The Home Depot, Inc.
Q4 2018 Earnings Call Transcript

Published: 26 Feb 2019

[Operator:]

Good day and welcome to The Home Depot Fourth Quarter 2018 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Isabel Janci. Please go ahead, ma'am.

[Isabel Janci:]

Thank you, Christine, and good morning everyone. Thank you for joining us today on our fourth quarter earnings call. Joining us on our call today are Craig Menear, Chairman, CEO and President; Ted Decker, Executive Vice President of Merchandising, and Carol Tome, Chief Financial Officer and Executive Vice President, Corporate Services. 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 and 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 presentation will also include certain non-GAAP measures. Reconciliation of these measures is provided on our Web site. Now let me turn the call over to Craig.

[Craig Menear:]

Thank you, Isabel, and good morning everyone. Fiscal 2018 was another record year for our business as we achieved the highest sales and net earnings in company history. Fiscal 2018 sales grew $7.3 billion to $108.2 billion. An increase of 7.2% from fiscal 2017 while diluted earnings per share grew 33.5% to $9.73. And although fiscal 2018 was a record year for our business, our fourth quarter comp sales were slightly below our expectations as the quarter experienced some unfavorable weather. Sales for the fourth quarter were $26.5 billion, up 10.9% from last year. Comp sales were up 3.2% from last year. And our U.S. comps were positive 3.7%. Diluted earnings per share were $2.09 in the fourth quarter. Internationally, Mexico posted another quarter of positive comps in local currency while Canada was essentially flat. As we mentioned on the last quarter's call, our fourth quarter faced tough comparisons given the prior year's approximately $400 million hurricane-related sales that would not repeat, and we have planned for this in our outlook. But as Carol will detail, what we did not plan for was the extent of the unfavorable weather we experienced in all regions throughout the quarter. It was cold. It was snowy. And perhaps worst of all, it was wet. Wet weather delays projects and this was evidenced in our sales performance in the quarter. In fact as Carol will detail, ex weather, our business performed in line with our expectations. And as Ted will discuss while the ticket and transactions grew in the quarter and we saw a growth in both Pro and DIY categories, Pro sales once again outpaced DIY sales in the quarter. And the work that are doing to enhance the service capabilities for our Pros continues to resonate. I am very proud of our associates for continuing to do what they do best

[Ted Decker:]

