Q2 2023 Lowe's Companies Inc Earnings Call
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Good morning, everyone and welcome to lowest companies' second quarter 2023 earnings Conference call My.
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 and Treasurer.
Thank you and good morning here with me today are Marvin Ellison, Chairman and Chief Executive Officer, Bill Boltz Executive Vice President merchandising, Joe Mcfarland, our executive Vice President stores and Brandon, Thank our executive Vice President and Chief Financial Officer.
I would like to remind you that our notice regarding forward looking statements is included in our press release. This morning, which can be found in the Investor Relations website.
During this call we will 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 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.
Additionally, we'll 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'll turn the call over to Marvin.
Kate and good morning, everyone for the second quarter comparable sales declined one 6%.
Our results were driven by strong spring recovery combined with continued growth in pro and online, which helped to offset softer DIY discretionary spending and 160 basis points of pressure from lumber deflation.
Q2 also reflected the importance of our ongoing investments in our total home strategy.
And despite an uncertain macro these investments are paying off with positive comps in pro and 6.9% comparable sales growth online as we continue to improve our omnichannel experience.
We're pleased that our core protocols, where the small to mid sized pro remains resilient and continues to respond to our expanded national brands.
<unk> Pro rewards program and enhance online tools.
And our most recent survey nearly 75% of promos reported healthy project backlogs and lead volumes remain consistent with recent quarters.
This quarter, we launched a new same day delivery option on Lowes Dot com and our mobile app powered by one rail, enabling us to tap into their network of $12 million drivers to deliver directly to pro job size and consumer homes in a matter of hours.
This new capability allows us to leverage our 1700 plus store footprint to make those much needed last minute deliveries to pro job site saving them, both time and money.
Our expanded same day delivery capability is the latest of many examples of how we are meeting our customers, where they are and making home improvement shopping faster and more convenient for both pro and DIY customers.
We're also making strides in the rollout of our market delivery model for big and bulky products with 13 geographic regions now supporting more than 12, 100 stores and we're on track to complete the initial rollout by the end of the year.
As we invest and what will drive our future growth, we remain disciplined in improving productivity through our perpetual productivity improvement initiatives or PPR.
In the second quarter operating margin expanded 18 basis points, leading to diluted earnings per share of $4 56.
A common misperception, we hear is that our productivity journey must be close to us in.
As we've driven significant operating margin leverage since beginning our transformation five years ago.
But the reality is we still have a lot of opportunity ahead.
We're in the final phases of Sunsetting, our 30 yield operating system. In addition to the productivity benefits of using intuitive touch screens instead of hard to navigate green screens. This conversion gives us to modern foundation needed to quickly build and scale, new omnichannel capabilities for the future.
We also continue to leverage our penetration of rural stores to drive sales productivity.
We run these stores were low expense base than the rest of our portfolio and our ability to generate outsized operating margin leverage on sales growth as unique specifically the expansion of our rural product assortment combined with the implementation of our PPI initiatives make a rule that were most stores a competitive advantage for.
Our company.
Beyond our productivity initiatives underway in stores, our leaders across all functional areas are executing against dozens of PPI work streams to deliver sustained operating margin improvement.
One example of this is in our supply chain, where we are driving greater throughput with new mobile applications combined with automation and robotics to improve productivity maximize speed and minimize damages.
And we're piloting a new break pack process, which leverages automation to breakdown cases, five times faster, making it far more efficient to replenish stores.
And as we drive productivity. We also continue to focus on sustainability as a too often go hand in hand.
And we recently published our 20th corporate responsibility report spotlighting, our path to net zero emissions, along with our investments in our associates and communities.
As we speak with investors many of your questions have centered on the macro environment.
And as a reminder, the two strongest demand drivers of our business are real disposable personal income and home price appreciation and they're our most supportive of demand when they pull in tandem.
Home price appreciation has slowed but it's still up 35% versus pre pandemic while.
While real disposable income has been pressured by a persistent inflation and elevated interest rates.
But on a positive note over the past quarter growth and real disposable income started to improve and realign with long term trends with growing wages, surpassing inflation for the first time in two years.
<unk> has also improved slightly but remains below pre pandemic baselines and inflation concerns linger. However improvements in sentiment typically must be sustained for a period of time before that translates to consumer spending.
As a result home improvement shoppers remain cautious with their spend especially big ticket discretionary purchases in.
And are more focused on smaller repair and maintenance projects.
These trends are consistent with our expectations and reinforced our outlook for a relevant market to be down mid single digits in the second half of the year with our sales continuing to outpace the market about 100 to 200 basis points.
Looking ahead it is encouraging to considered at home improvement projects are typically postponed rather than canceled.
And home improvement spend as a percentage of home equity is below the historical average a positive indicator for medium term demand as consumer sentiment improves.
The aging housing stock will also drive remodel and repairs combined with other favorable trends like millennial household formation aging in place and persistent remote work.
All of these factors continue to make us bullish on the mid to long term outlook for our industry.
In closing, we remain a customer centric company focus on our daily execution. While also ensuring we continue to make the right investments to take share in any macro environment.
