Q1 2022 Lowe's Companies Inc Earnings Call
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Good morning, everyone.
And welcome to lowest company's first quarter 2022 earnings Conference call. My name is Kevin and I'll be your operator for today's call.
As a reminder, this conference is being recorded I will now turn the call over to Kate Pearlman, Vice President Investor Relations. Please go ahead Kate.
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 brand, Thank our executive Vice President and Chief Financial Officer.
I would like to remind you that our notice regarding forward looking statements is included in our press release. This morning, which can be found on Lowe's Investor Relations website.
During this call we will be making comments that are forward looking including our expectations for fiscal 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 risk factors MD&A and other sections of our annual report on Form 10-K, and our other SEC filings.
Additionally, we will be discussing certain non-GAAP financial measures a reconciliation of these items to U S. GAAP can be found in the quarterly earnings section of our Investor Relations website before we turn to our first quarter results I would like to announce that we will be hosting an analyst and Investor conference in person on Wednesday December seven from eight a M to one P M. Eastern time in New York City.
For those of you who are unable to attend in person. The event will also be live streamed on video.
At this event, our executive leadership team will provide updates on our key growth initiatives and our total home strategy and our long term financial target with that I'll turn the call over to Marvin. Thank.
Thank you Kate and good morning, everyone in the first quarter, our total company comparable sales declined 4% with the U S comps down three 8%.
Excluding our seasonal category sales were in line with our expectations for the first quarter.
Looking at sales growth on a two year basis total company comps and U S comps were up approximately 20%.
In probe, we delivered growth of 20% and 64% on a two year basis.
We also saw solid DIY demand for core non seasonal home improvement projects.
However, we experienced a delayed spring selling season due to prolonged unfavorable weather that impacted spring related categories.
In fact to put this into historical context. The past April was the coldest in over 20 years and one of the wettest in recent memory.
But now spring has finally arrived and we were seeing the anticipated improvement in our seasonal sales in the month of May.
I would like to provide some perspective on the impact that a very delayed spring has on our do it yourself or DIY sales.
As a reminder, roughly 75% of our sales are to the DIY consumer and many seasonal categories like live goods outdoor power equipment grills and patio furniture are more heavily concentrated in DIY.
While spring was delayed across all geographies. The season came particularly late in the north where sales were down double digits in many of our northern markets.
And at the same time cells in our Florida, Charlotte Nashville, Houston, Atlanta, Dallas, and Richmond regions were ahead of our sales expectations, even though spring weather was unfavorable in those regions as well simply.
Simply stated the further north you look at the larger the negative impact to our seasonal categories.
Although the late spring postpone our DIY sales, our pro customers continue to shop to fuel their strong business demand.
In a recent pro surveys indicate that the majority of our pro customers continue to report strength in their business and a full slate of projects for the year.
At load, we see spring as a first half event and as I mentioned, we are encouraged by the improved sales trends, we're seeing in the month of May.
We're also ready to capitalize on increased demand with our enhanced assortment strong inventory position improved supply chain capabilities and seasonal staffing in place to serve our customers.
Later in the call Bill will discuss our plans to when spring again this year, while Joe will discuss how we're serving our customers doing this busy season.
Currently our toll home strategy has given us the agility and flexibility to deliver operating margin improvement even when sales decline.
During the quarter operating margin expanded approximately 65 basis points, leading to diluted earnings per share of $3.51, which is an increase of over 9% versus last year.
These results reflect great operational discipline. In addition to excellent execution in a number of key initiatives, including our enhanced labor management tools are.
Petrol productivity improvement or PPI initiatives, and our improved pricing capabilities.
All told home strategy also enable us to win with both the pro and DIY customer in Q1, as we elevate our product assortment and provide our customers with the products and brands that they need across all of their home improvement projects.
Yeah.
Let me now discuss the progress, we're making with our pro customer.
As I mentioned, we delivered pro growth of 20% in the quarter on top of 36% comps last year.
The progress, which is very important customer is reflected in the nearly 600 basis point increase in pro sales penetration in the U S from approximately 19% in Q1 of 2019 to approximately 25% in 2022.
Later in the call Joe will discuss how we continue to drive growth in pro with the early success of our Lowes Mvps Pro rewards and partnership program that was launched in the first quarter.
On Lowes Dot Com sales grew 2% on top of over 36% growth in the first quarter of 2021, which represents a two year comp of over 39% and nearly 10% sales penetration.
As we enhance our omnichannel offering we are gaining traction with consumers, who increasingly expect a fully integrated shopping experience.
We're also expanding our market delivery strategy by adding other big and bulky products in Florida.
Clothing, patio grills and riding lawnmowers to the appliances that we already deliver from our cross dock terminals.
By adding these incremental products, we're better leveraging our fixed costs.
While enhancing customer service at the same time.
We've also converted our fourth geographic area to Tennessee, Kentucky region to this new delivery model.
We're on track to convert our full portfolio of stores to market delivery by the end of 2023.
