Q2 2022 Lowe's Companies Inc Earnings Call
Appreciation activities, let's tackle home together.
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Good morning, everyone and welcome to Lowe's Companies' second quarter 2022 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 will now turn the call over to Kate Pearlman, Vice President of Investor Relations. Please go ahead.
Thank you and good morning here with me today are Marvin Ellison, Chairman and Chief Executive Officer, Bill Boltz are executive Vice President merchandising, Joe Mcfarland, our executive Vice President stores, and Brandon zinc, 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.
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 on the quarterly earnings section of our Investor Relations website now I will turn the call over to Marvin. Thank you Kate and good morning, everyone in the second quarter, our total company comparable sales decline, 0.3%, while U S comps increased zero.
2% for.
For the quarter Pro sales remained strong in fact this is the ninth consecutive quarter that we've driven double digit pro growth.
As a reminder, at Lowe's, 75% of our sales are driven by the DIY customer, while 25% of ourselves as from the probe.
And while underlying home improvement trends remained strong our DIY sales were lower than expected in the second quarter and the first half of the year.
As I mentioned on our previous call the timing of spring disproportionately impacts DIY sales as many seasonal categories like lawn and garden are heavily concentrated in DIY.
In addition to spring arriving late it also ended early quickly moving from a cold winter to a hot summer in some regions.
Shortened planting season, and pressured lawn and garden sales.
Also while we plan for a modest sector pullback this year as we lap outsized DIY consumer demand, we now believe that certain categories like patio and grills are disproportionately impacted by the unprecedented demand from 2020 and 2021.
This unprecedented demand was likely fueled by the combination of three rounds of government stimulus and increase in consumer savings rate and a temporary shift away from spending on services towards spending on goods, including home improvement products.
These factors drove more discretionary purchases over the past two years than it was possible to precisely measure at a time.
And some of you have asked whether we're seeing consumers trade down in their purchase activity. At this point, we are not seeing indications of material trade down if anything we're seeing the opposite with continued strong demand for our new and innovative products at higher price points Bill will provide more context.
Next on our customer spending trends later in the call.
To summarize our DIY trends despite slower sales in select discretionary categories like patios and grills. The DIY customer remains resilient, which reflects continued strong home improvement demand trends.
Now turning to Pearl.
We continue to outperform the market delivering growth of 13% and 37% on a two year basis.
We're particularly pleased with the momentum we're seeing with our pro loyalty program Mvp's Pro rewards, which is designed to make every pro feel like an MVP regardless of the size of their business.
At this time is money for pros or most valuable ways that we can serve them is by saving them time with enhanced fulfillment.
Therefore, we are actively piloting convenient fulfillment options.
Including a new pro fulfillment center in Charlotte and gig network solutions that offer same day delivery for both pro and DIY.
Joe will provide a further update on our strategic initiatives to improve pro penetration later on the call.
On Lowes Dot Com sales grew 7% this quarter, representing a sales penetration of nearly 10%.
We're continuing to invest in omnichannel capabilities, because we believe there is still tremendous runway for further growth ahead in.
In Canada, Q2 performance lagged the U S and as a reminder, because our Canadian business is more heavily weighted towards lumber it disproportionately benefited from record high lumber prices last year.
Let me now discuss our operating performance for the second quarter.
I'm, particularly pleased with the operating discipline that we develop across our business, which is demonstrated by our ability to improve operating margin once again, despite lower sales.
During the quarter operating margin expanded 12 basis points and we delivered diluted earnings per share of $4 67, which is an increase of nearly 10% versus last year.
The progress also reflects our team's disciplined focus on our perpetual productivity initiatives or PPI not.
Not only the PPI support our first half operating margin improvement. It will also help to drive operating leverage for the balance of the year and for the next several years, Joe will discuss the success of our PPI initiatives in more detail later in the call.
Now I'd like to address some concerns that I've heard from our shareholders about the home improvement market.
When we began by clarifying that the market dynamics that pressured a homebuilder or not necessarily the same market dynamics that pressure to home improvement retailer.
At Lowe's, the three highest correlating factors of home improvement demand or home price appreciation.
The age of the housing stock and disposable personal income.
While housing turnover is important it does not index at the same rate as home price appreciation housing age and disposable personal income.
And while we acknowledge that housing turnover has slowed home prices and home equity remains at record highs, which gives customers confidence that they will get a return on the investment that they are making their homes.
And also importantly, those homes keep getting older one half of the homes in the U S are over 40 years old and millions more built at the peak of the housing boom in the early two thousands and now starting to turn 20 years old which is a key inflection point for big ticket repairs.
In terms of disposable personal income household Walter is still at an all time high <unk>.
Consumer savings or roughly $2 six trillion higher than they were pre pandemic and 75% of that excess savings is concentrated in middle and high income households, who are more likely to be homeowners.
Which highlights another key benefit of our industry, our core customer is to homeowner.
In addition to having significantly more disposable income most homeowners are benefiting from lower fixed mortgage rates and has low housing supply and high interest rates make moving less desirable homeowners are motivated to invest in their current homes to fit their needs. This.
