Q4 2021 Lowe's Companies Inc Earnings Call
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Good morning, everyone and welcome to Lowe's companies' fourth quarter 2021 earnings conference call.
My name is Rob and I'll be your operator for today's call.
As a reminder, this conference is being recorded.
I'll now turn the call over to Kate Pearlman, Vice President of Investor Relations.
Thank you and good morning here with me today are Marvin Ellison, Chairman and Chief Executive Officer, Bill Boltz Executive Vice President merchandising, Joe Mcfarland, our executive Vice President stores, and Dave Denton Executive Vice President and Chief Financial Officer I.
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 the Investor Relations website. During this call we will be making comments that are forward looking including our expectations for fiscal 2022 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 <unk>.
Risk factors MD&A and other sections of our annual report on Form 10-K , and our other SEC filings. Additionally.
Additionally, we will be discussing certain non-GAAP financial measures a reconciliation of these items to U S. GAAP can be found in the quarterly earnings section of our Investor Relations website.
That I will turn the call over to Marvin Thank.
Thank you Kate and good morning, everyone. Our results once again beat expectations this quarter with comparable sales up 5% for the total company and five 1% for the U S on top of over 28% growth last year.
This was all in comp sales up 34, 5% for the total company and up 35, 2% for the U S on a two year basis.
These results cap off outstanding financial results for fiscal 2021 with sales of $96 3 billion up six 9% on a comparable basis and earnings per share of $12 <unk> up 36% on an adjusted basis.
These outstanding results, 100% of our stores earned a quarterly winning together profit sharing bonus.
This $94 million payout is $24 million above the target payment level and in recognition for their hard work throughout the pandemic in 2021, we are awarding and incremental discretionary bonus of $265 million to our frontline associates altogether, we rewarded our frontline us.
<unk> with bonuses of over $350 million in the fourth quarter.
As Joe will discuss later in the call financial support of our frontline of sources is consistent with our commitment to being an employer of choice in the retail industry.
Our toll home strategy continues to gain momentum as we grow our share of wallet with both pro and DIY as they increasingly rely on Lowe's as a one stop solution for all of their project needs.
And looking at our results this quarter I'm, particularly encouraged that our growth was broad based and balanced across product categories across both DIY and pro both online and in store.
In <unk>, we delivered growth of 23% and 54% on a two year basis.
And we're building on our momentum to pro with the launch of our New Pro loyalty program Mvp's Pro rewards and partnership program, we redesign our loyalty program based on feedback from our pro customers, who expressed a desire for a business partnership rather than a series of Standalone transactions.
Our data shows that pros, who leverage our loyalty and credit offerings span, 300% more than pros not engage in these programs.
Our pro business is off to a strong start this year and we're excited about the national launch of our Mvps Pro loyalty program.
I look forward to providing updates on this critical initiative throughout the year.
Now turning to our DIY customer, where we delivered growth on top of exceptionally strong demand last year.
Later in the call Bill will discuss how we continue to grow our DIY market share by elevating our private brands product Assortments and our home decor category.
Although stock comp sales grew 11, 5% on top of 121% growth in the fourth quarter of 2020, which represents a two year comp of 147% and nearly 11% sales penetration.
Our intuitive online shopping experience and expanded entre and Assortments are resonating with our customers.
And while we were pleased that our online sales have more than double over the past two years, we still have tremendous growth opportunity in front of us.
And as part of our efforts to enhance our Omnichannel experience. We are expanding our same day and next day fulfillment capabilities with that in mind. We are actively piloting several gig network solutions, including partnering with instant card in several markets for same day DIY home delivery and building on our success, we gain in Florida, and Ohio Valley.
<unk>, where our market delivery strategy, we completed the conversion of our third geographic area The Carolina region during the fourth quarter.
While we're reminder, and the market based delivery model big and bulky products flow from our supply chain directly to customers homes.
This replaces the highly inefficient store delivery model, where each store acts as its own distribution and transportation center for these products.
As we continue to expand our market based delivery model, we're freeing up space in our 10000 square foot store backrooms, which on average are considerably larger than our competition.
And we're testing out different options to drive both greater in store fulfillment and expanded delivery alternatives for both pro and DIY customers.
Few minutes Bill will discuss our continued investments in online as we create a best in class integrated Omnichannel shopping experience.
During the quarter operating margin expanded approximately 115 basis points, leading to diluted earnings per share of $1 78.
Which is a 34% increase as compared to adjusted diluted earnings per share in the prior year. These results reflect our disciplined focus on driving operating leverage through our perpetual productivity improvement initiatives or PPR as well as the ongoing benefits of our new pricing strategies joined day will discuss these initiatives in further detail later.
And the call turning to our results in Canada, where performance lagged the U S. The Canadian leadership team continues to drive productivity through proven technology and processes that have delivered great results in the U S.
Before I close I'd like to share my perspective on the home improvement market as well as our opportunity to continue to win share.