Turning to our results in Canada, where our performance lagged the U S. In Q1 last year Canada's results benefited from a record high lumber prices due to the higher lumber mix in our Canadian business.
In closing despite some increased uncertainty in the macro environment, our long term outlook for the home improvement industry remains positive.
Homeowner balance sheets are very strong and their confidence to purchase big ticket item is supported by continuing home price appreciation.
Other factors like the extension of remote work the age of the housing stock Millennial household formation and baby boom was preference to age in place all our long term tailwind for home improvement.
And over the past few years, we have greatly improved our operating capabilities. So that we now have the agility needed to respond in this dynamic macro environment.
These enhanced capabilities will allow us to continue to take market share while expanding our operating margin.
And as a reflection of lowers his commitment to the community at the beginning of the year, we announced a new community impact program call Loews hometowns.
This is a five year 100 million dollar investment to improve the communities in which we live and work.
And to ensure we remain committed to giving back to our customers.
And before I close I would like to welcome Brandon zinc to his new role as EVP and Chief Financial Officer.
Brandon brings tenure home improvement expertise and strong financial and operational acumen to this role and we're excited to have him on the executive leadership team.
I would also like to take a moment to thank Dave Denton for the contribution he made as CFO the past three years.
And at levels, we believe that our store soldiers are a competitive advantage and I would like to close by thanking our frontline associates for their hard work and dedication.
And with that I'll return the call over to Bill.
Thanks, Marvin and good morning, everyone in the first quarter U S. Comparable sales declined three 8%, but were up 19, 7% on a two year basis.
This quarter, we delivered a strong positive comp in building products driven by our momentum with the pro.
While sales in home decor came in above our expectations driven by solid DIY demand.
However, comps in hard lines were down compared to prior year as a delayed spring season impacted seasonal categories.
We are particularly pleased to see improved demand in seasonal categories over the past few weeks as spring weather has finally arrived.
In the quarter 10 of 15 categories were above company average, while eight categories were up over 20% on a two year basis.
Within our home decor division paint and flooring delivered the strongest comps this quarter.
Inside our paint category the biggest growth drivers were in interior and exterior paint and primers as our in stocks continued to improve throughout the quarter.
Also our investments in our propane offering continued to pay off as we've enhanced our pro service model expanded associate training and have built out our job site delivery capabilities.
We are building on this momentum with the recent launch of our new incremental paint reward program for our Mvps Pro customers. In addition to the other meaningful rewards they have already received.
Within flooring luxury vinyl was once again the top contributor as our consumers continue to prefer the low maintenance and stylish solutions that this product category has to offer.
We also refreshed our stainmaster carpet lineup continuing to reflect current styles and consumer preferences and in late March we launched our first extension of the stainmaster brand in tile and right behind Tayo, we are launching new laminate and luxury vinyl products in stainmaster as well.
We're excited to have the stainmaster brand within our portfolio and to extend its high performance characteristics and stain resistant warranty to these new product categories.
With this new brand lineup, we are offering innovative and functional products for the home.
All at a great value for our customers.
Now turning to building products.
We continue to see broad based strength across key pro categories, including electrical building materials rough plumbing, millwork and lumber driven by strong pro demand and competitive in stock positions.
Building on last year's strong performance, we delivered a positive 38% two year comp in building products, which continues to reflect the persistent underlying strength in consumer demand for larger core home improvement projects and to a lesser extent commodity inflation.
Over the past several years, we have been focused on expanding our brand and product offerings to meet the needs of our pro customers.
This quarter, we are excited about the introduction of Orange Corning, new fiberglass rebar known as Pink bar.
This pro family product is stronger than traditional steel rebar and seven times lighter, which makes it both easier for the pro to work with and less costly to ship.
We're also excited to announce the national expansion of the APAC roof coating brand, which is a leading manufacturer in roofing and an important strategic partner to Lowe's.
These new products and brands are strong additions to our outstanding Pro brand portfolio, which already includes other powerful brands like Bosch Crescent, the Walt Eaton S. Dwayne fashion Master Flex G RK ITW Lesko little giant Lufkin Mansfield Marshall.
Martaban shark bite Simpson strong tie expects spider and warranted.
Now looking at our performance in hard lines as I mentioned earlier, our seasonal categories were impacted by delayed spring.
As the weather has finally broken over the past few weeks, we have now seen higher demand across the seasonal categories.
And it's important to remember that spring is always a first half event and while this year's spring season has started slow the teams are focused on delivering a successful spring again this year.
From the convenience and quality of the igo cobalt craftsman and skill brands with their zero emission rechargeable equipment to our other leading brands such as John Deere Honda Husqvarna, Aaron's and Craftsman, we offer the products that our customers need to have the best looking yard in the neighborhood.
We're also continuing to expand our private brand lineup with new products and origin 21, our new modern brand as well as our popular Alan and Roth brand, which is tailored to the more traditional taste.
Spring Fest, which is our new approach the spring is a multi week event and we leveraged several strategic promotions for popular spring items like mulch soils and hanging baskets to deliver great value for our customers.
