Q3 2024 Lowe's Companies Inc Earnings Call
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Good morning, everyone. Welcome to Lowe's companies third quarter 2024 earnings conference call.
My name is Robin.
Your operator for today's call.
As a reminder, this conference is being recorded.
I will now turn the call over to kroman vice president of investor relations and treasurer.
President merchandising Joe, McFarland our Executive Vice, President stores and Brandon sink, our Executive Vice, President, and Chief Financial Officer.
Thank you and good morning here with me today. Are Marvin Ellison. Chairman and chief executive officer. Bill Boltz are Executive Vice President.
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 lows investor relations website.
Including those discussed in the risk factors mdna and other sections of our annual report on form. 10K, and our other SEC filings.
During this call, we will be making comments that are forward-looking including our expectations for fiscal 2024. Actual results May differ materially from those expressed or implied as a result of various risks, uncertainties and important factors.
additionally, we'll be discussing certain non
Financial measures our reconciliation of these items to us. Gaap can be found on the quarterly earning section of our investor relations website. Now, I'll turn the call over to Marvin
A burning Marcos.
Thank you, Kate and good morning everyone. And thank you for joining us today before discussing our third quarter results. I'd like to take a moment to offer my sympathy to the markets family on the passage.
Bernie and his partners are the blank kin lingon and Pat Farah invented, the modern home improvement. Business model.
In many years ago, Bernie took me on this.
To teach me the Home Improvement business.
As a young executive eager to learn about merchandising marketing and business strategy for 1 of the icons of the industry. I was surprised at doing my first meeting. The only thing that Bernie talked about was the importance of people, both customers and Associates.
An advice during my early years in Home Improvement. He was a true original and ever since of the words and because of his generosity and philanthropy, he leaves a legacy far beyond.
Burning provided me with a lot of coaching wisdom.
On the Home Improvement industry.
From me personally, and from all of us at Lowe's, our thoughts and our prayers go out to his family and to his loved ones.
Now, allow me to transition to our third quarter results.
Third quarter sales were 20.2 billion dollars in comparable sales were down 1.1%.
Our results will modestly better than expected. Even excluding storm related, activity driven by strong Pro and online sales and smaller, ticket outdoor, DIY projects.
While demand for DIY, discretionary, bigger, ticket projects, remain soft.
We're tightly managing our operating expenses and continuing to invest in our total home strategy.
We're particularly pleased with the sustained strength. We're delivering in 2, key areas, Pro and online sales.
Our.
Pro Sales were up again in Q3 with high single digit positive comps.
This growth is being driven by the Investments, we've made to better serve the small to medium-sized Pro, which is our core Pro customer.
Our efforts to transform the pro shopping experience. Continued to pay dividends
The brands that are the most important to these customers.
we have the inventory depth of
And we're making it easy for them to shop in our stores and online and through our pro loyalty program, we're giving them reason.
To keep coming back.
Later in the call, Joe will provide more detail on our efforts to continue our momentum in Pro.
We also continue to grow our online sales with 6% comparable sales growth.
Our lows mobile app.
We've increased both online conversion and traffic, including a double-digit increase in traffic.
And we're making it easier and more convenient for customers to order paint and paint supplies online by expanding our free. Same day, Paint delivery program via
Gig Network.
And as a reminder, paint Remains the number 1 Home Improvement project.
So we've added more Brands and products to our same day delivery options. So, customers can get what they need to finish their projects faster delivered, right to their home or job site.
In the Lowe's app which gives them product information at their fingertips. Through the app, they're able to quickly access product details reviews and in-stock information and they can
Customers are also leveraging our new intro mode.
More easily navigate the store to find what they're looking for.
And if they don't see the exact product, they need on the Shelf, they can shop on the app, right? Within the aisles of our stores for a larger selection of products and finishes from our extended aisle or lows.com.
our models rewards loyalty program, which we just launched in March,
another way we're driving traffic both online and in store is through our
This free program is designed to reward DIY customers for choosing loads over other retail competitors. For
Home Improvement needs.