Total home strategy is resonating with our pro and DIY customers alike, and we are confident in our ability to deliver in the short and long term.
As I'm out visiting stores. Each week are continue to be impressed by our hard working frontline associates and I'd like to thank each of them for their commitment to lowes and their communities and with that I will turn the call over to bill.
Thanks, Marvin and good morning, everyone our.
Our second quarter comparable sales were down one 6% slightly above expectations.
We successfully recovered $300 million of delayed seasonal sales from Q1 due to the late start to spring $50 million more than anticipated.
We saw growth in rough plumbing building materials paint seasonal and outdoor living lawn and garden and hardware as we captured the spring sales and continued to see solid broad based pro demand.
These factors, partly offset 160 basis points of lumber deflation as well as continued pressure on big ticket DIY discretionary demand that Marvin mentioned earlier.
And hard lines, we drove broad based sales growth driven by our stronger than expected spring recovery.
And garden was a standout category achieved in partnership with our live good vendors, who helped us effectively respond to changing weather patterns and stretch spring into the summer months, we saw an increase in smaller instant gratification projects that improve outdoor spaces at an affordable price like landscaping.
<unk> and pre potted plants.
Seasonal and outdoor living also benefited from the weather recovery, where we saw momentum in outdoor power equipment.
Specifically in riders with the strength of our exciting products from John Deere and Aaron's along with the battery powered equipment from the strength of ego cobalt and Craftsman.
And we are pleased with our strong seasonal sell through putting us in a better inventory position than last year as we move into the second half.
Hardware was another top performing category this quarter as our associates drove attachments alongside the higher lumber units and leaned into fastening with key brands like specs G. RK power Pro one and facet master.
In tools, we started the rollout of Klein tools. The number one tool brand for electricians and Hvac's professionals. We're excited about the launch of this brand, which is returning to loews after nearly 15 years.
As part of this launch we will offer the largest assortment of Klein tools anywhere in the home improvement retail channel featuring hand tools storage safety and electrical products in store and online positioning us as the go to retailer for these brand loyal customers.
Within home decor paint delivered the strongest comp performance this quarter as we gained traction with the pros who paint these.
These pros are increasingly taking advantage of our mvp's paint rewards program paint job site delivery and our new spec rate paint designed specifically for pros.
Turning to appliances, we continued to outperform the market.
We've seen a return to pre pandemic levels are vendor funded promotions that are pressuring average tickets across the industry.
But I'm excited about the traction that we're gaining is the leading appliance retailer in the U S reflected in our unit sales growth market share gains and the momentum with our pro customers once again this quarter.
One encouraging trend was the increase in bundled appliance purchases. This was fueled by focused red vest associates, selling auto applied supplier rebates faster fulfillment through our market delivery model and our improved online customer experience.
Now shifting gears to building products, we continue to see strength in key pro categories, helping offset the pressure from year over year lumber deflation.
While lumber deflation pressured our top line by 160 basis points and our pro comps by 315 basis points. The category. Once again delivered the highest unit comp in the company this quarter, reflecting strong pro demand.
Our continued growth in building materials and rough plumbing is another positive indicator of the resilience of the small to midsized pros supported by the healthy backlogs Marvin mentioned earlier.
In rough plumbing, we expanded our assortment of pet products and added our first battery powered cobalt drain AGA.
This is one of several new cobalt launches this year as we celebrate this private brands 25th anniversary, our private brands are specced out and quality tested to ensure that they are equal to or better quality than comparable national brands and we continue to see our customers respond to their great quality and value.
Our increasing private brand penetration is nicely balanced with a strong lineup of trusted national brands like Bosch Dewalt Rubbermaid and Scotts.
Shifting to localization, we completed our rural expansion to roughly 300 stores ahead of schedule this quarter. This.
This includes scaling our store within a store concept with petco designed to provide a dedicated space for all things Pat.
While it's still early we're encouraged to see an increasing basket size and these stores and customers are saying that they appreciate the convenience and the ability to reduce the number of stops they need to make.
As Marvin mentioned, our work to optimize our rural stores is one piece of our broader localization strategy designed to drive market share gains increased productivity and margins.
Another highlight this quarter is the growth we've driven online as we continue to improve the digital shopping experience and increase conversion.
Our launch of same day delivery nationwide on Lowes Dot com and our mobile App is resonating well with our customers.
We also introduced a new digital will this fit capability that helps customers determine if a refrigerator will fit into their space and our refined search experience with better recommendations filters and featured categories.
And our Halloween and holiday sets are already available online positioning us nicely for customers, who want to get a jumpstart on decorating.
We're also encouraged to see better than expected performance for our lows one roof media network, which is driving increased traffic to lowes dot com and generated results that are exceeding the industry average for our suppliers.
Our media network is one of many merchandising PPI initiatives underway at Lowe's.
The team is constantly working with our suppliers to find ways to take cost out as commodity prices and transportation costs have come down and we continued to enhance our technology and processes to optimize pricing.
