Diane Dayhoff - Senior Vice President of Investor Relations Carol Tomé - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Corporate Services Mark Holifield - Senior Vice President of Supply Chain Craig Menear - Executive Vice President of Merchandising Marvin Ellison - Executive Vice President of U S Stores Francis Blake - Executive Chairman and Chief Executive Officer

Alan Rifkin Joseph Feldman - Telsey Advisory Group Greg Melich - ISI Group Inc. Michael Lasser - UBS Investment Bank David Schick - Stifel, Nicolaus & Co., Inc. Eric Bosshard - Cleveland Research Company Gary Balter - Crédit Suisse AG Simeon Gutman - Crédit Suisse AG Budd Bugatch - Raymond James & Associates, Inc. Matthew Fassler - Goldman Sachs Group Inc. Dennis McGill - Zelman & Associates Deborah Weinswig - Citigroup Inc Christopher Horvers - JP Morgan Chase & Co Michael Baker - Deutsche Bank AG Laura Champine - Cowen and Company, LLC Scot Ciccarelli - RBC Capital Markets, LLC

Good day, everyone, and welcome to today's Home Depot Second Quarter 2011 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] Beginning today's discussion is Ms. Diane Dayhoff, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Alicia, and good morning to everyone. Welcome to The Home Depot Second Quarter Earnings Conference Call. Joining us on our call today are Frank Blake, Chairman and CEO of The Home Depot; Craig Menear, Executive Vice President, Merchandising; and Carol Tomé, Chief Financial Officer and Executive Vice President, Corporate Services. Following our prepared remarks, the call will be open for analyst questions. Questions will be limited to analysts and investors, and as a reminder, we would appreciate it if the participants would limit themselves to one question with one follow-up, please. This conference call is being broadcast real time on the Internet at earnings.homedepot.com. The replay will also be available on our site. If we are unable to get to your question during the call, please call our Investor Relations department at (770) 384-2387. Now before I turn the call over to Frank, 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 those in the forward-looking statements. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission. Today's presentations also include certain non-GAAP measurements. Reconciliation of these measurements is provided in the financial statements included with our earnings release. Now let me turn the call over to Frank Blake.

Thank you, Diane, and good morning, everyone. Sales for the second quarter were $20.2 billion, up 4.2% from last year. Comp sales were positive 4.3% and our diluted earnings per share were $0.86. Our U.S. stores had a positive comp of 3.5%. From a geographic perspective, we saw positive comps in all but 3 of our top 40 markets, with particular strength in our Midwest and South Atlantic regions. We are also encouraged that soft housing markets like California, Florida, Arizona and Nevada were positive in the quarter. And the spread of performance across our major markets continued to narrow. As we discussed in our first quarter call, we expected to see an improvement in sales in our northern division, following a very difficult spring season. And after a soft May, we did see that, with our northern division posting our strongest positive comps in the U.S. Our southern and western divisions were also positive, again reflecting a stabilizing environment across the country. As Craig will detail, we saw strength in the core merchandising areas of our store, particularly in hardware, tools, building materials and electrical. We had a return to positive transaction growth in the quarter as well as an increase in average ticket. On the international front, our Canadian business had flat comps for the quarter, and our Mexican business had another quarter of positive comps, making it 31 quarters in a row of positive comp growth. For the quarter, we also continued to invest in our core initiatives. Matt and our IT team, along with Craig and the merchandising team, made significant progress on our special order initiatives. We have now digitized all of our flooring and lighting catalogs and expect to have the rest of our catalog assortment digitized in the third quarter. This will allow more accurate order entry for our associates, and it will also provide the foundation for a new special order sales dashboard that will give visibility into the sales performance of specific special order SKUs, a capability that will enable our merchants for the first time to have direct line of sight into their best and worst performing special order items. We are continuing with the rollout of our Buy Online Pickup In-Store, BOPIS capability. We have over 100 stores with BOPIS now, and our rollout will be complete in the third quarter. Even without marketing, we're seeing a strong interest in this capability. About 30% of the visitors on our website who use our check inventory functionality make the purchase in the store within 2 days. We also see that a significant percent of BOPIS orders result in an additional purchase on the day of pickup. On the store operations side, Marvin and his team continue on the path of switching tasking hours to customer-facing hours. We have piloted a new scheduling system for our associates that will eliminate approximately 30 hours per store per week of manual scheduling activity. The system has been very effective at both reducing the time required to create schedules and in making the schedules more visible and predictable for our associates. With the time saved on scheduling activity, we can increase the time allocated for customer-facing activity. We'll have this rolled out throughout the U.S. by the end of the year. Our supply chain efforts are delivering significant benefits to the business as we leverage supply chain expenses even in the face of increasing fuel costs. We have more opportunities to pursue, particularly in optimizing our supply chain goal of international product, and we are beginning the process of optimizing our supply chain in Canada as well. Balanced against the positive performance in the quarter and our progress against key initiatives, the U.S. housing market remains under stress. Private fixed residential investment as a percent of GDP continues to set a 60-plus year low of 2.2%, and the key measures that helped in the housing market starts turnover in pricing remain depressed. As we've discussed, we see our business is more correlated to GDP growth than housing statistics at the moment. But while our sales for the first half were consistent with our expectations, GDP growth was less than we expected. We do not expect any meaningful improvement in the housing market for the back half of 2011 and events here and across the globe would suggest that there are more risks to the downside than the upside on GDP growth. But both of those conditions were also true for the first half, and we saw steady strength in the core of our store. We have no reason to change that expectation for the back half. As Carol will detail, we are maintaining our sales guidance for the year and increasing our earnings guidance to reflect our second quarter results. And we will continue to invest in and position our business for recovery. I want to thank all of our associates for their hard work in the second quarter. Due to their efforts, 92% of our stores will be eligible for Success Sharing, our profit sharing program for our hourly associates. We are very proud of that accomplishment. With that, let me turn the call over to Craig.