Customers are engaging in the program to take advantage of new. Member-only offers earned mylo's money and use their rewards. You hear more about our loyalty program from bill later in the call.
Now, allow me to transition to the economy.
Remains a challenging Home Improvement Market.
When it comes to the macro environment.
While interest rates are beginning to drop consumers, continue to face affordability, challenges as both inflation and interest rates are putting
Pressures on their wallet.
Mortgage rates also remains stubbornly high and there's still a meaningful gap between current mortgage rates to purchase a home, and the homeowner's existing rates with over half of current rates below 4%.
30 year lows.
Combined, with the lack of available, homes for sale housing, turnover remains near.
Looking ahead, it's unclear when Laura rates and improved consumer sentiment will translate into improved Home Improvement demand.
However, the 3 primary drive,
Drivers of our business continue to work in our favor, 1, strong home price, appreciation, 2 disposable personal income is outpacing inflation and 3. The medium age of homes is the oldest has been in US. History, currently sitting at 41 years old.
The long term, which means existing homeowners are likely to continue investing in repairs and upgrades to their homes.
These drivers will support demand over.
especially as interest rate pressures, ease
Expect that homeowners will start to tap into the record, 35 trillion in home equity to finance larger, Home Improvement projects.
Long-term outlook for the Home Improvement industry.
these factors along with long-term demand drivers like Millennial household formation Baby Boomers Aging in place and continued remote work, reinforce our optimism around the medium to
In the meantime, we're investing in our total home strategy to position the company for long-term growth and sustainable Market.
Is your gains in preparation for the anticipated Home Improvement Market recovery.
We're looking forward to telling you more about our plans at our analysts and investor Conference next month.
Before I wrap up, I'd like to extend our thoughts and prayers to everyone who is impacted by hurricanes Helen and Milton.
Attitude to our Associates suppliers and First Responders for the efforts to support those in the storm's path.
And I want to express my great.
working together the teams provided round-the-clock support ahead of
Both hurricanes and immediately mobilized in their wake to help address urgent needs and impact the communities across the southeast.
Boots on the ground as part of this commitment. We recently announced plans to provide 2.5 million in Grants and support to help small businesses in Western, North Carolina recover.
As part of the largest storm recovery efforts in our company's history, loads us pledged 12 million dollars to support disaster relief assistance, through several nonprofit organizations.
And to rebuild.
Joe Bill and Brandon, will each share more detail on roses response efforts and provide more context on how these storms impacted our results.
Front line Associates in Florida, and North Carolina for their commitment to the neighbors and for the resiliency. Now, I'd like to turn the call over to Joe to talk more about our storm recovery effort.
In closing. I'd like to thank all of our Frontline Associates for their dedication to serving our customers and supporting our communities. I especially would like to salute our
And our store operations.
Thank You, Marvin. Good morning, everyone. Hundreds of stores. Felt the impact of hurricanes, Helen and Milton, and our operations. Team worked tirelessly to get them up and running quickly leveraging. Our improved Disaster, Response capabilities that we have continued to enhance over the years.
Chain Network, helped us mobilize essential supplies staging inventory, in nearby Distribution, Center facilities, more efficiently ahead of the storms and flowing products to impacted stores.
Investments in our supply.
More quickly afterward.
Recent investments in Pro job. Site delivery, especially in Hurricane prone areas. Also help with our relief efforts so we can more quickly flow.
Larger orders to our Pro customers to support their work. Helping homeowners recover.
In the largest activation of its history our Command Center team coordinated, these efforts across the company while district and store managers responded to the needs of their communities by ensuring the critical supplies or position for convenient access for our customers.
Additionally, hundreds of Associates have volunteered in Western North Carolina to clean houses, cleared debris and serve warm meals.
