Lowe's Companies, Inc. — 2023 Q1

So I think previously, we had heard a lot of focus on higher sales per square foot as the main driver of operating margin improvement. Now I think you guys are talking more about the benefits of operating in lower-cost markets like the more rural stores. So presumably, those stores have lower sales per square foot in your stores in more densely populated markets. So how are you thinking about geographic mix and potential for stores benching going forward if those more rural areas are now looking more attractive?

Liz, this is Marvin. I think it's more in tune with what Bill talked about with some of the investments we're making in those rural stores. As we survey those customers, they give us a list of things they wish they could purchase in one shopping occasion and some of those types of things like Carhartt Apparel, farm and ranch types of items and categories as part of our expansion opportunity. And we think by doing those types of initiatives, we're going to see sales per square foot actually improve.

Liz, this is Brandon. Just as we think about the CapEx, as Marvin mentioned, we're not necessarily looking at opening stores over the long term is really part of our core strategy, but we love what we're seeing with these rural stores. We initially piloted on a smaller subset of locations. We love the profit profile of these stores within these rural markets, and we've been very thoughtful around the assortments and where we're rolling out and really excited to see this scale as we move through 2023 and what this can deliver from a top line perspective beyond that.

Great. And in those stores, just as a follow-up, are you seeing online penetration that's similar to your overall company average? Or is it a little bit lower? Is it higher? Just curious if there's any difference in the online mix?

Liz, it's about the same, but I mentioned in my prepared comments that we're retiring this old legacy operating system and by retiring this system, it opens up the ability to have really true omnichannel selling in the store. So we see omnichannel and e-commerce growth only accelerating with the ability of our 300-plus thousand associates having the ability to more easily transact in the store, thus connecting physical and digital in a more seamless way.

Can you hear me?

Yes, we can, Simeon.

My question is, first, I'm trying to sort out the guidance. If you take the Q2 through Q4, what's embedded, both for sales and margin, is that roughly the same as what it was, call it, when you guided a year? Or has anything changed.

Simeon, thanks for the question. This is Brandon. Let me just kind of speak a little bit to the curve specifically. When we look at Q2 as I mentioned in the prepared remarks, expecting Q2 sales towards the higher end of the full year guide. That's inclusive of the $250 million delayed spring benefit, offset by the 150 basis points lumber deflation and then the $400 million, week shift drag. As we start to transition and look at the second half, we do expect the Pro business is going to continue to outperform and drive our growth. We mentioned that backlogs remained healthy and we expect that business to continue to outpace DIY.

That's helpful. And then maybe a follow-up, sticking with the guidance. If you looked at whether it was the weak or even the moderate cases beforehand, margins were going to hold up reasonably well for a couple of reasons, a lot of your internal initiatives. Those drivers that were holding up margin, are those the same? Are you on a faster trajectory? Are you pivoting? Are you prioritizing some over the other? If you could share some of that, please?

Yes. Simeon, largely the same, roughly flat is what we've spoken to as it relates to gross margin over the course of the year. The puts and takes that we've talked through still relatively consistent. The headwinds from the supply chain expansion and investments in the Pro growth initiatives. The benefits and Bill covered this when he talked through merch productivity, higher private brands penetration, lower commodity transportation costs and then the pricing initiatives that we're working through. So those largely are going to drive the outputs. And then just from an SG&A standpoint, that's where we're going to see the bulk of the leverage, 40 to 60 basis points reflected in the new guide. That's going to offset the planned wage increases and the strategic investments. And then on the lower sales, just the change from the previous guide, it's mainly volume related.

Steve, this is Marvin. I'll take that. So Steve, we would basically describe it as in line with our current guidance. The good news is, is as we've seen periods of more sustained seasonal weather, we've seen those seasonal categories respond in line to that. And that's geographically specific around West, South, North and East. But May is performing basically at our current guidance.

Yes. It's a really good question and really to be quite honest with you, as you can imagine, we spent a lot of time looking at it, but it's just hard to predict. What we can say is that the overall structural drivers for home improvement remain really strong. And so we are bullish to the medium and long-term health of this business, things like the savings rate of consumers and you're looking at pent-up demand in the housing shortage, the age of homes. I mean, all of these things are still incredibly relevant. And when you think about the highest correlating factors to our sales, historically, they remain disposable personal income, home price appreciation and the age of housing side. So although we can't predict the duration of what we think will be a more short-term turbulence, but we think the medium and long-term health of this segment is incredibly strong.