This is one of the key reasons at home improvement can win in markets. When housing turnover is strong and when it slows as we saw in the mid 19 nineties when home improvement spend grew despite rising interest rates and a slowdown in housing turnover.
Now shifting to trends and pro.
We continuously survey, our pros and their confidence and their job prospects is the highest it's been in years.
<unk> was busier than ever in the strength of the pro backlog speaks to the significant pent up demand for their services and.
In short we are fortunate to operate in this retail sector and despite the macro uncertainty and unprecedented seasonal demand the past two years, our long term outlook for the home improvement industry and the pro customer remains positive.
As I close I would like to personally thank our associates for their hard work and dedication in recognition of some of the cost pressures. They are facing due to high inflation, we are providing an incremental $55 million in bonuses to our hourly frontline associates. This quarter. These associates have the most important jobs in our company and we.
Deeply appreciate everything they do to serve our customers to deliver a best in class experience and with that I'll turn the call over to Bill.
Thanks, Marvin and good morning, everyone in the second quarter U S comparable sales were up 0.2%.
I'd like to walk you through the trends that we're seeing in the business beginning with our DIY results as.
As Marvin mentioned, we had a short spring moving directly from winter to summer in many areas of the country impacting demand for outdoor garden products like fertilizer chemicals and live nursery.
After two years of outsized growth in home related sales, we plan for sales to slow in certain categories. This year and our disciplined planning process enabled us to mitigate many of the inventory pressures you are seeing across the retail industry, but certain categories were still down more than expected like patio furniture, and outdoor grills, which is.
With trends across the broader market.
But even within patio, our newly designed <unk> in 'twenty, one items sold out first in most stores like our exclusive brand field Agg chair that retailed at $628.
Another interesting trend from the quarter is the ongoing demand for innovation, reflecting underlying consumer strength.
Rather than seeing trade down in many cases, we are seeing customers trade up spending more to purchase the latest technology like battery powered products available in the ego cobalt craftsman and skill brands.
In fact, one of our top performing products. This quarter was an ego 56 volt self propelled mower that retailed for over $700. This unit dramatically outperformed our sales forecast despite being one of the most expensive battery mowers in our assortment.
Proven what we have said before that value doesn't have to be low priced.
In refrigeration.
We continue to see consumers trade up to higher priced products and brands like Kitchenaid, Samsung and LG with features and benefits that serve a busy families lifestyle.
And while appliance sales were below our expectations, we continue to take incremental share and lead the market as the number one appliance retailer in the U S. We also continue to source new products that make projects easier for our DIY savvy customers.
Like our expanded stainmaster lineup, including laminate flooring sheet vinyl and tile.
Which are getting overwhelmingly positive customer feedback due to how easy they are to install and keep clean.
Or how about our new build in baton product a lowe's exclusive this new pre sized and mitred molding makes it easy and cost effective for the do it yourself to do highly intricate designs like wainscoting and for the pro it saves them time on these jobs as well.
Customers can transform a wall in a day for less than $300.
And across the store and within each of our merchandising categories, we offer value at all price points and feature leading products from our all star brands like tracks Owens Corning, John Deere Ego, Honda Kitchenaid, Samsung LG, Kohler, Moen, Whirlpool Husqvarna and Aaron's.
Shifting gears now to our pro customer.
We delivered broad based and strong results with positive comps across rough plumbing building materials paint electrical millwork and hardware.
We are pleased with the traction that we're making with this important customer and we continue to optimize our pro assortments to ensure we offer the products pros need from the brands that they know and trust.
This quarter, we launched <unk> and.
Illiquid additive that improves the quality durability and sustainability of concrete projects.
We also launched the new stack lithium battery technology, and our line of flex cordless power tools, making Lowe's now the only destination to have this new battery technology available in both flex and Walt which brings more power in a smaller package.
And millwork, we also were the first to market with our own reliability stock exterior black trim vinyl window and increasingly popular trend to give homes a more premium look with some pros even buying pallets of these products before they even hit our shelves.
We also added gelled when pre finished interior doors, which come prepayment from the factory saving pros the time and expense required to paint the door.
These additions have further strengthened our portfolio of trusted pro brands like Bosch Crescent to Walt Eaton swing facet Master Flex G RK.
<unk>, let's go little giant Lufkin, Mansfield, Marshalltown, Metabo sharp bike Simpson strong tie specs Spider and Warner.
And our lumber business comps declined modestly as we cycled over record high prices in the previous year. However unit volumes were up significantly year over year, which reflects the strong underlying project demand.
Turning now to Lowes Dot Com sales grew 7% building on top of the tremendous growth we've seen over the past few years.
We continue to invest in the online user experience by expanding and enhancing our assortments building out and improving our visualized and configuration tools and enhancing the delivery experience to make it easier for our customers to track their orders.
As I close I'd like to thank my entire merchandising team along with our finance inventory and supply chain teams for their disciplined inventory management and planning process and a complex retail environment and lastly, I'd also like to thank our vendor partners for their continued partnership and hard work to ensure our customers have the products there.