And on particularly grateful to the over.
1,000 emergency response team members who voluntarily left their homes to support stores and the impacted areas.
These teams quickly mobilized to serve customers reeling from Storm impacts and to relieve local Associates. So they could focus on their own recovery efforts.
Despite the challenges posed by the storms.
Pleased that we maintain our recent gains in customer satisfaction. This is a reflection of the Investments we've made in tech-driven enhancements to the customer experience, as well as the ongoing.
Commitment of our Associates to deliver outstanding customer service.
Driven by our enhanced digital offering for the pro. We recently launched shop the job, a digital shopping experience that helps our pro loyalty customers purchase everything.
Shifting gears to our performance and pro as Marvin mentioned, we delivered positive High. Single digit Pro Comp sales in the quarter with broad-based growth of the Cross regions and Merchandising categories. And we continue to deliver outsized growth in Pro online sales.
A need for specific jobs, more quickly, and efficiently, cutting down on the time. Spent sending Runners from job site to buy forgotten items.
We launched this program with a focus on kitchens bath and flooring projects and look forward to expanding to additional project types as we incorporate our Pro customers feedback on this initial roll out.
Looking ahead pros and our recent survey indicated that their backlogs remain strong and consistent with prior year. They also remain confident about their access to financing
Labor and materials. All key factors Drive, the success of their business.
Turning to our efforts to become the employer of choice in retail. A few weeks ago, we concluded our annual engagement survey a critical component of our proactive associate listening strategy.
And we're pleased that our preliminary scores are crossed. The key measures of Engagement and Leadership. Effectiveness continued to improve as past surveys show a correlation between more engaged Associates and
Our 90 plus percent response rate is industry-leading.
Stronger business results driven by better customer service.
Held last month.
As Marvin mentioned, we continue to see increased engagement in our Milo rewards programs. And we're pleased this quarter to recognize First Responders by upgrading them automatically to Silver Key status. This is part of our fourth annual First Responders appreciation event.
This is just another way we're working to show our gratitude for the mission critical work, they do for our communities.
Finally, I'm looking forward to discussing. What's?
On a Perpetual productivity Improvement or PPI roadmap next month at the analyst and investor conference.
We'll discuss our continuing efforts to elevate the customer experience while at the same time. Enhancing labor productivity through tech-driven Solutions.
I would like to close by thanking all of our Associates for their hard work and commitment to our customer.
And now, let me turn it over to Bill.
And while DIY bigger, ticket, discretionary demand remains pressured, we saw improved results in outdoor categories.
Thank you, Joe and good morning, everyone. We're pleased with the strong performance. We delivered in Pro and online. Again, this quarter
Now, turning to our results in hardlines.
Where we delivered positive comps. Driven in part by Hurricane related sales of products. Like generators, chainsaws cleaning supplies water, gas cans tarps and flashlights.
Stories, like Lawn Care, landscape products in Fall cleanup supplies.
We also saw customers engage in projects to help their lawns recover from a summer of intense heat, which drove strength in outdoor category.
And Hardware.
Taking all of this into account, we delivered positive comps for the quarter in both seasonal and Outdoor Living.
Next, we're getting ready for the upcoming holiday season. We're offering customers Innovative products at Great values, all season long.
Starting with.
With our new Black Friday, buildup event. We're encouraging customers who are gearing up for the holidays to shop early with deals on top-rated Craftsman, DeWalt and Kobalt Tools.
To pass up.
And next week, we're excited to welcome customers to our Black Friday event where they can continue to save with online, exclusive deals, and special in-store offers. That will be too good.
During the event maayos rewards. Loyalty members will also have Early Access to more exclusive door busters on Thanksgiving Day on lows.com.
In fact, since tools are perfect holiday gifts for both the do-it-yourselfer and the pro and your family will have compelling offers from Brands like Klein and DeWalt, and DeWalt will take over the pro Drop Zone in a big way throughout the holiday season.