And we are well positioned to capitalize on the late surge in spring demand and I look forward to updating on this first half event on our second quarter call.
Now looking at Lowes Dot Com as Marvin mentioned, we saw a positive 2% sales growth in the quarter and over 39% positive growth on a two year basis.
We continue to enhance the user experience on lowes dot com and our omnichannel capabilities, which is critical for consumers, who increasingly expect flexibility and seamlessness in their shopping experience.
Our new paint and countertop visualize yours are driving better conversion rates and we also enabled our customers the ability to order bag goods online for in store pick up ahead of the spring season.
And as Marvin mentioned, our enhanced supply chain capabilities, including our expanded coastal holding facility network are now in place to enable us to flow product quickly to where it's needed as weather breaks across the country.
And we continue to leverage our scale and carrier relationships to secure capacity and work to mitigate cost increases within our supply chain.
Before I close I'd like to once again, thank our vendor partners and our merchants for their hard work and dedication.
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 their continued commitment to serving our customers, especially in this busy spring season.
We are laser focused on delivering a consistent and high quality customer experience at the same time, we have labor aligned to demand patterns. So that we effectively managed store payroll this quarter, even in a lower sales environment. The investments that we've made over the past several years and our enhanced labor management tools are clearly paying dividends.
As we flex labor across stores and departments. So effectively that we continued to achieve strong customer satisfaction scores.
Also the technology enhancements that we've made over the past several years enable our associates to spend 60% of their time, serving customers and only 40% on manual tasking activities. As a reminder, as recently as 2018, 60% of all associates time was allocated on tasks that did not.
Support the customer we flipped this ratio by enabling more and more capabilities on our associates handheld mobile devices, which eliminated many time consuming tasks.
This is in addition to new technology that has enhanced our point of sale checkout modernize project management improved inventory visibility and digitized in store pricing for appliances and lumber.
This improved associate productivity has not only driven profitability, but it has also enhanced our customer service.
And we continue to unlock further productivity through our perpetual productivity improvement or PPI initiatives. As a reminder, our PPI initiatives are not one time efforts, but rather a series of initiatives that are scaling across our stores over time, all of which contribute to operational efficiency as well as a culture.
Continuous improvement is.
As Marvin mentioned earlier the success of our PPI initiatives contributed to our strong operating margin performance in Q1.
Now I'd like to take a few minutes to discuss our strong pro results in the first quarter. When we launched our Mvps Pro rewards and partnership program, which is centered around creating a business partnership with our pro we are really pleased to see the better than expected adoption rates for the new program and we expect to build on this momentum with the pros.
As we launch enhanced features to the loyalty program in the coming months.
Through this program. We are also gaining valuable insight about our pro customers that will enable us to better anticipate and meet their project needs through our pro CRM platform and allow us to continue to expand our share of wallet with these valuable customers.
And we are expanding our pro fulfillment capabilities with our new pro fulfillment center in Charlotte, where we are stocking the top skus that pros consistently need in job lot quantities as we pilot this new approach to pro fulfillment. We are building on our existing job site delivery capabilities handled through our stores and Lowe's Pro <unk>.
Fly branches today, although we are pleased with our 600 basis points of growth in pro penetration over the past three years, improving our fulfillment capabilities will allow us to accelerate this growth and continue to gain market share. In addition to the success of our new pro initiatives I am pleased with our strives to become the employer of choice.
In retail as a company we are committed to investing in continuous learning and development throughout our associates careers through Lowe's University as well as a new debt free education program that we just announced.
Through this initiative more than 300000 associates are eligible to participate in over 50 academic programs free of charge. These programs are designed to help associates excel in their jobs today and build toward their future careers with them lows, including pathways into supply chain logistics data analytics.
Cyber security technology and more.
Finally, I'm pleased to report that we are in a better position from a hiring staffing standpoint than we were at this time last year.
We accelerated our associate hiring process through new technology that dramatically reduce the time it takes us to process applications.
These new tools ensured that we captured the best candidates in the pipeline and helped us step up quickly for spring.
Looking forward, we are making the right investments to continue to drive productivity, while also enhancing our customer service and we are well positioned to serve our customers to meet the surge in demand for spring products.
As I close I would like to once again, thank our store associates for their relentless focus on serving customers and driving productivity in our stores with that I will now turn it over to Brandon.
Thank you Joe I'd like to begin by saying what an honor it is to serve as low as CFO over the past several years, we've made tremendous progress transforming lowe's into a leading omnichannel retailer with a world class Finance organization I'm extremely excited to be joining the executive leadership team in my new capacity as we continue our momentum.
Now turning to Q1 results, we delivered diluted earnings per share of $3.51, an increase of 9% compared to prior year driven by improved gross margin rate and disciplined expense management against lower sales as.
As expected, we lapped our most difficult sales comparison of the year given the approximately 300 basis point benefit from government stimulus last year.
Q1 sales were $23 7 billion with a comparable sales decrease of 4%.
Comparable average ticket grew 9.1% driven by higher pro sales increased levels of product inflation, and 150 basis points of commodity inflation.