We have also expanded our merchandising services team or MST to over 30000 associates across our stores and garden centers, which frees up our red vest associates to spend more time serving customers.
New this year, we are adding MST assistant store managers. This role will be focused on providing dedicated store leadership for the critical work that this team does.
Through their improved service the team is squarely centered on driving sales per square foot productivity in our stores, while creating a better shopping experience for our customers.
As I close I'd like to once again extend my appreciation to our vendors and merchants for their hard work in partnership.
Thank you and I'll now turn the call over to Joe.
Thank you Bill and good morning, everyone I'm really pleased to begin by announcing that we are awarding over $100 million in bonuses for our frontline hourly associates in recognition of their hard work and dedication during the second quarter.
Our investments in our associates are paying off as we continued to elevate the customer experience with a 200 basis point improvement in both our DIY and pro customer service scores this quarter as compared to last year.
And we're seeing strong staffing levels and improved associate engagement as we continue to invest in associate wages and ongoing development through Lowe's University.
As Marvin mentioned, our online comp sales grew six 9% in the quarter and roughly half of those orders are picked up in a store.
We continue to unlock productivity through one of our many PPI initiatives by reducing the time to pick these orders by approximately 70% as our associates leverage our omnichannel investments, which include mobile devices and order picking carts with mobile printers to streamline the process.
And we've enhanced our workforce management tools to better align staffing levels with customer demand. These enhancements are allowing our customers to get in get what they need and get back to their projects faster.
Looking ahead, we are further enhancing our booth this experience as we transform the front end of our stores. This includes an expanded staging area a dedicated pickup desk with improved signage and new technology that expedites the process.
Now shifting to pro we continued to deliver positive comps this quarter, despite lumber deflation and under the leadership of our new Executive Vice President Quanta advance, we will continue to expand our online business tools for pros that allowed them to easily generate quotes and track orders as part of the MVP.
Pro rewards program.
As we continue to find ways to save pros time. This month, we launched our newest online tool purchase authorization.
Until now when pro Sinter crew member to the store to pick up and order the designated buyer would need to call their team from the checkout line to confirm the order and have an authorized by the store.
This could be a time consuming process, taking the pros time away from their job site and the associates time away from serving other customers now.
Now runners can simply scan a QR code, that's pretty authorized up to a specified amount and checkout without having to wait in line at the pro desk.
This solution addresses a pain point for many pro customers and our pro desk associates and leapfrog the competition.
And we're encouraged to see that our suite of online tools is resonated with pros and adoptions already exceeding our expectations.
Now I'd like to spend a moment discussing how we are managing shrink which is a big responsibility for any retailer, especially in this environment.
As expected shrink was in line with last year's results despite industry wide challenges.
Driven by our proactive customer service Tech driven solutions industry, leading asset protection program and our penetration of rural stores.
We are developing radio frequency identification or RFID technology embedded in power tools to prevent theft. This solution will be largely invisible to customers, but it makes it tool inoperable until it is scanned and purchased.
Turning to PPI or perpetual productivity improvement and store operations, we have a series of exciting initiatives on our roadmap that will continue to deliver productivity for the company.
In addition to the Omnichannel enhancements that I mentioned earlier, we also upgraded the freight flow process for shipments from our distribution centers into our stores and onto the selling floor.
Through improved technology, we now have better visibility into how freight is flowing into our stores. This enables us to better match staffing levels with the type of inbound freight getting the product onto the shelves faster.
These PPI initiatives combined with our continued investments in our associates have helped us to control our expenses and improve our customer service scores and a down sales environment.
Before I close I'd like to extend my appreciation to our frontline Associates, and Kentucky, New York, and Vermont, who supported flood relief in their communities and to our teams in Hawaii corresponding to the devastating wildfires too.
To support the recovery efforts and Maui, we are donating $1 million to provide food emergency shelter and relief supplies to those affected and are grateful for our frontline associates for going above and beyond to help those on the island with recovery and cleanup with that I'll turn it over to Brandon.
Thank you Joe.
Let me begin with our Q2 results, we generated diluted earnings per share of $4 56.
Q2 sales were 25 billion.
As a reminder, prior year sales included $1 7 billion generated in our Canadian retail business.
Results also reflect a $335 million sales headwind due to the shift in our fiscal calendar as we cycle over a 53 week year.
As Marvin mentioned comparable sales were down one 6%, which includes approximately 160 basis points of lumber deflation.
This pressure was partly offset by a 125 basis point benefit or $300 million of seasonal sales delayed from Q1 due to a late start to spring.
Although the calendar shift pressured total sales growth in Q2, it had no impact on comparable sales as comps are calculated based on weeks, 15% to 27% in fiscal 2022.
Comparable average ticket was up 0.3% to prior year.
Ticket increases in the majority of our merchandise categories were offset by lumber deflation and more normalized appliance promotions.
Comp transactions declined one 9% driven by continued pressure in DIY discretionary purchases, partly offset by a seasonal recovery.
Our monthly comps were down one 2% in May one 6% in June and 2% in July as the seasonal recovery was concentrated in the first half of the quarter.