Tools, which have more power longer run times and increased durability compared to a typical 20 volt battery.
We're featuring a great selection of dewalt's. Best performing 20-volt, Max, XR batteries, and Power.
turning to Building Products where we
Delivered comps above the company, average, driven by positive comps, in building materials with the continued strength in Pro as well as hurricane related sales.
and we're continuing to add to our powerful Pro brand, Arsenal by welcoming to lows the world leader in drywall, tools, wallboard tools,
Include a comprehensive range of the best and most Innovative products in the industry. That caters to both seasoned drywall professionals and diyers with tools for every step of the day.
This new assortment will include.
Drywall process from taping knives and trowels to texturing and repair patches. We're also pleased to introduce the pelis steady set, interior Installation System an Innovative way for pros to install Windows from the inside.
It's faster and safer than exterior, installation. Because installers now won't have to carry a
Show up a ladder.
this Innovative solution, turns a 3-day installation, into a 1-day job and reduces ladder Time by 70%
This will be a game-changer for.
Pros making it easier than ever for them to provide high-quality window installation, while cutting down on labor expense.
shifting, now to home decor,
We continue to see ongoing pressure and DIY bigger ticket, discretionary projects and categories, like flooring kitchen and bath and decor.
In appliances.
Third quarter comps improved slightly from our Q2 Trends driven by growth in average ticket size.
We delivered positive comps and laundry partly driven by the expansion of the
New all-in-1, washer and dryer units and integrated wash Towers.
These new and exciting products are driving growth in laundry and reflect the customer's willingness to trade up for innovation in new products.
Line.
Another example of consumers, responding Innovation is in refrigeration, with LG's new zero clearance.
Which has a hinge system that allows homeowners to install the refrigerator in tight spaces and still fully open both doors with virtually no extra clearance.
Needed.
Finally we're pleased to see continued momentum in our Milo's rewards loyalty program with promising results in key performance metrics like repeat purchases, average order value and penetration of loyalty member purchases.
And we're now leveraging the insights, we gained from our loyalty program to trans
For our marketing with tailored offers by anticipating what customers need next. And we're reminding them to take advantage of their Milo's money. Sending them tailored offers to
Entice them to return and Shop categories, we know they've shot before.
We're also giving members exclusive access to new product launches like best Customer Events and door busters.
in October, we launched our first ever member week with offers across categories, like appliances kitchens and bath paint and more
For the first time we now have the ability to drive our own event schedule for our DIY customers. Instead of being tied to the calendar, we can now create events when we see an opportunity to drive
Excitement traffic and sales.
In closing, I'd like to thank our supplier partners and Merchants for their hard work and shared commitment to ensuring. We have the right
Hands and the right assortment for our DIY and pro customers.
And I'd like to recognize 2 of our suppliers for their support of our storm, recovery efforts.
Starting with Niagara Water.
Less than 24 hours to help us serve our customers in need.
This team sent more than 700 truckloads of additional bottled water from their plants outside of our typical Network, in many cases, turning around our orders in,
And also firman Power Equipment. They Source generators from all around North America, to get them to our stores.
And our customers in the hardest hit areas, where their warehouse Crews work, literally overnight and through the weekends to ensure our emergency orders arrived in less than 24 hours.
start their generators find the right product for their needs and even repair Old units, regardless of the brand,
They also deployed 2 storm trailers with dedicated staff to Lowe stores across, Georgia, North Carolina and South Carolina to help our customers.
I want to thank them and all our suppliers who stepped up to help during the
Difficult time. And now I'd like to turn the call over to Brandon.
Thank you, Bill, and good morning.
Beginning with our Q3 results, we generated gaap diluted earnings per share of $2.99.
Consideration associated with the 2022 sale of our Canadian retail business.
in the quarter, we recognized a pre-tax gain of 54 million on deferred,
excluding this benefit, we delivered adjusted diluted earnings per share of
2.89.