Thanks, Craig, and good morning everyone, when we look through the unfavorable whether we experienced in the fourth quarter we were pleased with how the business performed. Looking at our departments, comps and tools appliances to the core indoor garden building materials outdoor garden hardware and paint were above the company average. Electrical, plumbing, flooring bill work and kitchen and bath were positive but low the company average due primarily to price deflation, lighting and lumber recorded low to mid-single digit negative comps. In the fourth quarter, average ticket increased 2.3% and comp transactions increased 0.9%. The fourth quarter finished, what was a volatile year in many commodity markets, particularly lumber. For example, during the second quarter [technical difficulty] prices were more than 40% higher than they were in the year prior. These prices fell significantly during the third and fourth quarter and now sit approximately 25% below last year's prices. While this deflation pressure sales we've seen strong unit growth as prices have come down and this unit productivity drives activity across the store. During the fourth quarter deflation and lumber negatively impacted average ticket growth by approximately 41 basis points. However, this deflation was largely offset by inflation and other core commodity categories and that impact the average ticket from core commodities of negative 8 basis points. During the fourth quarter, big ticket comp transactions for those over $1,000 which represent approximately 20% of U.S. sales were up 4.8%. A number of factors served these headwinds to big ticket sales in the fourth quarter. Notably unexpected like weather across the U.S. and laughing last year's hurricane related sales. Excluding hurricane affected markets, we see the January's big-ticket comp was up almost double-digits in line with what we saw throughout 2018. Big ticket categories like vinyl plank flooring, roofing, and appliances all had comps above the company average in the fourth quarter. We saw growth with both our pro and do-it-yourself customers in the fourth quarter. With pro sales growing faster than the company's average comp. We continue to see strong performance in pro heavy categories like power tools, water heaters and commercial and industrial lighting. Sales to our DIY customers grew year-over-year as our customers completed a variety of interior projects. Categories like card window coverings, safety and security and cleaning all posted strong growth in the quarter. We also saw record performance for their annual gift center and holiday sets. Additionally, the combination about standing values from our suppliers', right assortments from our merchants and phenomenal execution in our stores led to the single highest sales day in our company's history on Black Friday. As part of our journey to enhance the one Home Depot experience, we are significantly investing our digital assets to provide a frictionless interconnected shopping experience. Earlier this year, we formed approximately 50 cross functional swats focused on agile development to improve our online customer experience. These teams have accomplished a great deal in a short period in our driving results. In 2018 we had a milestone of approximately 2 billion online visits and our ongoing efforts to improve the interconnected customer experience have led to a consistent improvement in our conversion rates throughout the year. However, our work is not done. In 2019, we will continue to rollout enhancements across our digital assets. As you heard from Craig, we're excited to be rolling out a new B2B online experience for our pro customers to provide a more tailored, personalized offering and for consumers we will continue to focus on improving the way we bring our service to life in the digital world. As we looked at 2019, we are excited to build on our momentum. We are the number one retailer for product authority and home improvement and together with our supplier partners. We will work to offer the best products at the best value for our customers every day. A great example of our strong partnerships is in our paint business. Our exclusive partners bear in PPG brings the two highest rated consumer paint and stain brands to the Home Depot. These strong brands along with a great execution in our stores, help drive paint comps above the company average and fourth quarter. We are particularly pleased with our sales to our pro painters as our investments and initiatives are gaining traction. In addition to having the best products, we are investing to improve the in-store paint experience for our customers. In 2019, we plan to rollout a new color solution center to all stores and we'll do a full reset in exterior states. We are thrilled with the results we are driving in our paint business and look forward to building on our momentum in 2019. Product innovation is resonating with our customers as we see them trade up to new features and innovation across the store. One example we are seeing this is with Traeger in our grill category. Traeger is one of the fastest growing brands in the grilling category. Their innovative pellet grills. Traeger offers the versatility and convenience of being able to grill, smoke, bake, roast, sprays for barbeque all in the same grill. Giving the strong sales, we are introducing Traeger's new lineup of live fire grills. This technology connects the grill directly to your smartphone, so you can monitor your grill or adjust the temperature remotely. We are excited to be Traeger's exclusive partner in the big-box Home Improvement Channel. Another example of innovation is in our pro heavy roofing category. Over the last several years, we have seen both residential and commercial roofers trade up for innovative products that save them time and money. In the residential space, we've seen a significant shift from strip shingles to laminate architectural shingles. These laminate shingles last longer have a lifetime warranty are easier to install and offer dramatic color contrast in dimension which is important from a decorative perspective. In the commercial segment the trend is shifted from asphalt and aluminum roof coatings to - roof coating that are more water and dirt resistant. A great example of this is Henry Tropi-Cool Silicone, an exclusive to the Home Depot and Home Improvement channel. No primer coat is needed so the one code application saves time and money. We're excited about the year ahead particularly with the spring selling season right around the corner. Our investments in localized assortment and innovative products in everyday low prices will continue to position us as the product of authority in home improvement. With that I'd like to turn the call over to Carol.

[Carol Tome:]

