Q1 2021 Lowe's Companies Inc Earnings Call
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Because theres not just 1 type of family.
Good morning, everyone and welcome to Lowe's companies first quarter 2021 earnings Conference call. My name is Melissa and I will be your operator for today's call.
As a reminder, at this conference is being recorded I would now like to turn the conference 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 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 lowest 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 for 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 of sources for their continued hard work and commitment to the company would.
We'd also like to extend our thoughts and prayers for our solstice in India, who are grappling with an aggressive resurgence of COVID-19 in our country.
At Lowe's, we all of our soldiers in Bangalore, India, and our digital information technology and finance functions, who played a key role in our transformation efforts over the past 2 years.
To help our team in India safeguard their health, we've sent personal protective equipment to our team members there.
We've also made financial commitments of support nonprofit organizations in India that of working to respond to this humanitarian crisis.
As we moved into the second year of the pandemic, we remain focused on our number 1 priority, which has always been protecting of health and safety of our associates and communities.
And with that in mind in Q1, we invested nearly $60 million in support of COVID-19 safety protocols.
Now turning to our results our outstanding performance continued this quarter with total company comparable sales growth of 25, 9% or.
Our U S comps were 24, 4% with broad based growth across all geographic regions and divisions in fact for the quarter comp sales for all 15 of U S regions exceeded 18% at all of U S divisions exceeded 20%.
During the quarter operating margin expanded 313 basis points on an adjusted basis.
Leading to diluted earnings per share of $3 21.
Which is an 81% increase on an adjusted basis over the prior year.
Our outperformance on operating margin was supported by our continued transition to an everyday competitive price strategy as well as our disciplined pricing and product cost management strategies.
On improve operating margin also reflects the progress of our operational transformation driven by our perpetual productivity initiatives or PPR Bill.
Bill will discuss our everyday competitive price strategy pricing and product cost management and Joe will provide details on our PPI initiatives later in the call.
On lowest dot com sales grew 36, 5% on top of 80% growth in the first quarter of 2020, which represents a 9% sales penetration of this quarter and a 2 year comp of 146%.
With customer demand for an integrated Omnichannel shopping experience only increasing we continue to invest in our omni channel capabilities.
Pro comps outpaced DIY comps were over 30% comps in the quarter. Although this has been a 2 year journey I'm very pleased with the progress that we've made where our pro customer.
We began by addressing the basics, ensuring that we were carrying the brands and product approach me and the job lot quantities.
And also provided excellent service this busy customer expects.
And now we've shifted to at a more strategic phase of growth in the Pearl by resetting the layout of our stores with the pro and mine and deepening our relationship with the pro through of loyalty program that provides them with members only benefit.
Joe will discuss more about the specific initiatives that we're undertaking to serve at a pro both online and in store later in the call.
The small and medium sized pro is our target customer. This customer is a frequent shopper who purchased products in multiple departments, which drives increased productivity throughout the store.
And I'm confident that we have of compelling growth opportunity as we continue to improve our engagement with this highly valued customer.
In addition to the stretch on parole, we deliver over 60% comps along with significant increase in customer satisfaction and our installation services business.
We've overhaul of this business and improve the service offering by consolidating our provided network and implementing industry leading technology.
And although all of us of looking for to a post COVID-19 World. Our research tells us that the importance of the home will remain elevated for many years to come.
And given the increase of importance of the home this quarter, we launched spring fast.
Our new re imagine approach to the season.
Our campaign provided inspiration for home projects, so our customers could transport themselves to the destination of their choice without ever leaving the sanctuary of home.
And of more mobile will discuss the outstanding results that we're able to generate from this re imagination of spring.
Now turning to Canada, we deliver comp growth that outpaced the U S. Despite several COVID-19 related operating restrictions.
Like to thank the new Canadian leadership team for all of their hard work as well as of frontline of sauces, and Canada for their resilience and commitment to continuing to serve our customers in this challenging operating environment.
This quarter, we also announced the acquisition of Stainmaster brand, which is the most recognized and trusted carpet brand on the market today.
With this acquisition we are building on our decade long of exclusive position as the only national home improvement retailer to carry stainmaster carpet.
This is an important step on our total home strategy as we seek to elevate our product assortment and provide consumers with the products and brands. They trust for every project across the entire home.
We see great potential to extend the stainmaster brand in other product areas, where we can continue to leverage as high performance characteristics.
This acquisition also expands our private brand portfolio, joining the family of private brands, including Allan Robb Cobalt and project source.
We're focused on expanding our private brand penetration with a balance of brand strategy that includes a powerful national brand portfolio that appeals to both pro and DIY customers.
At the same time, we will offer a select number of high value private brands building consumer loyalty for these products.
Our results in the first quarter continued to give me confidence that we're making the right investments to accelerate on market share gains through our total home strategy by enhancing our investments in pro online installation services localization and elevating our product assortment.
These initiatives will allow us to drive sustainable growth as we deliver a total home solution for our pro and our DIY customers.
Before I close I'd like to once again extend my appreciation to our frontline associates.
In the first quarter I had an opportunity to visit stores and that of our 15 geographic regions.