Our outlook for the home improvement industry remains strong supported by very healthy consumer balance sheets, especially for homeowners and continuing home price appreciation.
Persistent solid demand for homes. Despite an uptick in interest rates is also expected to support residential investment. In fact, we are encouraged by the strengthening millennial household formation trends that will support home buying in the coming years.
While the trends remain favorable including baby boomers, increasing preference to age in place.
If the extension of remote work for some employees were expecting a permanent step up and repair and maintenance cycle and as a reminder, 50% of the homes in the U S are over 40 years old and we will continue to require investments for upkeep and approximately two thirds of Lowe's as annual sales are generated from repair and <unk>.
Maintenance activity.
Therefore, we are encouraged that the macro environment for home improvement remains very supportive.
And as we close the year, we continue to give back to the communities, where we operate with total donations of $100 million in 2021, well over our pre pandemic levels.
And we're pleased that our efforts to enhance our brand reputation while supporting our associates and driving long term value for our shareholders was recently recognized by Fortune magazine as they named lows. The number one most admired specialty retailer for the second general. This is the first time in our history that we received this recognition and back.
Back years in closing I would like to extend my heartfelt appreciation to our frontline associates as I travel the country every week visiting stores I continue to be struck by their commitment to supporting our communities, while providing excellent customer service and with that I'll turn the call over to Bill.
Thanks, Marvin and good morning, everyone in the fourth quarter U S comparable sales increased five 1% and 35, 2% on a two year basis, we delivered positive comps in all three merchandising divisions in the quarter with growth across pro and DIY customers.
Both was well balanced with 12 or 15 merchandising departments Comping positive and was broad based on a two year basis with all 15 departments up more than 18% in that timeframe.
Beginning with our home decor merchandising division.
Flooring into appliances delivered the strongest comps in the quarter.
In flooring vinyl flooring once again led the way as we continue to see consumer preference shifting towards this affordable and stylish solutions.
<unk> already offers a wide selection of vinyl flooring products, including several perrigo wed protect options and this year, we look forward to extending our own trusted stainmaster brand with its high performance characteristics and lifetime stain resistant warranty across a full range of flooring products, including laminate tile and <unk>.
Vinyl.
Within appliances sales of ranges Cook tops, along with dishwashers were the strongest in the quarter as we continue to extend our private brand offering. We recently launched origin 'twenty one across several product categories in home decor. This is our new modern brand designed for the trendsetting millennial consumer.
Our ever popular Alan and Roth brand is tailored to the more traditional style.
Now turning to our performance in hard lines. The team delivered an exceptional holiday season customers, where active early and shopped often in our <unk> category, which drove excellent sell through in this holiday category.
Seasonal outdoor living and lawn and garden delivered standout performances as customers continue to enhance their outdoor living spaces with new grills patio heaters, firepit as well as live goods for the yards and garden.
With the home serving as a center for entertainment our customers are making the most of their homes inside and out.
We continued to build on our number one position in outdoor power equipment with further share gains in battery outdoor power equipment as we drove over 37% growth in this area for the quarter and over 118% on a two year basis.
Both DIY and pro customers enjoy the convenience reliability and the power of our innovative battery powered products available in the ego cobalt craftsman and skill brands.
And this spring we are thrilled to expand our exclusive lineup of ego battery products with their new 52 inch <unk> turn riding mower with features that include a fabricated deck and power to move up to four acres on a single charge also new for igo is the industry's most powerful handheld battery powered blower with power that will.
Outperformed the leading gas blower with 765 cubic feet per minute a blowing capacity.
These new products will complement our existing lineup and assortments from powerful brands, such as John Deere, Honda Husqvarna, Aaron's and Craftsman.
This spring, we will launch our new origin 'twenty, one patio collections as well as our new style selection replacement cushions. These cushions are made with 100% recycled plastic bottles and theyre fade resistant UV protected as well as easy to clean.
Now turning to the building products Division, our comps were very strong driven by broad based balanced growth across lumber electrical rough plumbing millwork and building materials.
We are pleased with the continued momentum we are building with the pro as we work to expand our brand and product offerings to meet their project needs.
New this year will be a full range of certainteed roofing insulation and gypsum products.
As a leading manufacturer of building products for both residential and commercial construction Certainteed is an important strategic partner that we are proud to add to lows as we continue to enhance our pro offering in the building materials category.
We also continue to build out our pro power tool program with the introduction of the new Dewalt power stack battery technology, which is the smallest and most energy dense battery pack on the market.
These new products and new brands are strong additions to our pro brand Arsenal, which already includes other great brands like Bosch Eaton Ashwin facet Macerich Flex G. RK ITW, let's go little giant Lufkin, Mansfield Marshalltown, Metabo shark bite Simpson strong tie.
<unk> Spider and awareness.
Moving to Lowes Dot com as Marvin mentioned, we delivered sales growth of 11, 5% in the quarter and 147% on a two year basis in the fourth quarter. We are focused on further enhancing our omni channel capabilities in 2022 across three key areas.