Thanks, Frank, and good morning, everyone. We had a solid performance in the second quarter driven by 3 factors. First, the seasonal business and outdoor projects. Second, the repair business from harsh winter and spring storms and finally, the continued strength in our core departments. During the quarter, we saw strong sales across many of our key departments with outperformance with the company average comp in building materials, electrical, kitchens, indoor garden, outdoor garden and tools. Hardware performed at the company average. Paint, plumbing and flooring delivered positive comps, but less than the company average. Comps in lighting were flat, while comps in lumber and millwork were negative for the quarter. As spring arrived, customers are focused on gardening outdoor projects. This business was especially strong in the northern division. Examples of categories that delivered solid comp performance were exterior paint, exterior stains, live goods, landscape, fencing and concrete. In addition, customers continue to respond to great values and innovation in grills and patio products. We leveraged the capability of our merchandising tools at a new level in the first half. Category assortments were planned and in more detailed level than in the past. Using outdoor patio category as an example, we plan not only dining and seating combinations by local store, but also cushions, umbrellas and chairs. Another capability merchants had was the ability to more quickly identify trends at a local store level. This allowed merchants to make assortment adjustments during the selling season and before the season was over. These capabilities continued to add value for both our customers and shareholders. Widespread heat, as the quarter progressed, drove strong performance in ceiling fans, air-conditioners and portable fans. Our air movement product category sold double-digit positive comps and contributed approximately 30 basis points to U.S. comps in the second quarter. Watering and irrigation products also delivered positive comp performance, especially in our southern division. Additionally, we had good performance in appliances, driven by outstanding values and in part by refrigeration sales due to increasing replacement needs caused by soaring temperatures. We anticipate that the need for repairing damage done by harsh weather, as North America came out of the winter thaw, customers needed to repair or replace snow damage rust, gutters, lawns and live goods. Violent tornadoes and storms in the spring increased roofing repair sales to customers in the southern division. In addition, floods across the country resulted in the purchases of cleaning supplies, pumps and pressure washers. Performance in our core departments of electrical, hardware, paint and plumbing continue to be encouraging. Products such as portable power, power tool accessories, hand tools, fastening tools, conduit boxes, circuit protection devices, adhesive tapes and compressors were positive performers in the second quarter. Based on independent third-party tracking of consumer activity, we gained unit share in 5 of 13 departments during the second quarter: flooring, plumbing, electrical, lighting and kitchens. At the end of the first quarter, we chose to carry more inventory and keep our stores fully stocked with seasonal products. This was the right decision. Improvements in the weather, combined with our merchandising tools and enhanced transportation network allowed us to end the first half with inventory turns flat to last year. The cornerstone of our end-to-end supply chain transformation, the 19 Rapid Deployment Centers, is performing better than we planned. We are improving delivery and service to U.S. stores and at the same time leveraging the cost of moving goods. While we expect the RDCs to continue to provide cost leverage, we have several more supply chain projects underway in the U.S., Canada and Mexico, which will improve the efficiency in handling of our goods. Our average ticket increased 3.3% and total customer transactions grew by 1.1%. At the beginning of the year, we believe transaction improvement would lead to sales growth in the first half of the year, and improvement in average ticket would be more sustaining in the back half of the year. However, average ticket was more of a driver in the first half of the year than we anticipated, due both to mix and price. For example, transactions of tickets over $900, representing approximately 20% of our U.S. sales, were up 5.4% in the second quarter. In regard to price, we have talked to you in the past about how we manage retail price through a "portfolio" strategy and our approach to addressing vendor cost increase request. In situations where we took a cost increase and pushed it through to the retail price, it had some impact on ticket growth, but was not the principal driver. We are well positioned to drive average ticket and transactions in the third quarter. Being the pioneer of Vanity Insanity, our bath event is in stores now and has been expanded to include great values in faucets, toilets, tile and lighting. During the third quarter, customers will also be offered great values and special buys during our fall cleanup season. Innovation plays a big role for us in driving sales. For our professional customers, we are rolling out the DEWALT hand tools, exclusive to The Home Depot and DEWALT's new line of 20-volt lithium-ion power tools. The new 20-volt lithium-ion battery has 35% more runtime and is approximately 35% lighter than its current lithium product. Hand tools, including DEWALT's utility knife that features blades 35% sharper, 20% stronger and 75% longer-lasting than traditional utility blades. We also have new product introductions in our decor lineup. We're introducing the Home Decorators Collection premium faux wood blinds at great value with added features. Innovation also extends beyond just the product. Our new blind cutting machine simplifies the cutting process, saving our associates time and better servicing our customers. We continue to be the leader in paint for our customers. We introduced Martha Stewart Living specialty finishes and metallic paints and glazes, glitter paints and texture paints along the specialty applicators. With specialty finishes and a few