My comments from this point, forward will include certain non-GAAP comparisons that exclude this benefit were applicable.
Third quarter sales were 20.2 billion with comparable sales down 1.1%.
Lean and Milton positively impacted comp sales by roughly 100 basis points.
We estimate the demand generated by hurricanes.
Excluding the storm related lift sales came in modestly better than
Expected driven by continued strength and pro and online, as well as smaller outdoor projects as customers work to address the impact of intense summer heat on their Outdoor Living Spaces.
For appliances and sales of storm related products.
Comparable, average, ticket was up 0.2% driven by strength and pro an increase in average ticket.
Ary projects was partly offset by growth in protrans.
Comparable, transactions, declined, 1.3% as continued softness and DIY discretion.
Our monthly comps were down 3.3% in August down 1.
2% in September and up 1.3% in October as hurricane related sales, positively impacted the second half of the quarter.
Gross margin was 33.7% of sales in the third quarter up slightly from prior year.
Gross margin benefited from ongoing PPI initiatives.
Which were largely offset by continuing supply chain Investments and storm related pressures which included.
Mixed pressure from lower margin products, like generators, chainsaws and lumber.
Incremental, Transportation costs to expedite product into affected areas and inventory, losses from damages in multiple locations.
Adjusted sgna of 19.2% of sales, de-lever 86 basis points versus prior year.
Cost for damage stores and facilities and incremental labor and other operating expenses. Like using diesel, generators to power buildings during extended electrical outages.
Adjusted sgna was largely in line with our expectations except for direct storm. Related expenses, which included philanthropic support, for our communities and Associates repair and impairment.
Adjusted operating margin rate of 12.3% declined, 86 basis points and the adjusted effective tax rate of 24.2% was in line with prior year.
Continue to manage our purchases in line with sales Trends and invest in key Pro items.
Inventory ended Q3 at 17.6 billion which was roughly flat to Prior year as we can.
Now turning to Capital, allocation.
728 million in free cash flow.
in the third quarter, we generate
Capital expenditures totaled, 571 million as we continue to invest in our key growth initiatives.
We repurchase 2.9 Million shares for 758 million, and paid 654 million in dividends returning over 1.4.
4 billion to our shareholders.
In September, we repaid a 450 million Bond maturity and ended Q3.
At adjusted debt to ebitdar of 3.04 times.
And we delivered a return on invested capital of over 31%.
Now, turning to our Outlook.
Ated modest storm related demand in the fourth quarter.
we are updating our full year 2024 Financial Outlook to reflect better than expected, third quarter results and in
While our third quarter results, came in ahead of expectations, much of it was driven by Hurricane related sales while
Underlying DIY demand remains pressured especially for discretionary projects.
Percent.
Initiatives as well as the incremental direct costs in a lower gross margin rate profile for storm related activities.
Taking these factors into account. We are now expecting 2024 sales in the range of 83 billion to 83.5 billion with comparable sales in a range of down, 3% to down 3 and a half.
We also now expect adjusted operating margin of between 12.3% and 12.4% reflecting the benefits of our ongoing. PPI
Additionally, we expect
Full year. Net interest expense of approximately 1.3 billion Capital expenditures of approximately 2 billion and adjusted effective income tax rate of approximately. 24.5%
Events to $11.90.
this results in an updated outlook for adjusted diluted earnings per share of approximately $11.80.
Any environment will allow us to navigate any near-term Market uncertainty while continuing to deliver long-term shareholder value. And with that, we will
I'm confident that our continued investments in our total home strategy and our ability to effectively manage our business in
Open it up for your questions.
Thank you. We are now ready for questions. If you like to ask a question, please press star 1 on your telephone keypad. Please draw your question, press star 2.
In order to allow as many questions from as many individuals as possible, please leave me yourself to 1 question and 1 follow-up.