Expanding our online assortment.
Enhancing the user experience and improving fulfillment.
First we are expanding our lowes dot com assortment to meet our customers' design and lifestyle needs.
For example, within Loews Livable home products, we will offer a range of products to help our customers adapt to their changing mobility needs at the same time, we will continue to enhance the user experience with continued upgrades to the visualization and configuration tools like kitchen, visualize <unk> and measure your space.
Finally, as we continue to improve our fulfillment capabilities our customers can now track their appliance delivery in real time, and we will soon be leveraging enhanced technology to further streamline the buy online pickup in store experience for our customers through an improved store execution process.
As we look ahead to spring, we are well positioned to capitalize on what we expect to be another strong spring season, consistent with our approach over the past year, we have worked hard to land our spring product early.
Through an expansion of our network of coastal holding facilities, we are better able to manage the flow of imported product, enabling us to quickly flow product where needed as spring arrives across the country.
As one of the largest importers in the U S. We continue to leverage our scale and carrier relationships to secured capacity and work to mitigate and manage the impact of cost increases across our supply chain.
Before I close I'd like to extend my appreciation to our merchants and inventory and supply chain teams along with our vendors for their hard work and continued support.
Thank you and I'll now turn the call over to Joe.
Thanks, Bill and good morning, everyone I would like to begin by thanking our frontline associates for delivering tremendous results in 2021.
In recognition of their outstanding efforts, we awarded the discretionary yearend bonus of $6000 for assistant store managers $1000 for Department supervisor $800 from full time hourly associates and 400 for part time hourly associates as.
As Marvin mentioned the combination of winning together and this discretionary year end bonus will result in a payout of over $350 million for our frontline associates this quarter.
As someone who started his career in home improvement is an hourly associate I understand how meaningful this type of financial recognition is for our hourly associates.
At Loews, our people are truly our most valuable asset when it comes to recruiting and retaining top talent, we strive to be an employer of choice.
From the moment that a candidate applies for a position that Lowe's, we are committed to creating a positive impression we have invested in leading technology that accelerates the hiring process. So that we are processing applications in a matter of minutes rather than the weeks that the manual process required as recently as last year.
We also continued to improve our onboarding process, so that our new hires can quickly come up to speed leveraging the technology and product knowledge that is readily available to them on their handheld mobile devices via the Lowe's University application.
As I mentioned on our last call. We are also leveraging our new lows University in store training labs to provide the ongoing training that our associates need to build their skills and confidence so that they can continue to progress in their career.
Over the last three years, we have created valuable career opportunities for our associates with the incremental 10000 department supervisor roles and a 1600 ASM positions that we've added.
Since 2018, we have also invested well over $2 billion in incremental wage and equity programs for our frontline associates to ensure that we continue to offer a strong competitive wage and benefit package to our associates.
I'm really pleased to report that our investments to position Lowe's as an employer of choice are paying off.
Heading into spring, we anticipate be even better positioned than last year from a hiring perspective, and we are also confident that we will continue to drive productivity in our operations to our perpetual productivity improvement or PPI initiatives.
As a reminder, this is not a single win it is a series of improvements that are scaling across our stores over time in.
In fact, we are working on over 20 different PPI initiatives in our store operations. This year to highlight just a few key PPA initiatives.
We have just launched a new store inventory management system or sales across all of our stores. This platform gives store associates real time visibility to inventory in their store. This includes inventory of the homebase location as well as product and the top stock and cap off shelf and Backstopped ground. This new.
System will eliminate the countless nonproductive hours associates have been spending looking for product.
I'm also excited about our continuing efforts to eliminate the ancient green screen technology with the launch of our simplified user interface to other selling stations throughout the store.
First introduced at our front end registers, we're beginning to implement this new technology across the sales floor.
With this new platform, we are accelerating the associate training process and facilitating cross training and other departments. This new technology will free up our associates to focus on providing excellent customer service, while reducing customer wait time.
While these two initiatives are just a few of the PPI deliverables planned for this year. We expect that these two initiatives alone will drive $100 million of productivity this year looking.
Looking forward, we will continue to leverage technology to reduce manual tasks for our associates, while also enabling them to deliver better service to our pro and DIY customers.
I would like to close once again by thanking our store associates for their continued hard work and dedication and the great results. We achieved together this year with that I will turn it over to Dave.
Thank you Joe I'll begin this morning with a few comments on the U S economy as it relates to the home improvement sector.
As Marvin indicated the consumer backdrop remains favorable as we are confident that home improvement demand will remain strong despite an uptick in interest rates here.
Historically when interest rates have risen against a strong economic backdrop, the home improvement sector has delivered solid growth.
During these periods housing affordability was supported by growth in jobs, and personal income, which offset the impact of higher borrowing costs.
Today housing affordability remains above the pre pandemic average.