As I observed our associates' hard at work serving customers through very challenging circumstances, my respect and admiration continues to grow.
In recognition of these efforts, we decided to close our stores and distribution centers on Easter Sunday for the second year in a row to give ourselves as a much deserved day off the spin with their families and loved ones.
I'm also pleased to analysis of for the fifth consecutive quarter, 100% of our stores earned a winning together profit sharing bonus a record $152 million payout to our frontline hourly of sources. This represents an incremental $70 million above the target level.
While at a new term macro outlook remains uncertain. We're confident that we will continue to outperform the market driving both market share gains and improved operating efficiency.
Our 2 year plus journey to transform Lowe's has given us improved operating capabilities and of technology infrastructure at a dramatically enhance which in turn makes us more agile and able to respond quickly to any potential changes in the business environment and with that I'll turn the call over to bill.
Thanks, Marvin and good morning, everyone. We delivered U S comparable sales growth of 24, 4% in the first quarter.
Our compelling offerings, great values and improved in stocks allowed us to capitalize on the continued strong demand for home improvement products.
Consistent with recent trends growth was broad based across pro and DIY customers in store and online and across product categories. In fact, 13 of 15 merchandising departments generated comps over 15% and all merchandising departments were up more than 20% on a 2 year comp basis.
As Marvin described we were extremely pleased with how consumers responded to our spring Fest event.
Similar to our approach to the winter holidays, we extended this event across 4 weeks to create a new sense of excitement and to prompt return trips while also avoiding congestion in our stores.
We offered for different weekly giveaways of garden to go kit that provided everything needed for our funds spring project and also strengthen our customer connection through a required my Lowe's activation online.
The success of this event was due to the great organization alignment across our stores marketing and merchant teams.
Turning now to our top performing categories lumber again delivered the highest comp driven by strong pro demand and unprecedented inflation in the category.
Over the past year as lumber products had been in tight supply our merchants have worked closely with our suppliers and successfully secured new sources and additional product to share that we can maintain a competitive in stock position in the category straw.
Strong in stocks in this tight market have allowed us to continue to strengthen customer relationships, especially with the pro in.
In addition to lumber, we delivered comps exceeding 30% in electrical decor, kitchens, and baths and seasonal and outdoor living.
Our electrical category posted strong comps in the quarter driven by inflation in copper as well as solid demand from the robust repair remodel market.
In support of our total home market share acceleration strategy, we drove strong engagement with our customers as reflected by increased sales into core and kitchens and baths.
The strong sales in our decor category were driven by great performance in home accents as we continued to elevate our product assortments, especially with our recently refreshed Alan and Roth brand.
In fact this quarter, our merchant teams launched new spring collections that span across a broad array of product categories through of lifestyle point of view with inspirational on trend designs that gives our customers the confidence they need to decorate their homes in style.
Our kitchen, and Bath Department outperformed in the quarter as homeowners continue to enhance their living spaces and economic stimulus supported bigger ticket projects.
Finally, seasonal and outdoor living benefited from the early demand in patio and grills as homeowners embrace of the arrival of spring.
We also saw strong sales in the newly launched battery powered ego and skill brands as consumers are attracted to the convenience and the quality of their zero emission rechargeable outdoor power equipment and.
In fact during the quarter igo delivered some of their largest weekly sales results in the history of their brand.
The addition of ego and skill has only strengthened our number 1 position in outdoor power equipment and truly compliments the leading brands, we carry such as John Deere Honda Husqvarna, Aaron's and Craftsman.
And during the quarter, we continued to see strong demand for our other powerhouse brands like Weber and Char Broil, which remain the top 2 brands in outdoor grilling.
We were excited to add new brands to our Arsenal, including the exclusive launch of flex cordless power tools.
Of the Flex brand is known by the most discerning builders contractors and trade professionals and this new lineup of power tools offers the latest innovation more power and faster charging in the competition.
We are also excited to bring the less co brand of fertilizer to Lowe's. This spring a brand that is trusted by landscape pros and knowledgeable homeowners alike.
The addition of flex power tools and less go fertilizer further complements our powerful pro brand lineup, which already includes Simpson strong tie to Walt Spider Bosch Eaton and sharply.
As Marvin mentioned, we delivered strong sales growth of 36, 5% and a 2 year growth of 146% on Lowe's Dot com.
We continued to enhance the online customer experience with improved search and navigation functionality that allows consumers to easily shop for products across categories. Additionally.
Additionally, we continue to see strong download rates of our mobile app as we are working to enhance our customer loyalty through of great mobile experience.
As Marvin mentioned, we delivered a solid improvement in our product margins this quarter driven by disciplined vendor cost management improved and enhanced pricing systems and our continued transition to a more relevant everyday competitive price strategy that is complemented by targeted seasonally relevant promotions.
All of these initiatives are part of our ongoing merchandising excellence strategy.
We will continue to leverage and refine these capabilities as we deliver strong everyday values to our consumers. While we continue to manage our product margins by taking a data driven portfolio approach to pricing.
Our total home strategy will continue to allow us to expand and elevate our product and brand assortments and take market share.
