Home Depot (HD) Q1 2023 Earnings Call Transcript

Home Depot (HD 0.59%)
Q1 2023 Earnings Call
May 16, 2023, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to The Home Depot first-quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

Isabel Janci -- Vice President, Investor Relations and Treasurer

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's first-quarter 2023 earnings call. Joining us on our call today are Ted Decker, chair, president, and CEO; Billy Bastek, executive vice president of merchandising; Ann-Marie Campbell, executive vice president of U.S. stores and international operations; 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 Ted, let me remind you that today's press release and 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 Ted.

Ted Decker -- Chairman, President, and Chief Executive Officer

Thank you, Isabel, and good morning everyone. Over the past three years, we grew our business $47 billion, or 43%. After this period of unprecedented growth., we expected demand would moderate in fiscal 2023, which our first-quarter results reflect. Sales for the first quarter were $37.3 billion, down 4.2% from the same period last year.

Comp sales declined 4.5% from the same period last year, and our U.S. stores had negative comps of 4.6%. Diluted earnings per share were $3.82 in the first quarter, compared to $4.09 in the first quarter last year. Our sales for the quarter were below our expectations, primarily driven by lumber deflation and unfavorable weather, particularly in our western division as extreme weather events in California disproportionately impacted our results.

As you will hear from Billy, where weather was favorable, we saw strength in key spring-related categories such as live goods and other garden-related categories. As we look beyond weather and lumber deflation, our underlying performance in the quarter was mixed. We saw more pressure across the business compared to what we observed when we reported fourth-quarter results a few months ago. While there was relative strength in project-related categories like building materials, plumbing, and hardware, we had many departments with negative comps in the quarter and continue to see pressure in a number of big-ticket discretionary categories.

DIY customers outperformed the pro in the quarter, but both were negative. All internal and external surveys suggest that pro backlogs are still healthy and elevated. Relative to historical norms, they are lower than they were a year ago. Additionally, recent external data point suggests that the types of projects in these backlogs are changing from large-scale remodels to smaller projects.

Though we are only one quarter into the year, we believe the underperformance this quarter relative to our expectations, lumber deflation, and continued uncertainty around underlying demand were in some more cautious sales outlook for the remainder of the year. Richard will take you through the details in a moment, but we are now guiding to a comp sales decline between 2% and 5%. Reflecting this updated comp guidance, we now expect our operating margin rate to be between 14.3% and 14%, and earnings per share to decline between 7% and 13%. We continue to navigate a unique environment.

We remain agile and respond to evolving customer dynamics while always being an advocate for value. In addition, we feel confident in the investments we have made in wage are driving the intended results. As Ann will discuss, in the short time frame since our most recent wage enhancements took effect, we are attracting a greater number of qualified applicants and attrition is down. Lastly, and as you would expect, we will continue to focus on driving productivity and efficiency across the business.

While the near-term environment is uncertain, we remain bullish on the medium to long-term outlook for home improvement and our ability to grow share in this large and fragmented market. We look forward to sharing our perspective on the many opportunities ahead when we meet at our Investor and Analyst Conference coming up on June 13th. Our team continues to focus on what is most important. Our associates and customers, our merchants, store and MET teams, supplier partners, and supply chain teams did an outstanding job delivering value and service to our customers throughout the quarter.

I'd like to close by thanking them for their dedication and hard work. I'd also like to introduce Billy Bastek who was recently named EVP of merchandising. Billy is a 33-year veteran of The Home Depot and brings tremendous experience to the role, having spent his entire career with us in various roles of increasing responsibility throughout the merchandising organization. Not only is Billy a world-class merchant and leader, he's also a fantastic steward of our culture, and it's my pleasure to welcome him to the call today.

Billy Bastek -- Executive Vice President, Merchandising

Thank you, Ted, and good morning, everyone. I want to start by also thanking all of our associates and suppliers, partners for their ongoing commitment to serving our customers and communities. As you heard from Ted, during the first quarter, our sales were below our expectations, primarily driven by lumber deflation and unfavorable weather. We also saw a continuation of the trend we observed in the fourth quarter with consumers pulling back on big-ticket and some discretionary-type purchases.

However, where weather was favorable, we saw strength in smaller-ticket outdoor projects. Turning to our department comp performance for the first quarter. Four of our 14 merchandising departments posted positive comps, which were building materials, hardware, plumbing, and millwork. During the first quarter, our comp average ticket increased 0.2% and comp transactions decreased 5%.

Excluding core commodities, comp average ticket was primarily impacted by inflation across several product categories, as well as the demand for new and innovative products. Deflation from core commodity categories negatively impacted our average ticket growth by approximately 335 basis points during the first quarter, driven primarily by deflation in lumber. During the first quarter, we saw a significant decline in lumber prices relative to a year ago. As an example, on average, framing lumber was approximately $420 per 1,000 board feet, compared to approximately $1,170 in the first quarter of 2022, which is a decrease of 64%.

Turning to total company online sales. Sales leveraging our digital platforms decreased approximately 2.9% compared to the first quarter of last year. For those customers that chose to transact with us online during the first quarter, over 45% of our online orders were fulfilled through our stores. DIY customers outperformed the pro in the quarter, but both were negative.

Pro results experienced a disproportionate impact as a result of lumber deflation and a wet start spring -- a wet start to spring negatively impacted both customer cohorts. Big-ticket comp transactions, or those over $1,000, were down 6.5% compared to the first quarter of last year. We saw some big-ticket strength across pro heavy categories like portable power, gypsum, and pipe and fittings. After a couple of years of unprecedented demand in the home improvement market, we continue to see softness in big-ticket discretionary categories like patio, grills, and appliances that likely reflects deferral of the single-item purchases in pull forward.

