Lowe's Companies, Inc. — 2023 Q3

Steven, thanks for the question. We're not going to get into that level of specificity for competitive reasons, but what I will tell you is that the rural stores have exceeded expectations. And as we noted, we started out with roughly 300. But candidly, the performance and the customer response has been such that we're now looking at a couple of different options. One option is we're going into those original 300, and we're add incremental investments initiatives, categories based on feedback from customers. We're also looking at categories that are working really well in those rural stores and asking the question, can we now take some of these categories and put them in nonrural format locations because we believe we could get the same response from customers in nonrural environments.

Yes. So as Joe said, we've got roughly 450 stores that we'll complete by the end of the year. We continue to test and learn in these stores. As you can imagine, there's opportunities for us to try some additional merchandising opportunities up front of the store. It's all about getting another item in the basket, and there's opportunities in the obvious areas like snacks and drinks, but we're also looking at other categories as well that can complement what we're doing and also that shopper, both a Pro and a do-it-yourselfer that's making that transaction in our store that could pick that kind of stuff up and you think about like aspirin, band-aid, stuff like that, that could complement what they're doing and could be used on a job site or in a glove box of a car at your home.

And Steve, the other thing that I'll add is this also complements the ongoing omni expansion that Joe talked about. As we extend the capabilities of connecting digital and physical stores, we need more productive space, and we need to just optimize all the things that the associates are going to accommodate and fulfill those orders. And as Joe mentioned, part of this is to create more designated space in a more productive fashion for that process, but also it's creating a much better customer experience, and it's also driving a lot of productivity for Joe's taming the store.

Yes. Peter, this is Brandon. Just in terms of as we're looking at 2024, we're in the later stages of our planning process at the moment across the organization. So we're going to hold off on providing any in-depth guidance until our Q4 call. But what I will tell you just in terms of top line macro home improvement, there's continued uncertainty on interest rates, when we're going to see relief when existing home sales are going to turn the corner and begin to improve. And obviously, the ongoing impact of inflation, higher rates on consumer wallet. So we're watching all that. I think to your specific question on margins, we're managing several puts and takes as we look at next year. We're cycling onetime legal settlements, normalization of incentive comp, wage growth, the pacing of our PPI initiative. So we're looking at all that. We're going to take all those factors under consideration as we develop our guide and hold off on providing that until we get to February.

Peter, this is Marvin. And the only thing I'll add is you heard in some of your prepared comments, was talking about an old operating system. And we talked a lot about this 30-year-old operating system. There's really been a significant impediment to some of the technology advancements, and we're going to be sunsetting that system at the end of this year, and it's going to just unlock a little bit of acceleration in some of the technology advancements that we have on the project list. We just candidly, we couldn't get to because of this system. And so the good news is we're going to continue to work to Brandon's point on all the elements of running an improved business from a merchandising to operations, supply chain, but also the technology project list over the next 3 to 5 years is robust, and it's going to allow us to continue to find ways to drive profitability, irrespective of the macro environment that we're in. We're hoping the macro environment gets better with the brand at this point. We're going to wait until our Q4 call to talk about '24 and give a much more educated perspective at that time.

Yes, Peter, this is Brandon. I would say just in terms of costs coming into the organization at this point, just from an inflation price action response to that. It's leveled off pretty dramatically here as we move through the year. We've had targets in terms of clawback for this year. We laid those expectations out back in December, I would say, very much pacing in line with those targets. We laid out about $500 million over the course of 3 years. We're leveraging cost management teams, working closely with the merchants, the tech-enabled tools that we've invested in. We have very detailed product cost breakdowns that are informing those negotiations with our suppliers. So we're continuing to be balanced. We're taking a portfolio approach. We're investing in price strategically where needed, but also looking through the lens of protecting our margins.

