The Home Depot, Inc.
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[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:]

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.

[Craig Menear:]

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.

[Ted Decker:]

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 continue 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.

[Richard McPhail:]

Thank you, Ted, and good morning, everyone. In the face of what was a difficult year for many, including for 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 expense 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 expense 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 expense 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 under spend, 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, improve 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

[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:]

Thanks. Good morning everyone. My first question is on the expense line. Richard, if I heard right, I think you said there was about $2 billion of costs that were present in 2020. I think about $1 billion of them become permanent. And then I think you said $250 million of -- I don't know, temporary costs related to equipment, et cetera. I think -- and then you said, we also need to think about expenses that weren't spent in 2020 related to, I think, one, HD that will come back into 2021. Is there any way you can quantify that? And then does that mean that at some point, there's, I don't know, $500 million or $750 million of cost that, in theory, sort of roll off the P&L?

[Richard McPhail:]

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 benefit 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:]

Okay. That's helpful. And then my follow-up, maybe for Craig and for you, Richard. If we go back to 2017, realizing that a lot of things have changed, the One HD investments, I think, were slated somewhere of a 20 basis point hit to margin and a benefit is up too much as 40 basis points. If that's still the case, and then we do have COVID costs rolling off, it feels like margins are being held back a bit, meaning they could be a good amount higher. Are you -- I don't know if your commitment or your philosophy has changed in some of what you're speaking about regarding continuing a certain level of investment to maintain that growth ahead of the market? Or will you allow margin to go up, not gross per se, but more SG&A leverage if you retain a lot of the sales from this period going forward.

[Craig Menear:]

Simeon, our overall philosophy hasn't changed from the timeframe that we started the accelerated investment. We said that we needed to do that because we had to get ahead of where the customer was taking us. And that's why we made the investment that we did in terms of the $11.1 billion. And the intent behind that was twofold. Number one, we wanted to be able to grow faster than the market, gaining share in the marketplace and then accelerate our incremental op margin dollar growth. Since we started the program in fiscal 2017 through 2018 to 2020 and market share is a little elusive in our market. But based on the best data we can get, we believe that we've captured about 275 basis points of share growth during that timeframe. And so that has -- during the whole investment, we're taking share. And so going forward, our approach is to make sure that we are investing on a more steady cadence what we need to in the business to make sure that we can stay ahead of the customer and we can continue to gain those kind of accelerated share growth opportunities going forward. And our focus is around really optimizing op margin dollars. And if we can do that and drive incremental op margin dollars, we'll let rate fall where it falls.

[Richard McPhail:]

And just to add to Craig's comment about market share capture, if you take that 275 basis points and translate that into dollars that share gain represents $10 billion of incremental sales annually to our top line versus where we were in 2017. So you -- as you heard from Craig, scale matters, our position as low-cost provider matters, and our investments put us in position to extend both.

[Simeon Gutman:]

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

[Craig Menear:]

Thanks.

[Operator:]

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

[Scot Ciccarelli:]

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:]

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 exists 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:]

But given the fragmentation of that market, now that you have, let's call it, two of the bigger operations kind of joining hands, if you will, you should have about -- we're estimating about 10% market share in MRO. Does your growth potential actually accelerate just because you can basically answer the bell to so many more customers?

[Craig Menear:]

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.

[Scot Ciccarelli:]

Got it.

[Ted Decker:]

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:]

Excellent. All right. Thanks a lot, guys.

[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:]

A couple of follow-ups. First, on the gross margin, you talked about a lot of pressures. I didn't hear anything necessarily that 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:]

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 we've supported 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. We -- 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 is 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:]

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:]

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

[Christopher Horvers:]

Thanks. Good morning. I had a follow-up on the investment side. You talked about 2% of sales for CapEx. That's about $2.7 billion, rough math here in '21. Do you stay at that 2% level of sales as you go beyond '21? And then on the OpEx side related to investments, will investment dollars be -- in OpEx be down in '21 and down further in '22? Maybe the best way to frame it is, how are you thinking about that core ex-COVID, SG&A versus sales growth metric as you look in '21 and '22?

[Craig Menear:]

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:]

From this point going forward.

[Craig Menear:]

Yes.

[Christopher Horvers:]

Got it. That's very helpful. And then just a follow-up -- quick follow-up on the gross margin. How are you thinking about the potential impact of lumber? Are you baking in a headwind there, given where our pricing is right now? And then is Home Depot supply a potential good guy offset as we think about the puts and takes on gross margin?

[Ted Decker:]

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

[Richard McPhail:]

It's on a like-for-like basis. There's -- this is immaterial to the Company.

[Ted Decker:]

It's immaterial.

[Richard McPhail:]

Yes, yes.

[Ted Decker:]

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 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 DCs where we're taking product in from our supplier partners in 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:]

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

[Steven Forbes:]

Richard, I wanted to focus on the outlook for strategic spending. So maybe both my questions will really be focused to your -- you mentioned the $325 million of quarterly spend. And I think that's been consistent for the past two quarters. So any color on how we should be modeling the quarterly investment spend, especially given your prior commentary, right, that I think we should expect the absolute level to be neutral on a year-over-year basis?

[Richard McPhail:]

I'll go back to Craig's comment on this. Now that the investment program is substantially complete, you're going to see us return to a steadier, more consistent investment posture. And so just think about -- if you're talking about modeling, what that means, we had a three-year period where in many periods, expenses grew faster than sales because of the expense component of the plan. And CapEx, obviously, was elevated. What we're telling you today is going forward, we are moving to that steady and consistent cadence. And so as Craig said, capital expenditures will approximate 2% of sales. And then expenses associated with it are assumed within the margin case that we laid out. And from this point going forward, we intend to deliver operating expense leverage on a consistent basis.

[Steven Forbes:]

And maybe just a follow-up on that comment, again, if you can, right, if we think about what transpired over the past couple of years at the quarterly level of investment spend, I think, ramped from 75, which was considered business as usual to this 325. So are your commentaries implying that we should expect, maybe not this year, but over a multiyear period to return to those prior levels of investment spend or normal case investment spend? Or should we anticipate a return to a above right that 75 level given just the incremental needs of the business. Any more detailed commentary would be helpful.

[Richard McPhail:]

So, I think it's important to remember the context that when we kicked this investment program off, we were $100 billion in sales, and now we're over $130 billion in sales. And so getting -- talking about dollars versus percentages, I think, becomes less relevant and meaningful. So what we're trying to do is provide you with sort of our stance going forward, which again, is going to be steady and consistent. And so if you take the case that we laid out, which is simply the case, where we would expect at least 14% operating margin in a flat to slightly positive comp environment, that would include our view of all operating expenses. And going forward, we expect and intend to deliver operating expense leverage on a consistent basis.

[Operator:]

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

[Zach Fadem:]

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:]

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 project. 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:]

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:]

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:]

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's 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:]

I don't know if it's helpful, but just on -- 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:]

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

[Michael Lasser:]

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:]

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:]

And just -- I mean, remember, our largest cost in the business is our cost associated with payroll, and that is driven on a transactional basis. It flexes with volume.

[Michael Lasser:]

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 digit, 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:]

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:]

Christine, we have time for one more question.

[Operator:]

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

[Karen Short:]

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:]

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:]

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.

[Operator:]

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

[Isabel Janci:]

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:]

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