Q4 2020 Lowe's Companies Inc Earnings Call

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Good morning, everyone and welcome to Lowe's companies fourth quarter 2020 earnings Conference call.

My name is Robert and I'll be your operator for today's call.

As a reminder, this conference is being recorded.

I will now turn the call over to Kate Pearlman, Vice President of Investor Relations.

Thank you and good morning, everyone here with me today are Marvin Ellison, our President and Chief Executive Officer, Bill Boltz are executive Vice President merchandising.

Joe Mcfarland, our executive Vice President of stores, and Dave Denton Executive Vice President and Chief Financial Officer.

I would like to remind you that our notice regarding forward looking statements is included in our press release. This morning, which can be found on Lowe's Investor Relations website.

During this call we will be making comments that are forward looking including our expectations for fiscal 2021.

Actual results may differ materially from those expressed or implied as a result of various risks uncertainties and important factors, including those discussed in the risk factors MD&A and other sections of our annual report on form 10-K, and our other SEC filings.

Additionally, we will be discussing certain non-GAAP financial measures a reconciliation of these items to U S. GAAP can be found in this morning's press release and on our Investor Relations website with that I'll turn the call over to Marvin.

Good morning, everyone I'd like to begin by thanking our frontline associates for their efforts to serve our customers and communities during the ongoing pandemic and recognition of the efforts and the unique challenges posed by the pandemic, we invested over $100 million on incremental financial assistance for our frontline hourly associates in the <unk>.

Quarter, which brought our total COVID-19 related support for hourly associates to over $900 million per year.

We remain laser focused on our highest priority, which is always been protecting the health and safety of our associates and communities.

And in the quarter, we invested $65 million in support of store safety protocols in our communities.

For the year, we invested nearly $1.3 billion in Covid related support for our associates store safety in our communities.

Now turning to our results.

For the quarter, we delivered total company comparable sales growth of 28% over the prior year and 41% growth in adjusted diluted earnings per share to $1.33.

Those results cap off a fiscal 2020, where comp sales increased 26% and adjusted earnings per share grew 54% to $8.86.

Looking at the fourth quarter results from a geographic perspective in the U S growth was broad based with comparable sales growth exceeding 19% across all 15 geographic regions and exceeding 25 per cent for all U S divisions.

On lowest dot com sales grew 121% as customers shifted more of their shopping online, especially over the holiday season.

We continue to enhance our omni channel retailing capabilities in store operations on Lowe's Dot com and across our supply chain with our goal to meet customer demand to shop, however, whenever and wherever they choose.

Once again in DIY comps outpaced pro comps on a quarter driven by consumer mindset that remains focus on the home.

During the pandemic the home has come to serve four primary purposes of residents of homeschool of home office and the primary location of our recreation and entertainment.

In addition to the strength in the DIY customer our continued focus on the pro is a very important component of our total home market share acceleration strategy.

And pro continues to show strong momentum evidenced by the mid Twenty's comp in the quarter and nearly 20% comp for the year.

Part of our Q4 of success in pro was driven by our steps to tailor our service offering for these busy customers even redesigning the footprint of our stores to facilitate a fast intuitive shopping experience for our small and medium sized pearl.

Pros are rewarding our air force with their repeat business returning to shop, our stores over and over again.

Looking forward, we're focused on further enhancing our service levels, both in store and online to meet the needs of our new and existing pro customers.

Joe will discuss our efforts to grow market share in pro later on the call.

Now turning to Canada, we delivered comp growth in the mid teens. Despite several COVID-19 related operating restrictions that went into effect during the quarter.

The new Canadian leadership team made tremendous progress in 2020 and remains focused on improving operational efficiency by executing our retail fundamentals playbook to drive greater labor productivity and improved gross margins.

And as I mentioned earlier, we're gaining traction with our new total home strategy, which is our commitment of at Lowe's to provide everything of customer needs for their home.

As an example during the quarter, we quickly pivoted from a successful holiday seasons of saving event to large two events to support our total home strategy in January and home organization of event and a bath event.

Doing home organization of event, we provided our customers with storage solutions for the home and garages, freeing up valuable space for other activities.

The Bath event help our customers find everything they need from paint to fixtures to tallest and tub and even towels to upgrade their bathrooms.

And for other customers, who didn't want to do it yourself, we provided installation services truly of toll home solution for dream bathroom.

Both of advanced helped us to close out of fourth quarter with very strong sales in January.

Looking forward I am confident we're making the right investments to leverage our total home strategy, while we shift our focus from retail fundamentals to accelerating our efforts to gain market share.

As a reminder, our total home strategy will drive market share acceleration by enhancing our investments and pro online installation services localization and elevating our product assortment.

We're confident that these initiatives will allow us to drive sustainable market share growth as we deliver a total home solution for our pro and DIY customers.

Before I close I'd like to once again extend my heartfelt appreciation to our associates for their dedication to serving our communities in this time of need.

During the most challenging personal and professional year in many of our lives our associates made enormous sacrifices for our customers and communities and.

And I'm very pleased that the marketplace is taking notice as reflected by Fortune magazine recently recognized in Lowe's as the number one most admired specialty retailer bestowing that on all of those but our first time in 17 years.

Humbled by our recognition, but we also know that 2021 will be a very unpredictable year.

Even with the vaccine rollout of underway in the U S and Canada, we continue to grapple with numerous challenges presented by COVID-19.

And although the business environment remains uncertain, we're confident that we will continue to drive market share gains and operating efficiency.

Also our newly developed operational agility allows us to quickly respond to a wide range of potential macro outcomes in 2021 and.

And we will not lose focus on our number one priority, which is supporting the health and safety of our associates and our customers and with that I'll turn the call over to Bill.