The market is expecting moderately higher interest rates in the coming quarters, but keep in mind rates are increasing off historic lows home equity has increased due to rising home prices and consumer savings are about $2 five trillion.
Higher than pre pandemic levels positioning consumers for continued residential investments given all these factors we are expecting another strong year of demand in the home improvement market.
Now, let me turn to capital allocation, we remain committed to be best in class when it comes to our ability to create value for our shareholders through our strong capital allocation program.
In 2021, we generated $8 billion in free cash flow driven by outstanding operating results and we returned $15 1 billion to our shareholders through both share repurchases and dividends.
During the fourth quarter, we paid $551 million in dividends and repurchased approximately 16 million shares for $4 billion. This brought the total to $13 1 billion in share repurchases for the year ahead of our expectations of $12 billion.
This reflected better than expected financial performance and our commitment to return excess cash to shareholders.
<unk> expenditures were $597 million in the quarter and nearly $1 9 billion for the full year as we continue to invest in strategic initiatives to both drive growth and enhance returns across the business our balance sheet remains very healthy adjusted debt to EBITDAR stands at $1 98.
<unk> well below our long term leverage target of 275 times.
As I mentioned at our December 15th Investor update we are planning to return to our leverage target over the next two years driven by our shareholder focused capital allocation strategy.
With that I'd like to turn to the income statement.
In the fourth quarter, we reported diluted earnings per share of $1 78.
An increase of 34% compared to adjusted diluted earnings per share last year.
This increase reflected better than expected sales growth improved gross margin rate and favorable SG&A leverage driven by our productivity initiatives.
In the quarter sales were $21 3 billion.
Reflecting a comparable sales increase of 5%.
Comparable average ticket increased nine 4% with higher ticket sales and appliances flooring and seasonal and outdoor living and 90 basis points of commodity inflation in both lumber and copper.
In the quarter comp transaction count decreased four 4%, but on a two year basis comp transactions increased eight 9%.
We continue to gain traction with our total home strategy as reflected in pro growth of 23% and positive DIY comps on top of extremely strong DIY growth last year.
On Lowes Dot com sales increased 11, 5% in the quarter.
U S comp sales increased five 1% in the fourth quarter and 35, 2% on a two year basis.
Saw acceleration in both our pro and our DIY comp sales trends from our third quarter performance.
By month, our U S comparable sales were up eight 1% in November up seven 4% in December and down one 3% in January .
Recall that we cycled over government stimulus in late December and early January of last year.
But looking at U S comp growth on a two year basis from 2019 to 2021 November sales increased 33, 8%.
December increased 37, 4% in January increased 33, 9% gross.
Gross margin was 32, 9% of sales in the fourth quarter up 115 basis points from last year.
Product margin rate increased 65 basis points, driven by our disciplined pricing and cost management strategies.
Improvements in both shrink in credit revenue benefited gross margin by 50 basis points and 25 basis points respectively.
These benefits were partially offset by roughly 30 basis points of pressure related to higher transportation and importation cost as well as the expansion of our supply chain network.
I'd like to spend just a moment addressing the recent increase in lumber prices. We are confident that we have an effective strategy to carefully manage our inventory and rapidly adjust pricing.
Although we are planning for our lumber margins to be compressed when prices decline. We are confident in our outlook for gross margin rate to be up slightly in 2022.
Turning to SG&A, we leveraged 15 basis points versus Earl Y driven by higher sales and our relentless focus on productivity.
This quarter, we incurred $50 million of Covid related expenses as compared to $165 million of Covid related expenses last year.
This reduction in these expenses generated 60 basis points of SG&A leverage.
Additionally, we incurred $150 million of expenses related to the U S stores reset in the fourth quarter of last year.
As we did not incur any material expenses related to this project in 'twenty. One this generated approximately 75 basis points of SG&A leverage versus Earl y.
These benefits were pressured by 100 basis points related to the discretionary yearend bonus of $215 million for our store based frontline associates.
Operating profit was over $1 8 billion in the quarter, an increase of 21% versus FY <unk>.
Operating margin of eight 7% for the quarter increased 115 basis points over last year, largely driven by higher gross margin rate as well as favorable SG&A leverage the effective tax rate was 25, 3% in the quarter, which is in line with prior year.
At year end inventory was $17 6 billion.
Up $920 million from Q3 and in line with seasonal trends and consistent with our effort to land spring products earlier, driven by both improved operating performance and a disciplined capital allocation strategy. We delivered return on invested capital of 35% for the year up <unk>.
760 basis points from 2020.
Now turning to our 2022 financial outlook, we closed out 2021 ahead of the expectations that we presented at our December 15th Investor update.
Month to date February U S comparable sales trends are in line with our fourth quarter performance on a two year basis.
And based on the continued momentum that we're seeing in pro sales as well as higher expectations for commodity inflation, we are raising our sales outlook for 2022 to a range of between $97 billion to $99 billion for the year, representing comparable sales of down 1%.