Thank you, Ted, and good morning everyone. In the fourth quarter total sells for $26.5 billion, 10.9% increase from last year. And for the year, our sales totaled a record $108.2 billion, 7.2% increase from last year. Fiscal 2018 included a 53 week which added approximately $1.7 billion in sales to the fourth quarter and the year. The extra week is not included in our comp sales calculation. Our fourth quarter results also included the impact of a new revenue recognition standard that we adopted at the beginning of the year. In the fourth quarter, the change in revenue recognition positively affected sales growth by $86 million. Our total company comps were positive 3.2% for the quarter with positive comps of 3.1% in November, 3.1% in December and 3.3% in January. Comps in US were positive 3.7% for the quarter, with positive comps of 3.4% in November, 3.5% December and 4.1% in January. There were a few notable factors that affect our comp performance in the quarter. First a stronger US dollar negatively impacted total company comp sales growth in the quarter by approximately $96 million or 0.4%. Second the commodity price inflation, we experienced in the first three quarters of the year disappeared in the fourth quarter. Finally, as you know we were up against nearly $400 million of hurricane related sales. We expected that but we did not expect such a wet winter. Sometimes weather driven demand can help sales growth sometimes hurt. Relative to our expectation we estimate weather driven the demand negatively impacted fourth quarter comp sales by roughly 85 basis points. In the fourth quarter, our gross margin was 34.1% an increase of 19 basis points from last year. The year-over-year change in our gross margin reflects the following factors. First the new accounting standard drove $168 million of gross profit or 53 basis points of gross margin expansion. Second higher supply chain and the filament expense because the proximate 19 basis points of gross margin contraction. Third higher shrink in one year ago resulted in 10 basis points of contraction. And finally changes in the mix of products sold drove 5 basis points a contraction. For the year we experienced 29 basis points of gross margin expansion. In the fourth quarter, operating expenses as a percent of sales increased by 79 basis points to 21.3% due to the following factors

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

[Simeon Gutman:]

Thanks. Good morning. My first question is two parts, on gross margin. So, getting to the 34% level in 2019, was that always part of your plan and The Street maybe just looked like it was mismodeling or is something changing on your investment cadence? And then the second part of that gross margin question is, can you split the, it looks like about 30 basis points of contraction, into like fixed versus variable costs, and how much would gross margin [indiscernible] comps or better or worse than the 100 basis points of your forecast?

[Craig Menear:]

Simeon, I think the first comment I'd have is as it relates to the margin rate, was a difference in what we anticipated. A little bit more sustained pressure in supply chain maybe than what we initially anticipated in 2017.

[Carol Tome:]

But as we look at our model, both for '19 and '20, let me break apart the gross margin performance for you and our expectations. First, as you know, productivity is a virtuous cycle at The Home Depot. And we have productivity in our cost of goods. And we project productivity into '19 and '20. Offsetting the productivity in '19 is some pressure that Craig mentioned, in supply chain as well as our supply chain rollout. There's a little bit of shrink pressure in 2019, but we're going to cover that off with productivity. And then there's a mix pressure, mix that was always in our plan as we see relatively outperformance of growth in lower-margin category. So, as we look through '19 to '20, nothing comes to our attention that is at this point that the margin will contract further, because productivity will continue into '20. On your second part of your question, in terms of fixed variable nature of our gross margin or of our cost of goods, we actually don't look it through that lens. But I will tell you, within the performance in the fourth quarter, there were a few surprises relative to the guidance that we gave at the end of the third quarter. First, the supply chain contraction of 19 basis points was a bit higher than we had anticipated. We had three basis points of fuel pressure come through, and about five basis points of higher fees related to third-party delivery agents. And then we had a bit higher shrink than we anticipated. Hopefully that's helpful.

[Simeon Gutman:]

Yes, it's helpful. My follow-up is on the demand side. Can you tell us if there were any markets that were "normal", not meaning ex-weather, did they perform in line or did they perform better than you thought? And then you've told us in the past where housing turnover markets have been soft you've called out that the business has been solid, just checking if that's still the case.

[Carol Tome:]

Yes. We've got great performance in areas that had good weather. I must say the weather was across the country, but you can find pockets of relative outperformance. And if you look at the housing related markets, let's take Seattle as an example. Seattle is talked about a lot as the place where there's been huge home price appreciation. The comp is Seattle for the fourth quarter was at 6.3%. Let's take Dallas. Dallas is another area of the country where home prices have seen significant home price appreciation. The comp in Dallas was in line with the company average. So, we're not seeing any impact to our performance in a negative way because of the housing environment.

[Craig Menear:]

If you looked at a market like L.A., when the weather has shifted, we've seen 1,400 basis point swing week-to-week based on weather. So, when the weather was positive it would lift 1,400 basis points.

[Simeon Gutman:]

Okay, thank you.

[Operator:]

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

[Michael Lasser:]

Good morning. Thanks a lot of taking my question. You noted that your comp guidance is based on 4% growth from underlying economic conditions in housing. Is there a way that you could size the potential downside if GDP doesn't meet 2.6% and we see a continued deceleration in some of the key housing metrics?