This was offset by comp transaction count declining 13.1% due to a later start to spring as well as the impact of cycling over government stimulus and storm recovery in the prior year.
Keep in mind that comp transactions increased 11, 8% last year, which results in a two year comp transaction count decrease of 2.9%.
U S comp sales were down three 8% in the quarter and up 19, 7% on a two year basis, our pro sales outpaced DIY with 20% sales growth in the quarter as we continue to build on our momentum with the pro driven by our elevated product and service offering.
And while demand for core DIY categories remains strong lower sales in seasonal categories pressured sales by approximately $350 million in the quarter or approximately 150 basis points.
On Lowes Dot com sales increased 2% in the quarter and over 39% on a two year basis.
Our U S monthly comps were up 8.5% in February .
178% in March and down 6.9% in April .
In March we cycled over the third round of government stimulus and the storm recovery sales in Texas, While April sales were negatively impacted by unfavorable weather.
Looking at U S comp growth on a two year basis from 2020 to 2022 February sales increased 34.5% March increased 25, 3% in April increased 6%.
Gross margin was 34.03% of sales in the first quarter up 74 basis points from last year.
Product margin rate improved 50 basis points as we leveraged our disciplined pricing and product cost management strategies to effectively manage product cost inflation and lumber price volatility.
Also higher credit revenue drove 25 basis points of benefit to gross margin this quarter, while a favorable product mix drove 20 basis points of benefit.
These benefits were partly offset by 10 basis points of pressure from live goods damage by unseasonably cold weather as well as 10 basis points of planned pressure from increased distribution cost.
SG&A of 18.19% Levered 21 basis points compared to SG&A in Q1 last year as Joe mentioned, we drove improved store labor productivity, which was offset by lower fixed cost leverage against lower sales and increased wage rate.
Operating profit was $3 3 billion inline with prior year operating margin rate of 13.96% of sales leveraged 67 basis points versus prior year.
Our ability to leverage operating margin. Despite a decline in sales reflects our improved operating capabilities that enable us to rapidly adjust in a dynamic operating environment.
The effective tax rate was 23, 7% inline with prior year.
Inventory ended the quarter at $20 2 billion up 2.6 billion from Q4 levels in line with seasonal trends.
This reflects a 1.9 billion or 10% increase from Q1 2021.
Our inventory balance reflects an approximately 13% increase from both product and commodity inflation, while balances were also higher than expected due to a late breaking spring.
Now turning to our 2022 financial outlook.
Our Q1 performance was in line with our expectations excluding seasonal categories.
However, as Bill mentioned spring is truly a first half event and the timing is driven by when weather breaks across the country.
Over the past two plus weeks, we are seeing improved trends in our seasonal categories, which is reinforcing our confidence that we will deliver first half results in line with our full year guide.
This morning, we reaffirmed our full year 2022 financial outlook.
We continue to expect 2022 sales in a range of 97 to 99 billion for the year, representing comparable sales of down 1% to up 1%.
We continue to expect pro to outpace DIY for the year.
As a reminder, our 2022 sales outlook includes a 50, <unk> week, which equates to approximately one to $1 5 billion in sales.
We continue to expect gross margin rate for the full year to be up slightly as compared to prior year. However, as lumber prices declined several weeks earlier than we expected gross margin pressure will shift into Q2, as we continued to turn through our higher cost inventory layers.
As a result, we now expect to see our gross margin for the first half to be up slightly compared with our gross margin in the first half of 2021.
We also continue to expect operating margin in a range of 12, 8% to 13% for the full year driven by a slightly higher gross margin rate and continued execution of our PPI initiatives we.
We are also confirming our outlook for diluted earnings per share in a range of $13.10 to $13 60.
In 2022, we still expect capital expenditures of approximately $2 billion and we remain committed to our disciplined capital allocation strategy with approximately 12 billion in share repurchases. This year, while also supporting our 35% target dividend payout ratio.
Finally, we are affirming our outlook of return on invested capital above 36% for the year.
Now I'd like to close by reviewing one of our value creation drivers at Lowe's, our shareholder focused capital allocation strategy.
In Q1, the company generated $2 6 billion in free cash flow and through a combination of both dividends and share repurchases. We returned $4 7 billion to our shareholders.
During the quarter, we repurchased $19 2 million shares for $4 1 billion and we paid 537 million in dividends at <unk> 80 per share.
Capital expenditures totaled $343 million in the quarter as we continued to invest in the business to drive growth and enhance returns.
We ended the quarter with $3 4 billion of cash and cash equivalents, which includes proceeds from our 5 billion notes offering in March.
This larger than planned bond issuance enabled us to slightly accelerate our share repurchase plans in the quarter.
Our balance sheet remains extremely healthy and we continue to make progress towards our target of 275 times adjusted debt to EBITDAR ending the quarter at 2.24 times.
Driven by both strong operating performance and a disciplined capital allocation strategy. We delivered return on invested capital of 33, 8% in the quarter up 380 basis points versus last year.