So Brian, I'd give you some thoughts. I'll let Brandon jump in and provide any additional thoughts. But candidly, what we're seeing is pressure across big-ticket discretionary purchases primarily. We're seeing some pressure in small ticket, but it's more pronounced in big ticket and is almost exclusively discretionary in DIY. As you know, 75% of our business is penetrated in the DIY customer, and Q1 is our most discretionary quarter of the year because of all the seasonal purchases.

Brian, this is Brandon. I think just looking out a little bit beyond the weather that Marvin just spoke to, when we look at this topic of normalization, home improvement share of wallet, definitely seeing normalization back to services in terms of where discretionary purchases are going from consumers, travel, restaurants and a shift back to some necessity-based spend, groceries, gas, taking up a larger share of wallet given the inflation that we're seeing. But just as we look at the business at a broad level, units transactions well documented back in below, in some cases, to 2019 levels. But as Marvin mentioned, really nuances within that.

Brian, what I'll do and I'll let Bill give you just some specifics on some of the categories that we're adding. And again, we piloted this for over a year to get the mix right, to get the assortment right. And we came away extremely pleased with the pilot results and thus, we identified roughly 300 stores that we're expanding this too, but I'll let Bill give you some specifics on those categories and what we believe that we can get from them.

Yes. And Brian, this is Bill. And so in my opening remarks, I mentioned some of these key categories in areas like pet. And we think there's an opportunity in these rural markets to do more in that category. There's opportunities with apparel. And so the launch of our -- the Carhartt brand, Wrangler brands gives us an opportunity to do something there in those markets. And then you think around livestock and really livestock feed as the consumer is looking for options from us to be able to serve that consumer. And then you can get into areas like fencing and some of these small pents that folks will use. And we're finding some interesting things with water troughs that are being used, certainly to water livestock, but they're also being used as a decorative piece for consumer's home where they're planting flowers in it.

And Brian, this is Marvin again. Just last point on that. Both Bill and I grew up in rural parts of the country. Bill in rural Montana, I grew up in rural Tennessee and I think rural Tennessee is actually more rural than rural Montana, but that's for another discussion. We're seeing things like ATVs, we pilot it, having no idea if customers will respond. And it's been an incredible growth category for us. And in these rural markets, they are responding really well.

So I'll take the first part on May. We tend not to give specific detail on current trends for all the obvious reasons. And so I'll leave my comments at May is performing at guidance, and we feel good about what we've seen, areas of sustained weather and how our seasonal categories are responding in those geographic locations, and that's reflective of May's performance.

Yes, sure, Seth. Just consistent with the upper end of guidance is what we referred to. And just the components again, the $250 million delayed spring benefit, the lumber deflation is going to step up. So a 350-basis point pressure in Q1, now expecting that to be 150 basis points in Q2. And just a reminder of the week shift benefit from Q1 is now flipping into Q2, and we expect that to be a $400 million drag. So those are just the components again, as it relates to Q2.

Seth, I can take that as well. So when we look at the makeup in terms of ticket and transaction, as you mentioned, we're seeing the pace and cost increases. Those have slowed pretty dramatically here over the course of the last couple of quarters. We are still expecting a modest level of product inflation as we look out at '23. Most of that is wrapped from pricing actions that we've taken in the second half of last year. We are -- ex lumber average ticket is actually up in most categories when we look at Q1. The lumber deflationary pressure is expected to continue to impact average ticket in Q2, but not as significant as Q1. And then when we look outside of commodities, we're not anticipating any meaningful deflationary pressure as we move through the year.

Kate, this is Marvin. I'll take the first part of Pro with Joe, and then we'll let Bill and Brandon provide some market share input. I would first say we're really pleased with our Pro strategy. We spent a lot of time in the last 4-plus years trying to refine this strategy but also being very disciplined on not trying to overreach beyond our capabilities. And that's why the small to medium Pro has been our target Pro customer, and we feel like we're gaining traction. Anytime you can face over 800-basis points of lumber deflation and comping up against a 22% growth last year and still deliver a positive comp, I think it sends a signal that we're making progress.