Up 1% now.
Now please keep in mind that our outlook assumes that lumber pricing will return to a more normalized level in the second half of the year.
We continue to expect pro to outpace DIY in 2022.
Keep in mind that we are cycling over an estimated 300 basis points of stimulus in the first quarter.
Also as a reminder, our 2022 sales outlook includes a 50, <unk> week, which equates to approximately one to $1 $5 billion in sales.
We now expect gross margin rate in 2022 to be up slightly as compared to the prior year.
With higher projected sales improving gross margin outlook and continued execution of our PPI initiatives, we are raising our outlook for operating margin to a range of 12, 8% to 13% from our prior range of 12, five to 12, 8% for the full year.
We are also raising our outlook for diluted earnings per share to a range of $13 10.
To $13 60.
From a prior range of $12 25.
To $13.
In 2022, we continue to expect capital expenditures of approximately $2 billion.
And share repurchases of approximately $12 billion.
Finally, we are raising our outlook for return on invested capital to above 36% from our original outlook of approximately 35%.
In closing we're off to a great start in 2022, we have significant runway ahead of us to both grow our market share expand operating margins and deliver meaningful long term shareholder value.
With that we are now ready for questions.
Thank you.
We're now ready for questions.
I like to ask a question press star one on your telephone keypad to withdraw your question Press Star two.
Two last 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 Kate Mcshane with Goldman Sachs.
Hi, good morning, Thanks for taking our question.
I Wonder if you could maybe talk a little bit more about inflation, how youre gaining inflation as part of the comp sales guidance for 2022.
Yes.
Good morning. Thank you for the question as we think about.
Next year and if you look at our guide of down one to up one we would expect units to be modestly down.
And our average ticket offsetting that almost dollar for dollar.
Okay. Thank you.
And based on what you said about February it does seem like there may have been an acceleration from what you saw in January .
February .
And on a one year.
Is it is it right that you're seeing better trends in February than January I should really just be thinking about things on that on a two year stack.
Kate It is true we are seeing better trends in February than January but on a two year basis you'd need to think about it our trends in February consistent with the two year trends for the fourth quarter, which is really solid.
Thank you.
Our next question comes from the line of Mike Baker with D. A Davidson. Please proceed with your question.
Mr. Baker Your line is live for question.
Hi, Thanks, sorry.
On the pro side in the past you've talked about it as being anywhere between 22% and 25%.
Your orange competitor yesterday bump there.
Talk about the pro is the 50% that used to say somewhere in the low to mid forties.
I understand that it's hard to exactly number but any update on what you think on an annual basis. The pro penetration is and then more importantly, what do you think it can get to.
Yes look I think your first statement is directionally correct on what and where the penetration is we just know that business continues to be very strong.
Think about 23% comps in the quarter at 54% on a two year basis, maybe we feel great about that business and think you'd noted we spent quite a bit of time over the last three plus years, making not only investments and adding products to our assortment, but also our service levels.
Fulfillment and we're very pleased as I mentioned in my prepared comments and with the launch of our new pro loyalty program and as I mentioned as well.
<unk> seen a 300% increase in <unk> sales for pros engaged in our loyalty and credit program and so we're always going to be a significant part of our growth. This year and we still feel very encouraged by the progress.
Okay and as a follow up DIY, you said up Chinese last year fair to stay up in the low single digits slightly up something in that range.
The math suggests.
That's correct, we saw expansion and growth.
Obviously, the pro but importantly, the DIY as well.
Yes.
Thank you.
Welcome.
Our next questions come from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Good morning, everyone. My first question is on EBIT margin now.
Now that it looks like you could get to 13% in 'twenty. Two if you look at the model in the out years and I know you haven't really given anything past. This is the correct way to think about moving past 13, as it bids productivity driven meaning its all throughput as sales per foot keeps rising.
Yes, I think that is correct I mean, we're excited about in December to come back.
Complete management team and really outlines the building blocks for our progression above and beyond our 13% level.
We think about EBIT margins, but yes, I think about productivity is the main driver of that as we continue to lean in to both the pro business as well as healthy growth in our DIY business.
Thanks, and my follow up is on inventory there's been this big divergence in Q4 now between you and home depot and if we try adjusting to see if there is a catch up it doesn't look like it's the case and so I guess Marvin when you've got to lows I think it was the first and maybe even the second spring, where you where you put loans on the offensive in terms of inventory. So the question.
For you is are you pleased with what you've bought so far and are you pleased with the visibility of what's coming in for this spring and even for the year.
Short answer is absolutely I give a lot of credit.
To build on the merchant team, Doug thrive within the supply chain team for working in a very collaborative fashion to make sure that not only are we feeling good about what we have from a product category, but also the quality of the inventory and as Dave mentioned in his prepared comments.
The coastal holding facility that we established on both the east and west coasts have given us the ability to land input product early take possession of it.