In addition, we've seen demand soften across other parts of the business including flooring, kitchen, and bath. This softer demand may reflect consumers moving away from larger to smaller projects. And while there are factors impacting the home improvement market, our merchandising organization will continue to focus on being our customers' advocate for value. This means continuing to provide a broad assortment of best-in-class products that are in stock and available for our customers when they need it.

We will also continue to lean into products that simplify the project, saving our customers time and money. That's why I'm so excited about the innovation we're bringing to the market, whether it's Leviton's Decora Edge, Viega copper press fittings, or the launch of BEHR DYNASTY exterior paint, just to name a few. At our upcoming investor conference, I look forward to sharing more about these products and some of my favorite product innovations with you in person. It's the power of our vendor relationships, coupled with our best-in-class merchant organization, that allows us to offer our customers the best brands with the most innovation to solve pain points, increase functionality, or enhance performance at the best value in the market.

Now let's turn our attention to spring. While we've had a slower start to the season, we continue to be excited about the lineup of products we have for our customers and remain ready to help them with their outdoor projects or outdoor living needs. As you've heard us say many times, we have a great lineup of outdoor power products, and our assortment of Ryobi, Milwaukee, DeWalt, and Makita offer something for everyone, building on an ecosystem of innovative tools powered by the same battery platforms. And our live goods look incredible.

We're ready for spring with everything from shrubs to a variety of flowers, herbs, vegetables for every type of gardener. With that, I'd like to turn the call over to Ann.

Ann-Marie Campbell -- Executive Vice President, U.S. Stores and International Operations

Thanks, Billy, and good morning, everyone. We believe that in order to provide the best customer experience, we must focus on cultivating the best associate experience in retail. Last quarter, I spoke about the investments we have made to make it easier for our associates to succeed at The Home Depot. We also announced that we would be investing approximately $1 billion in annualized compensation for front-line hourly associates.

Today, I want to update you on key areas of improvement that we've seen thus far. Our ability to attract qualified pools of candidates and hire from the top tier of these pools has improved even in our high volume -- higher-volume stores. And in March, we saw the greatest year-over-year improvement in our attrition rates across all associate tenure cohorts that we have seen in some time. As a result, we are seeing improvements in key customer service metrics, as well as benefits to our operations in the form of consistent staffing and less safety incidents across all our regions.

These improvements are exactly what we set out to achieve with this wage investment. The consistency and talent of our workforce is an important foundation for driving both customer service and productivity. It also gives us the ability and confidence to accelerate other key initiatives that are yielding positive results with respect to customer service and productivity. We have implemented changes to our order fulfillment processes to drive speed and efficiency when picking and staging orders for customers.

Historically, we have allocated fulfillment hours based on overall order volume. Now we have transitioned to allocating hours more accurately based on the types of products being picked. Just for example, it takes us less time to pick and stage a paint brush versus a patio set. We are also grouping fulfillment orders in batches so that associates can pick multiple orders at one time.

We also continue to focus on simplification. We've talked about leveraging the Sidekick application to help associates prioritize the highest-value tasks more effectively. Powered by our machine learning logic. Sidekick directs associates to key base where on-shelf availability is low or outs exist.

Since Sidekick was rolled out last year, we have seen improvement in all on-shelf availability for all SKUs, but we've seen the most improvement in our high-velocity SKUs or the products that are key drivers of our business. This has translated to an increase of approximately 300 basis points in our shelf availability customer service scores. While this app is helping us to be more efficient with our tasking activity and improving our customer experience in the process, Sidekick is just getting started. These initiatives are just a few examples of the many different types of projects that can drive significant impacts for customers, our associates, and/or shareholders.

I am so excited about all that our store teams are doing to focus on both the customer and associate experience and look forward to sharing a lot more in a few weeks. None of this would be possible without our amazing associates, and I want to thank them all for what they do every day to take care of our customers. With that, let me turn the call over to Richard.

Richard McPhail -- Executive Vice President, Chief Financial Officer

Thank you, Ann, and good morning, everyone. In the first quarter, total sales were $37.3 billion, a decrease of approximately $1.7 billion, or 4.2 %, from last year. During the first quarter, our total company comps were -4.5% with comps of -2.5% in February, -7.5% in March, and -3.7% in April. Comps in the U.S.

were -4.6 % for the quarter with comps of -2.8% in February, -7.5% in March, and -3.7% in April. Our first-quarter comp sales missed our own expectations, particularly in the months of March and April, driven primarily primarily by two notable factors. First, lumber deflation drove a negative comp impact of approximately 220 basis points versus the first quarter of 2022. Second, unfavorable weather, particularly in our western division, further impacted our results.

In the first quarter, our gross margin was 33.7%, a decrease of eight basis points from the first quarter last year, primarily driven by increased pressure from shrink. We continue to successfully offset supply chain and product cost pressures while maintaining our position as the customers' advocate for value. During the first quarter, operating expense as a percent of sales increased approximately 25 basis points to 18.8% compared to the first quarter of 2022. Our operating expense performance during the first quarter reflects the planned compensation increases announced during our fourth-quarter 2022 call, as well as a one-time benefit from a legal settlement.

Our operating margin for the first quarter was 14.9%, compared to 15.2% in the first quarter of 2022. Interest and other expense for the first quarter increased by $72 million to $441 million due primarily to interest on our floating rate debt, as well as higher debt balances than a year ago. In the first quarter, our effective tax rate was 24.2%, up from 23.9% in the first quarter of fiscal 2022. Our diluted earnings per share for the first quarter were $3.82, a decrease of 6.6% compared to the first quarter of 2022.