Gross margin was 33, 7% of sales in the second quarter up 42 basis points from last year.
Gross margin benefited from our ongoing <unk> initiatives favorable product mix and lower transportation costs.
These benefits were somewhat offset by costs associated with the expansion of our supply chain network and as expected shrink was in line with prior year.
SG&A of 16, 4% of sales de leveraged 16 basis points, largely due to lower sales related to the shift in our fiscal calendar.
Please note that it also includes the benefit of a onetime legal settlement.
We continue to tightly manage expenses adjusting spend appropriately to align with demand all while still improving our customer service.
Also as you heard from Marvin Bill NGO, We're pleased with the ongoing momentum we are experiencing across our portfolio of PPI initiatives, which continue to create significant value for the organization and help to offset the impact from lower sales.
Operating margin rate of 15, 6% of sales Levered 18 basis points consistent with the expectations, we outlined on our last call.
The effective tax rate was 24, 6% in line with the prior year.
Inventory ended the quarter at $17 4 billion $1 9 billion lower than the prior year quarter.
U S inventory units were down 3% compared to last year as we continue to manage replenishment inline with sales trends.
Now, let me turn to capital allocation and.
In Q2, we generated $3 5 billion in free cash flow and returned $2 8 billion to our shareholders through a combination of dividends and share repurchases.
During the quarter, we repurchased $10 1 million shares for $2 2 billion.
In addition, we paid $624 million in dividends and $1 five per share and we announced a 5% increase to $1 10 per share for the dividend paid on August 9th.
Capital expenditures totaled $385 million as we continue to focus on high return projects that support our growth objectives.
Our balance sheet remains healthy.
Adjusted debt to EBITDAR stands at $2 six nine times as we move towards our stated target of 275 times in line with our Triple B plus credit rating.
Additionally, we delivered return on invested capital of 27, 8% inclusive of a 750 basis point impact related to transaction costs associated with the sale of our Canadian retail business and the discrete gain we reported in Q1.
Now turning to our 2023 financial outlook.
As Marvin mentioned, we continue to expect our relevant market to decline mid single digits. This year and to outperform the market by 100 to 200 basis points.
As such this morning, we reaffirmed our full year 2023 financial outlook.
We continue to expect 2023 sales in a range of 87 to 89 billion for the year.
Representing comparable sales of down 2% to down 4%.
This includes a 150 basis point impact from lumber deflation for the full year.
This outlook reflects continued strength in pro and online offset by ongoing pressure from DIY discretionary purchases.
Specific to our Q3 expectations, we will be cycling over the toughest comparison of the year as we delivered plus 3% comparable sales in the U S last year.
Given these difficult comps, we are expecting Q3 sales towards the lower end of our full year guide.
We continue to expect full year adjusted operating margin in a range of 13, 4% to 13, 6% with disciplined expense management and ongoing PPI initiatives, partly offsetting the impact of lower sales volumes.
And we are reaffirming our outlook for adjusted diluted earnings per share of $13 20 to $13 60.
As a reminder, our full year outlook for operating margin and diluted EPS excludes adjustments associated with the sale of our Canadian retail business.
And finally, we continue to expect capital expenditures of up to $2 billion. This year.
In closing I remain confident that the investments we are making in our total home strategy are positioning us to grow our market share regardless of the macro environment, while continuing to deliver meaningful long term shareholder value.
And with that we will open it up for questions.
Thank you.
We are now ready for questions. If you would like to ask a question press star one on your telephone keypad to throwing a question press star two.
In order to allow questions from as many individuals as possible. Please limit yourself to one question and one follow up.
Our first question comes from Chris <unk> with Jpmorgan. Please proceed with your question.
Mr. <unk>. Please proceed with your question.
Thanks. Good morning. So my first question is on the top line what drove the difficult comparisons in the third quarter that youre not expecting this year and then as you think about those bigger ticket DIY discretionary categories. How do you how do you see the rate of change in those businesses I E are we starting.
To get to a baseline level that we can grow from or is that spending power.
Patterns still deteriorating.
Hey, Chris This is mark I'll take the first part and I'll, let Brian take the second part when you look at last year. It's two different years, two different macro environments two different sets of consumer sentiment.
Different set of expectations with DIY and pro customers I think the key point is we feel good about the steps, we're taking to grow market share.
Regardless of the macro environment, we have a plan to outperform the home recruitment Mark by 100 to 200 basis points and that's what we're focused on from a brand and answer the second part of your question. Yes. Chris. This is Brian let me get into a little detail on Q3 and second half.
First before I do that let me take care, one quick housekeeping item as it relates to Q2 exit rate.
Noise that we saw in the comp spreads across Q2, given the calendar shifts that we experienced in after adjusting those spreads to.
Compared to last year Q2 comps are down roughly 1% in July also when we look at July and August are traditionally lighter volume weeks until we hit the labor day fall seasonal periods. So looking ahead at Q3, specifically, we are cycling our toughest comparable of the quarter plus three last year in August .