Need for every home improvement project they tackle.
Thank you and I'll now turn the call over to Joe.
Thank you Bill and good morning, everyone. Let me begin by expressing my appreciation for our associates. They delivered strong customer service and profitability this quarter due to their commitment to our perpetual productivity improvement initiatives or PPI.
Over the first half of the year, we have made meaningful strides I would like to spend some time now discussing what we are focused on for the remainder of 2022, including how we continue to simplify our store processes.
Earlier this year, we launched what we call project simple in our stores one of our many PPI initiatives with a focus on further reducing daily duplicative tasks that distract from customer service and drive needless expense in.
In fact, as we continue rolling out projects simple, we expect that it will eliminate over 80 non productive hours per store per week in the second half.
In February I discussed the launch of our game changing new store inventory management system or <unk>, while were just six months into the implementation we are already seeing strong results with.
With the improved inventory visibility, we are reducing nonproductive hours that associates spend searching for product, while also improving the customer shopping experience in store and online.
And in the second half, we will leverage <unk> for an exciting new feature prescriptive pack down this new process will provide specific down stocking instructions to our associates based on sell through rates. So they know whether the product needs to go directly onto the shelf or the end cap bypassing the top stock altogether.
This drives a more efficient proactive replenishment and inventory planning process.
As these examples illustrate PPI is not a static set of initiatives that will expire at a predetermined date PPI as perpetual process of ongoing initiatives that will continue to deliver productivity not only in the second half, but for many quarters to come.
Now shifting our focus to the pro we continue to deliver incredible results with pro comps of over 13% in the quarter.
In fact, this is the ninth quarter in a row that we have driven double digit pro comps.
Even in a quarter that is traditionally our most DIY heavy we saw pro penetration of over 23% in the U S. An increase of over 500 basis points from 2019.
And we are further enhancing our pro offering with our new Mvps Pro rewards and partnership program.
Pro loyalty program launched in the first quarter and it continues to outperform our expectations.
In July we launched Mvp's bonus points in conjunction with our first ever lows MVP bonus days event with a focus on the products that pros use everyday pros or an extra bonus points on our leading brands such as the Walt Valspar Flex Metabo Ao Smith and Frigidaire are.
<unk> can redeem their points for other products or gift cards, and the MVP Pro rewards center. It is their choice and we made it easy for all pros to benefit.
As our Mvp's Pro rewards program continues to mature in the second half we are excited to present, our pros with compelling offers that will be tailored just for them.
Before I close let me discuss the investments that we're making in our most important asset our associates as we strive to become the employer of choice in retail.
We recently announced expanded scheduling options for our full time associates. Most full time associates can now request a fixed four day work week fixed days off or even choose their preferred shift providing them with predictability of their terms. This is a significant improvement and our associates quality of life and it is and.
Other way that we are differentiating ourselves from other retailers as.
As Marvin mentioned to help our frontline hourly associates. During this period of high inflation, we are awarding an incremental bonus of $55 million also for a designated timeframe, we're providing our associates with an additional 10% discount on everyday household and cleaning items associates can now purchase.
These products at a 20% discount, which we hope will ease the burden of the deflation impacting many of these items will continue to look for meaningful ways to improve our associates work life balance, while providing them with the tools to build a career.
<unk> I would like to thank our associates once again for their commitment to lowes and to our customers now I will turn the call over to Brandon.
Thank you Joe let me begin with our Q2 results, we delivered diluted earnings per share of $4 67.
An increase of nine 9% compared to prior year as we drove productivity in a dynamic operating environment Q.
Q2 sales were $27 5 billion with comparable sales down 0.3% comparable average ticket increased six 1% as higher pro sales and product inflation drove higher average ticket.
This was offset by comp transactions declined six 4% as we cycle over two years of outsized growth in DIY sales.
Comp transactions improved over 650 basis points sequentially from Q1.
U S comp sales were up <unk>, 2% in the quarter.
Our sales were impacted by the shortened spring season, lower demand in certain DIY discretionary categories and lower than expected lumber prices.
This was partially offset by a 13% increase in pro customer sales.
On <unk> Dot com sales increased 7% in the quarter.
Our U S monthly comps were down one 5% in Ma.
0.9% in June and up one 1% in July .
Gross margin was 33, 4% of sales in the second quarter down 54 basis points from last year.
This is consistent with the expectations that we discussed in May.
As expected product margin rate was down 35 basis points versus the prior year.
Lumber prices declined significantly from late April through mid June as we sold through our higher cost inventory layers product margin rate was pressured.
Transportation costs, both import and domestic as well as the expansion of our supply chain network also drove 35 basis points of pressure.
Additionally, we experienced 10 basis points of shrink pressure largely due to live goods damaged by unseasonable weather.
These impacts were partly offset by 30 basis points related to more favorable product mix.
Despite the product cost pressures in the quarter gross margin for the first half was up slightly compared to the first half of 2021.
This reflected our ability to effectively navigate a volatile lumber market over the first half of the year as well as product cost inflation.