[Carol Tome:]

Well, clearly, our base model starts with GDP and the forecast for GDP next year are - there's a wide range. We landed on 2.6%. We think that's the right number to you, we added to that about a point coming from the various housing metrics that we look at, so that takes our base comp to 3.6, and candidly, we rounded up to four because we are just not that good at it. There - we really wanted to call out two things that are important in our model and one is from equity. There's 15.4 billion through - what am I saying, $15.4 trillion of home equity out there. Home equity has more than doubled since 2011. And if you look at the home equity per owner occupied household, that equity is $193,000 and has not been extracted, so we think that bodes well, it's a wealth effect that bodes well into 2019. The other aspect of the housing market is just the age of the housing market, 52% of the home is older than 40 years. We know that spend for homes that are 40 years and older is 30% greater than spend on homes less than 10 year.

[Michael Lasser:]

An my follow-up question is on the contribution from your initiatives, shouldn't we expect that the contribution, which we said that a 100 basis points, should we expect that, that's going to build over the course of the year as you've had more time to benefit from what you've put in place over the last 12 month to 18 months and what's the upside risk from that those initiatives driving more than a 100 basis points contribution.

[Craig Menear:]

Michael, it will build as we go forward, you're thinking about that's the right way. And so, we definitely, we see it building throughout 2019 and then beyond.

[Michael Lasser:]

When…

[Carol Tome:]

Michael, I mentioned that the back half comp would be greater than the first half comp, part of that is due to Hoover Hurricane overlap but part of it is due to build.

[Michael Lasser:]

And what leading indicators are you looking at within the business that gives you confidence that it's going to contribute 100 basis points as you are expected?

[Craig Menear:]

Well when we look at the initiatives that we've begun to put in place whether that is the amount of store refreshes that we have done, whether it is the interconnected experience with the automated lockers that we put in place, which is driving obviously a great response from the from the customers. These are things that we tested, we piloted and as we rolled, we begun to see benefit a test result and feel comfortable that those are going to be the driver behind that point of initiative growth.

[Carol Tome:]

We're also seeing outside growth in our pro-business and as we continue to add pro's to our Web site, our new pro experience, if you will, we're adding over a million customers this year. We see spend with those customers increasing.

[Michael Lasser:]

Okay. Thank you very much.

[Operator:]

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

[Scot Ciccarelli:]

Good morning, guys. Got you…

[Craig Menear:]

Good morning.

[Scot Ciccarelli:]

So can you help us understand maybe the investment pace a little bit better? It sounds like there may be some shifts between the original expectations between 2019 and 2020, just from a timing perspective, number one. Number two, could we end up facing a scenario where the absolute investment amount knows what you're doing in the supply chain and in the stores et cetera. Maybe exceed your prior views and, almost every company out there, their investment plan seems to be moving target?

[Carol Tome:]

Well, I'm happy to take you back to December '17, when we laid out our investment plan. So you'll recall, we are announcing $1.1 billion investment plan, which was $5.4 billion over what we would have spent in a BAU basis. And this is the cash to look at the investment. So I suppose expense and capital. Then we shared with you a chart back in 2017 that broke that spending down by year, we said we would spend $1.4 billion in '18, $1.9 billion in '19 and $2.1 billion in '20. If we look at what we spent in '18, we spent $1.4 billion about $550 million in expense and $800 million in capital. Now on the expenses, we also had some depreciation but that wasn't on the chart that we shared with you. If you add the depreciation related to our investments in 2018, it was more like $700 million. As we look to '19, we are projecting in our guidance that we will spend $1.7 billion, $550 million and expense and about $1.1 billion in capital. That's roughly $200 million under what we shared with you in 2017, that spending is being pushed to '20, and it might push out a little past to '20. The reason for this is because we're just getting smarter about how we spend our dollars and I've had to change the prioritization of some of our activity to deal with some of our legacy IT system. As we look at it today, our estimate is we won't exceed our spend and that we may be able to deliver this under the target. So we've got to face this the appropriate way so that we don't actually deliver an initiative that the foundation can't serve. So hopefully that's helpful.

