Lowe's Companies, Inc. — 2023 Q4

Peter, sure, this is Brandon. In terms of incremental, decremental, we've established essentially a flow-through rule of thumb. If our sales do exceed the top end of our guide, we do expect about 10 basis points for every 1% of incremental comp sales on the high side. And then on the low side, sales fall below the bottom end. We're looking at about 15 basis points of margin contraction for every point of comp decline. So high level, that's more of a rule of thumb on an annual basis. It doesn't necessarily work in terms of quarterly performance.

Yes. Peter, I think to your first question on just our ability to manage costs. We're really pleased with our ability to manage expenses here in the last couple of years through this downturn. We have a robust and evolving road map of PPI initiatives. We were down comps 4.7% this year, expecting down at the midpoint, 2.5%. So our ability to manage the sales deleverage there with that robust pipeline. Again, really pleased there. And as we look out, a number of initiatives you heard from Joe and Bill that we continue to be excited about. We believe in '24 in particular, that PPI is going to enable us to offset over $400 million of wage pressure, inflationary pressure and strategic investments.

Zack, this is Brandon. I would say on SG&A, it's really 2 themes and it's the cycling of the settlements and its deleverage on lower sales. And when you look at the midpoint of the range, a step back about 65 basis points, it breaks down about half and half there. So those are really as we look at managing SG&A in '24. Those are the pressure points.

Yes, Zack. Sorry, I forgot your gross margin question. So I'll take that one. I'll toss it to Marvin for Pro. So we're expecting gross margins for '24 to be roughly flat. And the gross margin themes are really similar to what we saw here in 2023. Ongoing supply chain investment pressure as we wrap the rollout of market delivery. We're continuing to make investments in Pro fulfillment, but those pressures are being offset by ongoing PPI initiatives that Bill discussed as we manage product costs, lower transportation, continue to expect private brands. So those are the puts and takes from a gross margin standpoint. And on Pro, I'll toss it to you, Marvin.

Yes. So on the mix, that's directionally correct on the percentages. And look, we feel good about the resilience of our Pro customer. And as a reminder, our customers are small to medium sized business owner, and we're actually pleased with the survey results where they feel confident that they can build, the backlog is consistent with what they saw last year and that they can continue to drive their business.

No, look, it's a fair question. I think the best way for me to answer would be our customer service results. And when you look at the fact that we have improvements in both Pro and DIY, 200 basis points for both. That gives you an indication that our service levels remain extremely high and also gives you an understanding of the power of our PPI initiatives because a lot of our expense takeout is not the traditional cut payroll, it is more about the investments of technology that drives productivity that allows us to add more hours to driving service and selling and taking hours out of tasking.

And Simeon, let me give you a quick example. If you think about 5 years ago, we had less than 50% of the stores that actually had self-checkout. And so over the last 5 years, we've mentioned we've developed our own internal self-checkout built with the home improvement customer in mind. We now have that complete across the entire chain. And now we have started our front-end transformation in adding incremental assisted self-checkouts, and we have 400 stores complete. This has also allowed us to roll out a best-in-class loyalty program for the DIY customer that is tied right in with our mobile technology. And so as we look to complete the incremental 500 in 2024. And then I mentioned in the prepared remarks, our back-end initiatives, too. So very confident in the activity-based labor model and the PPI initiatives we continue to focus on.

One last point. I mean that's just one example of many initiatives that Brandon and I both have on our time line that we've yet to develop and yet to implement. So this is an ongoing process that is alive and well in every function, including merchandising, as Bill outlined in his prepared comments.

I'll give you my perspective, Simeon, and I'll let Brandon provide any additional comments. When you think about the cadence of our comp sales for this year, as Brandon mentioned, is more indicative of year-over-year comparison versus our forecast that the market is going to improve at some point this year. We hope that it improves and we are positioning ourselves that when that happens, we think that we will have outsized top and bottom line growth. But our perspective of 2024 is that we're going to feel this DIY pressure throughout the year and we're going to perform at a high level irrespective of kind of what type of macro environment that we're dealing with. I'll let Brandon add any additional comments.

Yes, I would just say, Simeon, you mentioned the base case. I mean our base case guide assumes no change in macro conditions versus what we've experienced here the last couple of quarters. It's unclear is the timing of the rate cuts, the improvements in home improvement share of wallet. Marvin mentioned housing turnover, consumer sentiment. So sort of more of the same philosophy there. And even when we start to see some green shoots there, it's going to be -- the trends are going to improve. There is an expected lag before the macro drivers we believe are going to translate into spending. So those have been the underpinnings, the assumptions that we've made here for 2024. And again, the improvement is just a function of what we're cycling in the second half versus our views on the macro and the timing of any improvement.