I am very pleased with the strong cross functional collaboration from the teams as well as our diligent planning efforts.
SG&A of 16, 2% Levered 80 basis points relative to Q2 2021.
We drove substantial productivity across the enterprise in the quarter against slightly lower sales.
Operating profit was $4 2 billion up slightly versus the prior year.
Operating margin rate of $15 three 9% of sales Levered 12 basis points as SG&A leverage was partly offset by lower gross margin rate.
The effective tax rate was 24, 5% inline with prior year.
Inventory ended the quarter at $19 3 billion up $2 billion or 11, 6% from Q2 last year driven by product cost inflation of 15% while units were down low single digits.
This morning, we are affirming our full year 2022 financial outlook.
We now expect that our 2022 sales will be near the bottom of our range of approximately 97% to 99 billion for the year, representing comparable sales towards the bottom end of the range of down 1% to up 1% for the year.
This reflects our first half results and our second half expectations of continued pro momentum and improving DIY sales trends we.
We continue to expect pro to outperform DIY for the remainder of the year.
As a reminder, our 2022 sales outlook includes a 50, <unk> week, which equates to approximately $1 to $1 5 billion in sales.
We continue to expect gross margin rate to be up slightly as compared to the prior year.
Given our better than expected flow through in the first half we now expect operating margin to be at the top end of our range of 12, 8% to 13% for the full year.
Our ability to lever gross margin and SG&A, despite lower than expected sales reflects the company's focus hard work and effective investments over the last several years.
Taking all of this into consideration, we now expect diluted earnings per share for the year to be at the top end of the range of $13 10 to $13 60.
At Loews, we remain committed to our best in class capital allocation strategy.
For 2022, we continue to expect approximately $2 billion in capital expenditures and $12 billion in share repurchases.
Finally, we are affirming our outlook of return on invested capital above 36% for the year.
Turning to our shareholder focused capital allocation strategy in Q2, the company generated $2 7 billion in free cash flow.
And through a combination of both dividends and share repurchases, we returned $4 5 billion to our shareholders.
During the quarter, we repurchased 21 6 million shares for $4 billion.
We also paid $524 million in dividends at <unk> 80 per share and we announced a 31% increase to $1 five per share in support of our 35% target dividend payout ratio.
Capital expenditures totaled $344 million in the quarter as we invest in the business to support our strategic growth initiatives.
We continue to make progress towards our target of 275 times adjusted debt to EBITDAR ending the quarter at two to three times and we remain committed to maintaining our triple B plus rating.
Finally, we delivered return on invested capital of 34, 5% in the quarter up 548 basis points versus last year.
As I look ahead I'm highly confident that we are making the right investments in our people and capabilities to support our business and drive meaningful long term shareholder value and with that we will open it up for questions.
Thank you we're now ready for questions.
Like to ask a question. Please press star one on your telephone keypad to withdraw your question Press Star two.
In order to allow as many individuals as possible. Please limit yourself to one question and one follow up.
Our first question comes from the line of Simeon Gutman with Morgan Stanley proceed with your question.
Alright. Good morning. My first question is DIY comps are negative and units are down the units appear to be bottoming or still decelerating and do you have a view if we re baseline this year or there is more to go in 'twenty three.
Yes, Simeon this is Bryan again.
Just as we look at DIY specifically the.
The business was heavily weighted to DIY seasonal in the first half of the year.
I think underperformed a bit just due to the weather the pull forward that we mentioned in patio and grills.
Second half of the year transitioning more to the core the interior of the store and.
And in particular post July four over the last six weeks. We've seen continued momentum building in these categories. We have seen us a clear step change in the business one to three year.
Comps improving again in particular in pro <unk>.
Core interior and then I'll point back to transactions Q1 semi.
SME and down 13, we saw improvement Q2 down six so we like the momentum, we're seeing and optimistic around.
The step changes again that we're seeing in the second half Simeon This is Marvin and I think it's important.
Note that when you look at the first half of the year.
First half is obviously more seasonal.
And so we had weather impacts that drove a lot of our negative units. If you think about outdoor lawn and garden chemicals et cetera, and then if you think about what we talked about the unprecedented demand. We saw the last couple of years and some of these DIY discretionary categories, specifically patio and grill, we're not.
Experienced the <unk>.
<unk> the business in the second half of the year and we're not going to experience that unprecedented overlap in those two highly seasonal discretionary the discretionary categories.
And maybe Marvin if I can ask you a follow up I know we have this analyst day later in the year and Youre coming off of a couple of years of historic topline growth and you've been able to get the margin goals much faster.
Sense or do you feel that these gains keep going as long as sales productivity keeps rising or do you feel like there is any part of you that says hey, we could pause reinvest and then we can even drive faster growth in the out years.
It's a really good question.
It depends on our financial category. So I'll remind you that home improvement is a $900 billion marketplace and I think it's easy to just focus on the two largest players.
And determine the overall market share gain just based on that but this is a really fragmented marketplace. So on a revenue side.