During the first quarter, we opened two new stores, bringing our total store count to 2,324. Retail selling square footage was approximately 241 million square feet. At the end of the quarter, merchandise inventories were $25.4 billion, essentially flat compared to the first quarter of 2022, and inventory turns were 3.9 times, down from 4.4 times last year. Turning to capital allocation.

After investing in our business and paying our dividend, it is our intent to return excess cash to shareholders in the form of share repurchases. During the first quarter, we invested approximately $900 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $2.1 billion in dividends to our shareholders, and we returned approximately $3 billion to shareholders in the form of share repurchases. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 43.6%, down from 45.3% in the first quarter of fiscal 2022.

Now I will comment on our guidance for fiscal 2023. As you may recall, last quarter, we provided flat sales and comp guidance for fiscal 2023. As we mentioned last quarter, our guidance did not include potential impacts from lumber deflation, which we noted, could negatively impact our performance for the quarter and the year. As a result, lumber negatively impacted comps by approximately 220 basis points in the first quarter.

Given the negative impact to the first-quarter sales from lumber and weather, further softening of demand relative to our expectations, and continued uncertainty regarding consumer demand patterns, we are updating our guidance to reflect a range of potential outcomes. We now expect fiscal 2023 sales and comp sales to decline between 2% and 5%. As a result of the change in our sales outlook, we are now targeting an operating margin between 14.3% and 14% for the year. Our effective tax rate is targeted at approximately 24.5%.

We expect interest expense of approximately $1.8 billion, and we are anticipating between a 7% and 13% decline in diluted earnings per share compared to fiscal 2022. As Ted mentioned, we expected 2023 to be a year of moderation in the home improvement market driven by monetary policy actions to dampen overall consumer demand. In our view, we are in a transitional period in the consumer economy. Setting the short-term impacts of monetary policy aside, we know that the home improvement customer is healthy.

And we believe the medium to long-term underlying fundamentals of home improvement make it one of the most attractive markets in retail and the economy as a whole. We believe that we are well positioned to meet the needs of our customers with a broad assortment of products, strong in-stock levels, and knowledgeable associates. The investments we've made in our business have enabled agility in our operating model. As we look forward, we will continue to prudently invest to strengthen our competitive position, leverage our scale and low-cost position to outperform our market and deliver shareholder value.

Thank you for your participation in today's call. And, Christine, we are now ready for questions.

Questions & Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] One moment, please, while we poll for questions. Thank you.

Our first question comes on the line of Chris Horvers with J.P. Morgan. Please proceed with your questions.

Chris Horvers -- JPMorgan Chase and Company -- Analyst

Thanks. Good morning, everybody. So, I have two questions. On the ticket side, average ticket was flat in the first quarter.

I think, last year, you had same SKU inflation, ex-commodity, of about high single digits all year. So, how much of the ticket deceleration relative to 1Q last year was just simply a same SKU disinflation on a year-over-year basis versus, you know, things like project size and trade-down?

Ted Decker -- Chairman, President, and Chief Executive Officer

Hey, Chris, good morning. You know, we -- we are still seeing inflation in same SKU items. So, putting commodity aside that we -- we gave the example of lumber being down 64%, we're still experiencing inflation in our ticket and our average unit retail. So, the -- the non-index, so the noncommodity prices, are still lapping cost in price from last year.

And then, there's still moderate inflation, you know, live this year in 2023. So, inflation is still present in the average ticket.

Chris Horvers -- JPMorgan Chase and Company -- Analyst

So -- so, as you look ahead, how are you thinking about how much of a headwind that becomes over the year and what did you incorporate in the guidance? And then related to that, you know, transactions are sort of back to '19 levels, but in the first quarter, ticket's still up 37% versus the first quarter of '19. I'm guessing maybe a third of that is same SKU. So, just trying to put in a context the risk around ticket in terms of disinflation and then also, you know, project size and trade-down.

Ted Decker -- Chairman, President, and Chief Executive Officer

Right. Well, you know, it's something we clearly look at carefully. There certainly has been a lot of cumulative inflation in price, in our average unit retail, in our ticket, but that is not something that we are expecting to broadly deflate. Now commodity prices, those -- those price essentially weekly, and we will price those up or down on a weekly basis.

But price levels in a number of our products, you know, have increased and been established over the past three years. Embedded in that higher ticket is innovation. So, when you think of -- of ticket, a lot of that is not just cost and price; it's trading up to -- to better product when you think of battery-powered outdoor power equipment, what we've done in the paint department with better and better paints. There's innovation, and with innovation, it's usually higher price points.

So, we don't see those deflating broadly as -- as we we work through this period of moderation.

Chris Horvers -- JPMorgan Chase and Company -- Analyst

I guess just in terms of, do you think -- you know, if you sort of look at the trend on project size, does that become -- you know, will that cause ticket to become negative over the year, is that how you're thinking about it?

Ted Decker -- Chairman, President, and Chief Executive Officer

I wouldn't say over the years. Certainly, right now, we are seeing two of the biggest factors on -- on each of ticket and transaction is, as we said, we have specific, you know, discretionary items. You know, best -- best examples are things like a grill, a patio set, and appliance, those tend to be one-off discretionary items. And we are seeing pressure in those.

