Lowe's Companies, Inc. — 2022 Q4
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, everyone, and welcome to Lowe's Companies Fourth Quarter 2022 Earnings Conference Call.
Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President, Stores; and Brandon Sink, our Executive Vice President and Chief Financial Officer.
Thank you, Kate, and good morning, everyone. In the fourth quarter, our total company comparable sales declined 1.5%, while U.S. comps decreased 0.7%.
Thanks, Marvin, and good morning, everyone. In the fourth quarter, U.S. comparable sales decreased slightly by 0.7%, though sales were up 34.4% on a 3-year basis, reflecting continued momentum with the Pro and resilience in core DIY home improvement demand.
Thank you, Bill, and good morning, everyone. I'd like to start by thanking our associates for their unwavering commitment to serving our customers and delivering another solid year of operating results. Associates are the heart of any retailer, but even more so in our industry where customers rely on our associates' product knowledge as they look for the right solutions to repair and upgrade their homes. That's why we are so focused on becoming the employer of choice in retail, where associates chose to stay to build their careers.
Thank you, Joe, and good morning, everyone. Let me begin with our Q4 results. We generated GAAP diluted earnings per share of $1.58 compared to $1.78 last year. Now my comments from this point forward will include certain non-GAAP comparisons where applicable.
[Operator Instructions]
First, I have a macro and then a micro question. So you just comped -- roughly minus -- minus 1 in the U.S. with some rounding and the midpoint of the guide is minus 1. I know the monthlies -- when Brandon gave the monthlies that kind of answered it.
I'll take the first part, Simeon. I'll kind of go back to what I said in some of the prepared comments. When we take a look at what our demand drivers are for home improvement -- and just to be specific, these are historical demand drivers that have held up over time. They still remain supportive.
Yes, Simeon, this is Brandon. I'll talk to your question specifically on Q4. As I said in the prepared remarks, inflation, interest rates, we are seeing a bit more of a cautious consumer, one that's anticipating and responding to value.
Okay. And the follow-up is more micro. Within this, the long-term guidance that you gave in December, the 14.5% to 15%, there's about $150 million to $200 million or so from OpEx productivity and then I think the -- some of the PPI initiatives. And I guess that's the stuff you can control.
Yes. Simeon, I would say ratable as we look at the 3-year period with what we shared in December. I mean, when we look at the algorithm for the guide for '23, we are expecting roughly flat gross margin. So the bulk of the 60 to 80 basis points of EBIT expansion that's reflected in the guide is coming from SG&A leverage, and it's being largely driven by our productivity initiatives.
And Simeon, this is Marvin. The only thing I'll add is, if you take a look at Q4, just as an example, it just -- it shows that even in a flat to negative sales environment, we still have the ability to leverage productivity, whether that's expenses or operating margin. And I think that is consistent with the PPI initiatives not being solely focused in one functional area, but as you heard at our December Analyst and Investor Conference, it's across all functions, merchandising, supply chains, to operations.
Next question is from the line of Kate McShane with Goldman Sachs.
This is Patrick Hollander on for Kate. We just wanted to ask about price elasticity. Another item discussed at the December Analyst Day was kind of the confidence in prices sticking but your competitor mentioned that they saw more price sensitivity in the fourth quarter than they had in the third quarter.
Yes. Patrick, this is Brandon. As it relates to the question on elasticity, stepping back, we look at the last 3 years through the pandemic, we saw consumers who were very resilient with higher prices, not necessarily impacting demand that we were seeing for our business.
Our next question comes from the line of Scott Ciccarelli with Truist.
This is Joe on for Scott. I was really impressed by the Pro commentary. I was just wondering, is there any sort of regional thing that you'd break out whether or not people are more or less bullish on their outlooks and backlogs in areas where there's been more housing price correction?
So Joe, good question. What I'll tell you, there are a couple of markets around the country that had a more accelerated, what I would call, appreciation of home prices during the pandemic. And let's call out markets like South Florida, Phoenix, as an example.