Toughest across that quarter, plus four and then your question on sort of puts and takes different from Q2 as we get into Q3, we won't see the same level of seasonal benefit going forward, we called out 300 million there that we experienced in Q2.
More modest lumber deflationary pressure in Q3, which sizes added about 75 basis points and then continuing to expect pressure in the DIY discretionary spend and then on the flip side continued.
Growth and momentum from the pro business as we expect to outpace DIY. So those are just to give you. Some insights as we look at Q2 and how we transitioned into Q3.
Got it makes sense and then on the gross margin line I know you had some.
Hi.
Price cost issues in the first half of this year as you look ahead given is that behind you and as you think about.
How freight is going to start to roll through the inventory should gross margin performance improve in the back half relative to the first half. Thank you.
Sure Chris So gross margin bounce back as we expected from Q1, we had easier product margin comparable data prior year timing.
Jennifer as you mentioned the transportation cost relief is now flowing through margin as expected. We also benefited from product mix and we continue to see great momentum with our PPI benefits across our merchandising portfolio.
Those benefits are offset by continued investment in supply chain and the expansion specifically in market delivery.
We called out shrink being neutral as Joe mentioned continuing to drive.
Solutions to manage some of the industry wide challenges there on all in as we look at the full year, we still expect roughly gross margins flat across the year. So puts and takes there just like Q2 supply chain expansion continued pressure from some of the pro growth initiatives and then we expect continued benefits across the back half of the year from <unk>.
Brand penetration and supplier Clawbacks lower transportation costs and initiatives that we're seeing across the pricing portfolio.
Thank you.
Thank you Chris.
The next question is from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Good morning, everyone. We're at the halfway point of the year I was hoping to take stock or diagnose the macro housing Marvin you mentioned that and then also the consumer curious how it's playing out versus your expectation it feels status quo, but wanted to hear the puts and takes on both sides.
Yes, I mean look I think you summed it up well.
For us when we look at consumer sentiment I mean, we know that we are seeing a pullback in DIY discretionary spend and that's really for us.
Kind of the overall theme of how we see the second half of the year I think the good news for US is we remain really bullish on the mid to long term view of the home improvement market and we think it's still very healthy.
I can just give you the traditional data points that really matter and we think that theyre going to matter not only for home improvement in the mid to long term, but we think this is one of the best retail sectors to be in you look at home demand you had 2 million fewer homes than what's available for sale of the age of homes, 90% of the hallmark.
Mortgage rates are in an environment, where rates as you know are going up and when we look at all of the things that we're doing relative to pro to DIY, we feel really really comfortable that irrespective of the macro environment for home improvement that we're going to outperform the marketplace by 100 to 200.
Basis points and key examples of why we believe that is when we take a brand like Klein tools that we have had absent from lows for almost 15 years and we can bring back the number one brand for electrical and HVAC pros and be the largest home improvement retail out.
<unk> for that brand that gives us a lot of confidence that our strategy is working and we're going to continue to grow market share across pro and DIY.
The DIY discretionary pullback on big ticket drives our overall.
Modest concerns about the back half, but even with that we think we can outperform about 100 to 200 basis points.
That's helpful.
Second question is more on margin and this is maybe irrespective of what happens to sales. So both on SG&A per foot and even GM you have the PPI is a good is a good guy and then just in general spending levels can you can you talk about where PPI is is it performing better than you thought.
And then is there any areas, where you in hindsight should be spending more than or less for that matter just as we think about the margin progression going forward.
So look I'll take the first part and I'll, let Brandon add any additional context whats interesting is that PPI started in store operations. I mean, typically you think about expense. It always begins in the store because of the amount of payroll we span how.
How we execute in our 1700 plus store environment, but then the philosophy started to permeate around the entire company merchandising supply chain and across all of the functional areas and so because of that.
We built a roadmap that Brandon I could look at over a multiyear timeframe and we can understand the tech investments, we're making and the expense reduction and the productivity that will be driven based on those investments. In addition to that I don't want to understate the importance of our rural and remote doors as I mentioned in my prepared com.
And Bill mentioned and he is we simply believe as we continue to identify ways to localize the assortment.
In addition to putting in technology and implementing PPI, we think it's going to give us a disproportionate benefit over the long term and driving operating margin improvement and again PPI is a big part Brian .
Semi and the good news too when we look more in the short term around the back half of 'twenty three we actually are expecting PPI at it to get more momentum in the second half than what we saw in the first half a couple of really good efforts that are going on with new store Tech architecture. As we continue to build a modern foundation, enabling new capabilities in the store.
Amit channel selling we're transforming the front end of the stores with improved self checkout revamped both of his experience and then across the other areas within.
Within merchandising I mentioned earlier pricing private brand expansion and call back and then also within the supply chain efforts as we continue to improve process and implement automation. There. So all and really pleased with the progress we have those benefits factored in but theyre going to continue to accelerate as we move across the second half of the year and those are captured in our expectations.
Thank you.
Our next question is from the line of Elizabeth Suzuki with Bank of America. Please proceed with your question.
