Lowe's Companies, Inc. — 2024 Q1

It's Christian Carlino on for Chris. Just to dig in on the gross margin. Could you help us understand some of the drivers there? And are you seeing the full run rate of vendor clawbacks at this point? Or does that build over the year. And just broadly, how should we think about the phasing of gross margin expansion over the year relative to the flat gross margin guide?

Yes, sure. This is Brandon. Thanks for the question. So as it relates to gross margins, and we look out for the full year, we are still expecting gross margins to be flat. Our improvements, mainly PPI, we expect those to be more back half weighted. The headwinds, we had many of these in Q1, ongoing investments in our supply chain as we finalize the rollout of market delivery, early investments in our Pro fulfillment initiatives, and spring promos as we continue to execute on our everyday competitive pricing strategy.

Got it. That's really helpful. And I appreciate the color in the prepared remarks, but I guess, how would you disaggregate some of the bigger ticket trends between more remodeling oriented categories that are more likely financed versus others like big ticket seasonal and appliances, and how are you thinking about the recovery path for maybe these 2 sides of big ticket broadly?

Yes. I think when we look at big ticket in particular, we continue to see pressure, right? We called out large tickets greater than [ 500 ], down 7.6% for the quarter. Most of that right now is still related to DIY, and we're continuing with the Q4 trends that we saw there where big ticket was down 8.8%. I think a lot of that is we look at discretionary. There is some seasonal impact there as we continue to see some level of pressure from patio, from grills with multiyear replacement cycles. We are continuing to see pressure from appliances as we normalize against the promo environment, we get back to more 2019 levels.

Yes. And so thanks for the question, Steve. I won't give the comp benefit, but there are several things that we're seeing. We have a detailed road map as we've laid out. We're 1/3 of the way through. And when I think about the proprietary self-checkout systems we talked about in the past, the user-friendly for the home improvement customer along with the partnership we have with our tech team under Seemantini's leadership, the teams work hand-in-hand. So we're incorporating the technology that we spoke about, NVIDIA, our assisted self-checkout. And in addition, we just finished launching the ability for our gig drivers to pick up from our enhanced buy online pickup in store and all of our gig delivery network. So we're really pleased. And again, third of the way through customer satisfaction scores have improved, the associate engagement has improved and very pleased with where we're at.

And Steve, I'll just add, you mentioned we're only 1/3 of the way through, but we're really pleased with the benefits that we're seeing. We're not going to call out the comps, but just financially speaking, seeing higher sales as we're opening up space on the front end, lower payroll costs, improved returns as we've increased or improved that experience and then the customer experience with the improved front end and BOPIS. So just as we look at all of our KPIs there, 1/3 of the way in, we're pleased with the progress there.

Yes, Steve, this is Bill. And so the trends we're seeing with appliances are very similar to what we've been seeing really over the last 6 to 12 months in that. We've seen the consumer shift from buying multiple pieces to now single item pieces really in that [ duress ] market. And so that's where we've pivoted our efforts to making sure that we're meeting her where she wants to be met. And we're really pleased that we've continued in a down market to be able to drive units and pick up unit share during that time frame.

Yes. Simeon, just as it relates to the macro first, we ultimately need to see customers, consumers reengage for us to have confidence that the home improvement is inflecting. We're watching for an uptick specifically on discretionary bigger ticket projects. I mentioned earlier what we're seeing. We're not seeing that at the moment. I think we're watching consumers continue to digest and adjust to the monetary tightening, which is working its way through the system, and that continues to have an outsized impact on housing where we see affordability challenges and historically low turnover.

Simeon, this is Marvin. The only thing I'll add is more of a broader theme that we're focused on. And that is managing through any unique challenges we're facing today. And I think Q1 reflects that we're executing at a high level in spite of some of the macro headwind that we're dealing with. But we're really positioning ourselves to really come out of this downturn as a much better company. We've invested billions of dollars in supply chain, IT infrastructure, our digital platform, our omni systems, store environment, merchandising assortments.

No, Simeon, I would say we've been fully committed to our long-term road map in terms of capital, major projects and PPI and top line growth initiatives still been fully committed to that. But we haven't pulled back at all. And as Marvin mentioned, we're investing in the business for the long term. Committed to the long-term trajectory and looking forward to comps starting to turn whenever that may be, and we believe kind of a long-term algorithm holds in place once that happens.