Yes. Thanks, Marvin. And Joe, thanks for the question. As it relates to the Pro and the market, Marvin made his prepared comments. But as you dig deeper, there's kind of 5 key areas that we look at, which is the jobs how far out the Pro is booked in the next 6 months. Materials, can they get what they need and is it the right cost? Can they get to Pro Credit? What does the labor market look like? And then just the balance of the type of work they do.
Our next question is from the line of Brian Nagel with Oppenheimer.
I apologize. My question may sound like similar prior questions. Going back to the comments made by your competitor last week, they discussed what -- they termed kind of broadening, if you will, of consumer normalization, consumer weakness.
Brian, it's a fair question. And I'd start off by saying Q4 is typically our highest discretionary selling period of the year because of the holiday season. But when we look at core home improvement categories, we feel really good about the performance of the DIY customer.
Yes. Brian, I'll just connect that to the guide, Marvin highlighted with what we're seeing more with the DIY customer. But just looking at the Pro and expectations into '23, continuing to outpace DIY 11 quarters in a row, double-digit comp, we're continuing to see Pro across all ticket ranges, both comp and transaction growth.
That's very helpful. And then my follow-up question, just with regard to lumber prices. So you discussed here -- and we get it, this is kind of a pass-along dynamic when prices declined as a negative for sales.
Yes, Brian, I'll take that and, again, kind of connect it to the guide. So our guide at the midpoint for lumber, in particular, assumes a normalized pricing environment, certainly considered to what we've seen for the last [ 30 ] years.
The next question comes from the line of Karen Short with Credit Suisse.
So just on 2 questions. You guided to flat to down 2% comps. So that was kind of in between the robust and moderate scenarios that you offered. And then your margins, though, are only on the moderate range, not the robust range. So I'm wondering if you could give any color on that.
So Karen, this is Marvin. I'll take the wage question, then I'll let Brandon take the first part of the question.
Yes. Karen, thanks for the question. And as it relates to our frontline associates, I'm very pleased with our staffing right now. This is the best staffing we've had in 3 years. And our spring hiring as the markets come into season is ahead of expectations. So very pleased with the team's ability to staff and pivot wherever the challenges are.
And so Karen, in summation on that, we have a strategy, we feel great about it. We feel like it's working for us, and we believe that our investment cycle, our commitment to our associates is something that is leading us to being truly an employer of choice in retail. And I'll hand it over to Brandon to answer the other part of your question.
Yes. Karen, your first question on operating margin. We look at what we shared in December, a midpoint of the guide down 1% and 13.7% in that moderate scenario. Our guidance is right in line, purely consistent with that with the range that we provided just bookending those midpoints. So very consistent there.
Our next question comes from the line of Michael Lasser with UBS.
So first, at the analyst meeting in December, you pointed to the most likely scenario being the robust market scenario or the moderate market scenario. The guidance now at the midpoint is squarely on the moderate market scenario, and at the low end could be closer to the weak market scenario.
Yes. So Michael, this is Marvin. At a high level, it's lumber deflation. That pretty much sums it up. As Brandon mentioned, we're going to have 300 basis points of headwind in Q1 and 100 basis points of headwind in Q2.
Yes. And Michael, I'll just add that the weak scenario that we called out still very much sort of off the table for us. I think we called out at that point, it would require significant economic shock, and we don't see that playing out.
Understood. My follow-up is on the gross margin outlook for this year. What's a realistic expectation, especially as the consumer environment gets a little tougher, the consumer may shop or want to shop a bit more on promotion. And how are you thinking about the private label credit card contribution to the overall P&L this year?
Yes, Michael, I'll talk about the guide as it relates to margins. So very focused next year on delivering operating margin expansion, and that's on flat to slightly negative comps.
Well, Brandon, and for Michael, what we talked about in December, private brands certainly gives us an opportunity in categories where a national brand isn't relevant. Private brands carry a better margin. They offer the consumer some additional choices.
That's helpful. And just to clarify, referring to the private label credit card, that was a drag on the gross margin in the fourth quarter.
