HD Supply Holdings, Inc. (NASDAQ:HDS) Q2 2019 Earnings Conference Call Transcript

Sep 10, 2019 • 08:00 am ET

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HD Supply Holdings, Inc. (NASDAQ:HDS) Q2 2019 Earnings Conference Call Transcript

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Presentation
Executive
Joseph J. DeAngelo

center that opened in May. As we previously shared, we experienced issues with the vendor delivered automated solution, resulting in delays in fulfilling customer orders. We turned off the automation and returned to legacy methods of fulfilling orders through much of the summer. This enabled us to resume next day deliveries, a significant improvement from May. We communicated with our customers throughout the process assuring them that we can deliver with the same reliability and quality that they expect from HD Supply. Customer reaction has been favorable and we believe we are regaining our customers' confidence and business in this important market.

Additionally, our IT and supply chain teams worked continuously with our vendor partner and in late August, we relaunched the Atlanta distribution center material handling automation. This was a regimented and measured process supported by live data from the parallel operation of our legacy processes and systems. The automated solution is now working as intended, and we are confident that we'll deliver the efficiency and quality that we originally expected. Evan will share more details, but I want to take this opportunity to recognize the team who has been working tirelessly to ensure our customers operating in the Atlanta area and throughout the Southeast receive exceptional customer service from HD Supply.

We walked the facility last week. I was especially proud and impressed by the flexibility and precision that the team was executing to support our customers in Florida, Georgia and the Carolinas as they prepared for and recovered from Hurricane Dorian. While the opening of our new Atlanta distribution center got off to a difficult start, we continue to believe in the improved service capabilities and efficiency anticipated when we initiated the investment.

As we look to the second half of 2019, the environment remains uncertain, with the new round of tariffs having gone into effect September 1st, an increase in tariff rate is planned for October 1st, and an additional round of tariffs planned for December 15th. We believe we are better prepared to manage the changing tariff environment than many of our competitors. The investments that we made in pricing and analytical tools during 2017 and 2018 have significantly increased our visibility into the competitive landscape and elasticity of demand, enabling us to modify pricing with precision on a SKU-by-SKU basis.

As we shared previously, our initial response to any increase in input cost is to avoid or offset as much of the increase as possible through negotiation and productivity. Then, as markets allow, we pass on unavoidable cost increases through price. We continue to believe in our ability to execute unavoidable cost increase pass-through with excellence. However, we may see some compression in gross margin rate.

Now, turning to Construction & Industrial, during the second quarter, we saw project delays from unfavorable weather year-over-year and lack of skilled construction labor. We do see significant activity in the non-residential construction markets with many large multiyear jobs continuing. However, it does appear that the year-over-year growth