[Craig Menear:]

Yes, Scot.

[Scot Ciccarelli:]

Okay. Thanks.

[Craig Menear:]

This year was a learning year as related to the investments and we found that some things we could actually accelerate and other things we are going to take us a little bit longer as Kelly mentioned because of legacy systems that we have to fix.

[Scot Ciccarelli:]

Understood. Okay, thanks guys.

[Operator:]

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

[Chuck Grom:]

Hi, thanks. Good morning. Carol just on the macro again just trying to connect the dots between your 5% guide and leaders view for 2019 particularly its expectation on games and our renovation spending slows as the year progresses, which is sort of counter what - to what you're speaking to. And just also on a follow-up to the comp with the shift going from week one to 52 weeks to 253. I know for some of the department stores that tend to throw things off a lot. Is there anything that we should think about in terms of the quarterly cadence because of that?

[Carol Tome:]

Yes, so let me address the latter part of your question first, and then we'll get back to the macro. So the shift in the calendar wouldn't be such a big deal that we weren't such a seasonal business, but we were very seasonal business. So this year, let's take the first quarter, we will be comparing weeks one through 13 and 19 against weeks 2 through 14 and 18 and that shift will have an impact. So you would expect the comp in the first quarter to actually be lower than the actual sales growth that we report that reverses in the second quarter and the second quarter we would expect the comps to be higher than the sales growth we report and the third quarter it'll be about the same and then in the fourth quarter, the comp will be higher than the sales growth that we report aggressively, because we're up against 14 weeks versus 13 weeks that we will share. I will tell you that the first week difference is about $1.5 billion sales. So we're dropping off the compare on a $1.5 billion and we're gaining that compare of over $2 billion. So hopefully that helps you kind of model with that first quarter impactful Bay. Now going back to the macro questions, we can use this directionally correct. But in perfect model, and it's worked for us pretty well, since we implemented it. And if you've been following us for a while, you'll recall that we set forth stages of housing recovery and the impact it would have on our comps. And we have three stages of housing recovery. There was sharp, there was moderate, and then there was stability. And if you look through that document, I think it's on our Web site. If not, we can get it to you, you can see in the stability area, which is where we think we are trending our model suggest it's GDP plus one to two, we conservatively said GDP plus one. So if you use a 2.6% GDP and you add one basis, 100 basis points to that, you get to 3.6% and we rounded up a bit to 4% and then as you heard from Craig, we added a point relative to our strategic investments. There are lots of forces and economic prognosis that you can use. But one thing that we use to kind of support our point of view is what the Harvard Joint Center says for remodeling activity and their forecasts for remodeling activity in 2019 is a 5% growth.

[Chuck Grom:]

Okay, great. Thanks very much. And then, one more if you Carol, on the third quarter call you gave some helpful color on tax refunds and the timing impact, just curious if your views on that front of change at all. And it looks like February refunds are down a lot, which is expected just wondering if that's impacted your business and thus far in February

[Carol Tome:]

Yes, now we wouldn't say that there's an impact to our business from tax in February and as you pointed out, we wouldn't expect the real benefits coming from tax reform to come in later. As those filers who haven't earned income credit or in a child credit, they actually haven't filed those returns get filed and processed later.

[Chuck Grom:]

Okay, great. Thanks.

[Operator:]

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

[Christopher Horvers:]

Thanks. Good morning, everybody.

[Craig Menear:]

Good morning.

[Christopher Horvers:]

So there's a lot of noise in '18; hurricane inflation in the first-half of the year, a touch in the fourth quarter of deflation, can you just - it'd be helpful to think about 2018. If we backed out whether on an annual basis and we backed out the net benefit from inflation in the first three quarters. What is that underlying rate and how does that compare to the 5% guide that you're putting out for 2019 and does that guide include any benefit from or headwind from inflation, deflation?

[Craig Menear:]

So we looked at that, we backed those noise levels out, it gets you somewhere in the area of a 55 to a 57 as a normalized run rate, you think about taking out the storms, you take out the weather, you take out the inflation. That's where we run into.

[Carol Tome:]

And as you know, when we build our plan, we are commodity inflation neutral. We don't really know how to plan for that. Based on where commodity prices are, let me give you a little bit of brush from - in the first-half of the year what we plan for that.