In closing we are confident in our trajectory and excited for the substantial opportunity ahead of us as we continue to grow our market share expand operating margin and deliver meaningful shareholder value and with that we are now ready for questions.
Yeah.
Thank you we are now ready for your questions if you'd like to ask a question. Please press star one on your telephone keypad to withdraw your question. Please press star two.
In order to allow questions from as many individuals as possible. Please limit yourself to one question and one follow up one moment. Please while we poll for questions.
Our first question today is coming from Greg Miller from Evercore. Your line is now live.
Hi, Thanks.
Hey, two questions. One is just to understand the shift of spring in stimulus.
Should we be looking at a three year comp when we think about how that flows in the second quarter sort of in the mid thirties and then my second question is on inventory.
Yeah, Hey, Greg. This is Brandon just as I mentioned in my prepared remarks, we came out of April U S comps down 7% for the Mark and I will say early on we feel really good about our trends in may, especially within our seasonal categories Comping positive and above the company average as spring.
Breaking across the country, we have some of our biggest volume.
Go ahead with Memorial day father's day J four we're pleased with the sequential sales improvement confident in the full Q2 recovery of the $350 million and then when we look at that.
The balance of the year I think with the weather trends Q2 $350 million, we're going to continue to see the pro shrink.
20% comp in Q1 64 two year.
Inflation is going to continue to be a bit of a tailwind for us as well.
But all that being said our range of down one to plus one we're confident in that go forward. After the full year and that yields a Q2 to Q4, that's a slight positive comp over the balance of the year for the one year.
Perfect and then on inventory.
You mentioned, the 10% growth that inflation was and mix was about 13% of that in my is that does that imply that units are actually down 3% year on year, yes.
Yeah, Greg spot on inventory balance was up 10% and we have in the prepared remarks price and commodity inflation, along with carrying additional seasonal inventory in Q2.
Heading into Q2 is pressuring both dollars and terms.
I will remind the group every year, we do manage our seasonal inventory to the first half and we have a strong holiday lineup upcoming in a couple of other things we continue to strategically invest in inventory to support the pro job lot quantities and we've had a couple of constrained categories, where we have made in stock improvement in particular in paint and appliances.
But we are in our best in stock position since the beginning of the pandemic.
Everybody if there's anything more to add there no I think you know Brandon I think you hit it I think the key for US is making sure that we're.
We're focused on sell through of the seasonal buys that we've made we shared with you during the fourth quarter call that we brought in some of the seasonal inventory ahead of the season and so we're focused on working through that through the first half of the year.
And you guys haven't seen any trade down it sounds like.
Greg This is Joe.
The answer is no as you can imagine.
Quite a bit of time.
Looking at this literally on a daily weekly basis, with the DIY and pro customer across geography online and we see no material trade down in our business.
That's great. Good luck guys. Thank you.
The next question is coming from Brian Nagel from Oppenheimer. Your line is now live.
Hi, good morning.
First off what are the congratulations on your new role.
Thank you Brian .
So my question, maybe a direction to Marvin primarily but thanks for all the detail on the call.
I guess, what I'll say as early as analysts following.
News of.
Whether it weather disruptions are now well documented.
Look at the business.
So what gives you the greatest confidence that these be slower spring sales were in fact weather related and not indicative of like now say be more cautious consumer pulling back on discretionary spending.
Brian is for US a really good question, but as Marvin So I'll take the first part and I'll, let I'll, let bill just give more of a product specific assessment. So when you take a look at the quarter. The month of February was really strong eight 5% a positive comp in the U S.
In the month of March.
The stimulus.
And so we're anticipating that.
With coffee.
But for us and we had really difficult weather on top of stimulus and then April as we mentioned was the coldest in over 20 years and when we start to look at the categories and their anticipated performance it was obvious to us.
This was a weather driven event the good news as well maybe we operate in all state. So we can easily look at the southern part of the country, where we were in something relatively close to seasonal weather in all of these categories are performing exceptionally well.
Live goods outdoor power grills patio et cetera, and then the moment, we get a glimpse of weather and some of these northern markets those categories would take off and perform well in the moment the weather would shift obviously you'd see the decline so the way, we analyze with literally on a day.
Weekly basis is very obvious to us that the Q1 impact was driven by weather and as Brandon and I. Both mentioned in our prepared comments as we look at the month of May.
Pleased with the trends, we're seeing and that also reflects that the moment, we are getting to what is more of a seasonal weather environment. Those same categories that underperformed in April are now over performing the company in the month of May.
I'll, let bill add any other detail I think the only thing to add Marvin is good. We're also seeing strength in new and innovative product and so you look at the strength of like the Eagle brand and the battery powered outdoor product.
Just continuing to perform very well the strength of John here strength of Aaron's in the riding mower segment doing very well and as you as you touched on you know as we saw green shoots of weather throughout in the first quarter. We saw the strength in project outsource outside project businesses like lagged nursery like exterior pro pro.
So it just gives us.
Good confidence that we can carry that through Q2.
Yes, Brian I'll, just add one additional comment there.
Given that our pro growth that Marvin mentioned earlier.
