Q4 2022 Lowe’s Companies Inc Earnings Conference Call
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Speaker 2: Good morning everyone and welcome to Lowe's company's fourth quarter 2022 earnings conference call. My name is Robin and I'll be your operator for today's call. Welcome to Lowe's company's third quarter 2022.
Speaker 2: As your reminder, this conference is being recorded. I'll now turn the call over to Kate Proman, Vice President of Investor Relations and Treasurer. Thank you and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer. Bill Bolts, our Executive Vice President merchandising. Joe McFarlane, our Executive Vice President, stores.
Speaker 2: and Brandon Sink, 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 Lowes Investor Relations website. During this call, we'll be making comments that are forward-looking, including our expectations for fiscal 2023. Actual results may differ materially from those expressed or implied as a result of various risks, uncertain...
Speaker 3: I'll turn the call over to Marvin. Thank you, Kate. Good morning, everyone. In the fourth quarter, our total company comparable sales declined 1.5 percent, while US comps decreased 0.7 percent. For the quarter, commodity deflation impacted US comps by 75 basis points.
Speaker 3: Our investments in the pro-customers continue to pay dividends for the company reflected by our continued strong pro-sales in the fourth quarter. In fact, this is the 11th consecutive quarter that we've driven double-digit pro-growth in the U.S., despite stronger than expected commodity deflation.
Speaker 3: And while there was continued solid DIY demand and core home improvement categories, as expected, we saw a DIY pullback on holiday gift buying.
Speaker 3: Despite a modest decrease in sales, we once again improved our adjusted operating margin by maintaining our disciplined focus on productivity. During the quarter, adjusted operating margin expanded approximately 88 basis points, leading to adjusted diluted earnings per share of $2.28, a 28% increase compared to last year.
Speaker 3: These results cap all of solid financial performance for fiscal 2022 with sales of $97.1 billion adjusted operating margin of 13% and adjusted earnings per share of $13.81 up 15% over the prior year.
Speaker 3: With these results, we're awarding $220 million in discretionary and profit-sharing bonuses to our associates, which includes an incremental $70 million to our assistant store managers and supply chain supervisors who hold two of the most critical frontline leadership roles in the company.
Speaker 3: This builds on our recent $170 million investment in permanent wage increases for our frontline hourly associates which went into effect in December .
Speaker 3: Since 2018, we've invested over $3 billion in incremental wages and share-based compensation for our frontline associates, including increasing associated wages by over 20%.
Speaker 3: And as we mentioned at our December analyst and investor conference, we are committed to additional frontline wage investments over the next several years, which are contemplated in our long-term targets. These compensation investments are just one reflection of our commitment to becoming the ploy of choice in retail, which Joe will discuss in more detail.
Speaker 3: Throughout the quarter, we continue to gain traction with our total home strategy as consumers remain engaged in home-related activities. In Pro, we deliver US growth of 10 percent and 36 percent on a two-year basis. In our future, we continue to continue to gain traction with our total home strategy as consumers remain engaged in home-related activities.
Speaker 3: We are capitalizing what our momentum, what our probe are growing, our MVPs, Pro Rewards and Partnership Program, building relationships through our CRM tool and continuing to enhance our product development to meet pro needs. One example of enhancing our Pro Product Disvolvent is the exciting news that client tools don?t know is appropriate.
Speaker 3: detail on this exciting addition to our assortment later in the call.
Speaker 3: Now, one question many of you have asked is about our pro backlog and if they're still healthy. We're in constant communication with our pros through formal surveys, our pro council, and countless day-to-day conversations. In our January survey, more than 70% of pros stated that they were booked out the same or more compared to 2022. faced a
Speaker 3: And they remain confident in their ability to find jobs and hold on to their backlog. We believe this dynamic is being fueled by all the things we talked about at our December Alice and investor conference, which includes homeowners with strong balance sheets and record levels of equity.
Speaker 3: On Loz.com sales group 5% on top of 11.5% growth in a fourth quarter of 2021, partly due to strong applying sales. This represents a two-year comp of 17% and more than 11% sales penetration. We continue to remove friction from the customer's online experience, which includes adding Apple Pay this quarter to improve conversion. We also focus on removing friction from our customer's omnichannel shopping journeys, like for appliances where customers often shop our showrooms before making their purchase.
Speaker 3: is enabling us to further consolidate our industry leadership position in appliances, and it positions us for profitable growth in other big and bulky product categories like grills, riding lawnmowers, and stock cabinets. During the Canada, we completed the sale of our Canadian retail business to sickle more partners this quarter. As a result, we are now solely focused on the transformation of our U.S. business. When we estimate that we have a $1 trillion addressable home improvement market.
Speaker 3: enabling us to invest more into higher return opportunities to grow our business and to take market share. I'd like to extend my appreciation to the entire Canadian team for their commitment to serving our customers, and I wish them the best as they move forward under new ownership. Before I close, I'd like to share my perspective on the home improvement market. And as you know, there's a wide range of conflicting opinions on what's going to happen in the macro environment in 2023. From our perspective...