Thanks, Kate, for the question. And as you look at the makeup of our Pro, it is on that smaller side. And as we rolled out our MVP Pro Rewards program, we're really seeing the Pros engage with us in our loyalty, our credit programs, of course, when they are engaged there, they spend 3x more than those not engaged. We've rolled out new CRM insights so we can better anticipate the Pro's needs. We can build those relationships. And with the loyalty program and the CRM system, they continue to improve as they mature. And so really excited about the unlock that is still ahead. Very pleased with the Pro LTR that we're seeing as a result. So we feel we're in a good place.

And Kate, before I hand it to Bill, I'll just add one additional thing. We did a recent survey in April of our Pro customers and then 75% of those customers came back and their backlogs were still healthy compared to Q4 and that gave us confidence that we still believe that we can grow market share and grow to extra market with this specific customer segment.

Yes. So when you look at market share, obviously, it's hard to measure home improvement share specifically, but we try to triangulate using data from mix, track line, other data, relevant market and broader market data. And then we look at our performance, obviously, in key categories like we've mentioned in our prepared remarks in areas like appliances where we've had unit growth feel like we're picking up share there in addition to the Pro growth that we've had and the continued acceleration with our online business, gaining traction with private brands, all of that and those elements kind of give us confidence that we're gaining some share here in these key categories. And when you see a positive growth in areas like paint, we also feel like we're gaining share in those areas as well.

Bill, the only thing I would add is just really pleased with the execution of Total Home strategy. You talked about Pro, positive comp with an 800-basis point drag on top of 11 consecutive quarters double-digit growth, really pleased with the online performance at plus 6%. So clearly, as we look at share gains, both for relevant market and broader home improvement, confident in what we're seeing. And it gives us confidence when we look at the broader market and our ability to grow 100 to 200 basis points above the market and growing Pro 2x when we look at 2023 and beyond.

Jonathan, it's a very good question. And I think it is a combination of both because in order to add these new categories, we're taking categories out. And the categories we're taking out are the ones that were most at risk of being marked down because of the lack of localization. We had a, what I describe as a peanut butter spread on our assortment planning because our tools was so inferior is almost impossible for the merchants to do any really specific localization.

Just going to add, Marvin, that the early read in the test stores would tell us that we're getting a new customer coming in categories like pet, like apparel. Those are 2 of the -- 2 categories that we had early read on that said we were drawing a new customer to the door. And so that's exciting to see.

Jonathan, you can imagine, we're paying close attention to that and the short answer is no. I mean, we're not seeing any disproportionate sales impact in some of these markets, and we are tracking these markets very aggressively and paying very close attention to all.

So Steven, I'll take the Pro question. I'll give Brandon the productivity question. The short answer is Pro did outperform our expectations. We -- candidly, we didn't anticipate 800 basis points of impact to lumber deflation for that specific customer. So the fact that we were able to deliver a positive comp, it actually exceeded our expectations. And I think it comes down to what you heard Joe mentioned earlier, and that is the maturity of our MVP Pro rewards program and our CRM tool, the increased Pro related national brands that Bill and his team have worked to get added to the assortment and our improved fulfillment capabilities that Don Frieson, the supply chain team in partnership with operations that really work to create a more seamless ability for Pros to get product and not to mention the improved digital capabilities that help to deliver a 6% online comp during the quarter as well. We take all of those things combined. And we believe that we'll continue to lean into those initiatives to drive continued market share gain. Brandon?

Yes, Steven, I'll speak to PPI. So very much in line with our expectations there. I mentioned earlier, 40 to 60 basis points of EBIT expansion plan this year. We have a really aggressive portfolio, a road map of initiatives across the business, across every function set to drive operational efficiencies. We've mentioned a few of those today. Store tech modernization, front-end transformation to name a few. So really aggressive plans, and we're very much seeing those come to fruition in line with how we've guided.

Thank you all for joining us today. We look forward to speaking with you at our Annual Shareholders Meeting this Friday and on our second quarter earnings call in August.