20% and then you look at the strength and the health of that pro strong pro market trends, we're seeing.
Our revamped Lowe's pro offering expanded pro product that Bill mentioned earlier in his prepared remarks, the deeper inventory and then the launch of our new MVP program.
We've got good confidence in the underlying trends there.
That's all that's all very helpful. I appreciate that I guess, just one really quick follow up so as we think about these seasonal sales and the weakness that happened in Q1 is it fair to assume that basically all the sales should be made up here in Q2 in other words, there's really no lost demand.
Bryan that's correct, it's fair to assume that the $3 50 would shift in for Q2.
Alright, guys. Thank you very much.
Thank you. Our next question today is coming from Simeon Gutman from Morgan Stanley . Your line is now live.
Hey, everyone. Good morning, so in the first quarter earnings at least beat the street handily and you're not making any change to the year.
The second quarter. It sounds like you will make up some sales and so the first half will be the same the fact that.
First quarter was better.
Did it and then by the way Youre not no one's getting paid or awarded for raising any outlook. So I guess implicitly. It means that something was taken out I don't know if thats the right way to think of it or just theres conservatism.
So curious your thoughts around that and anything that is changing in the second half.
The way Youre looking at the business since you have some you know some some head start here in the first quarter.
So assuming this is Brian in a lot of this is timing related and specifically around gross margin. So as I said in my prepared results remarks for Q1 74 basis points of improvement driven by product margin rate and mix. We also benefited from proprietary credit.
But keep in mind the benefits on the product margin side are temporary in nature, especially can be temporary in nature, especially in periods of inflation cost layers are going to lag and that's true for both commodity and product related inflation. So as we cycle into Q2, we do expect some level of step back specifically due to lung.
<unk> deflation that began we began seeing that late March and then we have some other variables such as shrinking credit we expect that to largely be neutral over the back half and in the supply chain inclusive of market delivery build out higher transportation costs are going to be a slight drag which is consistent with what we've guided and what wed message. So it's mainly margin it's mainly.
Timing is the cost layers turn that of a step back but for overall margin modest improvement in margins for first half and up slightly for the full year. So that's the reason, we didnt flow to be to the full year.
Sundar.
This is more of it I think it's important to note that we're at.
Really pleased with the profit performance in the first half.
For a retailer our size is really difficult to have declining sales on a year over year basis.
And have leverage from an operating margin and gross margin perspective that took a lot of work.
A lot of operational discipline from the supply chain cost management.
Payroll expense management et cetera, and to bring this point, where in this unprecedented environment of lumber inflation and deflation and so we're just planning conservatively because as we said the last couple of weeks, we started to see lumber starting to shift and we're just anticipating that thats going to give us some headwind in Q2.
That's helpful. My follow up it's related on fuel prices and Brandon you just touched on transportation costs.
Does this mean that you're adjusting your pricing as well real time I know you mentioned you will feel a little pressure. So maybe you don't fully offset it and does the level of inflation help your business on the top line or are you assume that there might be some some unit degradation as pricing may continue to tick higher.
So look let me take this is mark I'll take the first part of that.
We've been a lot of time, putting it improved systems from a pricing standpoint. So we are scraping and we're doing pricing analysis real time, both in store and online by geography.
One thing that bill put in place early on when he arrived as a everyday competitive pricing strategy, where we've gotten off this high low promotional cadence at Lowe's was known for to more of an everyday competitive price and the only way you can be competitive everyday is you have to have a good line of sight.
So the competitive prices of your competition by category by geographic location and so we've done a lot of that and in some cases with inflation product inflation, we have to carry that forward to the consumer but in a lot of cases, we just focus on being competitively price and I'll, let Brandon provide some financial specifics.
Perfect for what that looks like yes, yes, I mean, I would just add to your question on fuel costs transportation also add an import container cost into that mix. The teams have done great job, just giving us visibility to where those costs are when theyre going to hit and it is correct to say as we manage the totality of the portfolio.
<unk> that that's a consideration set along with direct costs from the vendors. So we are managing that managing that appropriately.
Managing in this retail environment, so that would be the only additional thing I would add to the comment on transportation in particular on fuel it is a more minor cost.
The overall portfolio when we look at the totality.
Supply chain and we feel like we're doing some other things like managing trailers intermodal and leaning into some of those other things to also help offset that.
Thanks, everyone.
Okay.
Thank you next question today is coming from Karen short from Barclays. Your line is now live.
Oh, hi, thanks very much.
I had a couple of questions just in terms of how you think about traffic versus ticket.
With respect to your guide can you maybe talk about that a little bit more and then within your margin structure.
I mean I do think there is definitional change.
Differences with you and your largest competitor.
So think about square footage, but.
Can you maybe just give us an update on in terms of your 13% operating margin or <unk> bridging the gap with your largest competitor.
Yes, Ken let me start with the first question and I'll toss it back to Marvin to get the second point. So on on the ticket transaction side I'll point to.