We've been seeing pressure on those for some time. What was newer, in our observations this quarter, is that while projects are still strong and pro project backlog is still elevated, the size of the projects are getting a bit smaller. And it could be that the projects being deferred or it could be that the project is being broken up into chunks. So, whether -- you know, rather than do an entire room or an entire basement, you start working away at it in smaller smaller chunks, and that clearly, you know, impacts items per basket in overall activity.

Chris Horvers -- JPMorgan Chase and Company -- Analyst

Got it. Thank you very much.

Operator

Our next question comes from the line of Steven Zaccone with Citi. Please proceed with your question.

Steven Zaccone -- Citi -- Analyst

Great. Good morning. Thanks for taking my question. I was hoping you could comment a bit on what you're seeing in the second quarter to date, just given the fact that weather has been so volatile across the U.S.

And then, just in the context of that, how should we think about second quarter maybe versus the back half of the year? What can kind of get you to the high end versus the low end of your full-year guidance range?

Richard McPhail -- Executive Vice President, Chief Financial Officer

Sure. Well, thank you. Thank you, Steven. So, the first two weeks of May are in line with the guidance we've provided.

We don't break out quarterly guidance, but the two first -- the first two weeks are consistent with the guidance we provided. We're going to learn a lot over the next few weeks with respect to underlying demand as we still have some of our largest-selling weeks ahead of us. If you -- if you think about what -- what our guide implies from a shape of the year, first, let's -- let's perhaps talk about the building blocks of our range. So, how we got to the negative two to the negative five, and then we'll talk about the shape of the year.

The negative two was really built on flowing through the Q1 performance, adding the Q1 lumber impacting the guidance, adding a little further lumber pressure that we'll see in Q2. We think that there could be 120 basis points of comp pressure in Q2 based on current lumber price. And then that negative two scenario also reflects our share of PCE which shifted at a more accelerated rate than expected in the first quarter, sort of holding at that rate for the rest of the year. So, those are the underlying assumptions in the negative two.

The negative five case simply takes that PCE share shift assumption, our share of PCE, and assumes that we revert back to 2019 levels of PCE share by the end of the fiscal year. So, that would -- that would imply the -5% case. When we talk about the shape of the year, for the -- for the negative two, high end of the range, we would expect that the second half would be better than the first half really due to normal -- lumber normalization in the second half on a year-over-year basis. The vast majority of lumber pressure year over year exists in that first half.

So as that normalizes in the negative two case, second half improves versus the first half. In the lower end of our range, we would expect the first half would outperform the second half, again, due to that assumption of continued acceleration in our share of -- of PCE.

Steven Zaccone -- Citi -- Analyst

Great. Thanks for all the detail on that. And then, I wanted to follow up on the comment about this being a transitional period for the consumer. And the context of the question is, how do you think about this year as the potential trough in demand for home improvement versus it potentially being a multiyear trend and maybe 2024 is another step down? And I know you'll have a -- there's a lot of moving pieces and you'll have an Analyst Day in a month, but if you could comment on that at all, be helpful.

Ted Decker -- Chairman, President, and Chief Executive Officer

Yeah, why don't I just, you know, take it up a bit on on the consumer and their health and then their engagement in home improvement? If you look at the consumer overall, you know, they're still relatively strong as evidenced by continued increases in personal consumption. And then, when you look at our customer -- I mean we have -- we have one of the best customer sets, you know, in any market sector. Our -- our customer, you know, is stronger than -- than the overall consumer when you think they tend to have good jobs, increasing wages, and own their homes. And collectively, those home values have increased by about $15 trillion since 2019.

So, as we said, we grew disproportionately these past few years, $47 billion in growth, 43% cumulative comp, as consumers shifted their spending, as these healthier consumers shifted their spending into home improvement. And undoubtedly, after that period of growth, you're going to -- you're going to see moderation, which is exactly what we saw in Q1. So, when you -- when you think about what this reflects about the consumer in the future engagement in home improvement, you know, think about a few -- a few things. We've seen an accelerated shift out of goods to service spending as the broader economy has gotten back to normal, and that's, in particular, in home improvement.

Obviously, people aren't spending all their time at home as they did in the prior few years. And then, there's an impact of pull forward or deferral of certain categories, like I spoke about earlier, appliances, patio grills that saw, you know, outsized growth in the early years of the pandemic. And then, a newer dynamic now that -- that we're really seeing again this just this past quarter is a more cautious consumer given the broader macro concerns, including credit availability. And that aligns with what we're observing in our business, in the comments I made about our pros, in consumers taking on smaller, less discretionary projects.

And then, lastly, with the buildup of inflation that we've seen, there's certainly some price sensitivity, particularly with respect to those bigger-ticket discretionary items. So, in general, our homeowner consumer is -- remains very healthy. It's a matter of digesting the outsized growth in shift of consumption spend out of services into goods and, particularly, into home improvement. So, we'll get through this -- this period.

Richard's talked about the PCE normalization. It -- we don't know where that ends or how quickly it goes. There's an argument that PCE and home improvement stays elevated, all the reasons we've talked about before, the home values are so much higher, the age of the home is -- is considerably older on average, people are spending more time at home. So, all those dynamics could suggest, you know, normalization might be, in fact, a higher level of PCE spending in our sector.

But regardless of all that, we'll get through this -- this transition period, and we remain incredibly bullish on the health of this sector. It's one of the absolute best sectors in all of retail. It's a large and fragmented market, and we have tremendous growth opportunities going forward.

Steven Zaccone -- Citi -- Analyst

Thanks for all the detail. Best of luck for the remainder of spring.