Before I close I want to thank our vendor partners and our merchants for their continued focus on taking care of our stores and our customers. Thank you and I'll now turn the call over to Joe.
Thanks, Bill and good morning, everyone in the first quarter, our associates, we're laser focused on providing excellent customer service supporting of safe store environment and delivering record sales volumes as Marvin mentioned of 100% of our stores earned of winning together of profit sharing bonus a record $152 million payout to our frontline.
Surely associates I would like to thank our associates for their continued dedication and providing world class customer service.
As Marvin mentioned, our focus on perpetual productivity improvement or PPI initiative continued to yield results. During this quarter as we leveraged store payroll by using technology to reduce tasking hours improved customer service and increased sales productivity.
For example, we rolled out digital science first in appliances and most recently in our lumber Department. These signs cut down on associate tasking labor and they also support better product margin performance as we can now more rapidly implement price changes in line with the market.
We are also leveraging an improved freight flow app, creating a fully digital process that gives our associates better line of sight to win products will arrive at our stores. The App, which was developed in house, even health store associates to prioritize the incoming merchandise. So they can quickly and efficiently positioned the product on the sales for for our customers.
And we launched secure mobile checkout, which we're using to improve speed of service and high traffic areas inside the store and on the exterior of the store in areas such as outside lawn and garden and under the pro canopy.
This checkout App developed in house is allowing us to take care of customers from of scanning items, tendering payment and printing or emailing receipts before they even join align our customers are delighted with the solution, especially on busy weekends.
We are also driving productivity in our in store fulfillment. This quarter, we expanded our contact with shopping options by completing the rollout of both of US lockers to 100% of our U S stores in April.
Customers really enjoy these touchless easy to use lockers. In fact this is already become the highest rated store fulfillment options, having built this lockers in 100% of our U S stores will allow us to expand our omni channel capabilities further improve customer satisfaction and limit customer congestion at our service desk.
Turning to our pros it's.
As Marvin mentioned pro outpaced DIY on the quarter with over 30% comps, we continue to gain momentum with the pro through our improved in stock inventory levels, our enhanced service offerings at our new Pro loyalty program are part of sales associates have also begun to leverage our new CRM platform to proactively engage with.
Our pro customers and sell the entire project 2 of them.
Our most compelling growth opportunity with the pro is expanding the share of wallet with our existing customers, our new CRM platform as well as the redesigned store layout at aligns product adjacencies enable us to more effectively serve their needs for the entire project across all of their jobs.
And we continue to enhance the shopping experience for our pro customers small to medium sized businesses, who are always pressed for time.
We are launching of tailored shopping experience created specifically for pros to ensure that at the time they spend away from their job site is efficient and productive we're introducing new convenience products at checkout and services like dedicated pro trailer parking and phone charging stations all designed to help add value to each trip.
The pros take thus cutting down on the number of stops they make throughout the day.
We're also enhancing their online experiences with the ongoing migration of Lowe's for pros to the cloud this will give our pro customers access to incremental options that our DIY customers already have on Lowe's dot com and it will allow us to more quickly add new pro only features in the future including of personalized App experience.
Both in store and online we continue to demonstrate that Lowe's is on a mission to be at the new home for pros as.
As Marvin mentioned, we are seeing terrific momentum in our installation business with over 60% comps this quarter.
As a reminder of just 2 years ago. This was a money losing business from poor customer satisfaction.
Although we are lapping Q1, 'twenty 'twenty results that were pressured by COVID-19. We are very pleased with the overall execution of trajectory of this business.
In closing I cannot be more pleased with the improvements we are making in our stores as reflected in our strong net promoter scores on our recent third party study.
Our executive officers senior officers merchants and field leaders are out visiting stores on a weekly basis to ensure that we are listening to and supporting our frontline associates. This remains a very difficult environment to operate retail stores in and I could not be prouder of the accomplishments of this team and their commitment and hard work from our frontline.
Associates with that I'll turn it over to Dave.
Thank you Joe I'll begin this morning with a few comments on the companies robust capital allocation program in Q1, we generated $4 billion from free cash flow driven by improved operational execution and continued strong consumer demand.
We returned $3 $5 billion to our shareholders through both a combination of dividends and share repurchases.
During the quarter, we paid $440 million in dividends at <unk> 60 per share.
We also repurchased 16 8 million shares for $3 1 billion at an average price of approximately $182 of share.
We have approximately $17 billion remaining on our share repurchase authorization.
Capital expenditures totaled $461 million in the quarter as we invest in our strategic initiatives to drive the business and to support our growth.
We ended the quarter with $6 $7 billion of cash and cash equivalents on the balance sheet, which includes proceeds from our $2 billion notes offering in March.
In addition, we entered into a $1 billion term loan facility in April which remains undrawn.
Our balance sheet remains extremely healthy with adjusted debt to EBITDAR at 2.07 times at the end of the quarter well below our long term target of 275 times now.
Now turning to the income statement in Q1, we generated diluted earnings per share of $3 21 and.
An increase of 81% compared to adjusted diluted earnings per share last year.
This growth was due to strong sales growth.