Q1 ticket, specifically inflation, a little bit harder to pinpoint, but we do believe from an inflation standpoint, we ran high single digits. During Q1, and that's inclusive of 150 basis points from lumber and commodity and I will say to finance and merchant teams are still in the second is we're working on with our suppliers day in day out to figure this.
I will say however, as we lap second half of 'twenty. One we do expect the inflation impact to start to moderate we're expecting mid to high single digit positive.
Over the balance of the year and then on the transaction side as we mentioned in the opening comments DIY was the primary driver of the decrease there for Q1 was down double digits, partly plan due to the Texas storms and the stimulus the weather Miss from spring delayed accelerated that but we do believe Q1 will be our low.
Watermark on transactions.
For 2022 and that that transaction decrease should moderate as we cycle through the balance of the year. So net net mid to high single digit positive ticket expected over the balance of the year offset by down transactions is the formula that will get us to the flat comp and we expect that dynamic to narrow.
I get in transactions as we move through the balance of the year.
Karen I'll take the other question when you think about our operating margin and you think about kind of the more structural differences between us and our largest competitor I think it really comes down to the penetration of DIY versus pro.
In August reflection in the first quarter.
The good news for US is we're not setting a pro penetration target.
Expectation, we're going to continue to improve that business and if you think about my prepared comments in the last three years, we've been increase our pro penetration by roughly 600 basis points. So we feel like we're headed in the right direction, but as you think about overall operating income.
We're very pleased with our performance in the quarter and we have a very good line of sight to getting us to that 13% and beyond just based on executing our total home strategy.
<unk> pro.
Online and all the work that Bill's team is doing on private brands and how we're continuing to grow that business and.
In the private brands specific initiatives to drive margin improvement it gives the customer great innovation and style.
We can do it all at a really competitive price and it's a key point of differentiation. In addition to all the investments we're making.
Infrastructure, what are the supply chain or swap ratio of infrastructure.
Again, we feel like we have a clear line of sight and we're going to continue to execute to that and we have an expectation that it will go to.
Beyond on track with delivering on that expectation.
Great. Thank you.
Thank you next question today is coming from Christopher <unk> from Jpmorgan. Your line is an ally.
Thanks, and good morning. So my first question is just following up on the on the May commentary you talked about DIY now running ahead of that.
Total company average comp if youre still getting 20% growth in pro backing into that math. It all sort of cleanly gets you above the mid single digit comp is that does that math reasonable.
Yes, Chris This is Brian and I don't know that we said that DIY is going to be running ahead of pro in Q2.
I would say the majority of the $3 50 that we expect to recover is going to be reflected in the DIY business.
But the pro DIY dynamic.
Certainly unique in Q1, just given the environment, we've been in and what we've been cycling, but that breakout in that dynamic Q2 to Q4 should start to normalize a bit but pro is absolutely going to be expected to outpace DIY.
Grow two X data market, which will translate to our guide of down one to up one.
And I'll just a reminder, the seasonal performance in the seasonal business through the first couple of weeks.
Outperforming expectations in the balance of the business. So that's how I would answer the answer to your question.
Okay, Alright that you said and outperforming the company average or it was outperforming expectations.
Correct correct got it alright, sorry about that.
And then in terms of.
Marvin and in the press release, it seems like you're adding just a line around sort of increased macro uncertainty to an earlier question you mentioned not seen any any trade down effect and very responsive business to the weather. So can you can you expand on that is there something you are observing is it just simply.
<unk>.
Given all the puts and takes on the consumer being.
Less fulsome now versus maybe three months ago.
It's really enrollment acknowledgment of what we're all seeing in just the broader macro economy and I think what's interesting for home improvement is that we will.
Wherever we have inflation concerns were awarded or rising interest rates, but as we look at the home improvement sector. We still remain very confident in the outlook and very confident in the sector and so I'll just repeat what I've said, we've we've seen no material trade down from our customers we call.
We monitor our pro and DIY would look at it internally as you can imagine and when we think about the key economic drivers of our business. It remains home price appreciation. It remains the age of housing stock.
Those things that give the homeowner or confidence that continuing to invest in the hole and as we talked to our pro customers.
Booked up for the year, we talked to our DIY customers. They will just wait and put us on come out and so we feel good about the home improvement sector. My statement was just more of an acknowledgment of the broader macro environment that we're all seeing.
Got it thank you very much.
Thank you next question today is coming from Liz Suzuki from Bank of America. Your line is now live.
Great. Thank you so <unk>.
Written recently about 95% of the base of U S. Homeowners are not impacted by interest rates and that housing turnover isn't as important as home price appreciation that the pushback, we've gotten as it.
Those 5% of homes that do change hands, presumably see a greater degree of renovation spending. So my question is have you seen any reliable stats on how much the average homeowner spends on renovation when they prepay era homes for sale and when they purchase a home because we're just trying to get a sense of what that portion of the home improvement.
It is actually impacted by rising rates.
It would be anecdotal at best So we don't have any firm data to represent that but our view of it in our conversations with pros and consumers tell us that your statement is correct, but again, we don't have any fact based data to support that.