Our first.
Question is from the line of Peter benedict with Barrett.
Hi, good morning, guys. Thanks, thanks for taking the question first. Um,
Just on the DIY loyalty.
You mentioned um you know, better penetration levels and and um or renewal rates or repeat rates, I should say and the aov any more color, you can add on that. I'm curious kind of where those maybe sit and, and curious on the year 2 playbook for for DIY loyalty, I I imagine Lots can focus on kind of
Gathering the, um, the membership at this point. But um, just curious kind of what the year 2 Playbook looks like for the DIY loyalty program. That's my first question.
Hey Peter. This is Marvin, I'll take your question.
um, I would say we're really pleased with
The entire program as a reminder, we launched it in March and we're continuing to see the membership Bill. Uh this past October we we launched our first ever a member week which really allowed us to hit a a record enrollment week.
Based on that event. So all in all we're extremely pleased we're seeing the key metrics that really matter for loyalty program things like repeat purchases,
Average order.
Value for loyalty members. And we're also seeing a higher penetration of our loyalty members making larger purchases. Now the caveat is is that we're going to provide a lot more detail on this program. Not only kind of where we are, but where we're headed at the analyst investor conference.
The bill has any other specifics on the program. You just to share our degree of confidence and excitement around kind of what we're seeing thus far.
Next month. Uh as a matter of fact, it's going to be 1 of our key discussion topics. So we'll kind of hold off on talking about the future of the program. Until that time I'll
yeah, Peter, the only thing I would add is
You know, in my repair prepared remarks, I talked about, you know, being able to offer some tailored events and so next week, as we head into Black Friday, on Thanksgiving day, we'll give our members Early Access to some, um, Milo's uh, rewards offers. And so, we're excited about that as Marvin mentioned, you know, we did our first
never October member only week and so I think that, you know, allows us to, you know, learn a lot and we can now, you know, work within our own calendar to create these, you know,
Inclusive events for our members and you know, do some special things as we go forward.
You know, the event, some of the, some of the increases being tossed around, uh, come to fruition. Um, everybody went through this, uh, a handful of years ago. Um, just curious. You're you're kind of approach
Okay, great, that's that's helpful. Thanks on that my follow up would just be around around tariffs. Any any way? You'd you'd want to frame kind of the exposure, um, and actually even more interested in just, you know, what the Playbook looks this time. Um,
Your level of exposure and and your thoughts on tariffs. Um, if they are to, uh, to increase your thanks so much.
Yeah, so Peter this is Marvin. I I'll start it off by saying
A statement of the obvious and that is, it's very early. Uh, in like everyone we're waiting to see what happens when the Trump Administration actually, you know, takes office in January, having said that, you know, we feel good about the processes, uh, and the systems we put in place, you know.
The first Trump Administration uh, to manage tariffs or other challenges, I'll hand it over to Bill to talk about some of the work we've done to diversify. Our
Sourcing over the past few years and then I'll see a Brandon after that has any additional comments.
Yeah, thanks Marvin. You know, you know we we've built out what I think is probably 1 of the strongest teams in.
And so, as far as from a Playbook perspective, you know, we've got enhanced tools, you know, a, a really strong process and in order to deliver whatever gets thrown at us. Uh, in addition, you know, to Marvin's comment, we've been working over the last few years with our supplier partners and our private brand Partners to diversify.
Our products and we'll continue to do that. And you know, it's a big part of our Playbook is to work closely with our suppliers to to manage whatever you know comes our way. And so we feel really confident
Cam comfortable and confident that we can address, whatever is that gets thrown out of ya and Peter. This is Brandon, just as Marvin said, definitely staying very close to this. We're preparing internally for what may be coming from the new Administration. I'll just mention roughly 40% of our cost of goods. Sold are sourced outside of the US?