Thanks, Marvin and good morning, everyone. We delivered U S home improvement comparable sales growth of 28, 6% in the fourth quarter.

And consistent with the trends we've seen since the second quarter growth was broad based across both DIY and pro customers in store and online and across all merchandising departments. In fact, all 15 merchandising departments generated positive comps of over 16%.

Great execution, combined with our compelling product offering of well known national brands balanced with high value private brands ensured that we were well positioned to meet the continued elevated demand for home related projects during the quarter.

Lumber was once again, the top performer driven by strong unit demand across pro and DIY customers as well as commodity inflation.

Our merchants and our supply chain teams did an exceptional job in working with our vendor partners to keep up with demand and to ensure that our stores were stocked with job lot quantities.

Several other categories posted comps above 30%, including building materials, which is driven by strong demand for roofing and gutters and improved level of in stock and an exceptional customer service of allowed us to continue to grow our pro business and these pro focused building product categories.

Our seasonal and outdoor living lawn and garden and paint categories also delivered comps above 30% in the quarter, reflecting the consumers continued focus on their own.

Our seasonal and outdoor living team delivered a successful holiday season with a holiday trim a tree program that exceeded the customers' expectations. The team also leveraged our selection and key brands to drive strong sales and grills patio heaters and fire pits as these categories were strong throughout the quarter as consumers.

<unk> continued to enjoy their outdoor spaces.

Outdoor power equipment was driven by sales of chore related product such as snow blowers generators and pressure washers as customers navigated the weather and work to maintain their outdoor areas.

And the theme of enhancing the outdoors, we saw strength in lawn and garden with notable outperformance and holiday related live nursery, along with growth in hard scapes outdoor planners and cleaning products.

And finally, our paint category also continued its strong performance with both interior and exterior stains delivering strong comps as the weather early in the quarter remained favorable.

Now turning to our online results as Marvin mentioned, we delivered sales growth of 121% on Lowe's Dot com, our third consecutive quarter with over 100% comps online and during the quarter. We continued to enhance the user experience as we simplified the search and checkout features to speed up the process.

Yes per customer shopping online and.

And we are also now working on re platforming Lowe's for pros to the cloud to be completed in the first half of this year, which will significantly enhance the features that we offer to these time pressed customers and then further build out our loyalty with the pro as we discussed last quarter, we've been resetting the layout of our U S stores with approximately.

95% of our resets now complete we expect to drive greater sales productivity per square foot by achieving three key objectives with this investment.

First driving pro sales through a more intuitive and faster shopping experience as we've now placed relevant products adjacent to each other and added a pro flex area for grab and go products at the front of the store.

Second increasing our localized product assortment by eliminating unproductive bays without plan of grams or what we called junk base, which now opens up space for new products better tailored to the local market and then finally third driving more transactions by moving the basket building category of cleaning.

X to the main power aisle of the store.

We're confident that our stores are now easier to shop for both pro and DIY customers, which positions us well to accelerate our market share gains.

I'd like to offer my sincere appreciation to all of the teams across the company who worked so diligently to execute on this strategic initiative in such a short period of time.

We also continue to elevate our brand and product offerings, we are continuing to build on our position as the leading appliance retailer in the U S. With the addition of Medea and high sense of appliances to our stores and Lowe's will soon become the exclusive home improvement provider of Mansfield plumbing products.

This addition will make Lowe's the only home improvement retailer to offer customers. The top three toilet brands in the U S Koehler American standard and Mansfield.

As we transition to spring, we're in a great position to safely serve customers and our teams have already been preparing by completing our new spring sets as we anticipate the arrival of the season around the country.

Leveraging our leading position in outdoor power equipment, we have a wide selection from igoe the top selling brand in battery powered O P E to John Deere Craftsman, Husqvarna Honda and Aaron's.

In addition, we will have a terrific selection of patio furniture, including a refreshed Allen and Roth Patio program complemented by a wide array of Grilles as we continue to leverage the two leading brands in outdoor grilling Weber and Char broil.

We're confident that our products will inspire customers that are looking to upgrade their outdoor space, which we think will continue to remain a retreat for many of this spring season.

We're continuing to make changes to improve traffic flow within our outdoor garden centers to ensure social distancing, while shopping as well as showcasing inspirational vignettes and utilizing enhanced vendor support.

All of which will drive a great spring season in lawn and garden.

And finally, we are excited to deliver new innovation in flooring with the launch of Perrigo wet protect technology available in laminate and engineered wood and rigid luxury vinyl.

And offering guaranteed protection for both the flooring and sub flooring.

This new level of total moisture protection is of great Lowe's exclusive product that will provide peace of mind for consumers and further differentiate our flooring offering.

This spring, we will demonstrate to consumers that we provide everything they need to make their homes and backyards functional and safe a reflection of our total home strategy.

I'm looking forward to sharing more with you about our re imagined approach to spring on our next call.

And before I close I'd like to express my thanks for the resilience and dedication shown by our merchants and vendor partners. During what was truly an extraordinary year. As these teams worked tirelessly to meet the high levels of demand for our products and services.

Thank you and I'll now turn the call over to Joe.

Thanks, Bill and good morning, everyone. This past year presented challenges that few of us could have imagined Lowe's has always been at the forefront in responding to crisis in our communities and our associates rose to the challenge once again in 2020.

In recognition of the outstanding efforts of our associates in January we announced of bonus of $300 per each full time associates and $150 per each part time associates. This $80 million bonus brought the total COVID-19 related assistance to our associates to over $900 million in 2020.

And I could not be more pleased to announce today that for the fourth quarter in a row, 100% of our stores on their winning together profit sharing bonus totaling $90 million and because of their efforts. Once again exceeded expectations. This represents an incremental $30 million over the target payment level.