Speaker 3: the core drivers of our business, disposable personal income, home price appreciation, and the age of housing stock remain supportive. Consumer savings are still roughly $1.5 trillion higher than pre-pandemic, with 85% concentrated in the top 40% of income earners.
Speaker 3: who are more likely to be homeowners. Homeowners continue to endure a record levels of equity in their homes, nearly $330,000 on average. Even if there's a modestly client in home prices, the level of equity built up during the pandemic would not be meaningfully eroded.
Speaker 3: And the housing stock continues to age with 50% of US homes over 41 years old, the oldest sense world war II.
Speaker 3: These factors along with strong millennial household formation, baby boom was increasing preference to age and place, and more widespread remote work will continue to be tailwinds for our business. And given the slow-knit and housing turnover is driven by higher rates and low supply rather than demand, we continue to see a nationwide trend of trading up in place with consumers opting to upgrade their existing home to meet their evolving needs. All of these dynamics give us confidence in the medium and longer term outlook for the industry.
Speaker 3: experience leadership team competence in our ability to effectively manage the business in a wide variety of macro scenarios. In closing, I'd like to thank our frontline associates for their commitment to serving customers a day in and day out.
Speaker 3: As I'll travel to country every week visiting stores, I continue to be impressed by their passion for helping customers and their communities. And with that, I turn the call over to Bill. Thanks Marvin and good morning everyone. In the fourth quarter, U.S. comparable sales decreased slightly by 0.7%. Those sales were up 34.4% on a three-year basis.
Speaker 3: Reflective, continued momentum with the PRO and resilience in core DIY home improvement demand. We delivered positive comps in home decor fueled by key categories like appliances, paint, and kitchens and bath. And we delivered strong growth in our building products division, excluding the impacts of commodity deflation. We are particularly encouraged by the pro strength we're seeing across categories including rough plumbing, building materials, paint, and mill work as we continue to expand our product and service offerings to meet their needs. And consistent with our total home strategy we continue to add brands relevant to pros including four new partnerships.
Speaker 3: First, we're adding a portfolio of drinks from Coca-Cola to reduce the number of stops pros make before going to the job site, which is important since time is money for these customers. Second, we're adding Carhartt apparel that's popular with both our Pro and our DIY consumer, especially in our rural stores. Third, we have entered a new national partnership with Hubble, giving us access to all of their Pro branded electrical boxes, including Bell, Taymac and Raco. And fourth, we're excited to be bringing back Carhartttools. As Marvin mentioned, this is the number one TAN tool brand among electrical and HVAC professionals.
Speaker 3: So this is just a big deal for us and our pros. We're also really excited to announce that Loes will offer the widest selection of client products anywhere in the Home Improvement Retail Channel, which will be available in the second half of 2023. Our initial selection of client tools will include hand tools and electrical test and measurement tools, followed by a multiyear rollout of new product innovations. FINDTOOLS, HUBBLE, CARHART and COCA COLA are strong additions to our pro brand arsenal, which already includes other great brands like Bosch, DeWalt, Eaton, S-Twing, Fast and Master, Flex.
Speaker 3: GRK, ITW, Lesco, Little Giant, Lufkin, Mansfield, Marshalltown, Matabo, Shark Bite, Simpson Strong Thai, Spacks, Spider, and Warner. As we gain momentum with the Pro, we continue to see brands come to lows and in many cases come back to lows because they recognize our new found recommitment to the Pro and see the opportunity to grow with us.
Speaker 3: Shifting to our merchandising division performance for the quarter, in home decor, appliances, paint, and kitchens and bath led the way. Appliances grew across both Pro and DIY as we continue to gain market share in this critical category. Growth was bolstered by our new instant savings capability that automatically applies supplier rebates to a customer's order, making it much easier and faster for them to take advantage of these offers, which are supported by the manufacturer. This replaces our cumbersome mail-in rebates with real-time savings, both in-stores and online.
Speaker 3: to remove friction for the customer and improve conversion. This innovation is another example of blows leapfrogging the competition with technology that not only improves the customer experience, but also drives labor productivity. Paint was another standout category with solid pro growth fueled by our MVPs Pro Paint Rewards and Pro Job Site Delivery.
Speaker 3: We are also seeing an uptick in paint attachments, items like applicators, paint sundries, and caulk as we upgrade our paint departments across our stores. This upgrade is strategically designed to make it easier for our customers to get everything they need in one trip. We also began the launch of Stainmaster Paint, a high-quality, high-value solution for busy families looking to protect their walls from fingerprints and other messes. This is Lowes' first-ever private brand paint and early results are already outperforming our expectations.
Speaker 3: Our focus on driving private brand penetration is well timed, enabling us to capitalize on the nationwide trend of increasing customer preference for private brands.
Speaker 3: Another category that outperform this quarter is Kitchens and Bath. We were particularly encouraged to see a strong increase in demand for custom cabinets, driven by improved lead times, as well as an expanded suite of digital tools, along with our team of talented virtual designers, all of which help our customers tailor the right solutions for their budgets and design preferences. Turning to the Building Products division.
