Q3 2022 Lowe's Companies Inc Earnings Call
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Good morning, everyone and welcome to Lowe's companies' third 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'll now turn the call over to Kate Pearlman, Vice President of Investor Relations.
Thank you and good morning here with me today are Marvin Ellison, Chairman and Chief Executive Officer, Bill Boltz Executive Vice President merchandising, Joe Mcfarland Executive Vice President stores and Brandon, Thank our executive Vice President and Chief Financial Officer.
I'd 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 in 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 third quarter. Our total company comparable sales increased two 2% while U S comps increased 3%. These.
Better than expected sales were driven by improved DIY demand supported by fall nesting trends as travel slowdown and shoulder return to school.
We also saw continued momentum in pro reflecting the success of our pro initiatives and the resilience of home improvement demand.
In addition to strong sales growth our persistent focus on productivity. Once again drove improved operating performance with substantial improvement in adjusted operating margin of 54 basis points and adjusted diluted earnings per share of $3.27 an increase of 20.
8% as compared to last year.
These outstanding results enable us to make critical investments in our most important asset our associates.
In this quarter, we announced an incremental $178 million investment in permanent wage increases for our frontline hourly associates.
These increases are designed to ensure that our more tenured associates continue to receive market competitive wages.
And in further recognition of the hard work and dedication we are awarding $200 million in bonuses to our frontline hourly associates ahead of the holiday season.
At Loews, we make every effort to ensure that our social share in our financial success and I am very pleased that we are once again able to award a discretionary bonus because our performance is tracking ahead of our expectations.
This is a true win win outcome for the company for our shareholders and for our associates.
All of these investments reflect our efforts and our commitment to become the employer of choice in retail, where we continually invest in our associates and help them support their families and grow their careers at Lowe's.
Now turning to pro.
We delivered growth of 16% and 36% on a two year basis, the 10th consecutive quarter that we've driven double digit pro growth.
We are building on our greatly improved pro product and service offerings with our new MVP Pro rewards and partnership program and our enhanced pro CRM, which Joe will discuss later on the call.
We recently completed our annual Pro Pulse survey, which provides real time insights into what's on the minds of our pros and how they view their future business opportunities and we're encouraged to hear that pros remain optimistic with over 70%, saying that they expect even more work in 2023 than they have.
In 2022.
This is just another proof point of the resilience of home improvement demand even in this uncertain macro environment.
On <unk> Dot Com sales grew 12% this quarter over four times, our U S growth rate reps.
Representing a sales penetration of 10%.
We continue to enhance the online user experience as well as our fulfillment capabilities as we focus on driving this critical growth initiative within our total home strategy.
Turning to our supply chain transformation, we've made significant strides in our rollout of our market delivery model for big and bulky products this quarter spanning the country from southern California to Southern Illinois to Atlanta, Georgia.
We've now reached an important milestone with eight geographic regions covering more than half of our stores converted to the new model and we're on track to complete the rollout by the end of next year.
This is a central piece of our supply chain transformation as the market Liberty model will enable us to further consolidate our industry leadership position in appliances.
And position us for profitable growth and other big and bulky products like grills.
Putting lot more stock cabinets and vanities.
This also improves the customer experience through expanded fulfillment options and a seamless omnichannel shopping experience powered by technology.
We also just announced that we will be opening a new coastal holding facility in the port City of Suffolk, Virginia, Our expanded coastal holding facility network is opening up capacity for us the whole product upstream from our distribution centers, which creates the flexibility we need to Florida products quickly and where.
And when its needed this helps us to not only capture sales, but also mitigate markdown risk because we award strengthening product unnecessarily in our stores.
And now I'd like to discuss the macro environment and specifically address some misperceptions that I've heard about the home improvement market.
<unk> heard me talk about this before but demand drivers for home improvement are distinctly different from those that drive homebuilding saw its important not to confuse the two.
And as a reminder, at Lowe's, the three highest correlating factors of home improvement demand or home price appreciation age of housing stock and disposable personal income.
So let's start with home price appreciation, even if there is a broad based decline in home prices homeowners currently have a record amount of equity in their homes nearly $330000 on average which remains supportive of home improvement investment.
And even in the select U S markets, where home prices have declined after a particularly steep run up during the pandemic, we are not seeing any impact of sales.
The average age of homes in the U S is over 40 years old and roughly $3 million more homes built during the housing boom in the mid two thousands will be entering prime remodeling years by 2025, which is a key inflection point for big ticket repairs.
This is one of the key reasons why two thirds of home improvement spend is non discretionary on repair or maintenance projects that cannot be delayed.
Third consumer savings or near record highs, while disposable personal income remains strong.
And more than 90% of homeowners either owner home or are locked into a low fixed mortgage insulating them from rising rates.
On top of these three factors there is a persistent one and half to $2 million under supply of homes and 250001st time millennial homebuyers are expected per year through 2025.