Operator

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

Zach Fadem -- Wells Fargo Securities -- Analyst

Hey, good morning. Can you help us bridge the gap from the 15.3% EBIT margins last year to the 14 to 14.3 today? And specifically, how should we think about the moving parts around gross margin versus SG&A? And then, specifically for -- for Q1, cost controls were a bit better than expected. Can you talk us through the impact of the legal settlement and anything else you'd highlight there?

Richard McPhail -- Executive Vice President, Chief Financial Officer

Yes, Zach, thank you for -- thank you for the question. So, let's first walk from 15.3, which is our actual operating margin in 2022, to our original guide of 14.5% margin. At a flat comp, particularly in an inflationary environment, our business will see a degree of deleverage in expenses. And so, really, three factors: natural deleverage in the business; a $1 billion investment in wage which has proven to, as Ann said, provide real benefit from a customer experience point of view; and then, productivity initiatives designed to offset some of that deleverage.

And so, when you net all those three against each other, that led to our guide of 14.5% of flat comp. As we reflect on the revision to guidance, the range of operating margin that we have guided toward reflects the natural operating margin at these negative comp levels. In other words, there -- there is -- there are levers that help blunt deleverage, but there is deleverage still in our model. The greatest mitigator is that we have an activity-based payroll model.

And so, as activity in our stores decreases, so does our lever -- sorry, our level of payroll. So, you do have a natural buffer there. But again, the 14.3 to the 14.0 would be the natural operating margin at the negative two and the negative five. When we think about the -- the one-time legal settlement, so we did realize a large one-time benefit from a legal settlement.

Our guidance assumes this benefit will be offset during the remainder of the year, and so that's just a simplified assumption. We will protect that 14% operating margin. We'd agree with -- operate with a degree of financial flexibility. And as the year progresses, we'll be evaluating the levers available to us against the backdrop of the environment.

Zach Fadem -- Wells Fargo Securities -- Analyst

Got it. Appreciate the color. I've got a big-picture question. Could you talk about the macro and housing indicators that you believe are now most correlated to your business today? And then, considering the golden handcuffs of sub-3% mortgages out there, do you think this takes longer now for housing turnover to materially recover?

Richard McPhail -- Executive Vice President, Chief Financial Officer

Well, I'll take the second one first. You know, we've already seen the impact to housing turnover. I think that we've probably fully seen the impact of higher mortgage rates on -- on potential sellers. In this environment, if you have a low fixed-rate mortgage -- and let's just remind ourselves, 40% of owner-occupied homes are owned outright.

And of the households that hold a mortgage, close to 90% of those hold fixed rate mortgages under 5%. So, with mortgage rates where they are today, there's a reluctance to sell your home, and there is a greater incentive to stay in place and improve in place. And as Ted said, you're spending more time at home and that home is getting older, and you do not have an incentive to sell and take on a higher-rate mortgage. So, I think we've already seen that in housing turnover.

With respect to macro indicators, I think -- as Ted said, I think what we're seeing in the business now is reflective of the broader impact of tighter monetary policy and tighter credit conditions. You know, it's interesting, as we saw the quarter unfold, if you look at at how we did during February, our business was actually trending quite positively. In fact, February's dollar run rate adjusted for normal seasonal curves would have implied a positive comp for the year. When you think about March, well, first of all, March was impacted by extreme weather, most notably in California.

And, you know, that was also the point where we saw accelerating share shift. There were some external factors there that maybe don't have direct influence, but as you know, in March we saw the collapse of SVB. And you think about the tighter credit conditions that -- that were a result of of the external environment. We think all of those just build to a broader -- a broader caution among consumers.

As Ted said, our homeowner customer is extremely healthy, very healthy balance sheet, healthy income. This is a broader consumer economy dynamic we think we're seeing.

Zach Fadem -- Wells Fargo Securities -- Analyst

Thanks, Richard. I appreciate all the color.

Richard McPhail -- Executive Vice President, Chief Financial Officer

Thanks, Zach.

Operator

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

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot for taking my question. As you look across your entire assortment and trying to set current unit demand versus what would be a normalized rate, how many product categories are still well above what would be suggested by a normalized rate? Perhaps if you look at appliances, grills, and patio furniture, and where units are today versus 2019 and extend that math to the rest of the business, what would that suggest about a downside comp scenario even from here?

Ted Decker -- Chairman, President, and Chief Executive Officer

Michael, great question. I wouldn't say we've gone into that level of detail by -- by category. Certainly, a number of those categories were -- were elevated, the ones you called out, patio grills, appliances were elevated on retails with innovation, as well as as units with -- with outsized demand. I think, you know, you think of normal replacement cycles and pull forward on some of that product, that's just going to take a little little bit of time to -- to normalize.

Other categories that we haven't talked so much about that are that are really booming, frankly, are categories like building materials, where, you know, we're seeing unit volume still -- still running quite strong. We see units in lumber picking up meaningfully as prices come down and you get attachment with building materials. And then, hardware, which attaches to -- to both building materials, in lumber, we're seeing our strongest hardware unit productivity. And attach rate to those project-starter categories, I think, Billy, it's the highest attach rate we've ever recorded.

Billy Bastek -- Executive Vice President, Merchandising

Yeah, that's right. You know, think about our building materials performance, we call that out as outperform, along with lumber, still seeing great unit productivity across those businesses and seeing the attached smaller, certainly smaller projects taking place. And then, Ted did mention some of the -- you know, we did see some pull forward in some of those -- those businesses that we -- we talked about initially as well.