simple tools, do-it-yourselfers can transform a plain wall with texture, dimension and light to make a whole room look as if it were professionally decorated. In addition, we're introducing innovative Trim & Door paint by Glidden, another exclusive to Home Depot. This paint has unique Gel-Flow Technology that will not drip and does not leave brush marks while drying with a high-gloss, glasslike finish. We're really excited about the products and values we have to offer our customers in the upcoming months, and with that, I'd like to turn the call over to Carol. Carol Tomé: Thank you, Craig, and hello, everyone. In the second quarter, sales were $20.2 billion, up 4.2% from last year. Comps or same-store sales were positive 4.3% for the quarter with 1.8% comps in May, 6.2% comps in June and 4.9% comps in July. Comps for U.S. stores were positive 3.5% for the quarter, with U.S. comps up 0.8% in May, 5.7% in June and 4% in July. In the second quarter, our gross margin was 34%, an increase of 8 basis points from last year, of which 11 basis points of growth was driven by our U.S. business, offset by 3 basis points of contraction arising from our Canadian business. In the U.S., benefits arising from our supply chain transformation drove 26 basis points of margin expansion. This expansion was offset in part by 15 basis points of gross margin contraction, arising primarily from a shift in the mix of products sold. As Craig described, in the second quarter, our strongest selling categories were lower margin categories like building materials, outdoor garden and appliances. For the year, we continue to expect modest gross margin expansion. Operating expenses as a percent of sales decreased by 70 basis points to 22.6%. Our expense leverage reflects about 50 basis points of leverage arising from positive same-store sales, the majority of which was in hourly payroll. The remaining 20 basis points of expense leverage can be explained by the following factors. First, we realized 12 basis points of leverage in medical expense due to a lower cost per participant, among other factors. Second, we realized 13 basis points of leverage and depreciation expense arising from fully depreciated assets. And third, we experienced 11 basis points of leverage arising from favorable casualty estimates. These 3 items were offset by 16 basis points of expense deleverage arising from a $32 million asset impairment charge. In the second quarter, we wrote down our investment in a non-core carpet cleaning and cabinet refinishing business. It is our intent to sell this business. Based on our first half results, we don't believe we will have as much expense pressure as we thought at the beginning of the year, especially in the area of medical and payroll tax expense. For the year, we now expect the total expenses to grow at approximately 30% of our sales growth rate. Interest and other expense for the second quarter totaled $146 million, about the same as last year. Our income tax provision rate was 36.5% in the second quarter. For the year, we expect our effective tax rate to be approximately 37%. Earnings per share for the second quarter were $0.86, up 19.4% from last year. Now moving to our operational metrics, during the quarter, we opened one new store in Mexico and closed one store that was destroyed by a tornado in Joplin, Missouri for an ending store count of 2,245. While our Joplin store was destroyed, we do have a temporary structure serving that community and have already begun construction on a replacement store. At the end of the second quarter, selling square footage was 235 million, and total sales per square foot were $343. Now turning to the balance sheet. Inventory remains in good shape. At the end of the quarter, inventory was $10.8 billion, down $3 million from a year ago. Inventory turns were 4.4x, flat to last year. For the year, we anticipate a small improvement in inventory turnover. We ended the quarter with $42.3 billion in assets, including $2.6 billion in cash. On the capital structure front, a few items of note. First, in the second quarter, we repurchased $1 billion or 28.1 million shares of outstanding stock. Year-to-date, we have repurchased $2.3 billion or 63.4 million shares. Second, we ended the quarter with approximately $10.7 billion of outstanding long-term debt, of which the earliest maturity is $1.3 billion coming due in December 2013. And finally, computed on the average of beginning and ending, long-term debt and equity for the trailing 4 quarters, return on invested capital was 13.5%, 200 basis points higher than the second quarter of fiscal 2010. In February, we told you that our 2011 capital spending plan was $1,350,000,000. We now believe that our 2011 capital expenditures will be $1,275,000,000, primarily as a result of fewer new stores and the new store opening pipeline. As of the first half of 2011, we have spent $469 million in capital, as our spending plan was weighted toward the back half of the year. In the second quarter and for the first half of 2011, our sales performance disconnected from U.S. GDP growth. We expect that certain quarters will exhibit such a disconnect, as there are factors such as weather related sales, storm damage related sales and event driven sales that on a short-term basis can't be matched to any specific economic statistic. Because of these factors, we still project that our fiscal 2011 sales growth will be approximately 2.5%. While there may be more downside risks than upside risks to this forecast, our business continues to perform to our expectations and comp sales thus far into August are quite positive. From an earnings per share perspective, remember that we guide off of GAAP. Based on our first half results and our outlook for the balance of the year, we now project fiscal 2011 earnings per share from continuing operations to increase approximately 16% to $2.34. In our earnings per share guidance, we are not including the impact of any additional share repurchases outside of those executed in the first half. But it is our intent to use excess cash to repurchase shares and are targeting approximately $1.2 billion of additional share repurchases for the remainder of the year. So we thank you for your participation in today's call. And Alicia, we are now ready for questions.