Absolutely believe that we have an incredible runway to continue to grow just focused specifically on the fact that our pro penetration is hovering around 23% to 25% and we know we can get that number is significantly higher now the good news is as Joe mentioned, it's increased 500 basis points since 2019, so on.
The sales revenue side, we think we have a incredible opportunity to continue to grow on operating margin I mean, we've said consistently.
12% was not a plateau. It was a baseline now we're going to say the same thing about 13%. We think when we hit that plateau is just going to be another baseline that we can continue to grow from Joe talked about the importance of our PPI initiatives that is not a static list, but this is something that we see Ben.
In future quarters aimed candidly future year so.
Both of those areas, where we think we have room to grow and we look forward to providing.
Very detail outlook to do somewhat conference.
Thanks, everyone. Good luck thank.
Thank you.
Our next question comes from the line of Kate Mcshane Goldman Sachs. Please proceed with your questions.
Hi, good morning, Thanks for taking my question.
I Wonder if you could talk a little bit more about your inventory.
Cost per unit.
And then inventory seem to be.
Lower than your competitor just wanted your view on current and Scott and are hopeful of a category.
Okay I'll take the first part then I'll, let Brendan and Bill jump in I would say first and foremost I am extremely pleased with the.
Disciplined collaboration and planning has taken place to put us in a really good inventory position vis vis the retail industry.
Time, you can have units declining in this environment with supply chain constraints and just incredible difficulties in forecasting it points to a lot of hard work.
So the headline is we feel really good about our current inventory position and we feel good about our in stock position in the second half of the year versus last year. So I am going to let Brendan talk a little bit about the financial expression and then I'll, let bill talk about where we are and where we feel like we're in a much better.
Position versus what we have been in past years in past quarters.
This is Brandon the only thing I would add in the prepared remarks, we talked about units being down.
It has allowed us to make the needed investments in particular in the pro space as we've seen momentum there to continue to support demand. We've had an improved in stocks and in certain areas that we struggled a bit through the pandemic. So as Marvin said really pleased where we are from an inventory position. We're managing seasonal just like we would every year.
In stock levels are better than they have been here over the last two and a half years.
And any.
<unk> exit the seasonal fully included in the margin expectations that we have for second half.
Brandon the only thing I would add is that the quality level of the inventory is good. Although there are still categories across the store that we want to see improvements in and so we're continuing to work with our vendor partners to do that working with our supply chain teams in order to expedite that product to the store into the shelf.
And the teams working on those but the quality level of inventory this year versus last year is dramatically better than it's been.
Okay.
Our next question is from the line of Peter Benedict with Baird. Please proceed with your question.
Hey, guys good morning.
First question just.
The operating agility you guys have shown it's been impressive clearly how do you make sure you're not sacrificing service levels as you manage these SG&A dollars.
Any metrics that you can share that maybe gives you confidence that service levels in the stores are still holding up.
Peter It's a really good question.
Obviously.
We pay very close attention to what we describe as service levels versus SaaS levels, and the thing that Joe and the store operators have done an incredible job.
Investing in service, while taking hours away from test. So when you see that SG&A leverage is not like the old days, where you just kind of rip payroll out and your reserve is what Joe and his team done a masterful job of.
Just pulling hours away from non customer facing parts of the store taking.
Taking some of those dollars to the bottom line, but then reinvesting dollars on the service side. So I'll, let Joe give you some specifics, but the headline is likelihood to recommend up for both DIY and pro in the quarter with SG&A leverage and that is not easy to do so Joe you could provide some detail thanks, Marvin and listen.
And I think it goes back to the focus we've had on our associates and again with the PPI initiatives removing.
Unnecessary daunting tasks, replacing them with technology, and just enabling the associates' time on the floor to be more productive and we've done things the flexible scheduling we've talked many times in the past.
Our new Labor management engine.
So again as we continue moving forward, we measure every single day.
Every single week.
We're very pleased with the progress we've made both on the operational expense and the customer experience.
That's helpful. That's great. Thank you and then just I guess.
Next question would just be around what kind of metrics do you guys watch internally that would may be signaled to you.
A softening of demand whether it be proud or DIY.
Relative to <unk>.
Trend are there any categories are there any behaviors I know youre watching it constantly but.
Just curious kind of what you have your eyes on.
As you kind of navigate this.
This volatile environment. Thank you.
As you can imagine there are quite a few things that we look at and I think the thing.
Thing that I'm, most pleased with when I look around the table.
My team is theres a lot of experience a lot of people who lived through quite a few different iterations of macro slowdown in the home improvement space.
We have some pretty effective playbooks on the merchandising side on the store operation side.
On managing cost and inventory I think is one of the reasons why we've demonstrated quite a bit of agility and some of these unique times.
Having said that I'll, let Brandon who will give you a little bit of the things that we looked at it just to make sure that we have our finger on the pulse of the health of the business that Peter I would just call out just in this dynamic environment I think really important for us to look at the unit trends in particular, so between the merchant teams. The finance teams weekend week out we're down at a very detailed.