Great. Thank you I mean, just a couple of questions about the assumptions of the guidance. So for the second half you are assuming at the high end comps down about 1%, but on the low end down about five so I'm just curious what economic scenarios, you're contemplating for both the high end and the low end and then if trends youre seeing today continued easy.
You would end up on the higher end or on the lower end.
Yes. This is Brian and I think as we think about.
Our range for the full year, we believe the range is practical practical and it reflects a measured approach given the various potential scenarios and outcomes. We still as we look at the back half still significant macro uncertainty inflation interest rates a more cautious consumer.
Specially on the discretionary side Theres also variables such as the student loans and the uncertainty there with the moratorium. So the team continues to be focused on executing the total home strategy. We believe home improvement is going to be down mid single digits, and we will outpace add 100 to 200 basis points, we expect second half the Sol.
<unk> with DIY discretionary to continue and we expect to continue to see momentum from pro and dotcom. So those that's.
What's reflected overall in our second half.
Liz This is Marvin and this was a point I want to continue to reinforce in the obviously, we're looking at the data that we have available and we're looking at historical trends and how that data correlates to a horse historical trends.
But what we're saying is we're going to outperform the market about 100 to 200 basis points. So it would be.
We're being too pessimistic on the second half that's great because we're going to outperform that by 100 to 200 basis points.
So for US, we're really focused on controlling what we control executing our total home strategy and just maintaining our organizational alignment and agility around whatever the macro throws our way, but we're just really confident.
Team and a company that we have the agility to make sure. We continue to take market share irrespective of what the home improvement environment will be in the second half of the year.
Alright, great. Thank you.
Our next question is from the line of Zach <unk> with Wells Fargo. Please proceed with your questions.
Hey, good morning, So your average ticket slipped back slightly positive we know lumber played a role but considering this line is still 30% above 2019 can you talk us through the moving parts here and a little more detail and if you think it's fair to say that the average ticket has normalized or if there's still risk that you.
Will revert closer to those 19 levels.
This is Brandon let me, let me take sort of the ticket transaction narrative here. So on the ticket side as we look at inflation. The benefits, we expect to continue to normalize as we cycle.
A number of the price increases from 2022 as we look at new cost increases that are currently in our pipeline or inbound from our suppliers.
Effectively minimal at this point there is some positive.
Improvement in the average ticket and the expansion there thats not necessarily inflation driven as we continue to see healthy growth from our pro customers and pro penetration.
Punch line as we look across the second half, we're not anticipating meaningful deflationary pressure, we're going to see year over year lumber pricing is going to be much more normal across the second half Bill mentioned, we're going to begin to cycle more normal appliance pricing specifically as we get into Q4 and then the ongoing expectation.
With DIY discretionary is going to continue to put some pressure on ticket. So taking all that into account our outlook assumes more pressure overall on transactions and we look at ticket and expect that to really hold over the back half of the year.
Got it and just.
Over the past 10 years your cost controls and operating margins had been able to show really nice progress even on a negative comp.
During all of the PPI commentary and hosted a structural changes can you talk through.
What kind of margin progression, we should anticipate as comp slip back to positive eventually and if you think the expansion today.
In any way preclude more meaningful expansion in a recovery.
Yes. This is Brian and I think look right now, we're really focused on delivering our expectations for 2003, we've laid that out.
And the guidance I'll reference back just as we your question around flipping positive comp we laid out various scenarios back in December we still as we sit here today confident in our path to continue to expand comps topline through deployment of our total home strategy. We feel like we have a nice path going forward.
Expand operating margins, we've talked already at length around where we are from a perpetual productivity initiative standpoint, we're going to continue to make progress there and confident again that we have the roadmap in front of us and all of those building blocks are in place when we look beyond 2023.
Got it thanks for the time.
Thank you.
Our next question is from the line of Scot Ciccarelli mature Securities. Please proceed with your question.
Good morning, guys can you please talk about any regional and different things youre seeing both in different parts of the country, but also differentiation here between let's call. It the rural locations you guys continue to reference as well as heavier urban locations.
Yes, so Scott I'll take the first part of that like I say no regional differences there is nothing material to speak to I mean, we know that.
Housing and home prices ramped up pretty aggressively.
During the pandemic timeframe and in a couple of markets, but when we look at the overall geographic spread that would be there are no real material differences between locales have had dramatically increase in housing calls and some of those costs will start to moderate because you still have markets around the company country rather.
Where home prices are still going up so so we look at it obviously because it's one of those key internal macro or micro indicators that we factor into our assessments, but theres nothing material to speak to you relative to urban and rural.
We've spent a lot of time talking about the importance of localization.
And to say that Lowe's was a company that was not very localized five years ago would be an understatement as much progress as we have made.
Bill will tell you that we still are excited because there is still lots of opportunity for us to be even more specific in how we localize from a rule and from an urban standpoint.
I'll, let bill talk a little bit about our rule initiative and kind of what we're seeing it's early days, but the early signs are positive and I'll, let him share just with some general thoughts are on those initiatives and kind of what we hope will continue to see yes, thanks, Marvin and Scott as I said in my prepared remarks.