[Operator Instructions] We'll take our first question from Christopher Horvers from JPMorgan. Christopher Horvers - JP Morgan Chase & Co: First, since you opened up the dialogue, just curious if you could elaborate on what exactly quite positive means in terms of August trend, because obviously, we're all very focused on if the markets had any impact to your sales? And then my follow-up is on gross margin. A lot of questions after your competitors call yesterday exactly what the pricing environment is, is it becoming irrational? So in that, did you see any promotional pressure, unexpected promotional pressure? Has the environment changed? And also, did you see any fuel pressure in your cost of goods? Carol Tomé: Well, I'll start with an answer to your first question. Based on the guidance that we have given you, it implies a 3% comp in the back half of the year, and that's where we're trending. So from that perspective, it's quite positive.

This is Craig. Overall, from promotional activity market, really seems to be pretty common to what we've seen so far in the year, haven't really experienced any big differences at all.

And as it relates, I think, Mark, if you want to talk about fuel pressure?

Right. In terms of the fuel pressure, the 26 basis points of supply chain improvement came after offsetting 9 basis points of fuel price pressure.

We'll go next to Scot Ciccarelli with RBC Capital Markets. Scot Ciccarelli - RBC Capital Markets, LLC: I guess my question, you've commented before that you feel like you've disconnected from the housing market now it seems that you've disconnected from GDP a little bit, I mean I guess the question is what are you guys using as a kind of a guide post for kind of your same-store sales performance at this stage?

So Scott, I'd say, and to Carol's comments, I'm not sure we're not saying we're disconnected from GDP. There are always some events within quarters that explain ups and downs. So we think for our results, it's still going to be very important that we see GDP growth. At the same time, we also think our job with all of you is to report on what we're observing. And we observe strength in the second quarter even as GDP was under some pressure. Scot Ciccarelli - RBC Capital Markets, LLC: Okay, that's helpful. And then any other color on the growth in transaction size will be fantastic, because obviously that's something, was it a big driver of the quarter?

Yes. In terms of transactions, we talked about the fact that there'd be a little bit of a bathtub effect in the half. And as the garden business strengthened in the second quarter, that is obviously a significant part of the transaction growth that takes place. Certainly, in outdoor garden, for example, a lot of our customers were out making repairs. But we also saw strength across the store as well, and the core of our store performed well, which is also a driver to transactions.

We'll go next to Gary Balter from Credit Suisse. Simeon Gutman - Crédit Suisse AG: It's Simeon Gutman for Gary. Following up on the gross margin, how did the mix typically go from I guess the seasonal perspective? Should the mix change from summer into fall, be positive? And does that mean in the context of gross margins being up modestly for the year, that maybe the 2Q gain will represent a low point? Carol Tomé: Right. If I could just tell you what our forecast is, year-to-date our gross margin is up 16 basis points. We would define 16 basis points as modest. So that gives you a feel for what the back half will look like. Simeon Gutman - Crédit Suisse AG: Okay. And then I guess a quick follow-up for maybe Craig or whoever. Having gone through the process of trying to push through some of the price increases that you went through in the first half of the year and maybe now having a better understanding of the sensitivity to some of those, is there more room to optimize gross margin in the next couple of periods and should that be a positive flow through?

Yes, I mean we are constantly focused on making sure that we're driving value for our customer every day. My message to the merchant team continually is you are the customer's advocate for value, and we will deal with cost pressures as they come up individually, supplier by supplier, do everything we can working with the suppliers to try to find ways to squeeze out unnecessary cost to maintain value for our customer. Carol Tomé: And clearly, you can see the benefits of our supply chain. Gary Balter - Crédit Suisse AG: This is Gary. Just following up. On the distribution side, everything is in place now, you're starting to see some of the benefits, as you mentioned, in the supply chain. As you examine it, how much more is there than you thought there was when you first started the project? Carol Tomé: Well, Gary, as we've commented, we're very pleased with our supply chain performance, and it's exceeding our expectations. We've got a lot on the docket. We're not done in terms of transforming supply chain. One of the key benefits that we're seeing year-over-year is just an increase in the percent of goods that are handled by our central supply chain, including our bulk distribution centers, et cetera. So we've gone from about 50% centrally managed to now 63%. There's more room for opportunity here. We're not ready to lift the guidance that we've given, but certainly there's room for opportunity.