And we're supporting our communities again through hiring as we bring on more than 50000 seasonal on full time retail associates. This spring to ensure that our customers get the exceptional service. They expect from Lowe's. This builds on the more than 90000 associates hired into permanent roles over the past year.

One of 'twenty change the way of the customer shop with Lowe's Nowhere is this more evident than the 111% sales growth on Lowe's dotcom for the year.

And with roughly 60% of these online orders fulfilled in our stores, we needed to dramatically expand our fulfillment capabilities to support this increased demand.

We began by rapidly rolling out per of side pick up in the first quarter and then we begin to launch touchless purpose lockers in our stores a few months later.

We now have built this lockers in over 1200 stores with the goal of rolling out lockers to all U S stores by April.

Providing multiple contactless pickup options for our customers, we're meeting consumer demands to shop Lowe's in whatever way they choose.

And we've continued to enhance the mobile app to improve the customer pickup experience. This quarter, we began rolling out geofence of technology that alerts our stores when customers are on their way to pick up their orders, enabling quicker fulfillment when they arrive at the store.

Last quarter, we announced that we were standing up dedicated fulfillment teams to handle all in store fulfillment orders all of these enhancements from the ease of use both of us lockers and the new Geo fencing technology to the focus on the fulfillment teams have already driven improvements in customer satisfaction and speed of service.

Importantly, the fulfillment teams are also improving productivity as they leverage enhancements that we've made to the picking up this is evidenced by a dramatic reduction in the number of hours needed to fulfill orders per pickup in fact, we can now fulfill orders six times faster on average than one year ago.

Now, let's turn to our performance with the pro as Marvin mentioned, we delivered mid Twenty's comps in the fourth quarter, we continued to enhance our per loyalty offering by providing pros with the tools they need to get the job done. This time of years. Our pros are focused on not only their project pipeline, but they also need to close their books just like any other business.

As a true partner to the Pearl we are now providing our pro loyalty members with a $100 discount on turbotax. Our pro loyalty members can also export up to 24 months of transaction history expedite in their year end close process.

It's value added offers like these that truly differentiate our pro loyalty offering.

Throughout 2020, we continue to raise the bar on our offering for the pro with better service levels, the right brands and products and the job lot quantities they need.

Every day, we are demonstrating that Lowe's is executing our commitment to be the new home for pros, which is reflected in the strong repeat rates that we're earning from new and existing customers I'd like to offer of special thanks to the entire protein per a fantastic year job well done and I'm looking forward of building on this momentum as we continue to grow our per.

Pro penetration.

And one way, we will drive greater pro penetration is through our newly launched pro customer relationship management or CRM tool rolled out to all stores in late January This new technology provides a pro desk with the tools to manage grow and retain pro accounts. They are consistent and data driven selling actions. We will also be able to associate any.

Transaction, regardless of tender type two of specific pro account, allowing us for better record keeping for their business.

Store Associate training is currently underway and we expect that the targeted outreach enabled by this tool will facilitate stronger and more personal relationships with our pro customers.

Over the past few years of store operations team has made considerable strides in improving productivity in our stores with technology enhancements that free up our associates of spend more time in the aisles serving customers.

As we move into 'twenty and 'twenty. One we are kicking off of new productivity initiative in store operations that we are calling our perpetual productivity improvement or PPI.

This key productivity initiative will play a critical role on our continued multi year improvement in operating profit.

Through PPI, we will leverage new processes and technology to deliver continuous productivity enhancements some of the most significant technology initiatives under PPI or a modernized checkout infrastructure industry, leading in store workforce management tools, new touch screen Pos expanded rollout of digital side.

<unk> incremental functionality deployed to the handheld devices and enhanced store inventory management systems to name a few of these perpetual productivity improvements will help us to move toward our multi year goal of achieving two five to $2 7 billion in store Opex productivity that we set at the December investor update.

I look forward to updating you on the progress we're making towards these important productivity initiatives on future calls with that I'll turn it over to Dave.

Thank you Joe I'll begin this morning with a few comments regarding the companies robust capital allocation strategy.

In fiscal 2020, we generated $9 $3 billion in free cash flow driven by outstanding operating performance and we returned $6 7 billion to our shareholders through both a combination of share repurchases and dividends.

During the fourth quarter alone, we paid $452 million on dividends at <unk> 60 per share.

We also repurchased 21 1 million shares for $3 4 billion at an average price of approximately $160 of share.

This brings the total of $5 billion of share repurchases for the year.

We have approximately $20 billion remaining on our share repurchases authorization and plan to utilize our strong cash flow to drive significant long term shareholder value.

Capital expenditures totaled $619 million in the quarter and $1 $8 billion per the full year as we invest in the business to support our strategic growth initiatives.

We ended 2020 with $4 $7 billion of cash and cash equivalents on the balance sheet.

And along with $3 billion in Undrawn capacity on our revolving credit facility, we have immediate access to $7 $7 billion in funds.

We remain confident that we have ample liquidity to navigate any unforeseen circumstances.

At the end of our fiscal year, our adjusted debt to EBITDAR ratio stands at two two times.

Now I'd like to turn to the income statement in Q4, we generated GAAP diluted earnings per share of $1 32, compared to 66 cents last year, an increase of 100%.

In the quarter, there was a very modest impact on operating income related to the previously announced Canadian restructuring now.

Now on my comments from this point forward will include certain non-GAAP comparisons where applicable.

In Q4, we delivered adjusted diluted earnings per share of $1 33.

An increase of 41% compared to the prior year. These.