Michael Lasser -- UBS -- Analyst

My follow-up question is if we consider 2023 to be the transition year and comps for The Home Depot do return to growth in 2024, would you start seeing leverage on your expenses on the first dollar of growth? Or will there be some catch-up like, Richard, you mentioned this legal expense, you expect to give back some of that over the course of this year. Presumably, there'll be an incentive comp benefit as you lowered your guidance. So, will you see some of those items come back next year such that if we have in our models a positive comp, we wouldn't necessarily expect you to leverage your expenses on the first dollar of growth next year?

Ted Decker -- Chairman, President, and Chief Executive Officer

Well, we'll -- we'll get into a bit more detail on -- on outlook in 2024 when we get together in June for the investor conference. You know, we're not -- we're not modeling 2024 to that level of specificity as we're only a few months into 2023. But broadly, Michael, you know, our model is meant to leverage and will leverage with volume. And, you know, we have some costs to take out of the business for sure, you can think on -- on the product side.

With transportation in particular, you'll -- you'll -- you'll see significant costs come out as we work through our current inventory levels with the higher transportation rates experienced during COVID. And then, on the operating model, the store and labor, that will always leverage with growth.

Richard McPhail -- Executive Vice President, Chief Financial Officer

And obviously, you know, we manage costs and price independently, Michael, and transportation costs are a market dynamic. And so, you know, we'll make sure that we're positioned as the customers advocate for value with respect to price. But as Ted said, we'll get -- we'll get more into this in 2023 -- or sorry, in June -- June 13th.

Michael Lasser -- UBS -- Analyst

Can I just clarify what that -- that comment is intended to say? Because one of the debates is costs have come down, whether transportation costs, certain raw materials, so there's a question of whether that means there's going to be like-for-like product deflation in noncommodity-related areas over the course of this year. And it sounds like Home Depot is going to continue to be an advocate for growth, but how would you clarify that? For -- advocate for value, sorry.

Richard McPhail -- Executive Vice President, Chief Financial Officer

Right. No, again, we -- we manage cost and price independently. As Ted said, we don't expect broad-based deflation in this market.

Michael Lasser -- UBS -- Analyst

Understood. Thank you very much.

Operator

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

Brian Nagel -- Oppenheimer and Company -- Analyst

Hi. Good morning

Ted Decker -- Chairman, President, and Chief Executive Officer

good morning.

Brian Nagel -- Oppenheimer and Company -- Analyst

My first question, I know we've discussed a bit already about the weather. I was wondering if you can go in a little more detail on what you saw kind of a spread between -- in comps between markets where weather was an issue and markets where weather may have been more normal. And then, as -- you know, I mean, looking at our data, you know, the spring has come -- you know, has arrived and in a lot of markets. So, what are you seeing then as far as any type of pickup in seasonal categories as -- as the spring-like conditions are starting to take hold?

Ted Decker -- Chairman, President, and Chief Executive Officer

Yeah, Brian, thank you. So, weather, as we said, was most pronounced in the west and very unique weather pattern. This wasn't a bad weekend; this -- this was, you know, record rain and even things like snow in Southern California. So, where -- where weather, you know, was sustained in bad, when we look at the west versus our northern and southern divisions, the impact was a multiple of what we saw in the other parts of the country.

And generally, we -- we -- we've talked in the past about the bathtub effect and we wouldn't have updated guidance based on -- on stronger or relatively weaker sales in Q1 based on weather because we would look to get that back. So, when you think of of a shorter spring season in the north where people are going to get that activity done in a -- in a limited number of weeks, if you don't get it done in the first quarter, people tend to -- to make it up in the second quarter. The dynamic in the west in -- you know, this one into our -- you know, our guidance of the -2 to -5, is the west. You know, it's more level weather patterns.

We have very large stores, very high pro concentration. And when you get bad weather, you're not really looking at a bathtub effect to make it up in a short season, you just sort of missed that selling week. So, the difference geographically, you know, was pronounced in the west. And -- and we just look at that as sort of lost selling weeks.

In the north, you know, the behavior is, you know, more typical to the bathtub. I mean, we didn't have many good weekends, but when we did, you know, sales were incredibly strong. So, we're certainly hoping for better weather in Q2.

Brian Nagel -- Oppenheimer and Company -- Analyst

That's OK. That's helpful -- very helpful. Then my second question, again, recognizing there's lots of moving parts here and you're dealing with varied comparisons through the year. But as you look -- as you think about or as -- you know, the updated guidance for 20 -- for '23 you gave us today, does that basically assume kind of a continuation of what we've seen so far in '23? Or are you assuming some type of either, you know, improvement, further deterioration, etc.

through the year?

Richard McPhail -- Executive Vice President, Chief Financial Officer

That's right, Brian. That's why we gave the range. I mean, you would say that that, particularly the bottom end of the range, would assume greater deceleration than we've observed to date. And it's consistent with a hypothetical case we laid out at the beginning of the year, which was to say, look, if our share of PCE reverts to 2019 levels by the end of the year, that is what you would see.

And again, that would be an accelerated rate of reversion versus -- versus what we've seen. So, the negative two, again, sort of has -- it takes into account -- into account the fact that we saw sharper reversion than expected in Q1, and that we would hold that share through the -- through the end of the year. It's not a perfect science and that's why we gave you a range.

Brian Nagel -- Oppenheimer and Company -- Analyst

Great. I appreciate it. Thank you.

Richard McPhail -- Executive Vice President, Chief Financial Officer

Thanks, Brian.