We'll go next to Alan Rifkin from Barclays.

Early this year, you folks commented that you had been seeing stabilization with respect to vendor request on increasing prices. I was wondering if you can give us an update on what you've seen from the vendor community lately.

Yes, that did, Alan, stable out in the second quarter. There is still requests that come in, but prior to the beginning of the year, those requests were on the rise, and we actually saw that stable and flatten out in the second quarter.

Okay. So the 3% comp forecast that you're guiding to for the second half, does not include any inflationary element in it? Carol Tomé: It really doesn't. The way that we get to the 3%, to Frank's point about the observation is we've deconstructed the sales in the second quarter, backing out some of the weather-related sales, heat weather-related sales, and that takes our U.S. comp to slightly under 2%. And then we walked back up over 2% because of some additional storm-related sales, some of that related sales, and remember, as you know, we are now anniversarying lumber price inflation since lumber prices are up year-on-year. So we get to a U.S. comp that's north of 2%, you add to that some currency benefit and you're up 3%.

Okay. And one more, if I may. I mean we certainly appreciate your modesty with respect to sales disconnecting from GDP as well as PFRI, but to be fair, putting the weather issues aside, it appears that your business is at the core strengthening. I mean would there be anything that you guys are seeing other than the obvious effects of whether that would lead you to believe that maybe going forward your sales can continue to disconnect from GDP and PFRI, as they certainly have been doing in the first half?

We cannot say -- we haven't reached a conclusion that our sales disconnect from GDP. We still think our business, when you think about it, we need GDP growth. We need the economy doing well. Obviously, the discretionary purchases from our consumers is a key driver of our business. So we don't, I mean again, Carol kind of walked through there are some unique things that happen within quarters, but we would not be saying that our business grows regardless of what's happening with GDP.

We'll go next to Matthew Fassler from Goldman Sachs. Matthew Fassler - Goldman Sachs Group Inc.: I'd like to focus on first, if I can, on your improvement in average ticket over the course of the quarter, rather from quarter-to-quarter that kind of stands in contrast what one would expect from the macro backdrop. So if you could talk about the drivers that'd be great.

Sure, Matt, this is Craig. Let's start with, really we saw improvement across the store, quite frankly with the exception of lumber and millwork. So it really was somewhat broad-based across the store. Matthew Fassler - Goldman Sachs Group Inc.: And was that within categories or was it more reflective of mix?

It was a combination of mix as well as within category. Examples of within category would be things like inside the patio, inside the grills, where we actually saw a benefit inside the mix of sale. Matthew Fassler - Goldman Sachs Group Inc.: Got it. And then my second question follow-up, if you will, relates to your fourth quarter, the third quarter compare looks a lot like the second quarter compare and it sounds like you have good visibility to the store to the quarter. Last year, you promoted pretty aggressively in some holiday-oriented categories early in the season and wondering how you're thinking about the marketing plan to cycle that as you move into Q4 of 11.

We feel very good about our key holiday businesses, things around holiday decorating, around our gift centers, and we've actually bought up double-digit in those areas. Matthew Fassler - Goldman Sachs Group Inc.: Does that include the appliance business?

No, I mean we have different model in appliances.

We'll go next to Michael Lasser from UBS. Michael Lasser - UBS Investment Bank: Frank, the business really seems to be humming recently. Do you take this as an opportunity to maybe take a couple of bigger swings either on the promotional front or the inventory side? Is there any way you can use this time as a way to expand the competitive mode and further distance you from the competition?

So Mike, I guess, I'd say more. We've got a basic business strategy that we run consistently. We are obviously pleased with the results for the quarter, but that just says we keep at it. I mean we just keep at it. So there's nothing we're saying, "Okay, now let's take some swing for the fence." Michael Lasser - UBS Investment Bank: No real change in posture? Nothing to suggest?

No, sir. Michael Lasser - UBS Investment Bank: Then on the longer term outlook, obviously, it's very confusing especially with the prospect to subpar GDP growth would seems like a societal movement towards renting a home versus owning a home. So under those type of conditions, do you think that the home improvement market can generate a 2% to 3% long-term growth rate if maybe overall GDP is close to the 2%?

Well, with respect to the home ownership and renting, I mean we have seen a decline in the percent of the population that owns homes. But people who rent also do upgrades, the folks who own those rental units have -- there's actually a lot of wear and tear on rental units, and we can feel some of that need. And I'd also say, one of the comments just on the general market is there's been a huge upsurge, several millions of folks now living in multigenerational homes. That's just the kind way of saying kids living with their parents. And that is not a great long-term solution. I'm sure from either the kids' or the parents' perspective, so they're looking to go out and have new places to live as the economy improves.