These results were driven by higher than expected sales volume, reflecting a continued consumer focused on the home a modest benefit from the next round of government stimulus checks as well as strong execution across our operations.

Operating margin improved in the quarter as our strong focus on cost control and productivity continued to pay dividends.

Q4 sales were $20 $3 billion, driven by a comparable sales increase of 28, 1%.

This was due to comparable store average ticket growth of 14, 2% and transaction growth of 13, 9% with strong repeat rates from both new and existing customers.

<unk> inflation drove a benefit of approximately 300 basis points to comps in the quarter as lumber continues to experience rising prices.

U S comp sales were up 28, 6% in the quarter.

And consistent with our results for the past few quarters growth was well balanced across both DIY and pro customers selling channels merchandise departments and geographies.

Our U S monthly comps accelerated through the quarter with 23, 8% in November.

28% in December.

35, 7% in January.

As Marvin mentioned the company pivoted quickly from a strong holiday selling season in late December to launch Bath and home organization events in early January <unk>.

January sales also benefited modestly from the second round of government stimulus.

Adjusted gross margin was 31, 8% down nine basis points from last year.

Despite cycling over significant improvements last year in our process to more effectively manage product margin product gross margin rate improved 125 basis points driven by continued execution on our pricing cost management and promotional strategies, we took a less promotional stance across all.

Categories, including our focus on E DLP and appliances, which benefited margin in the quarter.

In addition, strong demand from holiday products led to good sell through and minimal seasonal write offs in Q4.

These benefits to adjusted gross margin were offset by 40 basis points of pressure from inventory shrink 40 basis points of pressure from supply chain cost.

35 basis points of pressure from lumber installation and 20 basis points of pressure from lower credit revenue.

Adjusted SG&A of 22, 3% Levered 42 basis points to 2019.

As we anticipated we incurred approximately $165 million of Covid related expenses. These.

These investments included approximately $100 million in financial assistance for our frontline associates, and approximately $60 million related to cleaning and other safety related programs as well as approximately $5 million in charitable contributions.

These $165 million of Covid related expenses negatively impacted SG&A leverage by approximately 80 basis points.

As expected, we incurred approximately $150 million in the U S stores reset project, which negatively impacted SG&A leverage by approximately 75 basis points.

As Bill mentioned, the resets have been completed in approximately 95% of our stores. These.

These incremental costs were offset by payroll leverage of approximately 105 basis points related to higher sales volume and improved store operating efficiencies.

Occupancy leverage of approximately 30 basis points and advertising leverage of approximately 25 basis points adjust.

Adjusted operating income margin of seven 6% of sales for the quarter was up 41 basis points to the prior year as operational productivity improvements were offset somewhat by significant investments in our stores and supply chain to drive long term growth. In addition increase of.

In short lived technology in store fixture assets is resulting in higher levels of depreciation versus our historical run rate.

The adjusted effective tax was 25, 8% the.

The tax rate was slightly lower than expected due to better than anticipated performance of our Canadian business in Q4.

We continue to build up our inventory levels throughout the quarter to meet the sustained high levels of customer demand at.

At year end inventory was $16 $2 billion and lumber inflation increased inventory values by approximately $240 million.

Now before I close let me talk about our current trends and how we're planning our business in 'twenty one on.

February is the easiest comp this year, we are encouraged that the strong broad based sales trends that we saw on the fourth quarter have continued this month apart from the impact of the recent winter storms looking at the balance of the year. Our approach to 2021 remains consistent with how we outlined our planning at our December.

Of our Investor update.

Like many companies, we have limited visibility into future business trends.

It remains unclear.

When there will be a widespread availability of the COVID-19 vaccine and whether there will be additional COVID-19 related restrictions like we're experiencing in the Canadian business today.

Given the near term uncertainty at our December Investor update we outlined three different market based scenarios on how the mix adjusted home improvement market might perform.

Weak moderate or robust performance levels.

Keep in mind that our business is more heavily weighted in DIY and less penetrated in online than the broader market both of which create modest downward pressure on the Lowe's home improvement market outlook.

These three market scenarios would result in total sales expectations, ranging from $82 billion to $86 billion per year.

While each scenario represents a topline decline from 2020 as we cycle of this unprecedented industry growth. We continue to expect that our sales result will outperform the market as our initiatives our focus on delivering market share gains.

Additionally, in each scenario, we expect our adjusted operating margin to increase year over year, ranging from 11, 2% to 12% depending upon the demand environment.

And consistent with my comments at the Investor update in December embedded in each of these scenarios are the incremental investments in frontline associate wages and equity programs that totaled $1 $4 billion through 2019 and 2020.

At the same time, we have implemented a slate of perpetual productivity initiatives that Joe mentioned earlier, and we are investing to drive operational efficiencies in our business.

We will also lap significant non recurring spend from 2020.

While it's still very early in the year, we are seeing market trends of essentially in line with the robust market scenario. This scenario assumes the relevant home improvement market will experience a modest contraction this year and our sales would approach $86 billion.

We will remain agile to react rapidly to any changes in the market and we are able to quickly flex store labor advertising and incentive comp expenses.

And consistent with what we outlined at Investor Day, we are expecting $9 billion of share repurchases. This year.

Our repurchases activity should be roughly ratable by quarter, but a little more concentrated in the first half of the year.

Given the robust cash flow generation, driven by our spring selling season.

And we are planning for approximately $2 billion in capital expenditures in 'twenty one.

So in closing we remain extremely excited about the future of our business and its ability to continue to deliver sustainable shareholder value.

With that we are now ready for questions.

Thank you we're now ready for questions if you'd like to ask a question. Please press star one on your telephone keypad to withdraw your question Press Star two.