This unique combination of factors is causing homeowners to trade up in plays preferring to invest in repairs and renovations to make their current homes meet their families evolving needs rather than buying a new home.
And this is why we're so confident about the outlook for the home improvement industry, even in a period of high inflation and rising interest rates because the key drivers of our business remain supportive.
And with the investments that we've made to transform our business. We also have the operating agility needed to rapidly pivot if market conditions worsen.
And we have a very experienced leadership team of home improvement veterans, who have developed a proven playbook to respond to a slowdown at.
At the same time, we will not lose our focus on investing in long term growth.
Now before I close I'd like to take a moment to discuss our recent announcement regarding our intention to sell our Canadian retail business to Sycamore partners.
Low source in Canada in 2007, and later expanded with the acquisition of Rona in 2016.
Over the last few years, we focus on the retail fundamentals of our Canadian operations, which brought the Canadian business to profitability and improved its operating cash flows.
However for this business to achieve the profitability in line with the U S significant incremental capital investments would be required to streamline to banners and improve operating margins.
By contrast, we have tremendous opportunity for continued market share and profitable growth in our U S home improvement business.
This transaction will simplify our business model improve our operating margins and return on invested capital, while enabling us to deliver sustainable value to our shareholders.
Brandon will provide details regarding the financial impact of the transaction later on the call.
I would like to thank our entire Canadian team for their hard work and dedication to our customers and we look forward to collaborating with Sycamore partners and executing a seamless transition.
I would like to also extend my appreciation to our team in the U S for their ongoing commitment to serving customers and the communities and with that I'd like to turn the call over to Bill.
Thanks, Marvin and good morning, everyone in the third quarter U S comparable sales increased 3%, reflecting solid core home improvement demand across both pro and DIY customers.
This quarter, we drove positive comps in our building products and home decor divisions fueled by momentum with the pro and improve DIY demand.
In hard lines comps were down slightly as we cycled over significant storm prep activities in Louisiana from Hurricane either in 2021 that did not repeat at the same scale when floridians prepared for hurricane in in 2022.
Overall growth was well balanced with eight of our 15 merchandising departments above company average.
Beginning with our home decor division the fall nesting trends that Marvin mentioned led to standout performance across core interior categories, including appliances paint kitchens, and Bath and flooring.
Appliance sales were bolstered by a strong labor day event and higher online sales as we continue to enhance our lowes dot com user experience.
As an example, this quarter, we began display and delivery dates earlier in the purchase process to highlight our improved next day delivery options.
If the customer needed to quickly replace a refrigerator a washer. That's just stop working this feature now helps them focus their attention to product that's immediately available.
This is especially important for Loews is our appliance business is skewed towards replacement within existing homes versus new housing starts.
As I mentioned last quarter. We also continue to see customers trading up for innovation like with our new Maytag pet pro washer with technology that removes pet here from clothes in the wash cycle, which is exclusive to Lowe's.
This quarter, we also launched a new exclusive home center partnership with Miller.
Global leader known for high end premium appliances.
This reflects our ongoing commitment to ensuring that we have new high quality offerings across all price points with leading products from all star brands like tracks.
Walt Owens Corning, John Deere ego, Honda Kitchenaid, Samsung LG, Kohler, Moen, Whirlpool Husqvarna and Aaron's.
Paint delivered strong positive comps this quarter across both pro and DIY.
Many of our pros, especially those who focus on repair and remodel work paint as part of their larger jobs. In other words. These are pros, who paint rather than professional painters and these pros are starting to see the value of our new Mvps pro paint rewards program paired with our expanded job site delivery for paint.
These enhanced benefits and capabilities are making it more convenient and cost effective approach to purchase their paint directly from loews, earning us more of their business.
And our continued partnership with Sherwin Williams, we're also upgrading our paint departments across the U S, including a new color well that converts all HGTV colors to Sherwin Williams colors, which resonate with both DIY and pro customers with.
With our new color wall, we are bringing all the colors together so that customers can easily match their favorite Sherwin Williams paint color at our paint desk.
We are also resetting some categories to pull relevant higher margin and more frequently purchase products closer to the front of the department.
Making it easier for customers to get everything they need for their paint project in one trip.
We plan to have half of our stores converted to this new color wall by the end of this year and roll it out everywhere by the end of next year.
We are very pleased with the progress we've made in this core category in just a few short years, we're gaining traction with both pro and DIY and this recent update highlights just a few ways that we plan to continue to take market share in paint.
We also had strong positive comps in kitchens, and Bath, largely driven by improved in stocks for cabinets and customers opting to trade up for larger higher quality in stock cabinets versus waiting for custom orders.
Within flooring vinyl flooring once again led the way as busy homeowners are turning to durable low maintenance flooring options available and popular brands like Pogo and stainmaster.
And we're gaining momentum across our private brand portfolio, especially in stainmaster origin, 'twenty, one Alan and Roth and cobalt is this is just another indication of the traction that we're gaining with our total home strategy.