[Christopher Horvers:]

Understood, so just to summarize, there's who basically saying I mean precise based points but 70, 80 basis points of moderation and the underlying driven comp from '18 to '19, okay understood.

[Carol Tome:]

What you speculate in that - you would expect that where we are in the house and recovery, we'd expect that.

[Christopher Horvers:]

Got it and then in terms of the shift from pricing, well turnover net, then pricing and now Home Equity and age does that express itself in any way in terms of traffic versus ticket growth, do you expect ticket continue to lead as ticket growth actually become more of a factor versus the traffic growth. How are you thinking about that?

[Craig Menear:]

Yes, it would impact continue to support ticket growth for sure, and if you think about the formations, estimated to be increasing in 2019 while turnover is more flattish to where it was in 2018 that would definitely drive project business.

[Christopher Horvers:]

Okay. And then one quick - go ahead. Sorry, Ted.

[Ted Decker:]

Yes, sorry, Chris. I would just add on the ticket. The thing that's really encouraging about ticket reasons we called out in an innovative product and more premium roofing and a grill like a Traeger grill. We look at a number of signals very closely. One is the line structure where sales are coming from OPP to good, better, best. We continue to see stronger productivity as you move up price points and we break that out. Second data point we look at very closely is where is ticket growth coming from? And we include commodity, we include tariffs, we include new items, et cetera. And by far our largest ticket growth is coming from the introduction of new innovative items. It's actually much more significant than either inflation or tariff.

[Christopher Horvers:]

Got it. And then, and just to sneak one, last one in and Carol anything - any particular cadence around gross margin in SG&A versus sales growth. Obviously the fourth quarter, you allow the extra week, but anything else to call out on a quarterly basis and margins?

[Carol Tome:]

Yes, [indiscernible]. And we try to predict when spring will break. And we use five-year historical averages and forecasts from Planalytics, and we tried to predict when it will break, we are usually wrong, but we try. Now based on the way that we built our plan, we think that spring is going to break, it hasn't yet, but we think that spring is going to break in the first quarter. So because many of our seasonal categories are lower margin, you would expect the margin decline to be the greatest in the first quarter. So that's an important thing to get out there as you're building your models, because as you know, we're not really good at this. But that's what our model - that's how we're planning. Then from an expense growth factor, the real noise will be I guess in the fourth quarter, but I think, we've given you enough color there that you can model to that. So there's really nothing too [goopy] on the expense side.

[Christopher Horvers:]

Have a great spring. Thanks very much.

[Carol Tome:]

Thanks so much.

[Operator:]

And our next question comes from the line of Steve Forbes with Guggenheim. Please proceed with your question.

[Steve Forbes:]

Good morning.

[Carol Tome:]

Good morning.

[Steve Forbes:]

I wanted to focus on the enhanced delivery and fulfillment option rollout that you mentioned for 2019. So maybe you just comment on the number and type of facility slated to open in '19 and I guess, how you're moving along relative to the original plan?

[Craig Menear:]

Yes, Steve, we're excited about the pilots that we’ve put in place in 2018 and the learning that we have and Mark is here I'll let him address that, but I would also say that we're excited about the options that we provided for our customers during the year as well on same day delivery for a car and van service on products out of our stores.

[Carol Tome:]

Yes, just a reminder, we have our five direct fulfillment centers already up providing one and two-day service to over 90% of the population. We've got our Interline Brands facilities. Now Home Depot pro that give us near national coverage with next day delivery via 700 private fleet trucks. We've opened three market delivery operations and we have openings planned and groundbreaking planned through the year on the various new platforms, market delivery operations, flatbed delivery centers, et cetera. So we're looking forward to that and of course we have our car delivery and van delivery fast options there with 40% coverage of the U.S. population for low cost car delivery and 70% with van coverage.

[Steve Forbes:]

And then, just a quick follow-up, maybe more of a modeling question, right, as it relates to DNA specifically, can you - because I think, if you walk back to the Analyst Day in '17, there was a - I guess an average three-year DNA run rate, right? That was called out. Can you just update us on how that - which we should be building in as we lookout to 2020?