Ted Decker -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

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

Scot Ciccarelli -- Truist Securities -- Analyst

Good morning, guys. So, Richard, you talked about protecting a 14% operating margin even with the wage investments that you guys have made this year at this point. What other -- I mean, how much flexibility do you think you have on the SG&A line? Because I know labor is your biggest kind of plus bucket, but you're actually investing more in labor, not less. So, like, how should we think about how you guys are managing that component?

Richard McPhail -- Executive Vice President, Chief Financial Officer

Well, the investment in wage, again, which is really proven to have driven a lot of benefit on the customer experience side, that's embedded in our guidance. We've made the investment, and that will be roughly a $1 billion addition to our cost structure, but it's embedded in our margin structure. Again, you know, as the year progresses, we'll be evaluating levers available to us against the backdrop of the environment. We -- we invest to win over the long term.

We're comfortable with our level of investment as it stands today. We'll continue to assess our investments against the backdrop of the environment, and we have some flexibility there too.

Scot Ciccarelli -- Truist Securities -- Analyst

And just a quick follow-up, with higher interest rates in the marketplace, does that change how you guys are thinking about capital allocation, not necessarily from a strategic basis but how aggressive you want to be in terms of issuing debt to buy back stock? Thanks.

Richard McPhail -- Executive Vice President, Chief Financial Officer

We feel good about where we stand from a debt to EBITDAR perspective. We had a maturity -- a $1 billion maturity in April. And we repaid that, didn't refinance it. We have no -- no need necessarily to go to the debt capital markets in the short term, and we'll watch market conditions as they unfold.

But we feel good about where we are from a leverage perspective/

Scot Ciccarelli -- Truist Securities -- Analyst

Roger that. Thank you.

Operator

Our next question comes from a line of Brad Thomas with KeyBanc. Please proceed with your question.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Thanks for taking my questions. I was hoping you could talk a little bit more about the trends you're seeing in the pro business. I think this is the first time in a few quarters that it had underperformed DIY.

What are you seeing out of the pro? Has it improved as the weather's gotten better? And how are you thinking about it going forward?

Ted Decker -- Chairman, President, and Chief Executive Officer

Yeah, I'll let Hector talk a bit about the pro and what we like that we're seeing. But from the broadest perspective, don't forget, the pro was disproportionately impacted by lumber, and then, again, a very strong pro-business out west. But we like what we're seeing with our -- with our customers as they engage with our capabilities.

Hector Padilla -- Executive Vice President, Outside Sales and Service

Yeah, good morning, Brad. This is Hector. On a two-year basis, our performance was positive. And as Ted just mentioned, and Billy, we saw that disproportionate impact from lumber and weather.

What we're most excited about is what we're seeing with our pros, who are engaging with our new supply chain assets and expanded pro capabilities that we have. We have talked about in the past, we're gaining share wallet with them and as they're growing their spend with us to have a willingness to consolidate their purchases with The Home Depot, the lumber brand, the lower assortment, and our value proposition, and we're seeing that across many markets. I really look forward to speaking with you in more detail in June about how the pro business is doing and around the capabilities that we're building.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. And as a quick follow-up, obviously, some moving pieces here with -- with weather and deflation, I believe your prior outlook for the home improvement market was a decline of low single digits. What are you assuming in your new outlook?

Richard McPhail -- Executive Vice President, Chief Financial Officer

So, we, you know -- we began the year with a flat outlook for PCE There are economists who have lifted that outlook slightly for PCE. But as we observe PCE share that our market holds and the shifts that we've seen, we expect our market to be down mid to high single digits. And so, implicit in our guide is the expectation that we'll continue to take share.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. Thanks so much.

Operator

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, thanks. Good morning, everyone. I want to ask about home prices. There's been a case that's made that demand decoupled a bit from turnover and that prices could matter more.

I want to ask specifically about how that could inform the cadence of the year, because if you are strict adherent to prices, the lag effect could suggest that the back half core gets a little bit worse. I'm curious how you think about that.

Ted Decker -- Chairman, President, and Chief Executive Officer

Well, of all the housing metrics, Simeon, we think home value has the tightest correlation to home improvement spend. Certainly, you know, turnover and household formation also are -- influence the spend. And there's -- there's generally a lag effect, as you say, to home price appreciation or depreciation. I think the difference here is how sensitive are people going to be that I was up 45% in home value from the end of 2019, and yes, now month over month, the values are off slightly, but I'm still up 40% or 38% from where I was at the end of 2019.

You know, that psychology is -- is tough to -- to -- to weed out with the general, you know, consumer apprehension, given -- given general inflation and macro and rising interest rates and, you know, all the talk are we going to have a recession, are we not going to have a recession. So, I wouldn't think that -- that that would have that big of an impact. We're not thinking that's a big impact in 2H.

Simeon Gutman -- Morgan Stanley -- Analyst

OK, that's fair. One more question around the updated guide, for Richard. The midpoint of this -2 to -5, just to clarify, that assumes that the core worsens from Q1 as well as the impact of lumber worsens from Q1?

Richard McPhail -- Executive Vice President, Chief Financial Officer

You can think of the impact of lumber being kind of an assumption that is equal across all cases. It's about 120 basis points of pressure to Q2, and then very, very slight, really nonmeaningful pressure in the second half. And again, we've -- we've given a range, Simeon, to just provide sort of a balanced view here. It's -- it's tough to extrapolate this early in the year.

And so, we feel like the -- the range approach is the most helpful guidance that we can give.

Simeon Gutman -- Morgan Stanley -- Analyst

Right. OK. Thank you.

Operator

Our next question comes from a line of Seth Sigman with Barclays. Please proceed with your question.