Improved gross margin rate and SG&A leverage as a result of strong execution across many facets of our business.
Please note that in the prior year quarter, there was a very modest impact on diluted earnings per share related to the Canadian restructuring effort.
My comments from this point forward will include approximately <unk>, when appropriate and comparisons to certain non-GAAP measures where applicable.
Strong sales growth was driven by several factors, including a continued consumer focused on the home a favourable weather backdrop across the country.
Commodity inflation, especially within the lumber category consumer.
Of our support from the March government stimulus package and our improved execution as we continue to elevate our product and service offerings.
Q1 sales were $24 4 billion.
Driven by a comparable sales increase of 25, 9%.
This was the result of a balanced contribution from both ticket and transactions as comparable average store ticket grew 14, 1% end transaction count grew 11, 8% with strong repeat rates from both new and existing customers.
While a little difficult to measure we estimate that the March government stimulus checks drove 300 basis points of growth, while commodity inflation benefited comps by 460 basis points in the quarter.
Lumber and other commodity prices remained at elevated levels versus last year.
U S comp sales were up 24, 4% in the quarter.
Insistent with the results from the past few quarters growth was well balanced across DIY and pro customers selling channels geographies and nearly all merchandise departments.
Our U S comps were 24% in February 35, 9% in March and 13, 9% in April.
February comps were negatively impacted by the harsh winter storms that hit Texas and several other states. While March were positively impacted by storm recovery in the third round of stimulus.
Additionally, we began cycling last year's COVID-19 related spikes in demand in the second half of April and those more difficult comparisons impacted April comps.
Looking at U S comp growth on a 2 year basis from 2019 to 21 February sales increased 33% March increased 48, 1% in April increased 37, 1%.
Gross margin was 30, 329% up 19 basis points from last year end up 183 basis points as compared to Q1 of 19.
Product margin rate improved 165 basis points.
As Bill mentioned, our teams effectively leveraged our merchandising excellence strategy to manage product cost and retail pricing throughout the quarter.
While we are seeing inflation in some product categories, our merchants work to diligently mitigate and minimize vendor cost increases.
Additionally, our supply chain team leveraged our scale and carrier relationships to minimize distribution cost pressures experienced throughout the retail sector.
On the pricing side, our shift to an everyday competitive price strategy continued to benefit our margins in Q1, as we leverage enhanced pricing tools to improve margin across the array of products that we sell.
We began to see improving trends from our increased focus on shrink control of this quarter with shrink improving sequentially from Q4 of 2020. However.
However, our results pressured gross margin by 15 basis points versus last year.
We expect that our shrink performance will continue to improve as we move throughout the year.
These benefits to product margin rate were partially offset by 90 basis points of pressure from product mix shifts due to lumber inflation and a less favorable product mix.
20 basis points of pressure from supply chain cost as we continue to invest in our omnichannel capabilities.
And 20 basis points of pressure from credit revenue.
SG&A of 18, 4% Levered 288 basis points compared to adjusted SG&A in L y driven.
Driven primarily by lower COVID-19 related cost as well as operating cost leverage resulting from strong sales and our ongoing productivity from our PPI initiative.
As anticipated, we incurred nearly $60 million of COVID-19 related expenses as compared to approximately $320 million of COVID-19 related expenses last year.
The $260 million reduction in these expenses generated 140 basis points of SG&A leverage.
Additionally, strong sales at our focus on efficiency and productivity allowed us to generate leverage of 100 basis points on operating salaries.
At 35 basis points in occupancy expense.
And 5 basis points on advertising.
Now operating profit was $3 2 billion, an increase of 63% over L y on.
Operating margins of $13 3 percentage of sales for the quarter was up 317 basis points to the prior year driven by both improved operating leverage and improved gross margin rate.
The effective tax rate was 23, 5%.
The tax rate was slightly lower than expected, primarily due to a tax benefit related to the vesting of certain employee stock options.
We continued to build up our inventory levels throughout the quarter to meet the sustained high levels of customer demand, while improving our in stock position.
At quarter end inventory was $18 $4 billion.
$2 2 billion from Q4 levels in line with seasonal patterns.
This reflects an increase of $4 1 billion from Q1 of 2020 when inventory levels were pressured due to unexpected spikes in demand as well as COVID-19 related supply disruptions.
Of note. This includes a year over year increase of $780 million related specifically to inflation.
Now before I close let me comment on our current trends and how we are planning our business for the balance of 2021.
Our year to date results are tracking ahead of the robust market scenario that we covered in our December investor update the.
The underlying drivers of home improvement demand appeared to be more resilient and stable than we originally forecasted.
These factors build our confidence in our ability to deliver strong results on top of an exceptional year end 2020.
Including 12% operating margins and flat gross margin rates for the year.
We remain confident that our total home strategy will enable us to capture market share.
We are very encouraged by our performance in Q1, including our strong sales volume even as we begin to cycle last year's mid April surge in demand.
Month to date May U S comp sales trends are materially consistent with April performance levels on a 2 year comparable basis looking forward year over year comparisons remain difficult throughout the remainder of the year also we continue to see COVID-19 restrictions and some areas across Canada.