Speaker 3: We delivered strong, broad-based growth, excluding the impacts of commodity deflation across copper and lumber. We delivered strong positive calms across rough plumbing, building materials, and mill work driven by pro-demand and continued DIY investment in the home. Our performance in hardlines was consistent with broader consumer trends as we saw a decrease in holiday gift buying compared to the prior year. However, the team still delivered a solid holiday season with sell-throughs above 2019 levels. As expected, consumers reverted to more typical holiday buying patterns.
Speaker 3: as compared to last year when we saw widespread early buying due to supply chain concerns. As we look ahead, we continue to build on our customers preference for new and innovative products with continued enhancements to our product assortments.
Speaker 3: We are expanding on our popular cobalt 24 volt platform with new tools and technology that customers have been asking for, including a cordless cobalt nailer that can instantly fire 1,100 nails on a single charge, eliminated the need to drag an air compressor and a hose around the job site. We are also excited about our new EGO Zero Turn Radius Mower with the industry's first E-Steer Technology.
Speaker 3: With a sleek, intuitive steering wheel that increases the driver's control and precision, powered by the ego battery system that now allows this unit to moat three acres on a single charge. We're ready to capitalize on spring with the best in-stock positions that we've had in three years. Right on time to support our biggest selling season of the year. In addition to an enhanced assortment and strong in-stock levels, we're also making strides in driving merchandising productivity as part of our enterprise-wide perpetual productivity improvement initiatives. As one of the larger importers in the US, we continue to leverage our scale and carrier relationships to secure capacity and reduce our import and domestic transportation costs.
Speaker 3: As the cost of transportation and raw materials come down, we are working with our suppliers to ensure that our prices are competitive to support sales and to protect our margins. We have sophisticated cost optimization tools that track prices of the underlying components of the products we sell, so the teams are well informed for these discussions. We are also holding our suppliers accountable to drive out costs through their productivity, just as we are doing throughout our own organization.
Speaker 3: We are also partnering with our suppliers through our Loes OneRoof Media Network. Some of our top suppliers have already locked in sizeable contracts for 2023, and we are excited to partner with them to strategically target the home improvement shopper to drive traffic on Loes.com and convert to sale. Before I close, I'd like to extend my appreciation to our merchants and our inventory and supply chain teams along with our vendor partners for their hard work and continued support throughout 2022. I am looking forward to what we will accomplish together in 2023 as we continue to find ways to provide value to our shared customers. Thank you and I'll now turn the call over to Joe. Thank you Bill and good morning everyone. I'd like to start by thanking our associates for their unwavering commitment to serving our customers and delivering another solid year of operating results.
Speaker 3: Associates at the heart of any retailer, but even more so in our industry, where customers rely on our associates' product knowledge as they look for the right solutions to repair and upgrade their homes. That's why we're so focused on becoming the employer of choice in retail. We're associates who choose to state to build their careers. As Marvin mentioned, we've made substantial wage investments over the last four years, and we constantly review each market and monitor candidate flow to help us remain competitive and maintain a robust hiring pool in all geographic areas of the company. Beyond competitive compensation, we offer comprehensive benefits, flexible scheduling options, and bonus opportunities.
Speaker 3: As we close out the year, we are excited to award $220 million in discretionary and profit sharing bonuses. This includes $70 million for our assistance store managers and supply chain supervisors with an incremental $7,500 bonus this quarter on top of their annual incentive bonus. And we are one of only a handful of retailers to offer share-based compensation for our ASMs, which incentivizes them to build their careers at lows. These critical leaders are undoubtedly some of the hardest-working leaders in our company, and they're at the forefront of creating a culture focused on exceptional customer service. In addition to recognizing these leaders, we are also awarding $150 million to eligible hourly associates in recognition of their efforts this year.
Speaker 3: or pro customers across the entire store, not just at the pro desk.
Speaker 3: This training supported store-wide participation in key Q4 Pro events, including the most successful Pro Vembr we've ever had, as well as our MVP's bonus days, which exceeded expectations.
Speaker 3: I would like to thank our associates, especially our pro team, for delivering outstanding results, driving U.S. pro-coms of 10% per quarter, 36% on a two-year basis, despite commodity deflation. We continue to leverage our MVP's pro-rewards and partnership program to capitalize on this demand by engaging pros, incentivizing purchases, and building long-term loyalty. Our program is designed to make every pro feel like an MVP regardless of their size.
Speaker 3: giving small to mid-size pros access to bonus points, savings, and exclusive offers that they can't get elsewhere. We're pleased to see the results continue to exceed expectations as reflected in our 200 basis points increase in pro-customer satisfaction scores in Q4. Chifting gears to our focus on productivity. We continue to make progress with our PPI or perpetual productivity improvement initiatives.
Speaker 3: One of the key objectives of PPI is simplifying our associate's jobs while removing friction for our customers. This approach allows us to generate productivity and cost savings in the store while simultaneously improving customer service. One great example of this is the transition of our outdated legacy technology to our new modern omnichannel systems. We just completed the conversion at our returns desk with easy to use touch screens that enable associates to quickly scan items and process the correct return value with the system automatically accounting for return policies and promotions. This simplifies the return experience for customers. Gizard Suppliers, more insights to improve product quality while also making it easier for associates to enforce our policies and manage complex returns.