Turning to our performance in building products Division, we continued to see broad based balanced growth across pro and DIY in millwork rough plumbing, electrical lumber and building materials driven by strong project related demand.
We are encouraged by the DIY strength that emerged in building products this quarter.
As lumber prices have come down DIY consumers are re engaging in home improvement projects. They had previously put on hold leading to double digit lumber comps in the quarter.
And our hard lines division as lumber demand increased so as demand for related attachment categories like fasteners, leading to a strong positive comps in hardware.
We also continue to see a trend of customers investing in innovation, our ego battery now powers 75 different tools everything from traditional outdoor power equipment like mowers, trimmers and leaf blowers to lifestyle products like camping generators, and mystique fans and with the accelerated growth in battery powered products that we.
We're seeing it's not surprising that Eagle continues to lead the pack and battery powered outdoor power equipment.
Given the concerns in the marketplace. Some of your vast if we're seeing a shift away from discretionary purchases, which is what we typically expect to see in a softer macro environment.
And the straightforward answer is no we had a strong sell through in Halloween. This year with an early sell out of our 12 foot lighted animated mummy at a price point over $300. One could argue that this is one of the most discretionary items we sell.
And with Halloween in total being a highly discretionary category. This continues to give us a positive indication of the strength of our consumer.
We kicked off the holiday season, with our trim a tree sets early in the quarter. We are seeing early sell through on taller higher end artificial Christmas trees, which is another example of both discretionary purchasing and consumers trading up.
Before I close I'd like to thank our merchants supply chain team and our vendor partners for their hard work and the continued partnership as they continue to provide our customers with the products that they need as we support our stores and communities and the recovery efforts from Hurricane Ian.
Thank you and I'll now turn the call over to Joe.
Thank you Bill and good morning, everyone. Let me begin with a heartfelt. Thank you to our associates. Our strong performance. This quarter is a direct reflection of their hard work and dedication to providing excellent customer service. That's why we are so focused on becoming the employer of choice in retail where associates choose to stay to build their careers.
At its core that means providing good stable jobs comprehensive benefits competitive wages and bonus opportunities.
As Marvin mentioned this quarter, we announced $170 million in permanent wage increases and we are awarding $200 million in bonuses are ahead of the holiday season for our frontline hourly associates. This translates to up to $1000 for eligible full time associates and up to $500 for <unk>.
Eligible part time associates as someone who started my career as an hourly associate in home improvement I understand how meaningful this type of financial recognition can be.
Our executive leadership team is passionate about rewarding our associates and taking care of our customers, which is demonstrated in the investments we make in both our people and the communities we serve.
Another example of these investments in action is the transformation of our disaster response capabilities over the last few years.
Which dramatically improved our ability to support communities through devastating storms like hurricane Ian.
Year round Lowe's now has a cross functional command center dedicated to supporting our disaster response efforts. In fact, it was these enhanced capabilities that enabled us to respond so effectively to the pandemic.
We also deploy our emergency response teams to the hardest hit areas. These associates volunteered to leave their home stores, giving their colleagues in the impacted areas a chance to focus on their families and we go a step further to help impacted associates by deploying refueling stations and our mobile disaster relief.
Trailers with showers, washers, dryers, and meals and offering financial assistance through our Lowes employee relief fund.
In addition to demonstrating the importance of our improved disaster response capabilities Hurricane and also spotlight is the value of our expanded omnichannel fulfillment options.
Earlier in the quarter lows rolled out same day delivery nationwide with more than 700 stores now supported by <unk>. This partnership allows us to deliver over 30000 items stocked in our stores that way up to 60 pounds to our customers.
In the days, leading up to the storm. We received thousands of these same date orders to help customers prepare and protect their homes customers were able to get critical items, they needed like water sand buckets in batteries without having to leave their homes and it continues to be helpful option for many who need supplies in the wake of the storm.
And we continue to optimize our parcel network in Q3, another important step in our journey to enhance our omnichannel fulfillment capabilities, we rebalanced our network to ensure a parcel stores are optimally located close to shipping hubs and we have upgraded our technology and hardware.
Port faster fulfillment ahead of the holidays, we are on track to meet our goal of decreasing shipping times by 50% and these are just a few of many examples of our tenacious focus on perpetual productivity improvements or PPI that are scaling across our stores overtime.
Shifting to pro I would like to thank our protein for delivering outstanding results. Once again this quarter driving pro comps over 16% for the quarter and 36% on a two year basis, we are leveraging our new Mvps pro rewards and partnership program to capitalize on this continued demand.
By engaging prose incentivising purchases and building long term loyalty. Our program is laser focused on helping pros grow their business because we know that when pros succeed. We succeed. This partnership based approach is already paying off with higher than expected adoption rates and overwhelmingly positive.