Chris, let me -- I'll hit the weather things first, and it really was just a January winter -- extreme winter weather story impacted January as we sized at about 200 basis points of impact on the month. It had an outsized impact on our Pro business over those weeks. The other weather theme also just to mention is we've cycled 2 straight years of hurricane recovery with Ian and Ida, it's about 150 basis point comp impact to Q4, just cycling that. But again, that was all baked into our expectations. And in terms of just what we saw through the holiday season, I'll actually toss it over to Bill, and he can give a view on what we saw in terms of consumer behavior there.

Yes. Chris, I think for the holiday, we saw -- as I mentioned in my prepared remarks, we saw record holiday sales. We saw the consumer respond very favorably to our trim and tree program and saw a nice performance there. We also saw, as you mentioned, December was warmer. And so we saw those outdoor businesses perform both on the Pro side as well as on the DIY side as the consumer continued to take on outdoor projects. As we've rolled into February and get started with 2024, as we begin to start our spring program for the South and Deep South, we're starting to see some of those early signs of spring where the weather is warmer, we're starting to get started with some of those spring-related businesses. So where we've got some warm weather, we're starting to see some of those early signs of spring. So we're excited about that.

Yes. So for the year, we saw share growth in appliances. For the quarter, we saw unit growth across all the major categories. We did see average selling price pressure as we called out. For the key major events, both Black Friday and Cyber Monday, we saw a nice performance across those holiday weeks, and we're pleased with that. We did see the consumer pivot. And we met them where they wanted to go, and that was a shift from multiunit purchases to a single unit purchase as the consumer was looking for that.

And Chris, this is Marvin. Just one last point on appliances. The work of our market delivery supply chain infrastructure is going to be significant, not only in 2024, but for years to come. I mean, we're virtually the only national player that can deliver major appliances next day and two-day in virtually every zip code in the country. And that's significant in addition to having same-day capacity for customers to have emergency purchases we still have take-with inventory in virtually every store where a customer can come in and literally leave with an appliance within the hour. And so our model is difficult, if not impossible, to replicate in the brands that Bill and his team have brought to our assortment is something that we think will continue to work for us. And look, we'll work and manage through the macro environment. And I think Bill and his team have done a really nice job, and we'll continue to listen to the consumer and pivot based on where they want us to go.

Yes. Kate, this is Marvin. I'll take the first part, and I'll let Bill or Joe jump in on the second part. But if you think about the DIY consumer for a second, the consumer is healthy and we feel good about the financial wherewithal of that consumer. They're simply choosing to leverage their spend in different places. As we've discussed and is not just us, but in all the different companies that talk about consumer spending, customers are just spending more of their wallet on experiences, on travel, on concerts, on restaurants because of this whole post-COVID relationship of getting back out and getting back to normal.

Yes. Kate, I would just add that it really varies by product category. And so as I said, with appliances, you've got really two spectrums going. You've got the value-conscious consumer looking at low-end pricing all the way to innovation, and we meet the customer across a variety of price points. And then you have the Pro looking at their jobs, and we can meet them wherever they want to be met, whether that's on stock cabinets and having those products in our stores again across a multitude of price points that we offer in our stores and the different levels of product quality of product that we offer both online and in-store.

Yes, Steve. Really, just when we look at the cadence of comps, I'm going to reaffirm my earlier comment, we expect the macro pressures, inflation, higher interest rates, low housing turnover to persist. When we looked specifically at the second half, we're cycling the easier compares as we comp over the DIY weakness that intensified in particular in Q3 of last year. And to be clear, our comp improvement in the second half is not a result of any views on the improving macro, but purely are reflective of easier year-over-year comparison. So we looked at the cadence. We looked at it a lot of different ways. I would tell you on a 2-year basis, which we leaned into pretty hard 2-year ex lumber, there's a pretty consistent trajectory as we moved across the year. So we feel really comfortable with the full year, the breakdown, the comps and the operating margin and wanted to provide the right level of transparency and visibility to that.

This is Marvin. I'll take that final part of your question. So on the new store openings, it's -- we're going to always look for what we describe as real estate voids around different parts of the country where we believe that we can get the right return on our capital for new store investment. But candidly, I mean, our focus is on space productivity. We have such incredible upside opportunities in our stores to just invest capital in our existing infrastructure and create space productivity. We think the return on invested capital is significantly greater in using our dollars for that versus opening new stores with expensive real estate, where we're struggling to get those investments to pencil. And again, we'll open a handful of stores for voids where you're going to see us spend a ton of time on driving space productivity and creating greater value from the assets that we already own. And that's going to be our key focus.

Thank you all for joining us today. We look forward to speaking with you on our first quarter earnings call in May.