And that includes both direct Imports and National Brands through our vendor Partners. Um and as we look at potential impacts certainly would add product costs. But you know timing and
Sales remain uncertain at this point. But just, as Bill said we, uh, believe we're well, well, prepared to respond, uh, when and if it does happen,
Alright, thanks so much guys. See you in a couple weeks.
Yep, thanks Peter.
Our next question is from the line of Steven Forbes with Google home security. Please just see with your questions.
Good morning.
Guys are thinking about planning the business for next year. As as we look at DIY Trends, you know, sort of um you know, this quarter and maybe showing signs of stability.
Marvin maybe uh, a follow-up to Peter's question on DIY and really just wanted to get your your higher level thoughts on on how you guys.
On a, on a multi-year basis or, um, you know, really just wanted to dig into, you know, how you guys are thinking about, predicting or forecasting, the DIY performance of the business.
just giving some of the challenging comps you've had over the past couple years here and if there's a any sort of path or visible path,
To a return to sort of stability and comp.
As it pertains to DIY.
Our reality of the company and the reality is we are a DIY dominant business which means that this is very important to us.
No h Steve. Uh thanks for the question and look, I I stayed all the time with the team that we have to accept.
here was specifically designed around putting more control of the DIY business, you know, under your stewardship versus
our loyalty program that we launched this year,
Being victims to the mackerel or really victims to weather patterns and so we're excited, you know, next month to give some level of detail around the Loyalty program and how we believe that that's going to give us the ability to again, be more on offense. So to speak when you think about the DIY customer
Now the reality is is that the macro environment puts a lot of pressure you know on our DIY business because we kind of skew more to that big ticket.
DIY discretionary. You know think of appliances think of flooring kitchen and bath Etc. And so we are requiring some positive response in the macro environment before we can change these Trends the way that we would like but our business thesis is really simple. We're going to continue to invest
And pro and online and we're incredibly pleased with what we've seen thus far anytime you can deliver High single digit positive cops, you know in any category.
In this environment, you know you have to feel good about it and as we've mentioned, we grew our online sales by 6%. So our our business thesis is if we can continue to grow pro at 2 extra Market, we can continue to grow online and we can get this DIY business. Just growing at Market based on some macro support we're going to
have a really good Financial outcome and so we're going to provide a lot of detail, you know, at the upcoming, Amazon, investor conference, specifically, around our thoughts, on the DIY,
And more importantly the initiatives that we're going to be either executing at a higher level or implementing that we believe is going to give us a lot more ability to drive this customer segment in the future.
I guess first can you can you quantify the the cam contribution in the latter 2 months of the period and then as it specifically pertains to gross margin, you know?
Appreciate the color there, Marvin and and just a quick follow-up for Brandon. Uh 2 2 parts on on the Storm related impacts.
What were the storm related pressures on gross margin uh, during the quarter?
Remarks 100 basis points. Impact the comps uh, in Q3, that was uh, weighted to the back half of the quarter. And again, that's largely related to prep.
Yes Stephen. This is Brandon just uh, you know, as I said in the prepared
Clean up activities, you know we saw strength in categories like generators chainsaws cleaning supplies and lumber. But again uh the majority of that uh you know back half weighted uh as it relates to our margins and pressure from the storms um you know really what we saw in terms of impacting gross margins. It's reflective of product mix.
Again categories like generators op, we had incremental Transportation damaged inventory in multiple locations. And then from an sgna standpoint, uh, just
Number 1 timers there as it relates to Community Support Facility, repairs uh, store impairments, and then just some incremental Opex uh to support our store. So definitely a bit of address.
bag on the incremental sales, uh, mostly isolated to Q3
Thank you.
In line of Simeon, Gutman with Morgan Stanley. Pleased to see you with your questions.
can I just ask a follow up on, maybe the hurricane and related to Q4 it looks like comes will be a little bit better because of hurricane, but
Hey, good morning everyone. It's for getting me on. Um,
Ebit dollars doesn't look like it will be. So, is there anything unique on margin? That's holding back you for and I apologize if you said it earlier and I missed it.
