business, excluding merchandise, grew by more than 26% to 957 million in the quarter, capitalizing on the growing do it for me market. We saw strength in installation services such as carpet and in countertops and kitchens and windows just to name a few. We have over 23 national installation programs and we install more than 11,000 projects each day. This is an important and growing piece our business and we are entering the fourth quarter with continuing strong growth.

You will recall that we acquired White Cap earlier this year. Now, White Cap is a pro distribution business that provides a platform for future growth in the $400 billion large and mid-size professional contractor markets. Sales are strong. The integration is going well. And we are enjoying purchasing and other synergies. Since we acquired the company we've made three small bolt-on acquisitions and have grown organically by adding seven branches, bringing our total to 77 in 17 states. This business is exceeding my expectations.

We continue to see a real growth opportunity in Canada and Mexico. Our Mexican business is strong with double-digit comp growth. The integration and rebranding of the Home Mart stores have gone extremely well. Today we have 10 stores in Mexico City and 42 stores throughout the country. Housing is a clear priority in Mexico and based upon my recent trip there I'm confident that we are well-positioned in this $16 billion market. I'm equally pleased with our performance in Canada. Today we have 110 stores with plans to open 25 more through the end of 2005.

This quarter we opened two unique urban formats on both coasts of North America. We opened our first Manhattan store located on 23rd Street. The store is off to a great start as the groundbreaking entrant of The Home Depot in New York City. We look forward to opening our second Manhattan store on 59th Street.

Now looking to Canada and Vancouver, British Columbia, we opened another successful urban store in Park Royal. Virtually everything about these stores from their design and layouts, their merchandising selection and use of technology was specifically designed to meet the specific needs of their local communities and provide us access to an almost entirely new and untapped customer base. I believe these stores demonstrate another opportunity for new store growth by bringing The Home Depot to previously underserved customers and markets.

Our commitment to creating shareholder value and building our core values have never been higher. In September Home Depot markets inaugural week of service. Our Associates volunteered and donated more than 260,000 hours that week alone, touching more than 1,200 communities and 1 million people throughout North America and China. We remain committed to do our military personnel and their families, both active and veterans. This year we launched in cooperation with the Department of Defense, Operation Career Front. And I'm proud to say that we've hired more than 10,000 veterans this year. We were honored to have been recognized by the employers support of guard and reservists and the Department of Defense with the Freedom Award. And just last week we were ranked number one as the most military-friendly employer by GI Jobs magazine.

Lastly we continue to be very encouraged by the current economic environment with …