Speaker 3: We also continue to raw new tools, including 90,000 additional Zebra smartphones by the end of June . To ensure all associates walking the sales floor have a device, including our MST associates. Our leadership team knows that when we make things easier for our associates, they make things easier for our customers. And our new returns process is just one example of the dozens of initiatives underway to do just that. And of course, none of this would be possible without our associates. For our associates tuning in, thank you for your ongoing focus on serving customers in driving productivity. We appreciate your hard work, and with that I'll turn the call over to Brandon. Thank you, Joe, and good morning everyone. Let me begin with our Q4 results.
Speaker 3: We generated gap deluded earnings per share of $1.58 compared to $1.78 last year. Now, my comments from this point forward will include certain non-gap comparisons were applicable. Excluding the $441 million of pre-tax transaction costs associated with the sale of our Canadian retail business, we generated adjusted deluded earnings per share of $2.28, an increase of $28% compared to the fourth quarter of 2021. This increase was driven by our continued focus on productivity as well as discipline capital allocation. Q4 sales were $22.4 billion, which includes approximately $1.4 billion in sales generated...
Speaker 3: represented a 25 basis point headwind to consolidate the comps. Of note, both the Canadian sales decline and lumber deflation pressured our Q4 comps more than expected.
Speaker 3: U.S. Pro sales were up 10% in the quarter despite lumber and copper deflation. On Loas.com, sales increased 5% in the quarter, partly driven by continued strength and appliances. Our U.S. monthly comps improved as we move through the quarter with comps down 3.1% in November due to DIY pullback on discretionary holiday spending. In December , comps were down 0.2% in December .
Speaker 3: with comps turning positive in January up 1.4% reflecting continued DIY investment in the home. Gross margin was 32.3% of sales in the fourth quarter down 60 basis points from last year. Product margin rate improved 15 basis points versus the prior year. Gross margins also benefited from 30 basis points of favorable product mix due to a lower percentage of lumber sales.
Speaker 3: Higher product margin rate was offset by 40 basis points related to the expansion of our supply chain network, 30 basis points of pressure from shrink, and 35 basis points of pressure from our private label credit portfolio. Adjusted SGNA of 20.9% of sales levered 131 basis points relative to Q4 2021, despite a modest decline in sales as we executed on our PPI initiatives across the company. Adjusted operating margin rate of 9.6% of sales levered 88 basis points as adjusted SGNA leverage was partly offset by lower gross margin rate.
Speaker 3: The adjusted effective tax rate was 24% below prior year levels. Inventory ended the quarter at 18.5 billion, which now solely reflects the inventory for our U.S. business as we close on the sale of the Canadian retail business on February 3rd. Inventory is up 0.9 billion from the same quarter last year, largely driven by product inflation with units down slightly to prior year. We continue to shift our inventory mix more towards pro categories as we invest to drive future growth. Now, let me turn to capital allocation. In 2022, we generated 6.8 billion in free cash flow driven by outstanding operating results. And we returned $16.5 billion to our shareholders through both share repurchases and dividends. During the fourth quarter, we paid $643 million in dividends at a dollar five per share. And repurchased 10 million shares for $2 billion. This brought the total to $14.1 billion in share repurchases for the year.
Speaker 3: ahead of our expectations for approximately $13 billion. This reflected better than expected operating performance in our commitment to return excess cash to shareholders. We ended the quarter at 2.4, four times adjusted debt to EBITDAQ. And finally, we delivered return on invested capital of 30.4% inclusive of an 800 basis point impact related to transaction cost associated with the sale of our Canadian retail business. Turning to our 2023 financial outlook, which we introduced this morning.
Speaker 3: As Marvin indicated, the long-term outlook for home improvement remains strong. However, in 2023, residential investment will be under some pressure. Given elevated levels of inflation, higher interest rates, animal cautious consumer, we are forecasting a slight decline in the home improvement market. We expect to continue to outperform the market in 2023 with sales ranging from $88 to $90 billion. Comparable sales are expected to be in a range of flat to down 2%. Keep in mind that 2023 comparable sales will be calculated based on weeks 2 through 53 in fiscal 2022. Pro sales growth is expected to exceed DIY again in 2023 as we expect to continue to outpace the broader pro-market growth by 2X. We will continue to build on our momentum with the pro-with our new MVP's Pro Loyalty Program, CRM tools, and our expanded program lineup. We are expecting operating margin in the range of 13.6% to 13.8%.
Speaker 3: as we continue to drive productivity through our PPI initiatives across the organization, in part to offset our planned wage investments. For 2023, we are expecting to invest $350 million in incremental wages for our frontline associates, which includes the 2023 portion of the $170 million permanent wage investment that went into effect in December . We expect capital expenditures of up to $2 billion this year, and with our planned sharey purchases, we also expect to reach our 2.75 times leverage target in 2023 while maintaining our triple B-plus credit rating. Our strong operating performance and shareholder focus capital allocation strategy is expected to deliver approximately $13.60 to $14.00 in earning $1.00 per share for the year.