On a temporary basis will elevate inventory levels that we feel is a prudent thing to do to make sure that we have that product available out of that global supply chain. So we can get it towards R&D season, our stores, but we do feel good about where we are we feel good about the investments we've made in job lot quantities will close.
Heading into spring, which as you know is a significant sales periods loss, we're in really good shape.
Thank you.
Thank you.
Our next question comes from the line of Scot Ciccarelli with Truth Securities. Please proceed with your question.
Good morning, guys, obviously business is still exceptional but what kind of impact are you projecting from higher interest rates on the housing market and what is your framework for those projections.
Yes, Scott kind of in my prepared remarks, we've talked about interest rates do have an impact to some degree but it can go back and historically look at periods of time of interest rates have risen at the same time, we had really good economic backdrop actually the home improvement sector has benefited from that and I think it is.
Cycle into 'twenty two each.
Do you see that same kind of economic climate now so we feel like the demand profile in the sector is.
And number one and number two maybe of the efforts that we're embarking upon and actually beginning to gain some traction we're going to actually disproportionately take share in the marketplace. So we feel like we're really nicely positioned to deliver a really solid 22, and if you think about the future growth of this business in a really healthy healthy manner.
This is <unk>.
Just want to add.
I do think that home improvement often times gets combined with home builder.
Relative to interest rates.
Obviously, the sectors are entirely different.
Hi, Thanks.
Sure.
I think <unk> comments are so important that historical trends will show convincingly that high interest rates combined with others.
With macro indicators do not have a negative impact on home improvement home buying.
Sure, it's totally different equation, but we want to make sure that there is a lot of delineation between the two sectors.
So just just to be clear guys. So they are at this point there is no assumed degradation in sales trends because of higher interest rates that's correct.
Got it thank you.
Youre welcome.
Yes.
Our next question comes from the line of Chris <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody can I just can you just delve into the factories a bit more about what's driving the increase in the comp outlook in 2022, so to what extent are you expecting a higher level of market growth versus what you laid out in December .
To what extent are you assuming more share gains and then.
How does that compare to your expectations on price inflation.
And how lumber will play out.
Yes, I think there is really three things that are driving our increase in our guide from a topline perspective. One is we do think the market is going to perform a bit better and by the way. We still think we're going to and belief in plan for us outpacing the market from a growth perspective.
We are seeing higher levels of commodity inflation than what we planned back in December largely in lumber that kicking our sales progression up slightly in the first half of the year and then third we're seeing really strong.
Sustainable performance in our pro business and that demand has been really consistent through Q4, and we're leaning into Q1 and a very consistent manner.
Healthy manner from a focus perspective, Chris I'm going to just add a little commentary on the progress of this is Marvin.
Survey.
Pro.
That.
Issued publicly in just a couple of interesting data points, when we talk to pros and DIY customers.
Both said.
They see continued investment in.
In the home.
Yes.
At a pace of over 50% of everything that <unk> project and a roughly 50%. So there is a powerful and then when you talk to our pro customers we have in detail.
Daily continue to let us know that their book of business is more robust than they've ever seen.
<unk> project line that was put out this year some projects may carry over into 'twenty three.
And to help that business is very strong and I think.
All of the investments that we've made in our.
Merchandise Assortments and our service levels in our stores and our supply chain is driving that business again, two year comp improved 54%.
Pretty good.
Understood and then can you also talk about the gross margin a little bit.
The shrink in the credit performance were quite strong.
And gross margin came in better than expected.
How do these sort of proceed into 2022 and whats elevating your gross margin outlook relative to what you talked about in December . Thank you.
Yes, listen I think first and foremost we're just extremely pleased of the performance from a shrink perspective, I think the store teams and the loss prevention teams have just done an excellent job of managing that and now it's becoming a bit of a tailwind for us as opposed to a headwind which is historic.
As we leave the 20 to think about a few things happening.
In general for the full year, we expect gross margin to be up slightly product margin to really lead. The charge. There is we really manage pricing cost very effectively.
<unk> and credit programs without that was largely neutral to our performance versus 22 versus 21, and then we'll have a little bit of headwind as we think about both rates and supply chain and our continued build out in the supply chain ecosystem.
Thanks, very much best of luck.
Thank you.
Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question Marvin I think you've mentioned earlier today that about half of low sales growth with second half of last year.
Due to product inflation home depot mentioned yesterday, they got an 800 basis points.
<unk> comp benefit from product inflation at what point does the consumer start to pushback or the industry experienced an elastic response from all of the inflation that will pass through especially as there is a return to normalcy mobility increases.
In other categories shifts on a return to normalcy.
Michael look I'll give you just a more philosophical.
Cyclical perspective based on the trends that we see.
So.
We are very confident that there are certain trends that will sustain you.
Millennial household formation trends that are much more robust than any of us had anticipated.
And Debbie you.
We're also seeing the.
The investments in the home.