Michael, I'll take the first part of that. This is Marvin, and I'll let Brandon give some additional perspective. I think Bill said it best. We're trying to meet the customer where the customer currently is at. And if the customer is looking for value, value does not always equate to low price, it equates to a great return for the dollar you spend. And so we feel really fortunate that we can make early investments in the customer with events and activities to win that early spring customer and still have an opportunity to outperform earnings per share and operating margin.

Yes, Michael, I would just add, as Marvin said, we were really pleased with our ability to pivot our go-to-market strategy, especially as we saw customer behavior start to change over the back half of last year and our execution, our marketing approach, how we highlighted value, we believe, helped us win Q1, and we did see a little bit of margin pressure from those actions, but really pleased that we were able to manage that and offset that within SG&A and still deliver the bottom line number and I think confident that we can manage the portfolio as we move through the balance of the year.

Well, Mike, this is Marvin. We're not going to get into the specifics of the lift. But as I remind you and everyone, we launched the program in March. The initial focus was on enrollment, getting active members engaged, app downloads, and we're really pleased with how well it is going. The rollout was very smooth, and it really spotlights the benefits of really modernizing our store operating system. We could not have rolled this loyalty program out a year ago. because we were still in the process of retiring a 30-year operating system, which is now for all intents and purposes, behind us and the store associates engagement was simply tremendous in educating the customer and making sure that they were articulating the value.

Yes, Greg, this is Brandon. The majority of that's going to be traffic related. I think as I'll get the breakdown across the year on ticket and transactions, we're, for the most part, expecting average ticket to hold, consistent over the course of the remainder of the year just as we saw here in Q1, some slight pressure, ticket related, as we've shifted down in the smaller ticket seasonal projects, which has boosted transactions. And then we're also seeing continued ticket pressure, as I mentioned, from the DIY big-ticket discretionary and that includes some of the appliance promo pressure. But the flip side is, Pro growth continues to run strong for us, which is helping mix ticket up.

I won't put a specific number on Q2, but we do expect Q2 to be similarly pressured with supply chain investments and some of the credit pressure that we're continuing to see. But for sure, as we get into the second half, we're seeing the improved -- the acceleration of PPI flow through with some of the supplier clawback cost out. There's some timing benefits that will come through in the second half of the year and then some of the credit pressures just start to ease. Again, that's a cycling, a timing issue as we started to see some of the interest rate pressures and delinquencies started to pressure in the second half of last year. So we expect that to smooth out as well. So that's sort of the shape of the curve there.

Not significant at this point, just given the timing of when we scaled that.

I'll take the first part, and then I'll hand it over to Bill. I mean this was broadly a weather dynamic from a standpoint of how the sales flow. We feel really good about the execution. We feel great about some of the initiatives with SpringFest and how the customers respond to it. But the cadence was really driven by the impact of weather to the initiatives. I'll let Bill kind of walk through some of the specific initiatives and how it played out in Q1.

Yes. Thanks, Marvin. And Seth, I think the big difference for us this year is that we took a slightly different approach to our marketing. We -- as I said in my prepared remarks, we took a geo-targeted approach, which was really going south to north with our SpringFest campaign. And we put some offers out there that were seasonally relevant. We were able to target those south to north. And then we got a little bit of weather favorability that happened in March, and then we carried that into April. We're able to navigate some storm weather. We took advantage of that. But the teams did a really nice job of making sure that we had new products, new brands.

Seth, this is Brandon. Just one more thing. Just as you recall at the beginning of the year, we did plan for a much more normal spring season, and we had called out the last 2 years about a $400 million drag related to unfavorable weather in the last 2 years. So cycling against that. Some of that recovery moved into Q2 over the last couple of years. So that's also embedded into our outlook as we're looking at Q2 for this year.

Well, I think overall, we're very pleased with the performance of our Pro strategy. As you know, it's been a 5-year investment journey on things like investing in job-like quantities for inventory, improving service levels, adding national brands, Bill and I, both mentioned the great performance of client tools, the #1 brand for electricians and HVAC professionals, bringing brands like that to the assortment, it just adds to the credibility of the turnaround that we've been on and trying to win some of these customers back from years past, in addition to a stronger digital platform, a great loyalty program that's resonating with the customers.