Speaker 3: Keep in mind that there was an approximate 25-cent contribution to adjusted EPS from the 53rd week and our Canadian business in 2022. I would like to spend a moment discussing our expectations for first half performance which is an easier comparison from a sales perspective. However, when we consider the impact of lower lumber prices, we are expecting a nearly 300 basis point headwind to sales in the first quarter and a 100 basis point headwind to sales in the second quarter. Given these impacts, we expect our first quarter sales comps to be below our full-year guidance range and our second quarter sales comps to be above our full-year guidance range.
Speaker 3: In closing, I'm confident that the combination of our strong operating results and our shareholder focus capital allocation strategies will continue to deliver meaningful long-term shareholder value. And with that, we will open it up for questions. Thank you. We're now ready for questions. If you'd like to ask a question, please press star one on your telephone keypad. To destroy your question, press star two. In order to allow questions from as many individuals as possible, please let me yourself to one question and one follow-up. Thank you. Our first questions from the line of Simeon Gutman. Morgan Stanley . Please just use your questions. Hey, good morning, everyone. First, I have a macro and then a micro question. So you just come to...
Speaker 4: remains supportive. Things like disposable personal income, which I mentioned, is roughly 1.5 trillion in savings of both pre-pandemic levels. The average equity in US homes, roughly 330,000 dollars on average, the age of homes. And it reminds you, two-thirds of everything we sell is nondiscretionary.
Speaker 4: And there are other tailwinds, millennial household, formation trend, baby boomers, aging in place, and more widespread, sustainable, remote work. So all of these things give us some confidence that the backdrop remains supportive, but as Brandon said, we still have some degree of caution when we think about discretionary buying, and that is factored into the guys. So I'll let Brandon add anything additional to that. Yes, I mean, this is Brandon. And I'll talk to your question specifically on Q4, as I said, in the prepared remarks. Inflation, interest rates, we are seeing a bit more of a cautious consumer.
Speaker 3: one that's anticipating and responding to value. We saw this play out in November with discretionary holiday categories, but we did see a nice progression of performance across the quarter as we hit the January exit, and we continue to see solid DIY demand and core home improvement categories like appliances. So as we turn and look at the guide into next year, we feel comfortable with what we're seeing in Q4, very much in line with what we shared back in December in terms of the moderate scenario, and it's consistent with the market being down, call it low, single digits at 2% to 3%.
Speaker 5: So I think we got a lot of good consistency with what we're seeing again, Q4, with what we're anticipating for the four-year next year. Okay, and the follow-up is more micro. Within the long-term guidance that you gave in December , the 14.5 to 15, there's about 150 to 200 or so from OPEX productivity and then I think some of the PPI initiatives. And I guess that's the stuff you can control. I forget if we discussed if that's readable, meaning even across the time frame, or are there things that you can pull forward this year, or you know, any year if you need it, and or is the cost environment going up such that it makes the achievement of that bucket any different.
Speaker 3: Yes, I would say, rateable as we look at the three-year period with what we shared in December . I mean, when we look at the algorithm for the guide for 23, we are expecting roughly flat gross margins. So the bulk of the 60 to 80 basis points of EBIT expansion that's reflected in the guide is coming from S-GNA leverage and it's being largely driven by our productivity initiatives. So that's specifically just translating and transitioning from what we shared on the three-year to what we're expecting from an S-GNA standpoint in 23. In Simion, this is Marvin. The only thing I'll add is if you take a look at Q4 just as an example.
Speaker 4: It just shows that even in a flat to negative, self-environment, we still have the ability to leverage productivity, whether that's expenses or operating margin. And I think that is consistent with the PPI initiatives, not being solely focused in one functional area, but as you heard at our December and the Anderson Investor Conference, it's across all functions, merchandising, supply chain, store operations. And so although it's readable, we're very confident in our ability to deliver upon that in a variety of macro scenarios.
Speaker 4: This shows that even in a flat to negative self-environment, we still have the ability to leverage productivity, whether that's expenses or operating margin. And I think that is consistent with the PPI initiatives, not being solely focused in one functional area, but as you heard at our December , Annals and Investors Conference, it's across all functions, merchandising, supply chain, and store operations. And so although it's rateable, we're very confident in our ability to deliver upon that in a variety of macro scenarios. Great. Thanks. Good luck.
Speaker 4: Thanks, Samuel. The next question is from the line of Kate McShane with Goldman Sachs. Please proceed with your questions. Hi, this is Patrick Hollander on for Kate. We just wanted to ask about price elasticity. Another item discussed at the December analyst day was kind of the confidence in prices sticking, but your competitor mentioned that they saw more price sensitivity in the fourth quarter than they had in the third quarter. So first, are you guys seeing something similar, and then how do you address some of the price sensitivity? Will prices need to come down? Will we see more markdown activity? Thank you. Yeah, hey, Patrick. This is Brandon. As it relates to the question on elasticity, you know, stepping back, when we look at the last three years through the pandemic, we saw consumers who were very resilient with higher prices not necessarily impacting demand.
Speaker 3: which we also expect to see that improve across the year. So we're looking back half of the year and then into 2024, a more traditional balance between ticket and transaction.
Speaker 3: So I expect to see that improve across the year. So we're looking back half of the year and then into 2024, more traditional balance between ticket and transaction. Great, thank you.