Good morning assortment level, we're looking at one two and three year trends and what how much of the business is being driven by inflation.
The offset how much we're driving in terms of units and demand we've mentioned some of these categories.
In seasonal where we've seen units get back to pre pandemic levels, we talked about patio and grills.
So starting to understand and get comfortable and the flip side is we're seeing great unit growth.
Other areas like the pro business, we want to continue to feed so looking across the assortment looking at those impacts how that impacts inventory replenishment ordering in the drivers of the business teams are really focused on that.
Okay, great. Thanks, so much guys. Good luck.
Sure.
Our next question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.
Good morning.
Wanted to start with the pro So Marvin are Joe you mentioned, Lois MVP loyalty program and I realize it's in there, but curious if you can know what tier.
Majority of pro sit in today, and whether you saw any sort of early signs of price peering up during the quarter.
We look out to the back half.
So Steve so.
So let me just now.
Not going to ask that question specifics, let me say that first so I'll give you just some thoughts on on the pro loyalty program.
Talk about the 13% comp growth in pro and 37% growth on a two year basis.
<unk>.
At the foundation of what's driving that.
Is it really monetizing the investments we've already made from a service staffing and technology I think the second reason why youre seeing growth is the investments in brand that bill talked about in his prepared comments and thats an ongoing process.
Fulfillment has improved as a third kind of component of improvement and we know that we have work to do.
Continue to make fulfillment.
He's here for our pro customers and Thats one of the things that as I mentioned that we're piloting a fulfillment center gig networks and we're excited about the possibilities and then the last foundational point is what you asked in this loyalty.
We think our MVP program is incredibly successful in the early stages and so how do I define that.
Customers that are engaged in pro loyalty and credit spend three times more using pros adult I mean to me that's the that's the key metric that we look at.
Do we understand the level of process, that's tearing up we do we don't want to disclose and discuss that externally, but what I will tell you is all of the events that we launched this year leveraging points and pro loyalty have exceeded our expectations.
We have a lot more to come and we will provide some level of granularity in the future, but it is too early to share it externally, but I will tell you that we're pleased with the progress.
I appreciate the color Marvin and then maybe just a quick follow up for Brendan.
Based on the gross margin guidance sort of implies a relatively flattish outlook for the back half.
Clearly, we got the supply chain Buildout and transportation cost pressures. So maybe just any help on the offset if it's from mix or just product margin strength.
Yes, we have we feel like we have a pretty good handle on the gross margin drivers in the business here over the second half, we expect modest product margin improvement as you mentioned.
Set by higher supply chain costs, Thats inclusive of distribution and transportation, we mentioned the drag in Q2, and the expanded network shrink credit fairly neutral as we look across the second half as it relates to other contributors to margin so full year unchanged as it relates to guiding to slightly up.
From a gross margin standpoint, we feel really good about our ability to deliver that.
Thank you.
You're welcome.
Our next.
This is from the line of Scot Ciccarelli with choice Securities. Please proceed with your question.
Good morning, guys. So another DIY question, I know you've bounced around a little bit.
Cycling of stimulus.
That all makes sense.
DIY would be negative.
I know this is an opinion, but I guess the question is what gives you confidence that the softer trends you've seen in DIY over the last few months at the beginning of the slowdown following several years of accelerated demand.
Yes, it's a fair question, so Scott I'll take the first part and I'll, let I'll, let Brandon provide some context. So when you when you look at DIY and you look at the first half I think it's important to understand that a lot of the negative impacts.
Been relatively isolated in discretionary categories, we talked a lot about patio and grills, but candidly for the last two or three years with the lack of mobility that we've all had in the amount of time, we spend at home once you're making investment for patio furniture grill, there's really not.
Overriding demand to do it again, a year or two later and we understand that and also we talk quite a bit about the shorten weather season spring and how that put a lot of pressure on lawn and garden outside category and Thats almost exclusive exclusively for us DIY specific.
So when we try to put.
In characterization, what drove the DIY slowness in the far side, we can be very specific on that but as we look at the back half.
We know that the shift is coming based on how our business trends and I'll, let Brandon just provide a little context on the trends we are seeing and when we look to the interior of the store what we believe will happen in the back half of the year, Yes. So Scott I think confidence just given the first half isolated impacts that marvin called out around the weather the Dr.
Discretionary I mentioned earlier just the.
Momentum that we're seeing in the business in particular post July 4th and again looking at one year and three year comps clear step change that we're seeing in the business. There and then I think last just as we look at the second half and really the structural.
Set up on the business, it's less seasonal.
Definitely more interior focused as we get into the core categories.
We think that coupled with the momentum again that we're seeing with the pro we felt like that plays really well when we look at the.
In the second half outlook that we have on the business.
Got it.
One thing to that so in a recessionary environment as you look at the DIY that tends to shift more to the repair categories.
Versus the big ticket, so theres a lot of.
Indicators out there that we watch on a very regular basis.
Got it thanks, a lot guys.
Thanks Scott.
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.
<unk> lowered the comp outlook to the lower end of the range.
I think related.