We'll go next to Deborah Weinswig from Citi. Deborah Weinswig - Citigroup Inc: So in terms of the Pro customer, can you talk about the strength here and anything particular to note in terms of the trends?

So Deborah, a couple of points on that, and then I'll turn it to Marvin to give you some comments on what we're doing operationally. We had, for a period of time, some very definitive statistics around what was happening with our Pro customers, and that was when we were using dunnhumby for data analysis. We've taken that in-house, but it's taken a while for us to kind of replicate the same who's a Pro and the whole data crunching effort there. So we don't have very good specific data yet on kind of year-over-year or month-over-month Pro sales performance. We hope to have that very soon, but we are doing a lot operationally that we think is working and working well, and I'd ask Marvin just to comment on that.

Thanks, Frank. Deborah, we went back and we did a lot of surveys of our key Pro customers, so just to understand what they wanted from retail to better serve them, and we rolled out something we mentioned a while back, our First for Pro, a take-on of our customer service initiative. The good news is that our greatest customer service improvement in the store happened in the Pro side of the store in the second quarter. Our Net Promoter Score increased by 270 basis points, our weighted checkout was dramatically improved, our healthiness in loading are just across the board, so we feel really good about Pro and good about the service model that we put in Pro. The key goal for us this year is continue to engage our customers, understand the projects they're we're working on and more importantly, give them a very convenient retail environment to shop in because time is money and they want to get in and out fast. As Frank mentioned, we'll have a better view on the overall sales trajectory as we continue to crunch the data in-house, and we feel very pleased with our progress thus far. Deborah Weinswig - Citigroup Inc: For my follow-up question, Craig, you talked about the ability to identify trends and make adjustments in season. Can you maybe share some color on some of those adjustments that were made in season?

Yes. We did look at things happening inside of our outdoor living categories, for example, made assortment adjustments and our growth at store level, we made assortment adjustments within things like outdoor power equipment.

We'll go next to Greg Melich from ISI. Greg Melich - ISI Group Inc.: Could you give us some detail on the comp traffic in the U.S.? I think you gave the transactions number. It sound like a global number and also what inflation or deflation data in the quarter. Carol Tomé: Right. So the comp traffic in the U.S. was about 0.9%. And then in terms of inflation or deflation, it's hard to really quantify that as you can appreciate. We could comment a little bit about our commodity categories that might be helpful. So remember, you may remember a year ago, we had 100 basis points of benefits from lumber price inflation. This year, we had about 70 basis points of comp contraction because of deflation. But that was offset for the most part by inflation that we saw in copper, so when we look at commodities in total, we say it's basically flat. Greg Melich - ISI Group Inc.: Got it. And as a follow-up, trying to get that ticket back, you know the consumer has been, at least up until last quarter or 2, are very hesitant to use credit again. Did that turn around the quarter? Did people want to use their Home Depot credit cards and what was credit penetration up to? Carol Tomé: Yes. We saw a slight uptick in our private label credit penetration, which we were happy about, of course, because it is our lowest cost of tender. So that private label penetration as of the end of the second quarter is 21.5%. Greg Melich - ISI Group Inc.: Great. So you did see a tick up? Carol Tomé: Yes. Greg Melich - ISI Group Inc.: Did you have anything special on the card to change there, especially given what your competitor is up to or are you still the same? Carol Tomé: No. As you know, we view broad-based discounting with caution. We use our card as a financing tool. We certainly think our card is a great value proposition, and we do try shut that out every day. But it is a financing tool.

We'll go next to Budd Bugatch with Raymond James. Budd Bugatch - Raymond James & Associates, Inc.: Just you gave the over $900 comp. Can you usually give the under $50 comp too, just for completeness, can you do that?

Sure. And it's basically flat. Budd Bugatch - Raymond James & Associates, Inc.: Okay. And you talked, Craig, about kitchen being strong, and I think you also talked about appliances or refrigeration being strong. Can you kind of maybe go into that a bit because with the economy the way it is and that overall industry feeling some pressure, I'd love to see what you did there?

Sure. Yes, we look at our kitchen business in total. We did have positive growth in our kitchen business. I think that's a result of the hard work the team has put in over the past few years to be able to really offer a wide range of kitchen open options for our customers, anything from an assembled cabinet, take it home, start today, if you want to refinish or simply replace doors and fronts, all the way to semi-custom. And the customer has responded well to that value proposition and those options in the market. And we did see growth in our appliance business. There's always a little bit of a spike in the summer timeframe against refrigeration because heat puts pressure on the obvious mechanics of older refrigerators. And we did well in that product category. Budd Bugatch - Raymond James & Associates, Inc.: Okay. Just one more, if I can sneak it in, the Net Promoter Score, what was it in the quarter?

The Net Promoter Score was a 68.7, and that's an increase of 210 basis points, and I have to note that, that's on top of a 530 basis point increase, same quarter last year. Real progress.