<unk> got roughly 300 stores completed in the second quarter.
We're excited about what we're hearing from our consumers as they're giving us credit for the products that we're putting in there we've been able to do some stuff around pet with our partnership with Petco, which we're excited about.
We've also continued to learn and continue to listen to our customers and so there's opportunities with different things related to that rural customer, whether thats utility vehicles livestock feed apparel different types of products that they will use every single day.
In and around their their home and so we're going to continue to learn we're going to continue to adjust as we go as Marvin said kind of in the early innings of our localization opportunities and on the urban side, we continued to adjust there as well, making sure that were right for those urban markets, whether thats the types of products that they need for security and safety weather.
Thats areas in and around building codes and making sure that we can meet the pros' needs in those markets, who can continue to tweak and adjust as we go forward. So excited about what we're doing on the localization front and what we're doing with rule.
So just a clarification if I can.
On the <unk> side like is it outperforming the urban areas now or that's the expectation as you wind up local anymore.
It's performing at what we expected it to perform.
Got it thank you very much.
Our next questions come from the line of Michael Lasser with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question. It is not the first metric and Theres a lot of noise in it but if we simply look at loans performance relative to its largest competitor over the last couple of quarters Lowe's has been out comping.
That player.
Presumably this quarter in part due to produce a little bit better online sales doing well and maybe more seasonal catch up.
As a result of leading higher harder into that category. So is that the right interpretation and then b how sustainable do you think that this measure of load performance is.
So Michael I'll take that Marvin and I'll, just be really honest with you. We spent a lot of time talking about the importance of being customer centric, we don't pay a ton of attention to what's happening at our competitor because we believe if we take care of the customer the customer takes care of everything else. So we're going to continue to stay.
Focus on our toll home strategy, we think if we do that well then our results will be sustainable and that means that we're going to be very local laws that means that we're going to be intentional around the small to medium sized pro that we're going to make our 17 under stores connected to our customers via omni channel and we're going to continue to.
Intentional around what we do to give our associates a great place to work those things are most important and I think our results this quarter, although in a difficult market reflected our toll homes strategy is working and we're continuing to invest.
The appropriate amount of capital to insure that irrespective of the macro environment, we're not going to slow down on our investments in supply chain.
Infrastructure Omnichannel and our pro initiative so for US it's all about taking care of the customer in it that allows us to outperform our close competitor and that's just a benefit that will be more than willing to accept.
Understood. My follow up question is on your view of the sales environment for the back half understanding that.
If you are taking a prudently cautious stand.
Given what's happening with macroeconomic indicators.
Now with that being said are you seeing any signs that those discretionary.
Ticket purchases that had been weak.
His patio furniture grills.
Other big ticket purchases are starting to stabilize or do you have line of sight that they might start to stabilize as you move into next year.
Yeah, Michael This is Brian and just a reminder, again as we look out at the second half, we're cycling a plus 3%.
In Q3 of last year, and a positive <unk>, 7% Q4, so that's been factored into our expectations to your question specifically on DIY discretionary we definitely saw the smaller ticket discretionary projects that were fueled by lawn and garden, we saw that benefit in Q2 as we get into.
Second half that seasonal benefit is going to subside. So some of the bigger I'll call. It interior DIY.
Discretionary areas I would say.
We're seeing very much performance here early on through August similar performance with what we've seen over the first half and that baseline performance is essentially whats reflected in our expectations for second half.
Thank you very much and good luck.
Thank you.
Our next question is from the line of Eric <unk> with Cleveland Research. Please proceed with your questions.
Two things if I could first of all I guess, probably for Bill as you think about manta.
Managing inventory and mix and promotions in this environment.
How are you.
Are you trying to position the business are you leaning in to try to drive traffic.
Are you responding.
And perhaps a little bit more defensively, just how are you trying to position inventory mix and promotions.
Yes, Eric first of all thanks for the question we're <unk>.
Focused on.
We're trying to provide value to the customer every single day and so.
That comes through lots of different things, making sure that from the pro side that we continue to do things like we're doing right now as we rollout Klein tools in our stores excited about that launch we think that.
Offers.
A nice opportunity for us as we will have the largest assortment of Klein in home improvement channel. So right now we've got roughly 150 skus in the stores today, we will have all of our stores set by the end of this week. So that's just one way of being able to provide value to that pro customer and then from an inventory side, we came out of Q2 and better.
Position with our seasonal inventories and we did a year ago. So that that helps us it allows us to invest as we go into labor day, and fall planning and fall harvest Halloween holiday those types of things. So that we can continue to provide value that way to the consumer with those holiday sets and Halloween sets provide a transition in the stores you know and it gives the customers.
Some excitement and then we've got a lot of new stuff that we've talked about we've got Coca Cola that'll finish rolling out in our stores.
Being able to have access to that entire portfolio of product, we're excited about where rollout carhartt to 250 stores in Q3.