Seth Sigman -- Barclays -- Analyst

Hey, everybody, good morning. I wanted to follow up on that assumption that home improvement wallet share will normalize back to 2019 levels. I mean, obviously, that implies things get worse from here. But I guess there's also been some prior cycles where wallet share overshoots on the downside and goes lower than where it was before.

And we talked a lot about pull-forward already today, but how do you think about that scenario and why that scenario would be wrong this time?

Ted Decker -- Chairman, President, and Chief Executive Officer

Well, you know, as we've said, we've given the guide for -- for our best -- best view of 2023. And the downside of a minus five would be that you've reverted by the end of the year to 2019 levels. So, mathematically, you could say, well, there'd be some hangover of that into 2024. And then, your question, does it overshoot? You know, frankly, we -- we don't know.

As I said earlier, there's as strong a case, if not stronger, that where you settle is a higher share. If based nothing more than your asset class, is -- is so much higher. I mean, we're not -- we're not talking billions of dollars; we're literally talking trillions of dollars that this asset class has more value. So, if you're thinking about percent of -- of investment in any asset class, you've got a much bigger base.

We talked about the average age of the home is now over 40 years old. And we have big chunks of homes that are reaching that 20-year and 40-year sort of witching hour of age. We all know we're spending more time at home. So, wear and tear is higher.

So, we've talked about all these dynamics in the past. And I'd say if you had to call it, you would say the spend would ultimately settle out potentially higher.

Seth Sigman -- Barclays -- Analyst

OK, fair enough. Just want to follow up on the EBIT margin guidance for this year. I think what you laid out here at the low end, so 14 % margin on negative midsingle-digit comps, very consistent with the scenarios you talked about last quarter, but it does include that Q1 SG&A benefit. Can you just help us better understand, does that imply the underlying? It's actually lower? I think you may have said there's an offset to that.

Maybe you can just clarify that point. Thank you.

Richard McPhail -- Executive Vice President, Chief Financial Officer

Thanks for the question. To clarify, it's not assuming that the underlying would be lower. Our guide actually assumes that that gain would be offset through the remainder of the year.

Seth Sigman -- Barclays -- Analyst

OK. Thanks very much.

Isabel Janci -- Vice President, Investor Relations and Treasurer

Christine, we have time for one more question.

Operator

Thank you. Our final question will come from the line of Steven Forbes with Guggenheim. Please proceed with your question.

Steven Forbes -- Guggenheim Partners -- Analyst

Good morning. Just wanted to follow up on lumber trends. You made a comment about price deflation. Curious if you could talk about what specifically happened with unit volume during the quarter, and then what the guidance assumes in the back half as the price compares ease in terms of unit expectations right in the second half.

Billy Bastek -- Executive Vice President, Merchandising

Yeah, thanks, Steven. This is Billy. You know, as we talked about, Richard mentioned in his previous comments, we do anticipate the greatest pressure from lumber in the first half. For the total year, we think lumber deflation impact to the comp is about 100 basis points.

Now with that, we're seeing, you know, strong unit movement across, you know, plywood, dimensional lumber, PT decking. You know, it's 220 basis points, as we mentioned in Q1, another 120 basis points roughly in Q2, which is in the guide. And then, we don't expect a material impact from lumber for the back half of the year but still seeing really strong unit performance in the category as they called out.

Steven Forbes -- Guggenheim Partners -- Analyst

And so, maybe just -- so -- so, you do expect unit volume to improve in the back half? Or what is sort of the trajectory of unit dynamics right with lumber specifically implied in the guide?

Billy Bastek -- Executive Vice President, Merchandising

Well, as -- as the pricing normalizes year over year, you'll see -- you know, you'll see the units reflect in that as we get toward -- toward a more rational state that we had in the back half of last year.

Steven Forbes -- Guggenheim Partners -- Analyst

And then, just a quick follow-up, any -- any sort of preview of what we should expect at the upcoming Analyst Day? I think made a comment before potentially about speaking to 2024, but I wasn't sure if you can maybe clarify any sort of preview thoughts on what we should expect to hear at the Analyst Day.

Isabel Janci -- Vice President, Investor Relations and Treasurer

Thanks for that question, Steve. I think what you'll hear us talk about is the -- the updated TAM that we will lay out for you, our growth opportunities to go after that TAM, and a little bit more about why we're so excited about the sector and the business.

Steven Forbes -- Guggenheim Partners -- Analyst

Thank you.

Isabel Janci -- Vice President, Investor Relations and Treasurer

You're welcome.

Operator

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

Isabel Janci -- Vice President, Investor Relations and Treasurer

Thanks, Christine, and thanks, everybody, for joining us today. We look forward to speaking with you at our Investor Conference on June 13th.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Isabel Janci -- Vice President, Investor Relations and Treasurer

Ted Decker -- Chairman, President, and Chief Executive Officer

Billy Bastek -- Executive Vice President, Merchandising

Ann-Marie Campbell -- Executive Vice President, U.S. Stores and International Operations

Richard McPhail -- Executive Vice President, Chief Financial Officer

Chris Horvers -- JPMorgan Chase and Company -- Analyst

Steven Zaccone -- Citi -- Analyst

Zach Fadem -- Wells Fargo Securities -- Analyst

Michael Lasser -- UBS -- Analyst

Brian Nagel -- Oppenheimer and Company -- Analyst

Scot Ciccarelli -- Truist Securities -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hector Padilla -- Executive Vice President, Outside Sales and Service

Simeon Gutman -- Morgan Stanley -- Analyst

Seth Sigman -- Barclays -- Analyst

Steven Forbes -- Guggenheim Partners -- Analyst

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