Feedback from our pros, we recently asked all of our regional Vice presidents to find pros, who do not want to sign up for our loyalty program. So we could talk to them and understand why but that proved to be a real challenge because once pros here the benefits. They are eager to join so awareness and continued execution.
Be the key to our ongoing success.
As I close I would like to thank our associates once again for their commitment to Lowe's and our customers without them. The strong results that we delivered this quarter would not be possible now I'll turn it over to Brandon. Thank you Joe I would like to begin this morning by providing additional details regarding our recent announcement of our intention to sell our Canadian.
Business as Marvin mentioned, despite making meaningful progress in improving our Canadian retail business over the past few years. It has continued to lag our U S operations and sales growth operating profit and return on invested capital in fact, the Canadian business represents approximately 60 basis points of dilution on our full year <unk>.
Operating margin outlook and during the quarter, we recorded a pretax noncash impairment charge of $2 1 billion related to this business.
Looking ahead this transaction makes us a U S focused business and gives us a clear line of sight to meaningful long term improvement of our sales productivity operating margin and return on invested capital in particular, we are excited to share our updated financial targets at our upcoming analyst and Investor Conference in December .
Turning to our Q3 results, we generated GAAP diluted earnings per share of <unk> 25, compared.
Compared to $2 73 last year now my comments from this point forward will include certain non-GAAP comparisons where applicable exclude.
Excluding the $2 1 billion asset impairment charge, we generated adjusted diluted earnings per share of $3 27.
An increase of 20% compared to third quarter of 2021.
This increase was driven by a combination of topline growth strong P&L management and disciplined capital allocation.
Q3 sales were $23 5 billion with comparable sales up two 2% comparable average ticket increased 8% driven by product inflation.
80 basis points of commodity inflation and higher pro sales.
Of note FX represented a 30 basis point headwind to consolidated comps.
Higher average ticket was partly offset by comp transactions declining five 8%.
Of note comp transactions have improved significantly as we move through the year with Q3 over 730 basis points higher than Q1, and 60 basis points higher than Q2.
Comp sales were up 3% in the quarter, while sales in Canada were down 10, 2% in USD with roughly half of the decline attributable to a stronger dollar.
<unk> sales were up 16% in the quarter driven by broad based strength across all categories.
Sales trends improved from Q2 with strong performance across many core home improvement categories as consumers spend more time at home following summer travel activity.
DIY project related demand also increased sequentially due to lower lumber prices.
On Lowes Dot com sales increased 12% in the quarter, partly driven by strong appliance sales.
Finally, we estimate that the net effect of storm related sales year over year was relatively flat as we cycled over hurricane Ida in the prior year.
Our U S monthly comps were up 4% in August three 4% in September and one 4% in October on a three year basis U S comps increased 33, 5% in August 37, 8% in September and 42, 1% in October .
Gross margin was 33, 3% of sales in the third quarter up 20 basis points from last year.
Product margin rate was up 110 basis points versus the prior year as we cycled over a lumber margin pressure in the third quarter of 2021, which was triggered by a steep decline in prices that began last July .
Higher product margin rate was partly offset by 30 basis points related to higher domestic and import transportation costs as well as the expansion of our supply chain network, along with 35 basis points of pressure from shrink.
Adjusted SG&A of 18, 7% of sales leveraged 41 basis points, driven by higher sales and substantial improvement in productivity.
Adjusted operating profit was 3 billion up 7% versus the prior year.
Operating margin rate of $12, 71% of sales leveraged 54 basis points, driven by both higher gross margin and SG&A leverage the.
The adjusted effective tax rate was 24, 5% below the prior year rate.
Inventory ended the quarter at $19 8 billion up $3 1 billion from the same quarter last year, largely driven by product inflation and higher freight cost with units roughly flat to prior year.
This morning, we are increasing our full year 2022 financial outlook based on stronger than expected flow through year to date.
Please note that our outlook for operating margin diluted EPS and return on invested capital are all adjusted to exclude asset impairment and expected transaction costs associated with the sale of our Canadian retail business.
We now expect 2022 sales of approximately 97 to 98 billion, representing comparable sales of flat to a decline of 1% as compared to prior year.
Please note that at the midpoint of the range. This implies that fourth quarter comparable sales will be slightly positive.
This reflects our expectations of continued strong pro performance and steady DIY trends.
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.
As you look ahead to the fourth quarter keep in mind that we are cycling over the second round of lumber inflation in 2021, which benefited product margins. We also expect continued shrink pressure next quarter.
Given our disciplined focus on expense management, we now expect adjusted operating margin of approximately 13% for the full year.
And we are raising our outlook for adjusted diluted earnings per share for the year from $13 10 to.
To $13 60.
Two our updated range of $13 65 to $13 80.
This reflects better than expected SG&A leverage as well as higher than planned share repurchase activity.
We expect capital expenditures of up to $2 billion this year.
Additionally, given our larger than expected $4 75 billion notes offering in Q3, we expect to accelerate share repurchase activity that we had originally planned for 2023 into this year.