In order to allow questions from as many individuals as possible. Please limit yourself to one question and one follow up.

Our first question comes from the line of Seth Sigman with credit Suisse.

Hey, guys. Good morning, Thanks for taking the question and congrats on all of the progress of Hey, Dave I wanted to follow up on the guidance of point here, obviously, not full guidance, but the scenarios you discussed in December if I recall. It included gross margin relatively flat given the pressure as you saw on the fourth quarter I'm, just curious should we be thinking about gross margin in 'twenty.

One of down slightly but maybe more benefits from SG&A to still get to the same EBIT margin outlook, how should we be thinking about that.

Yeah, Seth you.

Happy New year. Good question, just I think most importantly is really focused on operating income and margin expansion as we cycle into this year.

Clearly, we're focused on improving our gross margin performance as you've seen us do that consistently through 2020, we continue to make really nice progress from a product cost perspective, I think what you're also seeing US do is we're investing from a supply chain perspective to make sure that we're building out in the future.

<unk> for the to meet the needs and demands of consumers in the future. So I think we're excited about that.

I do expect debt gross margin over the longer term think about it flattish we are experienced some headwind as we think about inflation from lumber, but nothing has materially changed from what we discussed in December.

Okay. Thank you for that that's helpful. And then just a follow up question about demand obviously the strength you've seen it's been pretty broad based beyond some of the seasonal variations that you've been seeing I'm. Just curious how you see the consumer or the customer of evolving.

Their focus in the category how are the types of projects changing and part of the question is whether you're seeing an acceleration in some of the bigger projects that may have been constrained during parts of this year because it does feel like the mid Twenty's pro comp that you've pointed to that seem like that's an acceleration. So I just wanted to get a little more context on that thank you.

Okay.

Okay.

So Seth this is Marvin I'll take part of that and I'll, let Joe comment a bit on pro.

As we've said you know 2021 to state the obvious is a very difficult environment to forecast and I think all your questions are relevant and what we can can say is when you look at the comp cadence for the month during the quarter you saw us accelerate throughout you look at the month of January of which is.

A significant sales performance in both David.

Discuss the importance of our total home strategy leaning into those two events the Bath event and home organization of event that gives you an indication that the customer is still in the project mindset as they continue to find ways to make their home more livable and more.

Comfortable for all of the various activities that Covid has forced upon us so.

The short answer to your question is we feel great about the mood of the customer we feel great about the trends relative to big ticket small ticket pro and installations and all of the work that we've put in place. The last two years on our retail fundamental strategy just gave us a good position and platform to.

Serviced of customer effectively across all of those different categories of let Joe talk a little bit about pro because again, we're very proud of the performance as we mentioned in the prepared comments, we delivered mid 20% comps in the quarter for the year were hovering around 20% comps and this was in an environment early in a year where.

The pro business became very soft just because of the normal occurrences of customers not being comfortable allowing strangers in their homes. So I'll, let Joe just discuss a little bit more on our excitement around growth.

Thanks, Marvin and said thank you for the question you are correct from Q3 of the Q4, we did see a nice comp acceleration. We're excited about the underlying demand in the pro space as we look at the kind of robust pipeline that's out there in the pro space thinking about the expanded product offerings that we've had throughout the year in <unk>.

Additionally, as I mentioned in my prepared comments the benefit from Turbotax and the progress that we're making to help these pros.

Expedite their year end close and then in addition, we've been focused on all of the fundamentals and as we continue to move forward confident that things like our U S stores reset in the area that we created for pros and the ease of pros to shops. In addition, very excited about the growth of our new pro loyalty platform, along with the integrated CRM that rolls out.

So very excited about what's happening inside of the pro business.

Thank you all best of luck.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

Thanks, everyone and good morning.

My first question is on.

The outlook of the perspective, if you will.

Dave you mentioned that the business is tracking towards a robust case.

And I know robust I don't know if it was couched as a base case for you or not but I think we're interpreting it is one do you of any more confidence in that or are you expecting the twist and turns of the year. It goes or the fact that we're tracking there.

Is your confidence that you know.

More confidence in that scenario.

Listen I think we're only a few weeks ended the year, but I think we feel encouraged by the trends that we're seeing of them at the moment. So I think we as Joe and Marvin just articulated I think the health of the probe businesses is sustainable and is actually accelerating a bit. So I think we feel really good about that at the same time the consumer remains healthy.

And as it continues to invest in the home to support.

But both of their living needs, but also their educational needs for the kids of minutes in many cases and continue to invest to make sure that that is an asset that is sustainable for them going forward. So we're encouraged at this point, but pretty early still.

Simeon this is Marvin and what I'll add to that is we'll go back to the same theme that youll, probably hear US say all morning, obviously, we can't predict with any high degree of precision what 2000 2021 macro will look like but we're confident in two things number one that we're gonna take mark.

Share and number two we're going to improve operating income.

And I think for US we're just planning our flag on those two things. We believe that 2020 was not an anomaly. We believe is a reflection of a lot of hard work.

And retail fundamental implementations, we've put in place across Lowe's Dot Com pro merchandising store operations it infrastructure and we believe that those initiatives on our total home market acceleration strategy is going to allow us to continue to take market share and at the same time, Inc.

Moving operating income.

Okay and my follow up is in the robust case of 120 basis points I think of margin expansion.

I don't know, if we said, but how much can you look at the.

That amount and divide it among top line dependent versus internal execution of our transformation of the kind of I don't know if we looked at it that way or if we could bridge it versus the other scenarios.

Yeah, I would just encourage you maybe to go back and look at our analyst day presentation I'd of building blocks slide in that in that presentation that walked us from.