And then just a quick follow up on how product innovation has contributed to average ticket I mean the growth in average ticket is obviously more than just inflation. So what do you view as the categories, where product innovation, maybe accelerating the normal replacement cycle and how much of a tailwind that could be when inflation does ultimately.
Normalized.
Yes, it's bill and so what were seeing with product innovation, we really see it across the store across every category, but in areas like appliances, you see customers trading up to smart appliances to better quality appliances as I mentioned in an earlier question response.
<unk> outdoor power equipment with the ego brands, specifically Youre also seeing it in the likes of gas powered outdoor power with John Deere and errands, all innovative products there youre seeing it in pain.
So just really across the categories you see innovation and we're also able to offer that in our private brands with the introductions of stainmaster. So youre seeing that now start to leave its way in and I talked about it's already been in carpet and now you are seeing in tile vinyl laminate flooring. So yes.
The Orange Orange in 'twenty, one, which is a new modern brand for US again offers great innovation and great value.
This is Marvin again, I just want to reinforce the point on them on the value of home price appreciation to consumer confidence and is one of the reasons why I think home improvement is a unique retail sector and kind of this is.
Macro environment, where there are a lot of questions about the health of the consumer.
What our data tells us and it correlates historically is when your home value is going up you simply have more confidence to invest in at home because you see it as an investment and not an expense and we have unprecedented home price appreciation, but we also have.
Precedented supply demand issue for the availability of home. So our data tells US. This is less of a wobble as more of a supply demand issue, where you have $1 five 2 million homes of demand versus the availability and so if you think about what bill said about trading of our customers feel.
More comfortable investing in the home because they think theyre going to get a return on that investment and I think that's the that's the value of home price appreciation to our business.
Great. Thanks very much.
Thank you next question today is coming from Zach Freedom from Wells Fargo. Your line is now live.
Hey, Good morning can you help me reconcile excuse me the sequential step down in SG&A dollars, how much would you quantify as seasonal.
Versus what would you call structural our PPI driven and then how should we square that Q1, SG&A takeout versus the balance of the year.
Zach This is Marvin and I will take the first part of that and then I'm going to let Brandon and Joe will provide some context relative to payroll.
We have an activity base payroll model that allows us to flex hours up and down based on sales velocity by location of store, but also bought department.
That is a significant contrast to what we had in place when I arrived.
And for 2000, and they say that literally riding a completed as scheduled.
Morrisville, North Carolina, and sending that out to every store on a weekly basis irrespective of volume plans. So I'll, let Joe talk about payroll. So you can get a view of why we're able to leverage as effectively as we did in Q1 and how we think that's a sustainable result, and we will see for the balance of the year.
Yes.
Marvin and good morning, Zach Elisa from a payroll standpoint, I think it's important to.
Think about the PPI initiatives.
Not just one time initiatives.
Our key initiatives and so as we look at our ability to leverage SG&A through different initiatives centralize our Tvs go down a whole list of the.
CPI initiatives. So this is not a.
A one time, but it's going to continue.
And I think we've done it very effectively because both.
Pro and the do it yourself customer are showing increased LTR and service scores. So.
I think that just kind of points to some good productivity yes.
Yeah, and the only other thing I would add Zack so SG&A leveraged 21 basis points, that's consistent with the earnings algorithm, we have for the full year.
In the range of what we would expect I think the good news there being able to leverage.
Against our quarter with the highest expected negative comp is going to be a great proof point for us.
And as we move through the year and then in this inflationary environment I think to Joes point really being able to use those workforce optimization tools.
Understand truly within the business both in the supply chain and in stores water volumes water units water transactions and being able to flex.
The model against that demand and understand the split between the drivers of the business has been really powerful for us. So I would just add that.
Got it and what the spread between your pro and DIY comps widening to about 30 points in the quarter I realize the weather and seasonal component will normalize, but as you think about the balance of the year, how do you square overall industry pro industry growth versus DIY. This.
This year and is it fair to assume your pro business can track at a double digit rate from here.
In fact, we we talked about our expectation to grow two extra market and pro we think that that is achievable based on the list.
<unk> related products.
Bill and his merchant teams that are added.
Our assortment of based on our new MVP loyalty program Thats exceeding expectations on the number of enrollments and one one other really interesting data point.
If we look at the pro customers currently enrolled in our new MVP loyalty program and our credit program. They are spending 300% more than pro customers not enroll so it gives us a lot of confidence that that our program is sustainable and not been mentioned and some other admit to that we are pilot.
To improve job site fulfillment that we think will give us an opportunity to start in the future to serve a larger probe. So based on all of those initiatives, we feel like that our pro growth we'll continue to.
Look it's challenging none of us have a crystal ball, obviously and there are a lot of.
The dynamics in our pro DIY mix, having said that we backed out all of those things into our guidance and we think that the guidance that brand and reinforce is reflected on our view of how we think that DIY pro mix will play out for the rest of the year.
Got it thanks for the time guys.
Thank you. Thank you all for joining us today, and we look forward to speaking with you on our second quarter earnings call in August .
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.