Yes. Simeon, this is Brandon. I wouldn't say when we look at next year, we're losing the benefit of any of those levers. In fact, I think we're looking at where we have opportunities to accelerate. We've talked about PPI, I talked about where we were in that journey in terms of middle innings. Marvin mentioned the conversion of the store technology to a modern omnichannel platform. We got a lot of initiatives stacked up where we expect to see those benefits as that gets delivered next year. Earlier question on transforming the front end really expanding assisted checkout, expanding the BOPIS experience, and then Bill talked in his prepared comments about multiple other kind of merchandising PPI initiatives, whether it's cost clawback, inventory productivity, pricing, promotional strategies, expansion of private brands. So we're really confident in that portfolio of initiatives. We feel like it's in our control. We're managing the road map and the pacing of that and have a lot of confidence as we look at the longer-term margins that we can deliver against our stated targets there.

So Simeon, this is Marvin. I'll add this perspective. The reason why we call this a perpetual productivity improvement initiatives because we're trying to stay away from onetime events. We think that good companies create an ongoing sustained process of improvement and productivity gains. And so we have a road map of initiatives. And it's important that it's not just about store operations. You heard Bill talk about the PPI initiative, specifically for merchandising. If Don Frieson was here, he could speak specifically to supply chain and Seemantini could speak specifically for IT.

So I'll give you the perspective of a long-term operator. If we get the top line, PPI works a whole lot better. So irrespective we're going to intensify the focus. Obviously, if we have a softer top line perspective, we're going to be a lot more aggressive in the PPI side. But irrespective of our comp outlook, PPI is going to be in existence, and we're going to work really hard to make sure that we hit some of the key targets that we lay out. And again, you have our commitment that as we lay out 2024 as best we can, we'll be as transparent as possible about all of these things in our February call.

I want to focus a bit on the top line. You've seen increased big-ticket sensitivity, others are talking about, you mentioned flooring. People are doing smaller projects, you're not buying the suite of appliances, you're doing the bathroom, not the entire [first floor] and flooring. I guess -- so my question is, why isn't the Pro and the remodel business or maybe the remodel business and the answer is different from you on the Pro because of share, but why isn't the remodel business and the Pro business that the next should a drop? And given the changes that you've seen over the past 3 or 4 months, how are you thinking about the bottom of the comp cycle and sort of when does it start to refer back to positive?

So Chris, I'll take the first part of that, and I'm going to just let Bill Boltz talk about some of the initiatives relative to addressing some of the top line concerns. So specific on sales for us, when we look at the quarter, we look at it from a penetration from a DIY perspective and a product mix. So as a reminder, 14% of our revenue comes from appliances. So when you have pull back on some of these big-ticket categories like appliances, is going to be disproportionately impactful for us.

Yes. Thanks, Marvin. And Chris, just some of the things that we've talked about really over the last few quarters that I'm pleased with the work that the team has done is the continued acquiring of brands and making sure that we've got relevant assortments inside of our stores and online. And so we announced today Toro as part of our outdoor power equipment. We talked about Klein last quarter, and we're just starting to get that brand now into the electrical and the tool category. So that's excitement for us. We talked about localized assortments and Marvin touched briefly on the rural strategy. That's just one element of a localized opportunity.

And then my follow-up is, again, on the Pro side. As you think about the momentum in that business over this year or what you're seeing in the basket in terms of the projects that they're doing. Whether it's size or price point -- price spectrum, is there any change in momentum on the Pro side of the business?

Chris, thanks for the question. And listen, we can tell you that with the firm loyalty and CRM that we launched, we continue to view the basket. We continue to view the mix. We are very encouraged and continue to exceed expectation in the core metrics. And we continue to launch new capabilities, things like online quotes for the bulk pricing that Bill talked about. In my prepared remarks, I mentioned the integrated same-day gig delivery, streamlined order tracking. And so there's a lot going into that pro from an effort standpoint. And so we continue to be pleased at the progress.