Kind of where we where our guidance was for the end of 2022, a 12% margin rate perspective, and I think it does show a little bit of kind of how gross margin might perform as well as how SG&A is going to perform and again. This is largely about in aggregate gross margin rates being relatively flat and us improving our <unk>.

G&A performance across the business.

Okay. Thanks, guys. Good luck.

Our next question is coming from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.

Hi, Thanks, Good morning, Thanks for taking my question I.

I wondered if there was any way you could update us on what pro is as a percentage of your sales today I feel like there is some of <unk>.

With your stock price or valuation because of thinking is this you just don't have as big of exposure to the price your main competitor, but with the comps that you've put up in 2020 and all of the initiatives I wondered if there was any further insight into what that percentage of sales is today.

Hey, Kate this is this is marvin.

Best way to I'll answer that is we're going to pretty much stick to our 20% to 25% penetration, we're going to reevaluate that obviously coming out of 2020 debt. The key is is that as you know of DIY significantly out penetrated the per.

So during the year, so we know debt to two.

2020 data may not be a good consistent data set to look at it relative to pro and DIY penetration. So we probably need to cycle through the first half of 2021 to get that data really balanced out what I can say is.

In Joe's prepared comments and also on mine, we've laid out some of the specific initiatives related to their pro one of the key things of that we focused on arriving at Lowe's a little over two years ago. It was one of the main reasons why we had a GAAP relative to sales per square foot productivity.

Tivoli and operating income by store was because of the pro penetration was significantly less than what it should of been.

Pros drive productivity in multiple product categories throughout the entire store and so part of our focus on the pro is because we know is going to be critical for us to improve overall productivity from a space perspective, as well as driving operating income throughout the store. So we will get back to you later on that.

Year on an answer but the key is we're going to be focused on it and we think we're making great improvements and Kate I'll just add that we look at it a little bit the opposite we are underpenetrated, but that is the big opportunity, we have and in all of the investments, we're making is going to allow us to really accelerate in that business segment pretty significantly over the next several years.

Okay. Thank you and then my follow up question is just on wages.

How we should think about that in 2021 relative to what was paid in 2020, especially considering the number of of bonuses that were given to associates during that time.

So okay. This is Marvin I'll take it into day wants to provide any additional financial analysis. He can but I think at the highest level of.

What we've laid out for you.

Operating income targets for 2021, we laid out at the Investor update in December on what Dave mentioned in his prepared comments reflect any investments we intend to make in our associates. The good news for Us and Dave mentioned this earlier in the morning debt from the year 2019 and 2020.

We made of $1 4 billion dollar of investment and Ecmo wages equity programs and other associate related benefits and that was pre COVID-19. So other retailers candidly are catching up to the work of investments that we already made going into COVID-19. So we don't have an enormous bogie so to speak that we need to make from an <unk>.

Vestments standpoint to catch up we've been on a pathway to get our wages up that's why we're very proud to say that we are one of the highest.

Wage retailers from way of Audi of social perspective in the U S. So we don't see 2021 is there anything that will be materially different than that obviously, we will look at how the business is tracking well look at the needs of our associates, but any investments we plan to make has already been factored into any.

Financial guidance or at least the range of guidance that Dave has discussed in December and this morning.

So of Kate it's Joe and thanks for the question I'll, just add a few things to what Marvin said on over the last two years, we've been taking steps from a store operations standpoint to simplify the store structure. If you think about some of the updates we've given our four levels of sales associate on the sales floor and all of the work we've done. So in addition.

On the labor management tools and workforce management initiatives. The team has laid out and feel very good about the balance of ticket and transactions in our transaction based labor model and that will continue to be able to deliver on.

On the operational efficiency, we need to and then finally for for the spring hiring season, we feel that we've done a nice job addressing any difficult to hire markets. We measure of the pipeline of sales.

Sales associates coming in by position by market. So we've made adjustments, where we need to and feel confident going forward.

Thank you.

Our next question comes from the last of Michael Lasser from UBS. Please proceed with your question.

Good morning, Thanks, a lot for taking my question given the introduction of the PPI initiative is it likely that you'll come in at the high end of the profitability scenario, even if he'll come in.

Even if you come in at the Middle end or low end of your sales scenarios for 2021.

Hey, Michael Dave here.

Clearly what we're doing is we're working really diligently to improve the productivity across our business and in Joe's kicked off a pretty major effort to do that but we're doing it really across all segments of our operations and that's probably a little bit more specific.

Our guidance he will so we're probably not going to go there, but I'll, just say that as a management team and as a business. We're controlling what we can control, we're making sure that as we look at these sales scenarios over time as debt, we're improving our operating income performance and where we are dead set on improving that we're very focused in adamant about going.

After that and I think we have a very good line of sight to that.

Okay.

It seems like Youre going to have more takes than put on your gross margin this year with.

Supply chain pressure.

Probably inflation drag for at least of near term and what's likely to be at least some return to a normal promotional environment. So in that scenario with your gross margin already declining in the fourth quarter. How do you keep it flat in 2021, what are the offsets.

Well listen we're we're focused in a few different areas, we just enhanced our pricing and promotional tool from a merchandising perspective, I think the merchant sales.

Kind of taken a step back and looked at it from a promotional cadence perspective how to.

How to think of of more of an E. D. L. P type environment at the same time going out.

In negotiating special buys in certain areas to drive real value from a from a consumer of perspective, I think we're getting a lot more efficient on how we layer in and out of our online business to drive both top line and improve profitability at the same time, we do need to manage our supply chain to be more efficient as we think about same day next.

Day deliveries to the home to the job site. So all of those levers are things that we're working on that we're actively using to manage our gross margin performance and yes.