We'll go next to Eric Bosshard from Cleveland Research Company. Eric Bosshard - Cleveland Research Company: In terms of merchandising, kind of earlier you mentioned Vanity Insanity, and I'm interested in what your thoughts are about your merchandising and promotional strategy into the back half of the year, and then also interested, obviously, over the last 2 years, you've made a great deal of market share progress relative to the prior 6 or 7 years. I'm wondering, as you look back at that and look forward what you think is driving that and if there are specific things you're doing to sustain or expand that?

So starting with the progress, obviously, we implemented a "portfolio" approach a few years ago, really looking hard at what we wanted to stand for, where we wanted to invest. That then dictated what we had to do as it related to really looking at decisions around assortment, that of assortment, go-to-market strategies, how we present the products in the store, and that has served us well. And we have worked hard to work on the productivity of our assortments inside the bays, and we'll continue to remain focused there as we go forward. If you think, look at things like our Vanity Insanity again, start with what I said earlier, our focus as merchants has to be the customers' advocate for value. A long traditional history inside of Home Depot is to drive value for our customers, to look for opportunities, to work with our suppliers, to drive productivity in their factories, creating things like special buys that helps them leverage productivity and gives us the chance to give the customer a great value. And that's what we see in things like Vanity Insanity, and we'll continue to look for those opportunities. We have several of them in-play for the fall season to continue to drive the business and drive urgency within the business. Carol Tomé: I think Craig you would agree that market gains have come about not just with merchandising but also with the great customer service, the operators, our in stock position is as good as it's ever been. So as a company working together, I think we're really making some progress.

Yes, Eric, to Carol's point, I mean retail is, really candidly, like baking a cake, and you got to get all the ingredients right to really drive the business, and I think that's Carol's absolutely correct. It's all of those things combined.

We'll go next to Laura Champine from Cowen and Company. Laura Champine - Cowen and Company, LLC: In flooring where you're taking share, what changes have you made there? And do you think those share gains are being driven by values or by broadened assortment?

I think it's a combination of both. We have been working hard on our assortments over the past several years in our flooring business, outstanding values with our Platinum Plus and Martha carpet program. We've worked hard on our assortments in tile, whether that's in ceramic, porcelain, mosaics, wood, laminate, combinations of enhancing the assortment as well as driving special buys. So that's really a combination of all those things that has allowed us to really improve that business over the years. Laura Champine - Cowen and Company, LLC: And in flooring, but more of an overall follow-up, you find yourselves using more vendors or leveraging your size with fewer vendors?

I would say it really varies by category. And in some categories, we've actually expanded the vendor base. In other categories, we've actually contracted. Laura Champine - Cowen and Company, LLC: And can you comment specifically on flooring?

Flooring is pretty much the same.

We'll go next to Dennis McGill from Zelman & Associates. Dennis McGill - Zelman & Associates: Frank, I guess just big picture what you've talked about with comps and sort of the different macro factors. It seems like the business is sort of in this 1% to 2% range now for several quarters, even though the housing market's been pretty choppy, and we've seen the economy slow down. The consumer certainly seems to be under more pressure recently. Yet you haven't necessarily seen that impact on your business. So is that another way of saying that we're sort of out of the maintenance type level of spending, and would suggest that there's less sensitivity to a downturn? Just wondered if you agree with that or your thoughts around the topic. And then along those lines, if we are in a situation where the consumer spending declines next year, maybe we double dip modestly, can you just talk about the ability to manage expenses and how we should think about operating margin in a down comp environment?

First, Dennis on the question of whether we're at the maintenance spending level, I'd say we're still very cautious before we'd say something like that. Again, there's just, it's still kind of early. And as I've said before in answers to the other questions, we still think that there's a connection between our business and GDP growth. So I wouldn't want to suggest that regardless of what's happening in the general economy, that our business has hit sort of the basic maintenance spend. For sure, it's encouraging that as in this past quarter, we see kind of the core of the business hold up strong. It's encouraging that we see the spread narrowing across the country in terms of performance. So you're not seeing these dramatic swings that we've been seeing in prior years. So those are all encouraging signs, but I just provide some caution in looking at them, and we still think the general economy is important to us. In terms of -- I don't want to get into a hypothetical on what would happen with a double-dip recession. So for our business, we always have opportunities to improve. So we'll look at that regardless of what the economy throws at us.

We'll go next to Joe Feldman from Telsey Advisory Group. Joseph Feldman - Telsey Advisory Group: Just wanted to ask a little more on the expense control, which has been very good, and you're still planning to grow expenses at 30% of sales for the year. That's even better than what it had been before. I guess our concern was you made a comment that look you still think total sales, there's more risk to the downside, and as much as we know, churns are good right now. Let's say they do fall off. I guess within that 30%, how much of that I guess is fixed versus variable? Like where do you -- do you have enough room to keep adjusting to maintain that net 30% level? Carol Tomé: Well, remember that our largest expense is payroll, and we do have an activity-based model. And so we can adjust payroll based on the activity we see in our stores. The other components of expenses that are variable would certainly be advertising and that would also flex relative to where our sales are going. So we feel very comfortable about the guidance that we've given to you today. Joseph Feldman - Telsey Advisory Group: Got it. And then also like a follow-up, with the ticket and transactions have been good, and I guess are you seeing customers that you haven't seen in a while or so-called new customers or new households coming back? Especially with the way those trends are, it would seem, and with those promoter scores, it seems like things are really on an upswing. I'm just curious about that.