Yes, Seth, it's Bill. And so just a couple of things here. As I said, we are seeing probably more of a move on pre-pandemic levels of promotion, specifically in the appliance area. These are largely vendor supported, but we want to make sure that we're there, obviously, and we're part of all that. As it relates to the overall, the industry remains pretty rational and pretty stable. You want to make sure that at certain times of the year, you're out there with the relevant offers and that you're doing the things that you need to do. So whether that's in the spring or this Black Friday, we're excited about having some of those offers out there and working within the guardrails and the profitability targets that we've established.

And Seth, this is Brandon. I would just add the adjustments that Bill is talking about that we're making as the consumers changing as we're moving through the year, our go-to-market strategy, all of that's fully embedded and reflected in our updated outlook and confidence that we're able to achieve our flat gross margins for the year.

And Seth on a low price guarantee, our research just indicated that we needed a more simplistic straightforward message to the customers about our value. We had something that was a little too cute, call it, a price promise that I think was way too ambiguous, and we just decided just to keep it simple and stand by the fact that we will support the lowest price in the industry on the products that we sell. We just launched it. We think the timing is perfect going into a holiday season where you have a slightly cautious consumer looking for a value. And so you take everything that Bill said about the definition of value and the fact that we're going to put media behind this lowest price guarantee. We hope that sends a message to the consumer that they could always expect a lowest price at Lowe's.

Seth, this is Brandon. So our capital allocation priorities unchanged. We're going to continue to invest in the business in high-return projects, targeting a 35% dividend payout ratio and funneling the remainder to share repurchases. As I mentioned in my prepared remarks, we do expect funding and share repurchases through operating cash flow here in the near term and expect modest if any share repo in Q4 also expect to be in line with our stated leverage target at the end of the year. So we're also looking at our debt towers, paying those off as they mature. We have $500 million this past Q3. We have $450 million coming due in 2024, and we remain committed to our BBB+ credit rating and expect to manage our leverage accordingly.

Michael, we're not going to get into 2024 at this time. We'll speak more specifically about that on the Q4 call. What I'll just repeat is PPI is perpetual for a reason. We're going to keep doing it. It's sustainable, it's ongoing, and we're going to be agile. We'll take the necessary steps to make sure we're running a really sound business thinking first about driving service for the customers and giving our associates a great place to work. But other than that, PPI will be in place irrespective of top line, and we'll adjust it accordingly.

Michael, it's a fair question. If you strip out storm overlaps, geographically, our performance is relatively balanced. So there are really no outliers. When you look at markets that had a dramatic run-up in housing costs and some level of moderation, there's really no material impact to our business based on that. Obviously, it's something that we stay very close to. We're paying attention to it. But as of right now, it's not material, and we don't see it as something that's going to affect our business in the near term.

Michael, I'll take both and just allow Brandon and Bill to jump in if they have any additional comments. On the appliance shift, I mean we're not seeing anything other than what Bill talked about, where you have vendor-funded promotions kind of driving average ticket down. And also, as we mentioned in the prepared comments, we're seeing customers being just a little more specific on their purchases going from an entire suite to just a refrigerator as an example.

The only thing that I would add, Brian, is that just, as I said earlier, just a reminder that over 100,000 units of appliances break in the marketplace every week. And we've got to be there for that consumer as the market leader, and that's what we're trying to do and do that in a responsible manner to make sure that we can hit all the financial targets that we need to hit. But also make sure that we can meet the customer where they want to be met, both online and in-store.

Yes. And Brian, this is Brandon. Just to wrap it out in terms of how we are looking at Q4. I think our outlook largely a continuation of the macro and the traffic trends that we've experienced in Q3. We do expect a light or a slight impact from lumber deflation as we transition into Q4. All of the offers that Bill has talked about with appliance holiday offers are reflected in there. We do expect some light pressure from cycling Hurricane Ian. So we've triangulated all that. We've looked at 1-, 2-, 4-year trends all of that sort of baked into the expectations that we set, and we believe it's very achievable for us here for Q4.

Thank you all for joining us today. We'd like to wish everyone a Happy Thanksgiving and a wonderful holiday season, and we look forward to speaking with you on our fourth quarter earnings call in February.