We now expect 13 billion in share repurchases in 2022.
And finally, we are raising our outlook of adjusted return on invested capital to above 37% for the year.
Now turning to our best in class capital allocation strategy in.
In Q3, the company generated $1 7 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 25 million shares for $4 billion, we also paid $666 million in dividends and $1 five per share.
Capital expenditures totaled $403 million in the quarter as we continue to focus on high return projects that support our growth objectives. We ended the quarter at two five times adjusted debt to EBITDAR and we are well on track to reach our target leverage of 275 times in 2023, while also maintaining.
Turning our triple B plus rating.
Finally, we delivered return on invested capital of 27, 6% inclusive of a 590 basis point impact related to the asset impairment recorded in the third quarter.
In closing I am confident that we will continue to deliver shareholder value through our leading capital allocation strategy, while investing in our associates and our business to drive long term sustainable growth and with that we'll open it up for questions.
Thank you we're now ready for questions.
I'd like to ask a question press star one on your telephone keypad.
To withdraw your question press Star two.
Order to allow questions from as many individuals as possible. Please limit yourself to one question and one follow up.
And our first question today comes from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Good morning, everyone.
Marvin I wanted to maybe play Devil's advocate for a second on housing.
Idea that it's just taking a long time for all these pressures to catch up to the consumer in this segment for all the reasons you cited plus theres been some labor and product shortages. So curious how much the debate that and that there is a certain level of home price depreciation that's going to eventually weigh on this customer.
Okay.
No I appreciate the question.
And here's what I would say when we look at markets around the country, where we saw an aggressive increase in home prices. During the pandemic now you can see some of those prices start to fall those markets are performing at the same rate of performance as other markets. So we're already.
Seeing due to the lifecycle of home price appreciation and home price declines around the U S.
<unk> signals of kind of what.
The broader macro may look like in months quarters and years in the future. The great thing about operating stores in every state in the virtually our ZIP code is that you have a pretty good sample size of kind of what's currently happening, but also what future trends may look like.
And we're not trying to spin the data.
Trust me, we're looking at this every day.
Like you are but from a different vantage point trying to understand demand patterns, but the reality is still remains that home prices have appreciated.
At record levels as I said in my prepared comments on average $330000 per home.
<unk> XR that homes are older than they've been since World War, two and two thirds of our business is non discretionary because when your house get older things break that's just commonplace.
<unk> are that we have more personal disposable income to data we had before the pandemic and thats primarily in the bank accounts of homeowners and the facts are that we're still a $1 million <unk> 2 million homes under current demand.
Cause of the lack of homebuilding coming out of the financial crisis in 2008 2009.
So those are just facts and when we look at and try to forecast our business. We have to ask one simple question historically what data points.
Correlate closely to demand patterns for Loews, and what I just outlined to you are the data points that correlate to demand patterns and that's what we look at.
Yes, that's a fair fair points.
Paul for housing and maybe go back to the business.
If you look at the things that Lowe's can be doing better and have obviously youre executing against all the plans that you've put in place since you've joined.
It doesn't involve higher capex may be real reallocation of Capex or is it mostly execution in process.
Well I would say from a capex standpoint, we have no expectation to go above our current.
Capital.
Allocation.
Dollar amount of roughly $2 billion per year, we will have our Investor Conference next month and I can just give you a little bit of a precursor that's what the number is going to be for next year.
So as we look at things that we still have to catch up and I'll be very transparent, we're not where we want to be we still have a supply chain transformation process is underway, but we can get all that accomplished and stay within that $2 billion Capex dollar amount, we still have significant investments.
That we need to make we made incredible improvement, but all of those things also fall within the current allocation of Capex Bill.
Bill is working to continue to improve merchandising and pricing systems again, those things are all mapped out.
There are cost it out and we have a good understanding of it and we feel like a $2 billion of Capex will allow us to achieve all of these things and again, we'll speak to those in more specificity.
Next month in New York, but what I will say to you is yes are we working on execution, we are but I can tell you right now I couldnt be more pleased with our ability to execute at a high level in arguably the most difficult retail environment of our lifetimes anytime you can be 100 billion dollar company.
Company and you can be so dependent on the global supply chain and you can manage inventory with basically flat to negative units for the whole year. As we have that tells you that the degree of execution and collaboration is it on that level.
Thank you good luck.
Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question Youll be competitor yesterday talked about seeing some early signs of deceleration in the business in areas like <unk> are you seeing any of those similar time.
Separately, what do you think drove the acceleration.
In October on a month on a three year monthly.
Stack basis.
So Michael I'll take the first part of that I'll, let bill boats come in and provide some perspective.
But when we look across all of our merchandising departments. We don't have any really red blinking lights of concern relative to certain categories certain items certain skus, obviously, when you start to get into different times of the year, we're going to have performance.
Changing based on customer demand. So we didn't have in anticipation of grilles would be a top selling category in the third quarter. It tends not to be the same would patio and as we spoke to a lot of <unk>.