Speaker 4: Our next question is coming from the line of Scott Cicciarelli with Truist. Please just use your questions. Hey, good morning, guys. This is Joe on for Scott. I was really impressed by the pro commentary. I was just wondering, is there any sort of regional thing that you'd break out of whether or not people are more or less bullish on their outlooks and backlogs in areas where there's been more housing price correction? So, Joe, good question. What I'll tell you, there are a couple of markets around the country that had a more accelerated what I would call appreciation of home prices during the pandemic, and let's call out markets like South Florida, Phoenix, as an example. And as you can imagine, we pay really close attention to those markets. We've not seen any material difference in sales performance in those markets as those prices are coming down.
Speaker 4: materials, can they get what they need and is it the right cost? Can they get pro credit? What does the labor market look like? And then just a balance of the type of work they do. So remodel versus new construction. And as we track these and as we roll out our
Speaker 4: Pro loyalty program, we're pleased with the trajectory of the business and the help of this small pro that we're servicing. Thank you so much. Our next questions are in the line of Brian Nagel with Oppenheimer. Please see with your questions. My question may sound like similar to prior questions. Going back to comments made by your competitor last week, they discussed what they turned to have a broadening if you will, consumer normalization, consumer weakness. You've called out.
Speaker 4: the weakness around the holiday, the gift-giving and discretionary. But are you, would you characterize also seeing that in what they discussed in this kind of broadening of weakness and normalization across your portfolio? Brian , it's a fair question, and I'd start out by saying, you know, Q4 is typically our highest discretionary selling period of the year because of the holiday season. But when we look at core home improvement categories, we feel really good about the performance of the DIY customer. And I think as Brandon gave that monthly comp cadence for the fourth quarter, you notice that every month the business, you know, performs stronger with a positive comp in January , and that was almost...
Speaker 3: directly correlated to the DIY customer being stronger each month of the quarter because we moved away from that discretionary period that was you know so heavily focused on the month of November because of how they buy. So as we look at the overall customer we look at the health of the DIY discretionary spending, we don't see any really red flags that we're concerned about because the core home improvement discretionary category was held up really well-flaws, case-and-point appliances, case-and-point paint. So those are areas that really perform well and I'll let Brandon add any additional comments. Yeah Brian , I'll just connect that to the guide Marvin highlighted you know with what we're seeing more with the DIY customer but just looking at the pro and expectations into 23 you know continue now paste DIY 11 quarters in a row double digit comp or continue to see you know pro across all ticket ranges both comp and transaction growth and while we did see DIY lag in 2022 and the discretionary category some of what Marvin was describing we are seeing those overall transactions continue to improve across the year. So when we look at 23 still expecting out performance with the pro but expecting that gap between pro and DIY to continue to close and tighten and that's what's reflected in our guide for next year. So now we're looking for
Speaker 3: It's very helpful. And that might follow a question just with regard to lumber prices. So you discussed here and we get it. This is kind of pass along dynamic with prices decline, that's a negative or sales. But if we got to the point where lumber prices have declined so much of access actually becoming a potential stimulant to demand, I don't know if you're seeing this in your business or maybe some of your polling of your professional customers. Yeah, Brian , I'll take that and again kind of connect it to the guide. So our guide at the midpoint for lumber in particular assumes a normalized pricing environment, certainly considered to what we've seen for the last three years. And within that lumber assumption, as you heard in my prepared remarks, expecting headwind in both Q1 and Q2. And I'll call out also if that, that when we look at lumber pricing currently, if that were to play out across the remainder of the year, it actually puts another hundred basis points of pressure.
Speaker 3: on the midpoint of the guide, but to your point, within that we are expecting an offset in units, and there's potential that that could be a stimulant for our business, but again, right now we're expecting and have considered at the midpoint of our guide just more normalized pricing and a slight rebound in units in the next year. Got it. I appreciate all the color. Thanks, guys. Next question, come from the line of Karen. Sure. Credit Suisse. Please just see with your questions. I'm sure please go ahead with your questions. Sorry. Thanks for that. So just on two questions, you've guided the flat to down two percent comps. So that was kind of in between the robust and moderate.
Speaker 3: on the midpoint of the guide. But to your point, within that, we are expecting an offset in units. And there's potential that that could be a stimulant for our business. But again, right now, we're expecting and have considered at the midpoint of our guide just more normalized pricing and a slight rebound in units in the next year. Got it. I appreciate all the color. Thanks, guys. Thanks, Brian . Next question comes from the line of Karen Schur with Credit Suisse. Please assist with your questions. Ms. Schur, please go ahead with your questions. Oh, apologies. Sorry. Thanks for that. So just on two questions. You guided the flat to down 2% comps. So that was kind of in between the robust and moderate scenarios that you were talking about
Speaker 3: But to your point, within that we are expecting an offset in units, and there's potential that that could be a stimulant for our business. But again, right now we're expecting and have considered at the midpoint of our guide just more normalized pricing and a slight rebound in units in the next year. Got it. I appreciate all the color. Thanks, guys. Thanks, Brian . Next questions come from the line of Karen Schwer with Credit Suisse. Please just see with your questions. Michelle, please go ahead with your questions. Sorry, thanks for that. So just on two questions, you've got to decided to flat to down to percent comps. So that was kind of in between the robust and moderate scenarios that you offered.