Yes. Thanks, Marvin. Seth, as you think about some of the investments that we've made, Marvin has called them out, Bill has called them out. Job-like quantity, safety stock, but also our enhancement in our job site delivery for larger orders. If you think about the maturity of our loyalty program in Pro, our CRM program, or growing share of wallet. We continue to expand our Lowe's Pro supply. And then from the survey that Marvin had mentioned, the dimensions of the [ health ], we look at backlogs and materials, credit, labor and the project type. The Pros have been stable and steady there. And so we're pleased with the gains we're making with this customer, both in-store, product-wise and online.

And Seth, I'd just close the Pro discussion with just one additional point. We're really focused on the customer that we can serve at a very high level and that's that small to medium Pro. And we estimate that's a [ $200 billion ] market opportunity. And so we are focused squarely on that customer. That customer still leverages the store. For fill in we can leverage the productivity of our existing real estate footprint to serve that customer well. We can do it without having to make dramatic investments in op expense in addition to the fulfillment capabilities, as Joe talked about. So we are very confident that our strategy is working and that is reflected in the results. We still have other investments to make, we'll make them, and we hopefully will continue to see this business head in the right direction in spite of a very difficult macro.

Peter, thanks for the question. This is Brandon. Just -- again, Marvin hit on this a bit, but our goals overall with the loyalty program are to create further stickiness with our DIY drive repeat visits and spend over time, our ability to get the data and drive more personalized marketing. Super pleased with what we're seeing with engagement from the customer standpoint and our associates. We're managing the enrollments to membership points redemptions.

Peter, to add on Brandon quickly. We're pleased with the first kind of loyalty perk that we rolled with Mother's Day, the engagement we had with the members and new members as well as our associates and our ability to gain incremental loyalty members. And so as an early example there, the Mother's Day engagement, we're very pleased with.

Yes, Peter, it's Bill. And so the promotional environment remains stable. And so nothing radically crazy. We're going to go similar to what we've been doing. We want to be seasonally relevant as we go into the back half of the year, obviously, we'll be out there as we go into fall with Labor Day. We're going to introduce Halloween. We're going to make sure that we're relevant with holiday and gift center and introduce and set our stores for spring in the Deep South for that December-January time frame. But we're going to make that transition.

First one, I wanted to dig into regional trends. Some peers have been calling out less worse trends in the West. It was one of the first regions to enter the housing recession. So are you seeing less worse trends there? It looks like this year [ 15 ] geographic regions outperformed the company average. So any more detail in terms of regional variability that you're seeing would be helpful. That's my first question.

Jonathan, this is Joe. Thank you for the question. From a geographic standpoint, as we said, where we've seen great weather, we've seen great performance. But from an overall and geographical standpoint, our West is our best performance for Q1.

Yes. And Jonathan, I would just add, consistent Pro outperformance across all of our regions. So really pleased with that. And then conversely, pretty much uniform ongoing pressure in DIY big-ticket discretionary. So that's been pretty broad-based on both the Pro side and the pressure and no real differences in what we're seeing across regions.

Yes. I think the only comment I will make, Jonathan, is that our rural stores continue to be our best performing subset of stores within the overall geography and some of the initiatives that Bill's teams initiated with pet and apparel continue to perform really well in those locations, and we continue to evaluate the expansion of those categories in our rural environments. But overall, the West outperformed. As Brandon mentioned, Pro was widespread at a really strong performance. And the rural set of our stores kind of is the high watermark in performance among all geographic locations.

That's really helpful. And then just quickly, just to circle back on big ticket. I know there were some questions earlier. Just to be clear, what does the midpoint of your annual comp guidance embed for big ticket, right? So over [ 500 ] transactions were down around 7.5%. So does that 2% to 3% comp decline for the year requires sequential improvement in year-over-year declines for purchases over [ 500 ] or are you expecting that to basically continue throughout the rest of '24.

Yes. Again, Jonathan, I think just on an absolute dollar performance standpoint, we're expecting more of the same in terms of what we saw second half. We don't have any macro improvement sort of embedded in. So from an absolute standpoint across these categories, we're expecting similar performance as we move through the year, but the comps should improve significantly in these categories just again based on what we're cycling and when we started to see the downturn in the second half of last year.

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