As markets reopen we are closely monitoring consumer behavior anticipating of potential modest shift in spending away from at home.
We remain agile and ready to respond to whatever environment, we face this year with our focus on gaining market share throughout 2021, while improving operating margins.
With regards to our quarterly performance. Please note that we are cycling, particularly high gross margin levels in Q2 of L y.
In the prior quarter, there was an interesting wide pullback in promotions and a more favorable product mix.
As a result, we currently anticipate a moderate decline in gross margin rates in Q2.
Despite this moderate year over year decline, our gross margin rate is expected to expand nicely over pre pandemic 2019 levels at.
Investments in pricing vendor cost management, and our everyday competitive promotional strategy had been driving improvements in our gross margin performance over the past 2 years.
As I stated earlier, we continue to expect to deliver flat gross margin rates for 2021.
Further we expect the business to generate robust levels of free cash flow.
We plan to invest $2 billion in Capex this year to drive future growth and returns.
As we continue our disciplined approach to capital allocation with $9 billion in planned share repurchases this year.
While also supporting our dividend.
In closing, we're very excited about the momentum at our business and our ability to deliver significant shareholder value over the long term.
With that we are now ready for questions.
Thank you we are now ready for questions if you'd like to ask a question. Please press star 1 on your telephone keypad.
To withdraw your question press Star 2.
In order to allow for as many individuals as possible. Please limit yourself to 1 question and 1 follow up.
Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hey, Good morning, everyone. My first question is can you provide an update on where pro penetration can move to over time and maybe at some level of growth that you expect going forward and I'm asking because I think part of the.
Margin story is getting higher sales per foot and I think pro seems to be a big opportunity. There. So curious I don't know Marvin or David.
Data from that area.
Hey, Simeon this is marvin.
Purposely have not set a target for pro penetration as I mentioned in my prepared comments, we really started focusing on the basics and now we're elevating to a more strategic phase and pro we also stayed at a while back that we estimate on pro penetration today is between 20.
And 25% now having said that.
Based on my history in this business in this space and Joe's history and experience in this space, we can see over time appropriate training getting between 30, and 35% and we think that's the trajectory that we're currently on but we have purposely not set of target because of <unk>.
In the past when you set of target.
You can oftentimes at the target, but you do at at the expense of running a good business and we're just really focused on serving the customer right now.
Okay fair enough.
Can I ask you a macro question until.
Until whoever and I wanted to ask there's this school of thought that this industry at his home improvement industry.
At a mid single digit grower right that did 4 of 5 X that over the last 4 quarters.
And so that school of thought says hey, this industry needs to digest. This growth we may not grow going forward, maybe in 'twenty, 2 or it may be flattish at best at.
On the other side is that people have spent more on their homes theres more of invested capital. So there's more maintenance repair and that we could sort of comment and then maybe there is of housing cycle on top of this curious where you shake out what's your best guess of what some of them at some of the debate you're having on this topic are.
Yes, I mean, it's a good question I'll take the first part I'll, let day provide any financial perspective, but I mean, we are we're very excited.
And we're very bullish on the home improvement industry in general.
If you look at the macro factors that really impact this business and have historically impacted this business as things like <unk>.
Low mortgage rates rising home prices the age of housing stock improved household formation trends and also strong consumer balance sheets.
All of those specific macro factors of pointed in the right direction for US. In addition to that when there is home price appreciation that actually benefits home improvement at May not benefit the overall housing market, but when consumers decide to stay on their existing home.
Making investments in upgrading the home debt correlates to really strong home improvement sales and as the housing stock continues to age where in our repair and maintenance business. That's of significant part of what we do.
So when we look at home improvement, we see really robust year over year growth potential relative to the macro and then if we look at just of things that we control.
We've been very transparent, but there have been many strategic mistakes made in this business over the past 5 plus years.
And so we have what we believe has enormous upside.
In revenue and operating income by continuing to invest in really smart strategic initiatives that we think will drive the business for and we think Q1 reflects our ability to do that with our gross margin and operating income performance I'll, let day add any additional comments that he has on HMA and the only other thing that I would add.
Is it obviously over the next several years, we anticipated that the millennial customer would begin to migrate into the home ownership.
Our position I think what has happened through COVID-19 is that that macro trend is probably accelerated so probably given the industry segment a bit more tailwind as we think about the next several years.
Okay. Thank you good luck.
Thank you. Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.
Great. Thank you Doug if sales are running at does the robust market scenario do you think the sales upside it could be reinvested into additional initiatives aimed at gaining market share and deepening the competitive moat or should we think about there potentially being upside for the 12% operating margin that was discussed in that room.
Of that demand scenario.
Hey, Larry This is Dave I'll start with debt.
That question there I think what you are looking at here is we have a very specific investment thesis, but really as we launched it in 2020 at into 'twenty, 1 and I think if you look at the pieces that we have on all of the priorities that we have I think we feel like we're very well positioned making the right investments to grow our business long term improve.
Our operating performance I do think we're on.
Also very focused on the fact that we can't really predict the macro in the back half of this year, but we are very committed to doing 2 things. 1 is we're going to grow market share of this year and 2 we're going to improve our operating margin performance at.