Your earnings will be at the high end of the range.
How low could your comp in the back half of the year.
He'll hit.
<unk> guidance for the full year.
Yes, so Michael this is Brian and I would just tell you.
We're very focused on delivering what the most likely scenario that we have with the business, which that's updated and our outlook. So we're looking at top line.
Down 1%, we're really confident given the ability to manage gross margin to step up that we're seeing with SG&A leverage and how thats translating to profit expansion in EPS.
Confident in that scenario confident delivering on what we have in the guide.
And that's where we are at this point in time.
Michael This is Marvin.
Thing that we often talk about internally is that.
<unk> is typically relative to sales and <unk>.
<unk> expense as a percent of sales in percent of revenue and so we have proven that we.
We have levers that we can pool.
So that we can ensure that as revenue goes down didnt. We can at the same point bring our rate of expense down and Thats something that we feel very confident in our ability to deliver upon and I think Q1 and Q2 of this year should represent that.
Okay and my follow up thank you very much my follow up question is on the nature of where sales stand today versus where they were in 2019, Marvin you called out patio furniture.
And grills in categories that have been well above the trend line in demand.
Seasonal and outdoor is about 20.
10% of the business appliances, another 10% to 15% of the business is that the right way to think about the risk of those sales being kind of over earning from the last couple of years and how much risk is there that.
Yes.
Above trend performance in those category.
In Q other areas of the business lighting flooring other areas that could be more episodic in nature.
Mark I guess some really good question I think you can appreciate this has been one of the most difficult environment to <unk>.
Forecast and to build any kind of consistent modeling on so what I will say to you is we pay close attention to all of the trends and we also see now looking at what we call pre pandemic sell Reis and understanding where we have reverted back by category to those pre pandemic.
Level.
And so we know where we are and what categories are in those specific run rates, and we know which categories or not and our job is to pay really close attention to those merchandising categories to ensure that we're in a good insight acquisition that we have good presentation that we're priced right and and that's our best.
Tim to try to manage it and we will have a much better answer for you as we wrap up.
Kind of the back end of the year because of the uniqueness of these overlap is really tough to answer that question with any precision just coming out of the second quarter.
Understood. Thank you very much good luck.
Yes.
The next question is from the line of Eric <unk> with Cleveland Research. Please proceed with your question.
Good morning, Thank you.
Curious for your strategy in regards to promotions and pricing as we move into the back half considering.
What youre seeing with units, where you sit with inventory.
Changing relative to the first half.
Hey, Eric this is Marvin.
Short answer is no plans to change any of our philosophical approach to promotions.
<unk> are.
Our key is to be competitive and again, we've invested in some sophisticated tools give us real time visibility to our competitors. So we can be priced right every single day I'll, let bill talk more about it.
Installs on promotion and pricing just to reinforce that we have a consistent philosophy that we plan to stick with.
Yes, good morning, Eric and thanks for the question.
Just a couple of things and just a couple of reminders.
<unk> been on this journey for our merchandising strategy pricing strategy over really the last three plus years and that is the playbook that we're working to follow and really trying to.
Unwind from what was a high low pricing strategy to an everyday competitive price strategy and so the work that we've done between the merchants the finance team.
Up the resources to manage and monitor price on a daily weekly basis is really allowing us to do that and we feel really good about being very competitive good line of sight on those key skus that matter and then from a promotion perspective, it's all about being there when the customer expects us to be there. So obviously, we got labor day.
<unk> coming up here in the next couple of weeks you go into.
The holiday season Black Friday.
And so we will continue to supplement those events with.
Key offers and be there with value for the customer and then worked really hard to provide that value day in and day out.
In the store with the changes that we've made to our end cap strategies flex strategies et cetera.
And just a follow up within that what <unk> seen.
When you have run events you ran some July four patents.
I'm curious have you seen.
Different consumer engagement with promotions.
In this environment, we're now relative to the past are these are these resonate again I'm just asking as you look at.
Negative units and a bit softer sales.
And a bit more inventory historically promote more I understand the new lowest is less focused on that.
The payback from those things similar different is the consumer responding similar different on those.
Yes, I think.
There's a couple of things there is first there is a.
Time, and an opportunity to put stuff on value and so if you think about first half of the year and you think about.
Mulch and live goods promotions and those types of things that the customer in the door and drive traffic. They play a certain role for us in the role of the category of certain merchandising businesses and then you have new and innovation as I said in my prepared remarks, where the customers finding value in that and a good example is that igo lawnmower that I talked about.
In my opening remarks, it's a $700 unit and it was by far one of our best selling products best unit driving products in the assortment. So should not low priced it's not on it's not on promotion and it was just out there and the consumer has adopted that battery platform and they loved the product. So it's really a combination of both and thats the blend.
We're trying to.
To manage in the appliance business as you know hundreds of thousands of appliances break everyday so you've got to be out there with an offer in the appliance business day in and day out. So that's how we're playing it Eric This is Marvin and I really appreciate the question because we're in this.