We really don't have a way of judging that, so I can't give you a good statistic on who we think are returning customers versus new customers.

And Joe, this is Marvin. The general approach that we take is just provide great service, and we know that customers will traditionally shop for home improvement 4 to 5x a year. And we want those occasions to be with us, and we think by engaging them and giving them a great service environment, we have a great opportunity to get them on that next shopping occasion. So whether they’re new customers or not, we focus on our customers in a very aggressive service mentality, hoping that we can just retain them and continue to provide an opportunity for them to come back and shop with us again.

We'll go next to Mike Baker from Deutsche Bank. Michael Baker - Deutsche Bank AG: So just a clarity on the expense question, that 30% growth number relative to sales, that's for this year, is that something that we should plan on ongoing as we look out ahead? And then I guess a follow-up, but related to that, are there more examples that you could provide where you're seeing some inefficiencies in the store that you can fix, for instance the labor scheduling that Frank alluded to earlier, and I know in the past you've talked about processing returns at the store level. Are there still more examples of those where you guys can become more cost efficient and keep that ratio down? Carol Tomé: Well, regarding expenses, we've said as a general rule of thumb, expenses would grow in the area of 50% of our sales growth. Obviously we're doing better than that. And there are some reasons for that. While we thought we would have pressure from medical expense this year, we're actually seeing relief from the medical expense line, if you will. And so where that goes in outer years, not sure, but we certainly have done some great things here, getting our associates to be more healthy, and if they're more healthy, our costs go down. And we'll continue those efforts. So maybe our rule of thumb will change in the outer years, but right now, Michael, for your modeling purposes, I would use that for outer years. And then in terms of what we're doing in the store, well Marvin's on the path to get to 60-40, so he might talk about that.

Mike, when we laid out a pretty aggressive plan a few years back to shift our payroll model from a task, what I call noncustomer service activities, which was at 60% to flip that and make that activity to be customer-facing over a period of time. We're over 50% now, which is a great milestone. And when you think about some of the key initiatives, we have a new labor system that Frank mentioned that will really transform how we schedule, and give associates the ability to view schedules from home, just a great piece of technology that we believe will make us best-in-class from a retail payroll management standpoint. We have -- are rolling out centralized return to the vendor process. Today, we process returns individually in 2,000 stores in the U.S. We're going to create 3 large central locations and all stores will be processed in those locations. It's going to be a huge productivity and payroll savings. We're revamping our entire toolroom system, which saves a transaction from 8 minutes to approximately one minute. That's going to happen this year as well. Frank mentioned Buy Online Pickup In-Store. We waited a lot to roll this out, but we want it to be very good and have a process that will create differentiation, and we believe we've done that, and we'll have that rolled out within the next couple of months in all stores. As Carol mentioned, we have a project plan for the next 2 years with projects similar to the ones I just outlined that we think will be very beneficial for us to continue to transform our store environment, drive our payroll productivity and just create a better service environment for the customers. Michael Baker - Deutsche Bank AG: So it sounds like one of those are happening now or still ahead of you. Is that fair to say?

The ones I outlined are happening as we speak.

We'll go next to David Schick from Stiefel. David Schick - Stifel, Nicolaus & Co., Inc.: Frank, would be interested in your thoughts on long-term, 5 or 10 years out, how important is Mexico and the Internet or online sales to this business?

Well, 2 different answers. First, we obviously think both are very important, but in different ways. The Internet is going to be important for every part of our business. Marvin was just going through one example with Buy Online Pickup In-Store. But we have an entire focus here around what we call interconnected retail because we think online, online, for us, is not just a matter of selling online. Customers research online, they get project knowledge online. So there's a lot of ways in which our bricks connect with our online presence, and we want to make sure we have the best experience in all of retail for that. On Mexico, Mexico has just been a great, great story for us. The business has grown well. We've also been able to learn a lot in terms of, I mean, it is not just a matter of the team here helping in Mexico, but frankly, we probably get more help coming back the other way. Our Mexican business helps us think through customer, Hispanic customers in the U.S. are obviously a huge demographic opportunity. On personnel, we transfer personnel back and forth between the U.S. and Mexico, which is great. We do that both on the merchandising side, the operations side, the finance side, we do that across the business. So we look at Mexico as just absolutely a critical part of the overall business and see continued growth for it. Carol Tomé: Thank you for listening to us today. And we look forward to talking to you next quarter.

That does conclude today's conference. We thank you for your participation.