And yes, we do have some headwinds, but we're also that's part of our job is to manage those headwinds to improved performance over time and again with a real focus once again, Michael on improving our operating income flow through that's the opportunity we have.

Okay. Michael This is bill I'll just add.

I'll just add a couple of cost of debt.

You know as we've said over the last couple of years, we've been on a journey to get to more of an everyday competitive price and so getting credit for what we're doing and less of this high low.

Approach that we had been typically on prior to this leadership team coming in and then we have.

We've done a lot of work in the last 18 months around our localization initiative and it's one of our key unlocks in part of our total home strategy. As we go forward that gives us the opportunity from a margin perspective as well. So we're confident that we can deliver on what we said back in December.

If you could just clarify that though.

In terms of your price position versus where you might of been a year ago.

On the leverage.

Offset some of that gross margin headwinds that you might experience of the next couple of quarters.

Well look this is Marvin what I'll say Michael is a work in progress what I can tell you is the set of tools that bill and the merchants currently have.

Today versus what we had two years ago is truly a night and day difference. So it gives us the ability to have localized pricing and we can price now in more smaller clusters of me two years ago, we were using blunt instruments to price in broad markets now we can get down to.

Individual locations. In addition to that Joe talked about the expansion of things like digital signs may not sound like a big deal, but there are parts of the store where you have frequent.

Rather volatile price changing activities a lot of labor goes into that any of you can put of digital process in place that allows you to capture the different costs on retail changes on a weighted actually can benefit gross margin and localization of Bill's point.

A couple of major significant issues, but one is you have the right product in the right markets. So your exit strategy.

Doesn't just destroy your gross margin because you're clear thing everything just to get it out I would use. The example at the December update when Bill join our work on the store in West Philadelphia, and so riding lawnmowers and big deep seating patio sets and share it and other products that we're just waiting for.

Mark down to happen because it was simply in the wrong location from a geographic perspective, so bill's teams working to solve all of that so we can have a right product in the right location. So we don't take deep markdowns to exit so all of those things will play a role in giving us.

To create our own internal of headwind to go up against some of the investments, we're making a lack of supply chain. So we'll keep you updated on the activities.

Thank you very much.

Our next question comes from the line of Karen short with Barclays. Please proceed with your questions.

Hi, Thanks very much.

I know.

You said, you're kind of trending this contemplating you'll probably be at the robust end of your guidance range, but I guess, if you end up actually even slightly better than that.

How should we think about operating margin opportunity would there be upsides of that or would you reinvest and kind of maintain the cadence of you'd indicated previously.

And then I had one.

So.

Yes, ma'am. So Kerry this is Marvin the best way to answer that question is the simple statement is that we expect to outperform the market and gain share in 2021. So if.

If the market performs better than our robust scenario that would be music to our ears, because we would believe that it would only provide us with upside opportunity on the top line and on the bottom line. So again, we're going to just have a very very singular focus on taking market share.

There and improving operating income and if the macro improves better than our.

<unk> forecast and are better than we anticipate that that will be only good news for us.

Great. Thanks, and then I just wanted to see I don't know if you'd be willing to provide this debt.

Would you be willing to give us some color on the number per.

Loyalty members and then just a quick update on timing of combining the Lowe's credit card with the low <unk>.

Loyalty program or does that all of that happened at the same time as you migrate to the cloud.

Thanks.

I'll take the easiest part of the question and debt is no. We're not going to provide you with the number of loyalty members from a competitive perspective, what we can tell you that we're very pleased of what the adoption rate and we're very pleased with the return visits as a result of that I'll, let Joe talk about the emerging of credit and the platform.

Yes, Karen as Joe and thank you for the question, we will be migrating our credit platforms on a per loyalty platforms. Together, we have every intention that as a part of it's a huge part of the benefit again, we've been very encouraged by the new sign ups on in per loyalty, how the pro customers are responding and we've been.

Please also with our new credit acquisition from a pro standpoint, and so with those underlying themes you know, although we won't release the number of per.

Pros, we're excited about what the platform is delivering and all of the work that the protein is done.

Thanks.

Our next.

<unk> comes from the line of Christopher <unk> with Jpmorgan. Please proceed with your question.

Thanks, Good morning, everybody can you talk about.

How are you think stimulus to help the business there in January of very strong comp obviously at 35%.

What do you think of Lyft was and how would you compare that lift to what you saw last spring when stimulus head.

Hey, Chris Dave here, Yes, I do think stimulus as we cycled into.

The new year did it did help our comps we estimate somewhere between 50 and 100 basis points of.

Of from that perspective, I think in stimulus has gone on for a while now I think.

The performance from the impact of it has been.

Is moderated a little bit so I think we do see it when those track checks do hit we do see an inflection kind of up a little bit but it has not been nearly as dramatic as it was when it first hit.

Basically a year or so ago.

Understood and then as you think about just.

Square the tea on the on the gross margin. So you know on the slide you have flat gross margin to 12% in the robust scenario is there any potential cadence around that any of you do have the freight pressures probably earlier, maybe shrink and supply chain investments.

A flat relative to 2020 do you expect it to be maybe down a bit and in the first half and then up in the back half of net flat that way.

I think that's a little bit more specific than probably what we could give you some color on it at this point in time I'd, just say debt at the end of the day back to Marvin's point is our focus this year, taking market share improving operating income, whereas just art two things that we're focused on just consistently and youll continue to hear us talk about that.

That demonstrate our performance from those two those two metrics.

Understood have a great spring.

Yeah.

Thank you.

Our next question is coming from the line of Eric <unk> with Cleveland Research. Please proceed with your questions.

Good morning.

Just curious in regards to the supply chain investments pro and online obviously areas of growth and accelerating growth.