[Carol Tome:]

So I think in our guidance, we gave you a DNA number of what did we say $2.3 billion, some of that flows through cost of goods sold. So on the expense line, you could plan about $2 billion of DNA on the expense line, and the remaining $300 million would be up in the cost of goods sold.

[Steve Forbes:]

And then, any comments that we look at the 2020 relative to the three-year plan you laid out during the Analyst Day for DNA.

[Carol Tome:]

I just keep it about that rate.

[Steve Forbes:]

Thank you very much.

[Carol Tome:]

Yes.

[Operator:]

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

[Zach Fadem:]

Hey, good morning. You talked about some of the dynamics around the transition to the spring selling season with the later spring last year, is there anything that gives you confidence this year from either a whether to-date or product perspective, and can you just given the calendar ticket -- you gave some helpful color. But here is whether you anticipate the Q1 comp to be above or below the full-year comp growth just given the full start…

[Ted Decker:]

I mean, I will start with what Carol said earlier, and that is, we do use a multi-year average model in terms of planning. And when you look at that model, it suggests that we will actually see spring break in Q1.

[Carol Tome:]

We don't provide quarterly guidance as you know. So I'd like to go back to the half. That's the easiest way to think about our business, I would expect the first half comp to be lower than the full-year comp.

[Zach Fadem:]

Okay, fair enough. And could you comment on how some of the external factors in '19 like lower gas prices in mortgage rates for the consumer are incorporated in the '19 outlook? And then second, what do you assume in around the tariff environment?

[Ted Decker:]

We for years have tried to correlate gas prices to our business. We've never been able to draw a correlation on that. And so, we've - there's nothing built in for that whatsoever and then you've assumed nothing beyond what is in place today on tariffs. We just feel we don't try to plan for something that hasn't happened. As we've said with tariffs that's been manageable good news obviously Sunday and looks like negotiations are continuing but all the tariffs that have been put in place today, we have managed through that without any issue.

[Isabel Janci:]

Christine, we have time for one more question.

[Operator:]

Our final question today will come from Seth Sigman with Credit Suisse. Please proceed with your question.

[Seth Sigman:]

Thanks. Hey, guys. Thanks for taking the question. So regarding the weather impact and the impact on exterior projects, you gave us the 85-basis point impact. I'm curious during these types of periods, do you actually see an offsetting benefit on indoor projects and then just narrowing in on the exterior projects. To what extent you already trying to see those comeback or expect to see those comeback in that first-half outlook. Thank you.

[Craig Menear:]

Yes, I mean, generally, as Ted mentioned, we felt very positive about our paint business and so customers have a tendency to focus inside when they can't do work outside and that is something that happens in the business overall. So we felt good about the interior side of the business.

[Ted Decker:]

Yes, I would say every cycle, we have had a bad weather. You know, Craig mentioned the huge swings in a market like Los Angeles. We've seen that consistently across all our markets. Last spring, for example, we were delayed and as soon as the weather broke and our business just…

[Carol Tome:]

Not bad.

[Ted Decker:]

Just exploded, and we see that across markets now, weekend-to-weekend, so full expectation that when spring comes, we're ready for it. We got great innovative products. We are in stock and ready to go for our customers.

[Carol Tome:]

Okay.

[Seth Sigman:]

Got you. Okay. And then, just one follow-up on the pricing environment, you talked a lot about commodity prices. Can you just talk a little bit about price changes that you're seeing in non-commodity categories, and if you're embedding anything in the guidance? Thanks.

[Ted Decker:]

There's nothing in the guidance for sure. Right, across the board, not just with tariffs but we've seen through '18 and increased cost expectation from our suppliers, just whether it's wages or transportation, supply chain, fuel things that they've experienced. But we've digested all of that, and run that across the portfolio basis. So we don't see any increased pressure going into '19, if anything, as you mentioned, things like fuel and transportation capacity, and hopefully the tariff outlook, all those pressures should be abating a bit.

[Isabel Janci:]

So thank you for joining us today. We look forward to speaking with you on our first quarter earnings call in May.

[Operator:]

This will conclude today's call. We thank you for your participation.