We do expect that to be at market holds up at that robust or above robust around 12% operating margin and that's our focus for this year.
Great and just 1 quick follow up which is which of the 2 categories Comped below 15% of love is the 2 year growth there.
Yes. This is bill so all categories achieved plus 20% draw on a 2 year basis for 2 categories below the company.
Paint in our hardware business, driven largely because of <unk>.
[laughter] painting last year during the pandemic and then the hardware business driven by.
On safety and masks and some of that business that spike last year.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Michael Baker with D. A Davidson. Please proceed with your question.
Okay. Thanks.
Couple end.
It will be short term focused here, but.
First of all of April did fall off.
Vs.
Versus March on a 2 year basis, a little bit do you think that's because of the stimulus that occurred in March at and then.
Playing out for it if we take that 2 year trend and to May and for the rest of the quarter. It should be about flat in the second quarter is that a fair way to think about the expectations for the quarter.
Yes, I'll first as you look at.
I guess, our performance by by month through the quarter. If you look at it on a 2 year stack basis, Yes March was somewhat inflated. If you think about Texas of recovery from the storm in Texas and other states as well as stimulus hitting in that period. So I think we feel very good about kind of how we ended the quarter and the trends as we cycle.
And to me from a sales perspective, and I think listen we're not giving guidance for the quarter. We continue to be focused specifically on making sure that we have great service, we had at where in stocks in the right categories and we're supporting our consumers across our marketplace and I feel like were gaining momentum as we think about our biz.
<unk>, both in 2020 and here as we cycle into 'twenty 1.
Michael This is Marvin the only point I'll add to that is we were up against.
A 24% comp in the month of April in the U S and we comped almost 14% on top of that so we feel really good about their debt exceeded our expectations, we exceeded our internal plan and it also demonstrates to us at even going up against some of them.
The spike demand from last year, we still can perform at a high level. So we actually felt great about our performance in April but it demonstrates when you're up against significant surge in demand you're going to see.
Sales comp pressure and thats to be expected.
Yes, sure Okay that makes sense.
Follow up North Africa of tough question, particularly on a 25% comp.
Against a 12 last year at really really incredible on strong, but can you talk about market share gains a simple look at the gross of the market using the end a ics sales of building material current equipment and supply stores that did grow a little bit faster than you did this quarter. So.
So I wonder how you think about what.
Marketing, you're looking at of what number you're looking at to 2 on.
Underpinning your market share gain comments for the quarter end the year.
Michael coming from someone who has worked on a couple of different retail formats I've always said at home improvement as probably the most suspect market share data on.
On a short term basis of COVID-19.
Any retail segment, so to be quite candid when we look at the amount of growth we delivered on.
And the sales.
Revenue to regenerate at and we look at it on a 1 year of 2 year comp basis.
We can't quite well about moving market share will really focus on a broader market.
We've said consistently debt in this COVID-19 environment and this is going to be current and post COVID-19. The retailers sort of there are most capitalized and can make investments in omnichannel and omni channel fulfillment and creating different channels for customers to shop and convenience of technology can also.
Leverage of supply base.
Our merchants and supply chain, we're able to do over the past quarter win and will take broader market share and we believe that we did debt. So we feel very very comfortable where our market share position performance from a prospect.
Sure.
Yeah fair enough I appreciate the time thank you.
Thank you. Our next question comes from the line of Christopher <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody. So couple of questions on my first question is on the product margin benefits that you're seeing on on the pricing side should this accelerate over the year.
Given that some of this learning build somewhat so.
Sort to say in the systems and.
And to what extent is at more sensitive to sort of highly seasonal.
And Mark down problem quarters at <unk> and at <unk> versus the third quarter.
Yeah listen I think this is Dave we've we've made a lot of investments from a product cost management and pricing perspective infrastructure here at Lowe's and I feel very confident between the merchant and finance team on kind of managing that it is not necessarily seasonally related this is really about managing.
Our everyday price and cost in a more effective manner over time I do think that we're still in the early stages of this journey as we think about the next several years to improve our performance here clearly at the moment. We're as we said in our prepared remarks, there are some inflation pressures on our business that were managed.
And through I do believe that we have will continue to invest in these tools and technologies to enable us to improve our margin performance over the long longer term now keep in mind, Chris I just wanted to go back to what we said of all of our long term financial algorithm here is really to maintain kind of flattish gross.
<unk> over time with the fact that we would improve product margin, but we reinvest some of that product margin of supply chain to drive performance and growth over the long term.
Got it on there Steve I noticed that.
Yeah.
And then in terms of.
As a follow up on the on the 12% margin question I mean, if you do end up beating that minus 2% sales outlook I guess why wouldn't you be above at 12% is there an offset perhaps bonus.
And employee incentives at a headwind from lumber inflation that creates a rate headwind at more than offsets the natural leverage of of beating the robust scenario of sales guide.
Yes, Hey, Chris I, just wanted to get ourselves focused list from first and foremost we've said about the fact that we're going to gain some market share we've got to improve operating.
Margin performance here.