We'll maintain simply because there's so many millions of people working from home permanently.
Yet even as we hope and trade and then that will dissipate.
You still will have millions of people, who will permanently worked from home that's been a draw youll certain investments in repair and maintenance that we think will.
All of that.
And 'twenty, two and the work that the merchants and the finance team has done to drive cost out.
Make sure that whatever price increase is driven by inflation.
Pushing toward our customers, we're still doing that.
Competitive price because we are taking a multitude of all actions to ensure that we are trying to drive other practice cost data look you know this I think one of the only larger retailers.
This reported this reporting.
An increase in gross margin for the quarter and for the year 40 basis points standpoint.
Also regarding debt for the balance of 'twenty, two we're going to see gross margin rate continue to improve that gives you an indication that we have.
Some degree of confidence we can manage this holiday for automotive financial specifics on kind of what we've what we've seen and what we see going forward, yes, Michael I would just add to marvin's comments here, we've really put in a very robust process and analytical tools around this such that we're measuring and monitoring as we take our increases from a cost.
Perspective, first we pushed back on that when appropriate we take a portfolio approach to adjusting our pricing and then we measure and monitor the performance from our unit velocity perspective, and we adjust as needed when they need to do that such that we get the best.
Price points from a consumer perspective, but importantly, what also drives the economic value here at Lowe's.
Thank you my follow up question is low helpful.
Very interesting initiatives that are either in the early stages or just about to launch most notably the supply chain transformation and the launch of the pro loyalty program. So can you give a breakdown of the financial impact that you've seen from those both of both of those pro.
Graham as you've tested them and then what you factored in as far as the contribution from each of those in the year ahead.
Well, maybe I'll take the contribution just from a planning perspective. These programs are well planned and well thought out we have a substantial financial model associated with that we test and learn as we go and so we have a we feel like our plan for 2022, we have a very good line of sight to performance being driven out of those.
II program, so first and foremost what kind of check that box and then I'll, let Martin chat about the program.
No look I'll, just I'll just repeat what I said on the flow.
Tested our loyalty program all of 2021, we've made different tweaks to it based on feedback from surveys from our pro customers. We feel like we have a program that's going to drive differentiation and adoption and as I mentioned.
When customers engage in the pro loyalty and our credit program, we're seeing a 300% increase in.
And sales.
And we think that we're going to see some level of retention and engagement with our pro customers based on the loss it will be.
Happening within the next couple of weeks so again.
Excited about the test and learn environment, we've created and to Dave's point, we put a lot of robust processes in place to ensure that we have good visibility to what we think each of these programs will deliver.
Thanks, a lot and best of luck.
Thank you.
Yes.
The next question is from the line of Stephen to come with Citi. Please proceed with your questions.
Good morning, Thanks for taking my question.
Had a question on the DIY side of the business. So it sounds like most of the guidance raise is contemplated on the pro and then commodity inflation, but can you comment.
<unk> outlook has changed in 2022, and then larger picture on DIY.
<unk> will eventually see a give back of spending in the category, but it seems to still be accelerating as of late and it's still strong what are you seeing in terms of purchase activity. Our project sizes from your customers that gives you confidence in the sustained strength in DIY.
Hey.
Steve Thanks for the question.
Our DIY sales were very very strong in 2020, or so year over year. We had tough compares when we were able to grow that business.
Even though the purpose of really aggressive sales last year, one of the things that we're leaning into.
Part of our total home strategy is private brands.
Private brands, specifically in the core related categories.
<unk> talked a little bit about what.
We're leaning in there and how we believe that thats going to give us some level of continued growth and differentiation yeah. Thanks Marvin.
Just a little more color around the DIY business I think as we.
Head into spring.
As we mentioned in our prepared remarks, we talked about a couple of key private brands that will play a big role in the spring will be origin, 'twenty, one, which we're excited about that that's a new modern brand. So youll see it introduced in patio youll see it in some of the core categories in our stores.
And then Allan Roth, we worked really hard over the last 18 months to enhance the brand and so that's more of a traditional style and so that will play a big role as well and then we're really excited about the expansion of sustained Masters Stainmaster as you know we acquired a year ago.
It was largely a carpet brand, but we have opportunities to use that in other categories and flooring really building off of its characteristics and then along the same lines as we look at look into the spring season, our livelihood and nursery business very strong has been a really nice run over the last couple of years and that plays a large.
Roll in our DIY business as we go into spring as well. So we're really we're optimistic around the DIY business as we head into the first half.
We're we're students of history, and we know that one.
One of the strategic mistakes historically at low was to overcompensate and over penetrated in private brands.
<unk> related categories, and so bill and his team have been very very specific to continue to lean in to national brands on the pro side.
But on the DIY side, specifically only for the.
Customers are telling us the overwhelming year to date alone.
Design capabilities of private brands.
For differentiation and also more of a margin rate benefit and again, we think we're off to a great deal.
Great very helpful. Thanks, guys.