This unique environment, where customer demand, especially coming out of that outsized demand in certain discretionary categories. During the pandemic. So we.
We are closely monitoring any of our we call. It tier one holiday promotions just to see how customers respond the biggest difference at Lowe's today versus what are round about four years ago is that there is a rigorous analytical process that we go to coming out of all types of promotions just to look at.
The return on investment and so what we're not going to do to Bill's point is just kind of follow historical trends, just because we're going to evaluate whether or not we got a return was the customer responded and we'll adjust accordingly, and we've been doing quite a bit of adjusting because the customers are responding differently. Because this is such a unique environment.
But as I said earlier, we are anxious.
Now look at the back half of the year, we feel good about the trends as Brendan outlined we feel good about how the customer is shifting on into parts of the store because thats what were really strong and we feel we're well positioned and we will have but much about our assessment looking at the full year going into next year relative to some of these customer engage.
So some of these events.
Yes.
Thank you.
Our next question comes from the line of Christopher <unk> with Jpmorgan. Please proceed with your question.
Thanks, Good morning, everybody.
My first question is also a follow up on the DIY side, Marvin and there were some headlines that talked about.
The improvement continuing into August and Brian in his comments certainly.
With that have you seen DIY flip to a positive trend.
And then as a follow up last year post Labor day, you talked about that consumer coming back from sort of vacation and re engaging in DIY. So.
How are you thinking about.
The ability for that to sustain what youre seeing now to sustain again.
You saw last year.
Well I'll repeat what Brandon said, we've seen a step change post July four in our business and that continues into the month of August .
But it's early but.
Early means.
Trends that we anticipated we're seeing those trends and we are seeing even better than we had anticipated in certain categories. So that's that's a good news, but I will just let brandon to kind of reiterate.
While we have confidence in the DIY consumer as we look at the back part of the year.
Yeah, Chris I'm, not going to get into too much detail, just specifically on DIY comps, but I would say just the response as I mentioned over the last six weeks, especially as we move more to the interior of the core the DIY business within the home decor categories.
He has been notable.
And that's where we're seeing momentum and then I'd also just call out theres other areas lumber is going to be a mix between pro and DIY, but it sort of just given where pricing is at that point to we're seeing nice response, there and we're seeing activity that we continue to see momentum building as we get into August here.
Got it and then.
Commodities have some of the input commodities for a lot of your products have come down recently.
The environment. Since you came on board you have introduced some very sophisticated.
Pricing and cost deconstructing capabilities, how are you thinking about.
We're hearing 10, 10, and then near term to go back and add.
At the vendors from for some price rollbacks.
Before Brandon was elevated to a more prestigious position he did that work for us.
In merchandising will be off I'll, let him give you some specifics on that thanks Marvin.
So yes, Chris I would say just given rate tightening that we're seeing from the fed monitoring the commodity markets, we're definitely expecting some normalization as we move across the second half and into next year. We have built as Marvin mentioned the disciplined product cost management process, we feel like we have the insights to the cost driver.
Across our suppliers, we understand where it's coming from in terms of commodities labor transportation.
And as raw materials come down we're positioned and prepared to renegotiate prices with our suppliers were actually very much underway in certain areas with bill and his team.
And then from a pricing perspective, like we always do we're going to leverage the portfolio approach, if and when we call back to dollars, but we're always going to ensure that we're going to be competitive there as we approach pricing.
Thank you best of luck.
Yes.
Thank you.
Our next question.
Coming from the line of Michael Baker with da Davidson.
With your question.
Hi, Thanks.
Maybe a follow up I just wanted to probe a little bit in two questions. One auto business up double digits for nighthorse, that's great, but it did slow a little bit from last quarter.
One year and two year basis, So I'm wondering why.
What to make of that and then these comments on.
Slide four.
Better.
Yes.
Any comment on how the pro business is doing.
In the last six weeks or so.
Yes, Thanks, Michael this is Marvin.
Feel good about the overall sales volume in our pro business as Joe noted.
Quarter is typically our highest DIY penetrating quarter of the year, but when we look at the pro business, we feel incredibly positive.
The momentum in just the daily volume, we're seeing across all geographies relative to what we were seeing two or three years ago, and we think is very sustainable and has proven to be and we think as we get into the back half of the year.
Our new pro loyalty program.
Improved job lot quantity in stock with some of the brands that bill outline that we're going to see this momentum continue and as I said, it's not just about pro loyalty prolong LT is one of the foundational pieces of our strategy. In addition to all the investments we've made.
In the store.
Brands.
Filled with improvement and also just as a reminder.
Our U S reset project last year literally.
Improved all the Adjacencies, specifically put a pro customer and we think those things are paying dividends. So that business is performing really well and is performing really well.
The DIY and the same trends we've seen post July four for DIY.
<unk> also taken those same positive trends and performing well.
Thank you that's helpful. I appreciate the color. Thank.
Thank you.
Thank you all for joining US today, we look forward to speaking with you on our third quarter earnings call in November .
Thank you. This concludes <unk> second quarter 2020 earnings call you may now disconnect at this time.
Okay.