Speaker 4: And then your margins, though, are only on the moderate range, not the robust range. So I'm wondering if you could give any color on that. And then on the wage investments that you called out, obviously one of your competitors also announced, you know, very sizable wage investments. So I'm wondering if you could just give a little color on your wage investment versus industry and or one of your largest competitors. So Karen, this is Marvin. I'll take the wage question, then I'll let Brandon take the first part of the question. So two things. First, we feel great about the financial commitment we've made to our frontline associates, and we're also very confident in our long-term financial plan. So since 2018, as we mentioned, we've invested over $3 billion in incremental wages and share-based compensation for frontline associates, including the $170 million wage investment we made last year. And over the past four years, we've increased our wage by more than 20%. And Brandon mentioned that we're going to be investing $350 million this year in frontline wages, and over the next three years, we're going to invest nearly $1 billion. So when you contemplate all this together, it's factored in our 2023 guidance and our long-term financial guidance. And as an investor community, sometimes we get challenged by our rural footprint of stores as competitive disadvantage. When you discuss wage, that's actually an advantage because most of the small and rural markets where we operate, we're the highest-paying retailer. And where we're not, we're the lowest-paying retailer.
Speaker 4: The local operators have a very, very specific process to follow to get wage adjusted. So our approach to wage is our strategy and we feel really good about it and our associates have responded well. And what I'll do before I hand it to Brandon, I'm just going to let Joe McFarlane talk a little bit about staffing levels and spring hiring, which as you know is a really big deal for us this time of the year. Hey, Karen, thanks for the question and as it relates to our frontline associates, I'm very pleased with our staffing right now. This is the best staffing we've had in three years and our spring hiring as the markets come into season is ahead of expectations. So very pleased with the team's ability to staff and pivot wherever the challenges are. And so Karen and some nation on that we have a strategy we feel great about it. We feel like it's working for us and we believe that our investment cycle, our commitment to our associates.
Speaker 3: is something that is leading us to being truly an employee of choice in retail. Now I head over to Brandon to answer the other party question. Yeah, Karen, your first question on operating margin. We look at what we shared in December , midpoint of the guy at a down one and 13.7% in that moderate scenario. Our guidance is right in line, purely consistent with that, with the range that we provided, just bookending those midpoints. So very consistent there. Okay, thank you so much. Our next question comes in line of Michael Lasser with UBS. Please just see with your questions. Good morning. Thanks a lot for taking my question. So first, at the analyst meeting in December , you pointed to the most likely scenario being the robots market scenario or the moderate market scenario. The guidance now at the midpoint is squarely on the moderate market scenario at the low end could be closer to the weak market scenario. So what's changed in the last 90 days or so to moderate your expectations for 2023? And then I have a follow up. Yeah, so Mark, this is Marvin at a high level is lumber deflation. That pretty much sums it up as as Brandon.
Speaker 3: We're going to have 300 basis points of headwind and Q1 and a hundred basis points of headwind and Q2. Going into 2023, we looked at the first half of the year as our easiest compares, that remains, but when you throw in that lummer deflation, that pretty much sums up what's different between what we discussed in December and what our guide is. And Michael, I'll just add that the weak scenario that we called out still very much sort of off the table for us. I think we called out at that point, it would require a significant economic shock and we don't see that plan out. So we're still very squarely in line with that moderate view. And just as a reminder, the downside even in that weak scenario was a 13-3 operating margin. So still 30 basis points of expansion even in that scenario.
Speaker 3: understood. Thank you. My follow-up is on a gross margin outlook for this year. What's a realistic expectation, especially as the consumer environment gets a little tougher, the consumer may want to shop a bit more on promotion, and how are you thinking about the private label credit card contribution to the overall P&L this year? Thank you. Yeah, Michael, I'll talk about the guide as it relates to margins. So very focused next year on delivering operating margin expansion, and that's on flat to slightly negative comps. As you mentioned, the gross margin, we are expecting that to be roughly flat in 23, and there's a few different puts and takes that we're managing.
Speaker 3: and some of the momentum that we're seeing there. Well, Brandon and Pramikl, what we talked about in December , Private Brand certainly give us an opportunity and categories where a national brand isn't relevant. Private Brands carry a better margin. They offer the consumers some additional choices. As it relates to promotional activity, we want to continue to offer the customers value, but we're not adding new promotions for 2021.
Speaker 3: to 2023 again a number of puts and takes but we feel like the bulk of that for the most parts been absorbed and we have that factored into 23.
Speaker 6: Thank you very much. Thank you. Next question comes from the line of Greg Malik with IASI. Please receive your question. Hi, I'll start with a follow-up on that last question before I get to mind. Another gross margin puts and takes. Shrink was also, I think, a headwind in the fourth quarter. Could you just quantify that?