Thank you. Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.
Great. Thank you how much market share do you think you've taken in the last three years and if the supply chain disruptions normalized in some of your smaller competitors are able to get product again do you see some of those share gains moderating.
Yes.
Fair question, but I will repeat what I've said, a couple of different times home improvement does not have great market share data that we can blame very specific answers to what I can tell you based on just our on the ground but analysis.
Is that we are in fact, taking market share it's hard to grow a business. This yield by over 35% on a two year basis and is not coming from somebody. We also are aware that there are winners and losers in retail based on the efficiency of your supply chain.
We are fortunate that we are one of the largest importers of competitors.
And we have great supplier relationships that the merchants continue.
So do we believe that we're winning.
We think we will continue to take market share in 2022, as Dave said earlier, we absolutely believe we will and we think it will take it across pro and.
And DIY, both in store and online, but again, we can give you a lot of specificity of the data set is not it moves but from our internal data we continue to.
Our data suggests that we're performing two to 300 basis points ahead of the market pretty consistently and that would be our expectation going forward as well to outperform the market.
Great. Thank you and just I mean, how much do you think that the expansion into home decor, and new product categories increases your total addressable market.
So it's a great question, we can only go by the feedback that we received from our customers. When we do surveys and we do different types of focus groups and what they are telling us is that they are more brand agnostic when it comes to home decor related categories and they're more concerned with quality of good style.
Our employees.
What <unk> done with the launch of origin 'twenty, one and will be continued improvement in all of the loss as an example.
It gives us a lot of confidence in and we're really excited about state Massa as bill mentioned that you're going to see it go into more hard surface flooring, but we have some other really exciting ideas that will be shared over the next couple of quarters, where we've been extending this very very recognizable and high quality brand into other home improvement categories that customers I think it would be.
We're excited about.
Great. Thank you so much Rob.
Rob we're going to take one more question. Please.
The final question will be coming from Eric <unk> with Cleveland Research.
Good morning.
Two things if I could first of all the last two years had been relatively unique in terms of pricing and promotion and mix.
Pretty aggressive consumer and pro customer.
You think about 'twenty, two and it sounds like you think 'twenty two kind of largely feels like the last couple of years is your strategy the same with pricing promotion and mix.
Did those efforts normalize a bit towards what we had seen historically.
Eric I think theyre going to be fairly consistent our plan is fairly consistent in 'twenty two versus 'twenty one yes.
But I'll, let bill comment on that too Eric its bill and so as you know over the last couple of years. We've been on this journey of getting to more of an everyday competitive price and trying to wind down what has historically been here at very high load approach to marketing and promotion and.
Very successfully been able to do that and that has now given us the runway to continue to provide value in a number of different ways to our consumers both through special buys special values.
<unk> offerings and so.
That's the journey, we're on and that's what we're excited about being able to get off of that what historically high low approach.
Allows us to be in this everyday competitive pricing in our home improvement business and Thats, what thats, what we wanted to be.
Okay, and then and then secondly within the guide for 'twenty, two which I think you spoke to negative units and price offsetting that to get to a comp dollar growth.
They haven't had a negative unit plan our outlook in quite some time for your business I'm curious how you marry that up then with your inventory strategy and also with how you manage labor.
Specifically in terms of the investment or the growth in both of those areas in a year, where your the outlook is reasonably for negative units.
So Eric I'll take the first part of it but I'm going to let Joe talk a little bit about how our new labor.
Our labor system allows us to make real time adjustments by store by department of based on.
Ticket and transaction.
You have to understand that one of the reasons why you guys see negative.
This is because the DIY customer.
The heart of the pandemic made types of purchases if theyre not going to make in an era, where there is less concern around.
The virus and less nesting at home.
We had cleaning purchases that drove a lot of transactions not a lot of ticket we had a lot of garden purchases and drove a lot of transactions not allowed ticket because people were at home and they were saying.
CAGR would like take a lot of activity not a lot of ticket and so as weak as we normalize year over year.
Those activities are not sustainable so when we say that ticket is not as though we believe that we see less customer traffic. We are just seeing DIY customers.
Different projects than they had when they were confined to their homes and staying busy with just random different projects around the house.
So when we look at that we just made a lot of transparency around how we view the inputs to what's driving sales, but we have no concerns there.
Have a traffic issue or we have a customer demand issue. This is just more normalizing over unique activity in envelope.
I'll, let Joe talk about our laser system and how we can manage it based on all of those inputs.
Thanks, Bob and Eric.
Remember two years ago, we put together.
Topnotch workforce management team and we've developed.
Labor model that is activity base. This labor model has served us well.
Sales have.
Taken off and exceeded expectations.
Prime appropriate leverage standpoint, and does the same and balancing out the ticket and transactions. So we're very pleased with our staffing.
And our outlook for 2015.
Thank you.
Thank you all for joining US today, we look forward to speaking with you on our first quarter earnings call in May.
This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.