What I'm curious to understand is the incremental investments you're making on both of those areas. Some of them have made already.

Some of that are in process, how will the customer experience will be different in those areas in 'twenty one.

And what I'm really trying to end up is in terms of of the share gains that you are making in both of those areas.

What do you think about the future of that especially in terms of payback from where your interest in incrementally.

Yeah.

So Eric this is Marvin and early on we committed to a $1 7 billion.

Supply chain infrastructure investment between the years of 2019 and 2023.

And we're well on the pathway to achieve that spin.

Specific to your question.

We're trying to create a market based delivery model, which will transition the pressure of delivery from our individual stores from market based model. In addition to that we're trying to develop a fulfillment model that will serve a customer any way they choose to shop in this omni channel.

Ecosystem that we're creating so relative to a customer how will it be different will be different.

That you will have a more seamless.

Delivery with better visibility to appointment scheduling and arrival specific to any big and bulky items, starting with appliances. So for the DIY or the pro if youre in the appliance space Youre going to have a more seamless opportunity to purchase of product just to take you back.

Two how this has been done historically when a customer purchases on an appliance the.

On the scheduling process is done by an associate calling the customer at home and going through a manual process to try to find the day that best fits the availability of product and the customers schedule.

To say, it's clunky and inconvenient would be an understatement now we've transitioned to a digital scheduling model, where the customer can choose their own day based on pre published openness in our system and.

And our associates.

Total visibility to inventory, whether it's in their store or in a market based distribution center.

What we're doing on the pro side is also trying to create more of an omni experience you're going to see us launching pro lockers of later this year and youre going to sales improve our job site delivery with pro and have a lot more flexibility around that so those are those of two ways that those customers will see a difference and there are a lot of other activity.

Is underway that Joe and operations partnering with supply chain, but we'll wait till later day to get into those.

Okay. That's helpful. And then one question per day, the incremental margin.

Of the business in 'twenty one.

And an upside sales scenario does the incremental margin change and I guess, what I'm trying to get a sense of is obviously in 'twenty. There were incremental investments made through the year as sales came to the upside.

Where necessary, but diluted the incremental margin of the business is that same story play in 'twenty, one and a better sales scenario or can the incremental margin either be sustained or expand in an upside sales scenario.

Yeah, Eric I would say that it should expand a little bit on an upside scenario just given what we've done in 2020.

To your point.

Okay, great very helpful. Thank you.

So so great so rob with that we're going to take one more question. Please.

I asked that question will come from the line of Greg <unk> with Evercore ISI.

Great. Thanks, So I'd love to follow up on inflation. So I think you called out 300 bps on the fourth quarter.

What percentage of your sales of that really looking at the commodities in any number you have for the full year.

And if you could even talk about the ability of the pass through some rising input cost outside of those commodities that would be great.

Yes.

So yes, largely the inflation has been centered primarily in the lumber category. If you think about it from that perspective, and again of about 300 basis points.

This is from a commodity standpoint. This is something that we're very used to managing and largely those are passed on ultimately to the consumer at the at the store.

And for the full year would that number.

They have been 150 basis points as we're thinking about what it.

How it impacts 21.

Yeah, I don't know that off the top of my head, but obviously inflation on the back half of the year was higher than the first half of the year. So it's certainly less than 300 basis points.

On a market obviously, we'll keep we watch it daily.

Got it.

And then my follow up question sort of goes back to.

Really supply chain I know you have the plan and it's coming along.

Given the investments ramps, we've seen on particularly on supply chain not just from from your number one competitor of home depot, but from Amazon from Walmart.

Capex is sort of up significantly.

Significantly from where it was a year ago.

Is there anything you're saying that that's your plan on leaning more into.

Ah as you get sort of the first year of two of that of that $1 7 billion plan, whether it's more market delivery operations, it's more centralized fulfillment of anything on that as to.

What are you seeing them do on how you on our spot.

Yeah, No Greg I think.

Covid independent make really taught us all about responding to the needs of the customer in a more dramatic way and also it taught us how quickly consumer preferences will shifts specifically when it comes to how customers desire to receive products that they purchase.

We feel like our strategy is south of where the number one appliance retailer in the U S and we do it.

Hard way, we delivered from every store and that is not an optimal way to manage such a large amount of inventory and.

In such a large expense from a transportation perspective. So go on to a market based model is going to unlock an enormous amount of productivity not only from a store labor perspective, but on how we manage billions of dollars in inventory around the company so market based delivery of <unk>.

Absolutely the way to go in the moment, we bill the process well appliances it opens up.

Other product categories like riding lawn mowers and share it's in patio furniture grills. So this market based model is going to be incredibly important for us.

We opened up a dotcom fulfillment.

D C in southern California. This past year. It gives us the ability to have two day delivery from an E. Comm perspective to every U S location. We're also opening up.

Three of additional e-commerce fulfillment centers, that's relatively new to our strategy to answer your question and that's going to give us the ability to create more same day next day delivery opportunities and we're aggressively building out our bulk distribution centers and on.

Our cross docks to help with the market delivery. In addition to that you know we're gonna be leaning into pro job site delivery and we have a couple of initiatives underway that we're working on to make that of reality. So.

The short answer to your question is we benchmark a lot.

We look at what's working in the marketplace, but we feel really good about the strategy. We've laid out and there is a reason why most retailers delayed supply chain transformation, because they're very hard to do.

And we're committed to it.

And we understand the benefit of it and we're going to make the right investments and we believe is going to allow us to be competitive.

In out years, but it's an investment we know we're going to have to lean into put of next couple of years, but again, it's something we're very committed to.

That's great great color, thanks, guys and good luck.

Thank you.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.