Try to get to our 12% of short term here beyond 12%, we have objectives and we believe we can expand it further but less at least get to our 12% margin first and so we're just kind of laser focused on making sure that we're delivering upon our commitments from that perspective.
And Chris This is Marvin you can appreciate the challenge we have looking at the.
The overall macro.
Outlook for the business with all of the dynamics occurring in the marketplace.
Good news is is the.
The better the macro perform better we will before we feel great about the things that we control.
And some of the tools and some of the processes, we put in place on some of the decisions of the leadership team are really paying dividends.
And as David said, a couple of times already today, we were committed to outperforming the broader market and improving operating margin and if the macro improves significantly above the robot robust scenario than our business will perform at.
Clearly as well and Thats how were approaching it.
Understood Best of luck guys.
Thanks.
Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.
Hey, good morning, great quarter.
You guys spoke about the big increase in lumber pricing keeps us at the same thing yesterday at curious what youre seeing on the demand side on unit velocity over the past 3 months.
Hey, I'll start at all of what I can tell you is we're just really pleased that the merchants were able to create such strong supplier relationships that we could keep up with demand in an unprecedented environment of unit demand. So I'll, let I'll, let bill.
I'll talk about units and how were performing at kind of how we feel about debt.
Rest of the year.
Yes, Chuck I think Deco Marvin I think demand continues to remain strong all.
All of the preparation that was done coming off of last year has certainly enabled us to.
Fulfill that demand going forward on.
All of the work is being done right now is to maintain that as we go through the rest of the year.
And continuing to manage the needs of the pro customer.
To make sure that we can take care of of them first I mean, that's really what we're focused on in that job lot quantity and making sure that we're right by market and that's been the focus of the team.
That's great Great day here.
So on this probably just.
On the installation business, you talked about of 6% comp.
In the quarter I guess I'm curious like.
Penetration of the business is at today, how big can you grow that and then also just from a profitability perspective of how it compares to the rest of the business.
Yes, Chuck that business is in the mid single digits penetration.
For our business and we do think we have a big runway here as Joe indicated in his prepared remarks is that business with something that really wasn't invested in historically and was something that we hadn't really I'd say poor service model historically and was not the best from an operating performance perspective financially I think we've now turned that business around.
Have a really nice foundation as we think about.
Growing at so I'll ask Joe to give a couple of comments on it.
Thanks, Dave I'll, just make a few comments.
You heard in my prepared remarks, the performance very very pleased that we've attracted industry veterans that really understand.
The complexities of being inside the home and especially on the COVID-19 environment all of the new platforms that we have been focused on the consolidation of installers across the country and remaining laser focused on the programs that we really want to drive and that's all under the same umbrella is our total home strategy. So we're very pleased with the team's efforts.
I'm very pleased with all of our installer partners across the country and looking forward to a great continued momentum there.
Great. Thank you.
Thank you. Our next question comes from the line of Scott <unk> with RFA of capital. Please proceed with your question.
Hey, guys. Thanks for thanks for taking my questions. So I had.
Well long term long term strategic question. When you guys think about your business into 2022.
As you look at your strategic priorities, where do you think drives incremental growth for Lowe's kind of company specific what are your top 3 type of things as you look out over the next 18 months.
Scott. This is Marvin I think it goes directly to our total haul market acceleration strategy, where we talk about continuing to invest.
And online, which is really more omni channel focus making sure that we're investing in our installation services business.
And also improving our overall performance with the pro.
Mentioned in my prepared comments for me all of our customer segments are really important we are focus more intently on being a customer focused business. The pro adds a different dimension because of the frequency of how the pro shop and also out of pro shops throughout the entire store and 1 of.
Of the strategic mistakes made in the past here is not understanding that customer and understand the economic value of that customer. So we're going to continue to stay really focused on net customer of I would say those 3 things omni channel ensuring that we can continue to have a really robust.
And seamless installation service business and focusing on the pro our 3 of our priorities, but the whole of total home strategy encompasses what we're going to be leaning into for the next couple of years.
That's great and then just like looking out at the back half of this year Youre seeing any signs at this point.
Very high level of inflation is crimping demand at all or is that not something you're seeing.
We're not seeing at all I'll give your thoughts on I'll, let Dave give us more financial perspective, I mean.
We feel really good about this business.
On this business model.
As I look at home improvement as an overall retail sector I, just think debt, even though we're all just totally fatigue, both mentally physically.
The pandemic and there is nothing that we can say positive about operating 2 of what all of the health and safety issues that we've all dealt with both business and personal when you look at the macro for home improvement.
Positive backdrop and as we look at.
Forward looking quarters and into next year, even with the inflation, we're seeing in certain areas, specifically lumber and copper. We just don't believe that that's going to create an impediment for growth or significant headwinds for this business sector all of Dave at any other comments, yes. The only thing I would add is.
Just reconfirm, what Marvin said, we see no slowdown in demand at this point in time across our business and our categories and I think he can speak to our pro customers. We are hearing from them that they want are very busy at the moment and to have extremely long backlogs at this point in time. So I think this demand will continue for some period of time.
Thanks, guys I appreciate it.
Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer and company. Please proceed with your question.