Detail last quarter, we do believe there was some degree of pull forward.
And some of these more seasonal discretionary categories.
But.
We are not seeing anything that feels a looks like a trade down or consumer pullback I mean to the contrary.
The third quarter was our best performing DIY quarter of the year and that customer segment tends to be kind.
And of the indicator for us on the overall health of our business Pro has been strong all year and the good news is for the first time. This year. We saw continued strength in pro and we saw sequential improvement in DIY. So that is something that gives us confidence that things are headed.
In the right direction I'll, let bill talk about.
What performed well in the third quarter relative to product categories that really gave us a really strong.
Two to three year stack for that month, yes, Thanks, Marvin and Michael I think just a couple of things we see as we go into Q3, we see a shift away from a heavy reliance on seasonal like we do typically in Q2, yet there were still some seasonal business to be had in Q3 and that helped us as the weather was favorable.
As I said in my prepared remarks, our building products business continued to perform well and we continue to see strength really across all of our pro related categories and then the shift to indoor as Youll see appliances kitchen, and Bath flooring paint those businesses both on the DIY and pro side continue to do well and then holiday with her.
<unk> and then the early sets of our true inventory categories, where with what we saw in Q3 and then our online business continued to perform well in Q3 as well.
Okay. Michael This is Joe I'll add just one additional point.
And that's our new MVP Pro rewards program that we have been discussing.
And so when I look at our adoption rates.
Being way better than expected at the new Pro CRM platform and then just a combination of our strong credit offering along with pro loyalty gives us a lot of confidence in that business as well.
Okay.
Hi.
Follow up question is at the horrid scope.
Pulling forward a little bit of your messaging from a couple of weeks from now your SG&A dollars have been very well contained over the last few quarters.
Leading to the idea that maybe load doesn't have as much cushion in its cost structure in the event that there could be a downturn and home improvement demand either because of housing or just a weakening labor market why is that wrong.
While I will say is wrong based on the performance in Q1, just use that as your as your data point.
The season broke late.
Top line was not what we anticipated yet we still leverage operating margin for the quarter.
See that as an example of the levers that we now have in place to be agile.
As I said in my prepared comments, we've got a lot of experience sitting around this table. There is very few things that we have not seen we have a really strong playbook develop and we think that if the market.
Turns more negative than we May anticipate then we have the ability to pull those levers and perform really well as a matter of fact without giving you. The details in your brand and is going to spend a bit of time.
Next month at the Investor Conference outline somewhat over the levers and the agility. We build so that we can be really really swift to react to any market conditions.
That sounds great, Kevin I think giving and thank you very much.
Thank you same to you.
Okay.
The next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
Congrats on nice quarter again.
My first question.
Again, I don't want the risk sound nitpicky, but given the strength in the business and as Michael just pointed out his question.
<unk>.
Basically the accelerating trends through Q3, and then you talked about the initial <unk>.
Strength in seasonal with the mummy sales.
Why not lift why not lift sales guidance for the year, especially in when you're when you're lifting earnings guidance.
So I'll give you the philosophical perspective, then I'll, let Brad to give you a financial.
Perspective.
As you know Brian there is a lot of unknown out there and so we're not going to be overly bullish for no reason.
You had a midterm election that steel candidly hadn't been quite determined.
Have aggressive action from the fed.
You have global.
Geo political events happening.
So we're just being what I'll describe as appropriately conservative do we have confidence in our business absolutely do we have confidence in what we're going to deliver for the holiday season, you bet. We do and we think we have a great plan for the balance of this quarter and going into next year, but in an environment, where there is so much.
Concern and the macro we just felt it was appropriate to just be conservative. So are our decision not to live guidance has nothing to do with our lack of confidence is just more by being prudent and not being overly aggressive in an environment, where there's a lot of an asset macro questions solid brand and add some additional detail yes, Brian This is <unk>.
Brandon as I indicated in my prepared remarks, we looked at three year comps did see sequential improvement as we moved across the quarter.
Q3 exit rates were strong Bill mentioned the improvement specifically in the interior DIY related categories. The midpoint of our full year guide is flat to down one which implies slightly positive comp for Q4, and if you recall back in August we were guiding actually to the bottom end of that range of flat to down.
1%.
I will cite the commodity volatility and the impact Q3 to Q4 with lumber where it is we've actually seen a benefit of 80 basis points to comps in Q3, if the pricing runs out into Q4, we're expecting that to actually flipped to a 90 basis point drag. So that's about 170 <unk>.
<unk> point swing again, Thats taken where we are from a benchmark perspective of below about $500.
And running that out and comparing that to where lumber lumber prices inflated round two of last year. So all in excluding lumber and the differences I just cited the pro comp momentum is expected to continue in the DIY trends that Bill mentioned are expected to continue through Q4.
That's very helpful. I appreciate the color there and then my follow up question.