Speaker 3: Thank you for largely driven by what we're seeing more broadly in retail with organized crime. But again, as we turn and look at 23, that pressure largely absorbed in 2022. We felt like we got great efforts within the team and the organization in terms of what we're doing to protect against shrink and I'll maybe let Joe call that out. And so thanks for the question and listen, we're really pleased with the ASSA protection team.
Speaker 6: The entire industry has pressure from ORC. Our asset protection team has rolled out some new innovative things for safety, for shrink, and so we see the outlook. Great. And then I guess my key question was on the traffic and inflation and how that sort of comes in through the year. So, if you think about the cadence through the year, it sounds like first quarter is below the range, second quarter is above the range. Should we assume the second half is better than the first half or worse than the first half or in line? Second half Greg, very much in line.
And the difference would be better traffic in the second half, maybe still negative but less negative and less than correct. Correct. Thanks and good luck. Thanks, Greg. Our next question comes from the line of Peter Benedict with there. Please receive your questions. All right, guys. Good morning. Thanks for taking the question first. Just wanted to hone in on the first quarter of the first half of the week later, to understand the commodity impacts there. But just curious, any early season read, I know it is early, but some of your markets are the South. Just curious how spring season will demand is starting out here. That's my first question.
it's supposed to come and you start to see sales of product in fertilizer, chemicals, landscape products start to occur the way they're supposed to occur and so we're encouraged by that. February can always be a wildcard month but certainly in these months, in these deep south and south markets, seeing it progress the way it's supposed to. Got it, thanks and then I expected the...
maybe the promotional plan that you have laid out for the year. You mentioned in your prepared remarks that the consumers responding to value. I'm just curious, I mean, we've been through a period where there's been very, very limited promotion. So how do we think about the plan maybe for the first half of the year here, in terms of your promotions, things that you tend to do to drive traffic, and how they compare to maybe what you've done the last couple of years. That's my second question. Thank you. So Peter, I'll take the first part of that. At the highest level, you're not going to see any increased promotional activities by us. We're very fortunate to be in a very rational industry relative to promotions. And to be quite candid, a lot of the irrational activities came from all those. And those.
practices and behaviors are along behind us. One of the first things that Bill Boats and I discussed when we arrived four and a half years ago was getting off the high-low promotional drug that we felt was not consistent with how you should run business in this industry. And it's taken us a while to get there, but we're very fortunate that we are there. So we anticipate and see no increased promotion activities. Obviously, as you get out of these pandemic-driven demand cycles, customers are looking for value, but we believe we can offer value without getting to a high promotional environment. Bill, I don't know if there's anything you want to add. No, I think the one area that the team may see, you know, different activity on is in appliances. And you guys have to remember that, you know, roughly 100,000 appliances break every day. And so there's always going to be an offer in the marketplace for appliances driven by the manufacturers, supported by the retailers. So that's one area as supply is improved. Those offers are out there for appliance products, but no additional promotions.
I just wanted to follow up with a quick modeling question given the exit of Canada. I'm not sure if you can help us think about the mixed impact on gross margin because I would think the Canadian business and the exit of it has a positive impact on gross. Can you help us quantify that relative to 60 basis point net impact? And whether this is partially supportive of the 2023 outlook for a flatish gross margin in 23? Yes, the 60 basis points was a full year impact on operating margin. And when you think about the split there between gross margin and SGNA, it's roughly half and half. Thank you for that. And then...
Lastly, the ongoing conversation related investments that you noted during the prepared remarks, which is great to hear. I was curious, we just take a step back and think about the dollar level of Optics Productivity Initiatives. You've highlighted that the analyst days in 2020 and 2022. Any contextualization about how much still remains in front of us in dollar terms. And Mark, I'm not sure because maybe talk about some specific PPI initiatives that you're most excited about this year. Yeah, well, it's a really good question, Steve. A couple of things. Number one, as you can imagine, we have been working aggressively to update our IT infrastructure. We still have a 30-year-old basically mainline system that we're getting ready to retire and it's literally taken us four and a half years to get to this point. The moment that system is a few years ahead of us, it gives us the ability to create so many...
technology advancements that will do two things. We'll simplify the associate's job and limit friction points for customers, which will reduce payroll and improve customer service. And that's what Joe cited in some of his preparatory comments. So holistically, a lot of our PPI initiatives on the store and merchandising side, and canally the supply chain side, are tied and correlates to the retirement of this 30 year old operating system that we are excited. It's going to be going away over to the next few months. And as we look at that, you'll start to see your more omnichinal type of systems available in the store at Pornicell. You'll start to see pricing initiatives and pricing systems advanced on merchandising side. You'll start to see us have the ability to do more relative to integrating gig network deliveries online in a more seamless way in addition to all the supply chain and some of the advanced sourcing logics. We'll be able to do that. We'll give us the ability.
to ship merchandise, aggregate merchandise from different points of stores, distribution centers, without having to go out and build these monolithic DCs that some retailers have had to do. So all those things are tied together, but again, it's almost foundation driven to a lot of the IT work that's been done the last four plus years. Thank you. Thank you all for joining us today. We look forward to speaking with you on our first quarter earnings call in May. Thank you. This concludes the lowest fourth quarter of 2022 earnings call. You may now disconnect. You