Hi, good morning.
Congrats on nice quarter.
Yeah.
For the first question I wanted to ask.
You've talked a lot about of the various scenarios for 2021, and the operating margin and market share opportunities for for Lowe's, How do you look at <unk>.
Expense leverage I think you may have talked about this a bit on your prepared comments, but how do we think about the expense leverage to the extent that sales for.
[noise] choppy of through through the balance of 2021.
Yes. So obviously this day is obviously the biggest expense lever. We have is how we manage operating salaries across our business and probably labor a little bit in the supply chain I think what we've done is.
We have invested in tools and processes to really allow us to effectively manage that labor component and really adjusted based on demand that we're seeing from a profile perspective with that I'll turn it over to Joe.
Brian Thanks for the question and I really pointed out the 3 major points of the PPI initiative that we talk about first is the investment in technology to reduce the tasking hours and we have been.
We've been doing that very effectively.
Is the improvement in customer service with those changes and then finally of the overall sales productivity and sales per square foot productivity of the stores.
As we that we have given some examples of the digital signs in appliances digital signs in lumber the investments, we're making in the pro area of the investments we've made on the front end and so I think the overall investment thesis that we have in driving this PPI really speaks to the choppy times or good times. So we have to leverage the business.
Got it Thats very helpful and my follow up question.
With regard to sales.
Clearly through Q1, and then given the commentary Rick.
To me I mean sales of state of our very strong at a rather broad base, but as you look at your business.
On a kind of a market by market basis are you seeing any difference in sales trends in regions of the country markets of the country of debt that have opened up faster.
Consumers are getting back to it.
Their normal lives quicker.
Brian This is Ben when we talk about broad based it's more consistently broad based on anytime I can remember in my career I mean, we have 15 geographic regions in 3 divisions and as I said in my prepared comments.
I mean, all of our regions were in north of 18% all divisions north of 20% and when we look at.
Top 40 markets, we'll look at our top metropolitan areas. It is just surprisingly strong and consistent with very few outliers in the negative so that points to us.
There are.
Just good underlying.
Financial.
Metrics and balance sheet.
Positive aspects for customers that is showing up in how they spend in our business. It also demonstrates that we're running a more consistent business, but the short answer is we're.
We're not seeing any negative outliers when we look at customer mobility wood in EBIT. When we were seeing COVID-19 spikes around the country and vaccination rates, we still didn't see any major differences in overall revenue performance in those pockets of the country. So we feel good about that and it points to what we.
We believe we will be very positive signs for the rest of the year on that's what we're hoping and praying for.
Alright, I appreciate all the color. Thank you.
We're going to take 1 more question. Please.
Thank you. Our final question. This morning comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.
Good morning, and thanks for taking the question I wanted to focus on the pro.
You mentioned, 30% sales growth in the pro but curious if you could sort of remind us.
Speak to the contributions from existing.
Versus new customer growth and if theres any sort of quarter of quarterly variation on the pro sales penetration rate that we should be cognizant of as we work our way through 'twenty 1.
Uh huh.
Steve the Rick.
Also on probe.
Equity balance between new and existing customers as Joe mentioned in his prepared comments the key for us.
We will be just continuing to get on larger percentage of percent of wallet of our existing customers. If we didn't if we didn't attract 1 new customer and we were able to get a greater percent of spend from existing customer debt would solve our pro penetration.
For the next.
2 plus years, so I would tell you that our greatest opportunity is just getting our existing customers to buy more but at the same time with the loyalty program that Joe and his team launched we're seeing incredible growth in new customers and we're seeing also customers be very attracted to our new credit.
Program and that's a great sign for us to see the acquisition of new customers genre of if theres any of.
On the point you make.
Thanks, Marvin and the only thing I would add we started our journey in the pro of over 2 years ago, We talked a lot about the basics of price service of Red brands and now we're focused on net strategic phase of the <unk>.
Pro growth. So you know things like building out on a per loyalty database of new CRM the redesigned store layout.
Hillard shopping experience. So we believe that we have attracted a lot of new customers. We're growing the wallet of our existing customers and again I'm very pleased with the protein their focus.
That that team has accomplished in the last 2 years.
Thank you and at and then just a quick follow up regarding pro wallet share based on based on the CRM data.
The data that you have.
And any sort of color of occurred at the current data that you can share as it relates to.
On the wallet share at our chip share of the small and medium sized pro customer that you're focused on.
Yes.
You'll see we're not going to publicly share of lot of debt detail, obviously, we're tracking at.
But for competitive reasons, we typically don't share it externally what I can tell you.
Is that we've been pleased with the launch of loyalty and CRM both programs are exceeding expectations.
We had some delays lots of pauses in the rollout of the COVID-19, we're now leaning into it.
We are excited about the amount of data that were collecting at we're more excited about the feedback from our customers on how they feel about the visibility of of what they are buying how they are buying at and just the overall connectivity. So we look forward at some point in the future of sharing more details, but for now I mean.
We're not going to share a lot of externally other than to say, we feel great about.
The progress, we're making at the trajectory of the business of exclusive specifically with that customer.
Thank you.
Thanks.
Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.