Separate topic, just with regard to supply chain. So Barbara you could talk highly.
Highlighted.
<unk> success that you've had in improving the low supply chain internally by most measures now the external environment for supply chain is getting better with shipping cost and such so I guess the question are you seeing that and then recognizing you haven't given guidance yet for 2023, but to the extent these external supply chain issues continue to correct could that be.
Tailwind of some sort as we hit over the next several quarters.
Yes look it's a <unk>.
Great question, Brian and without getting in front of what we're going to discuss next month I would say the short answer is yes. There are elements of the supply chain that definitely will give us some cost advantages next year, Brandon is going to be very transparent and very detailed on kind of what we see going into next year and obviously some.
<unk> is going to be a big component of that in addition to just the overall cost environment for supply chain, we're going to talk about strategic initiatives as well that we're excited about because as far as much work as we've done in supply chain as I mentioned earlier, we still see it as a.
As one of our key opportunities to improve there is not a great retail in the world that doesn't have a great supply chain and we're committed to having a great supply chain.
I appreciate it.
Thank you thanks, Brian .
Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your questions.
Great. Thank you. This does for you as you think about that.
<unk> comp guide alright between transactions and average ticket.
I mentioned that in certain categories, where you saw inflation moderate.
And subsequent increase in transaction does that give you confidence going forward that as inflation does start to moderate L. B.
Average ticket.
Klein or lower growth rate would be offset by a pickup in transactions.
Yes. This is Brian and I think on the inflation front, we do continue to see high single digit inflation. This quarter inclusive of about 80 basis points that I mentioned earlier of commodity inflation. Our consumer does continue to be resilient, we haven't seen any significant trade down and in fact, we've actually seen trade up in place.
Across a number of categories in our Q4 forecast, which were focused on at this point, we're expecting that to continue at the high single digit Mark we are going to get some relief related to lumber pricing that I mentioned earlier, so that net 170 basis point swing, but for Q4. That's the forecast is that the inflation is going to.
To lift our ticket, which is going to be the primary driver of our comp and it's going to be offset by transactions being down in Q4.
And then just looking out beyond Q.
Q4, as you think about the potential.
Outlook for costs going forward, and how that ticket versus transactions could play out I mean, one of the pushback that we get is that.
Yes.
Yes.
I can start to come down, but transactions remain negative that would be severe headwinds.
Curious, how youre thinking about that outlet going forward.
Yes, we're going to hold until December to really give you a deep view there we will have an updated view of the macro.
Comps scenarios within that and specifically the makeup of our comp and we will plan to go into details there on December 7th.
All right Great I'll see you then thank.
Thank you.
Our next question comes from the line of Zach <unk> with Wells Fargo. Please proceed with your question.
Hi, good morning, So following up on the SG&A dollar question is <unk> been able to take out a couple $100 million.
<unk> in both Q1, and Q2 and while Q3 was basically flat it looks like your Q4, SG&A Embeds a pretty notable step up in trend even excluding the extra week. So can you just help me understand the puts and takes on the SG&A line and a little bit more detail and perhaps talk to the impact of the efficiency.
And then also to what extent you are able to flex up and down labor with the law.
Lower volumes today.
So Zack I'll take the first part of that and then I'll, let Brandon maybe Joe provide some additional detail.
So for US I think the key thing to understand is we have what we call PPI perpetual productivity improvement initiatives.
And we're going to go into some level of detail on how this has become more of a cultural process across the whole company at the Investor Conference next week, but specific to your question. We still believe that we have technology investments that we can make in the store environment, specifically that we can continue.
To drive SG&A leverage while improving customer service. So it's easy to drive SG&A leverage if you're just pulling payroll out indiscriminately, but what Joe and his sage done we've actually improved leverage in the store from an expense and payroll standpoint, and concurrently drove up customer service.
And Thats the key and that's really all about technology investments and so we think that there are still additional initiatives.
Initiatives on the on our project roadmap that will continue to give us those benefits I'll, let Brendan take the more financial part of your question and Joe can add something else about payroll and how we can adjust it.
Rather quickly relative to the demands that we're seeing from the consumers in our stores.
This is Brandon the only thing I would add implied our SG&A is expected to lever in Q4, and just as a reminder, we are cycling and incentive payout from 2021 and in Q4, but I would just add that while Marvin said continuing to drive substantial PPI initiatives store tech modernization for.
And transformation managing back office.
So we're really proud of the progress we've made as we've mentioned earlier expecting to significantly outperform from an EBIT standpoint, even in declining sales for the full year.
We'll tell you more about what we have in store for 2023 in December .
I'm going to let Joe talk about the activity based model that drives our payroll system into stores. So you can get a sense that.
We just don't have a blanket approach, we generate payroll based on a number of transactions and footsteps and we think thats the best way to look at it. So Joe you can expound on that.
Thanks, Marvin what I'd tell you is with our labor system that we have implemented in the last few years.