Yes. Got it, Michael. So -- yes, drag in Q4 mainly given the interest rate environment that we're seeing. But as we turn into 2023, again, a number of puts and takes, but we feel like the bulk of that for the most part has been absorbed, and we have that factored into '23.
Next question comes from the line of Greg Melich with Evercore ISI.
I'll start with a follow-up on that last question before I get to mine. On other gross margin puts and takes, shrink was also I think a headwind in the fourth quarter. Could you just quantify that and give us your expectations for that into '23?
Yes. So sure, Greg. On shrink, in particular, it was a bit of a pressure point, a bit worse than expected. It's been approximately 30 basis point pressure. We saw that Q3 and Q4, largely driven by what we're seeing more broadly in retail with organized crime.
So thanks for the question. And listen, we're really pleased with the asset protection team. The entire industry has pressure from ORC. Our asset protection team has rolled out some new, innovative things for safety, for shrink, and so we see the outlook good.
Great. And then I guess, my key question was on the traffic and inflation and how that sort of comes in through the year. So if you think about the cadence through the year, it sounds like first quarter is below the range, second quarter is above the range. Should we assume the second half is better than the first half or worse than the first half or in line?
Yes. Second half, Greg, very much in line.
Got it. And the difference would be better traffic in the second half, maybe still negative but less negative? And less...
Correct. Correct.
Our next question comes from the line of Peter Benedict with Baird.
Just wanted to -- on the first quarter comp view that you laid out there. We understand the commodity impacts there. But just curious, any early season read? I know it is early, but some of your markets in the South, just curious how Spring seasonal demand is starting out here? That's my first question.
Yes. Peter, as we look at February sales consistent with our guidance, we called out the Q1 being below the full year guidance range. And again, that's primarily due to the lumber pricing pressure that we're seeing. We are encouraged to see early signs of strength in discretionary seasonal categories, in particular, South and deep South as our customers begin to prepare for spring, and I'll let Bill talk to that in a little bit more detail.
Yes. Thanks, Brandon. And Peter, we started setting our stores in the South, Deep South, early January. And I think what's nice to see is spring start to come in the way it's supposed to come. And you start to see sales of product in fertilizer, chemicals, landscape products start to occur the way they're supposed to occur. And so we're encouraged by that. February can always be a wildcard month. But certainly, in these months -- in these Deep south and South markets seeing it kind of progress the way it's supposed to.
Got it. And then just back to the -- maybe the promotional plan that you have laid out for the year. I mean, you mentioned in your prepared remarks that the consumer is responding to value.
So Peter, I'll take the first part of that. At the highest level, you're not going to see any increased promotional activities by us. We're very fortunate to be in a very rational industry relative to promotions. And to be quite candid, a lot of the irrational activities came from old Lowe's.
No. I think the one area that the team may see different activity on is in appliances, and you guys have to remember that roughly 100,000 appliances break every day. And so there's always going to be an offer in the marketplace for appliances driven by the manufacturers, supported by the retailers.
We have time for 1 final question, which will come from the line of Steve Forbes with Guggenheim.
Marvin, Brandon, I just wanted to follow up with a quick modeling question given the exit of Canada. And so I'm not sure if you could help us think about the mix impact on gross margin because I would think the Canadian business and the exit of it has a positive impact on gross.
Yes, Steve, 60 basis points was a full year impact on operating margin. And when you think about the split there between gross margin and SG&A, it's roughly half and half.
And then lastly, the ongoing compensation related investments that you noted during the prepared remarks, which is great to hear. I was curious, if we just take a step back and think about the dollar level of OpEx productivity initiatives you've highlighted at the Analyst Days in 2020 and 2022. Any contextualization about how much still remains in front of us in dollar terms?
Yes. Well, it's a really good question, Steve. A couple of things. Number one, as you can imagine, we have been working aggressively to update our IT infrastructure.
Thank you all for joining us today. We look forward to speaking with you on our first quarter earnings call in May.
Thank you. This concludes the Lowe's fourth quarter 2022 earnings call. You may now disconnect.