So we're excited about getting that out there for both the DIY and the pro and then we'll have some new stuff in that spooky area for Halloween for the Halloween enthusiasm so all of that try to provide.
Value to our customers in lots of different ways and then.
From those promotional offers in appliances like you have to <unk> to provide because over 100000 appliances break every single day and we'd want to make sure that we're relevant out there and try to manage all of it in a portfolio approach. So we got a lot of stuff go and we're excited about it and we think will give us a nice way to position ourselves to drive value for our.
<unk> through the back half of the year and into next year.
Okay, and then and then second question if I could as you.
Brandon did a good job of explaining that you've kind of cycled through the price increases and theres minimal from here.
The math of the past couple of years. Since then price up more than volumes are down I'm. Just curious how you all think about is price no longer goes up.
The path for volume.
Turning from a negative to a positive I'm just curious how you think about that and what what makes that happen and perhaps one.
Yeah, Eric This is Brian and I think again, our focus right now 23, as I mentioned earlier and kind of breaking down transactions and ticket.
We do expect pressure on transactions as we move across the balance of the year ticket the hold.
I do think when we get on the backside of this I'm not going to put a timeframe on it. Obviously is there is a bunch of variables a lot of uncertainty it's too early for us to call.
What 2024 is going to look like but I do think we.
We're expecting a convergence and a better balance.
Transactions and ticket probably similar to pre COVID-19 levels as we start to look ahead across the long term.
This is marvin the only thing I'll add to that.
We still are in the early innings.
Of making what I would call best in class business operations, and our Omnichannel area.
And localization.
And in just the overall technology infrastructure I've mentioned that we're retiring 30 <unk> operating system.
And not only will then make.
Our stores are a lot easier to operate from a technology standpoint, and what it does it gives us incredible agility to build on top of that modern platform for more omnichannel capabilities. There are still a lot of things we're doing to date.
Hard way.
And so I get excited.
Because I can get out of bed every day and I can see a long list of initiatives that we have yet to get to.
That's going to drive operating margin improvement drive space productivity, and hopefully will drive top line as consumer sentiment continues to improve so we're confident that we have not reached.
Point of peak performance relative to the investment cycle that we have because we've been other places we know what world class looks like and we know that we're on a journey to get there, but there are still areas of our business pro online.
Fulfillment capabilities space productivity that we know that we're still in early innings, and so that's exciting and you'd have to do the work to make sure that we can achieve the expectations we have.
And Rob we have time for one more question.
Thank you our final question will be from Steven <unk> with Citi. Please proceed with your question.
Good morning, Thanks, very much for squeezing me in.
I wanted to circle back to your commentary about the appliance promotions could you elaborate on that a bit more it sounds new what are your expectations for that side of the business in the second half of the year and then just a follow up on the promotions question earlier. It seems like the industry has not needed to be promotional how long do you think this can last.
Big ticket discretionary weakness continues.
Yeah. So Steve this is bill so just on the appliance side, specifically, what we've seen with appliances is that really the industry has returned to kind of a more normalized go to market promotional offering similar to what you saw prior to the pandemic and so this normalization is as I said in my remarks has put pressure on.
Average ticket and average selling price across the industry.
Everybody I think is feeling that impact.
But essentially we cycle. This as we get into Q4, and we will get into a more of an apples to apples comparison, when we get to Q4, but we're excited about the strength that we've seen with our appliance business first quarter track line data would indicate that we took share in the first quarter. So we're driving units and trying to make sure that we can.
Meet the needs of our consumers is like I said in Eric's question 100000 appliances break every single day, we got to be there for our consumer but it's not a radical.
Shift to heavy promotions, it's more of a normalized promotion.
Got it and then just down.
Question on the back half margins for you Brandon given the commentary about the same store sales in the third quarter is there anything to be mindful of in terms of gross margin or SG&A cadence in the third quarter versus the fourth quarter.
No I would say Steven still expect 40 to 60 basis points of expansion. The one thing that I would call out I mentioned, we expect the PPI benefits to build over the second half and then the second thing I'll mention is we are cycling over $400 million of associate discretionary bonuses that were paid.
Last year that were not expecting to recur. So those those are the big.
The items that I would call out as we move through the second half.
MS divided and just talk a little bit about outperformance and shrink.
The most difficult retail environment will shrink in my 35 years in this space I won't let Joe just talk a little bit about the successes that we're seeing and how we hope that continues to support our gross margin forecast put it back half of the year.
Thanks, Marvin and let me give you just a quick shout out to the store operations team and really our asset protection team.
I believe they are best in class and as you look across the actions that we've taken.
Whether it's in supply chain, whether it's on the front end with our new proprietary self checkouts, replacing the Ncr's, we have a best in class awareness platform. That's got a 92% voluntary participation rate and that we have line of sight or front end.
Transformations as we move into next year.
The 100% execution of our high shrink program, where we've identified.
The stores and so I feel really confident and.
Just a great job by the team.
Thank you all for joining US today, we look forward to speaking with you on our third quarter earnings call in November .
Thank you. This concludes the low second quarter 2023 earnings call you may now disconnect.