This is really detailed as down to by store by Department by day by time of day.
In addition, as you think back in the last several years, our 60 40 initiatives to align.
The associates with customers and then the tasking activities, we've gone through a series of steps that continue to pay go forward dividends for us and so we have a lot of confidence in our ability to navigate to continue with the large.
<unk> been making.
2023.
We will be a transformative year for us from an it system standpoint.
And the ease of what we're doing.
Got it appreciate all the color there and then Marvin you had mentioned in the past about two thirds of your business is tied to repair and maintenance activity and then the remaining third of your business to what extent would you say those sales are tied to housing turnover home price appreciation and then considering.
The slowing in the housing metrics, how do you characterize the current demand environment for repair and maintenance activity, which is more stable and recurring versus sales that are perhaps more discretionary are bigger ticket in nature.
It's a fair question, but what I will tell you is that we're seeing strength in.
In both areas. So obviously when you see.
19% growth in pro 10 consecutive quarters of double digit pro growth. Then that tells you that there is big ticket projects going on that are.
Remodel in nature, but are also what I would call upgrade in nature, we talked about trading up in place and that is a phenomenon that we're seeing because.
The one $5 million to $2 million shortage of homes and the high interest rate environment is just incentivizing homeowners to keep their low fixed rate and modify their existing home and so because of that you're seeing a combination of older homes getting the maintenance and repair to falls into two third but then you see the other one third that's simple.
<unk>.
Operating and improving the environment of new kitchen, finishing debasement of new bathroom et cetera, and so we're seeing a combination of all of those things and as bill walked through the different.
<unk> Department of performance you can see it embedded in all of those different results.
Got it thanks for the time.
Thank you.
Our next question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed with your questions.
Great. Thanks for squeezing me in and Great results. My first question is on inventory it looks like the inventory sales Brad.
Widened a bit sequentially in <unk> from our store checks it looks like you're in stock positions are the best they've been in years. So is it safe to say that the majority of that inventory increase year over year is tied to average unit cost and on that topic, how should we think about inventory levels tracking.
At the end of <unk>. That's my first question. Thanks.
Yes, Jonathan this is Brian and so I would say inventory overall, we feel is in a really solid position balances up 19% drill.
Driven exclusively by product cost inflation and freight units are flat as you mentioned our in stock rates continue to improve across all of our categories. We're continuing to make investments in pro specifically in those high demand Skus we.
We felt like we got the right levels to support the expected demand that we see for Q4 and into 'twenty three.
And in reference to Q4, we do expect the inventory to build over Q4 with early ordering I think for springs, consistent to compared to pre pandemic levels.
We are still seeing a bit of unpredictability in the supply chain due to the zero Covid policy in China, but just also as a reminder, when we look at our seasonal businesses, specifically, we do start setting south and deep south.
In Q4, and then we're also maneuvering around Chinese new year, which is the latter part of January .
So it's going to be critical that we're in stock for spring and we're making those decisions based on lead times and supplier health across each of our categories.
That's really helpful. And then a quick big picture question on pro free Marvin.
<unk> continued to have great traction there it looks like the multiyear comp.
Held up this quarter at 36%. So when you think about the recent share gains, but the pro curious if the drivers have evolved at all if you could talk through how much new pro customer acquisition has been driving.
<unk> sales versus greater wallet share from existing pros that would be great.
Whether youre seeing any any change in those two drivers.
So thank you for the question, we don't give a lot of external information on number of new customers down to that level of specificity, but what I will tell you is that our new loyalty program is absolutely dry.
Driving new pro customers and is driving more return visits of existing customers, which is exactly what we wanted and a key data point is this when a pro customer is enrolled in our pro rewards platform and credit they shop three times more so that is a key data point and so.
And Joe scripted comments, he talked about the adoption rate and how it really comes down to our ability to engage to pro.
And when we engage them and educate them they tend to adopt protocols I'll, let Joe provide a little more context on probe, we're really pleased with the progress and equally pleased that we saw the DIY.
Customer come back strong in third quarter than we've seen them all year.
Jonathan just a couple of things to add first off our protein here at Lowe's is just full of deep experience inside sales outside sales and <unk>.
Done a really nice job and so we're still in the early stages of the Mvp's Pro program, but very very pleased with the adoption that we're seeing so we've spoken a little bit in the past about our pro CRM platform. So we have the ability to better anticipate pros' needs and drive sales and then this really does a nice job.
Of what we call leveling the playing field. So that every pro is important and has the ability to earn points no matter, what the size and so things like purchase based offers.
Completing different actions to deepen our relationship with Lowe's and so we'll continue pressing forward here, but very pleased with the pro progress.
So here, it's just the luck.
Great. Thanks. Thank you all for joining US today, we look forward to speaking with you at our analyst and Investor Conference on December seven.
Thank you.
This concludes the Loews third quarter 2022 earnings call you may now disconnect.
Okay.