Operating margin standpoint uh in Q4 uh, excluding storm related impacts, as it relates to the full year. Rough roughly in line with the prior year outlook. So
No, I think, uh, Simeon. This is Brandon, we, you know, our adding, some modest storm related benefit, you know, to Q4 in the top line. But from a
As I mentioned, most of that's isolated to Q3, uh, you know, slight impact on Topline for Q4. But, uh, are not expecting any sort of significant drags, from a gross margin or operating margin standpoint Q4.
I think it's high single digits. So can we can we talk about what's driving it? And I guess this may be difficult to answer but when the cycle turns
Okay, and now follow up on the pro. Um, it picked up on at least a single year basis.
Does tip traditionally does DIY or difm accelerate more and I get DIY is a bit depressed relative to, you know, where you'd like it to be. But does that?
you know, curious does
I mean it it necessarily comes up first, or does the pros strength continued given where it is?
it's so Simeon, I'll take the first part of that and I'll let Joe
Just give some specifics on some of the initiatives that that we're seeing that's really driving the business. So if I could take you back, I mean when we started this journey back in 2018. I mean our Pro penetration was less than 20% and and we didn't really have a true strategy to speak of and and our total home strategy.
It's really starting to pay some benefits and that's really driving the outperformance. The things that that I can be very specific on that we're seeing is really resonating with our
Customer and let me remind you. This is the small to medium Pro customer, which has a total adjustable Market of about 250 billion dollars, just that small to medium Pro. And so, our Focus has been on expanding programs, which, you know, bill has seen have done. Just an incredible job of getting
Those brands that literally had walked away or brands that we had to reintroduce to our company.
We've improved service levels in the stores and I'll let Joe speak specifically on that.
We may just aggressive investments in what we call never out key skus to make sure that the pro is always service when they come in to buy those items.
And our loyalty program is is providing some level of stickiness, even though we're going to talk, you know, next month at the investor conference, some some unique tweaks, we're going to make to that and and digital
Online for pro your grew double digits as well, and we're just really pleased with the Fulfillment capabilities.
so, that's the snapshot of kind of how
Be performed as well as we did in Q3 as we think about the recovery. Yeah. Obviously, we don't have a crystal ball, but but the way we look at it is what I said earlier, we're committed to Growing pro at 2, extra Market, because we think that there's market share, we can continue to gain and the small to medium sized Pro. We believe it's up for grabs. And also it's a very fragmented
Marketplace. So we believe that what we've designed can allow us to continue to grow that at 2 extra Market, but when the market recovers, we believe that recovery is going to come in.
The conference around initiatives to drive that. So when the inflection happens, we're going to be in a really good position as a company to take advantage of that inflection and have exactly what the
Is in that DIY big ticket and also for that do it for me. Customer and those are going to be 2 specific topics that we're going to be very purposeful in discussing at the upcoming.
Customers need from technology and capabilities to serve them. Now, let me just transition to Joe and he can talk specifically about some of the service initiatives in the store. That's really helping us drive this program.
Customer. Yeah. Thanks, Marvin Simeon. Uh, as you know we've been focused on the pro uh for the last 6 years and it's all part of the total home strategy. And when I think about, you know, what is driving the uh the pros to, you know, choose lows today. And we talked a lot about the uh, tools we continue to provide to the pro the
Easy in and out the Investments, we're making in our outside sales teams and more specifically. Uh, as you think about our proof of filament centers that we've been focused on across the
Backlogs continue uh to have a lot of strength. They continue to remain healthy, really focused on smaller projects and we feel that our ability to service this Pro.
Country. And so, these allow us to use these facilities in the Dual Purpose. And we're very pleased about the uh uh, survey from uh, Q3 the pros.
Uh, is taking care.
Thank you very much.
Horvers with JP Morgan, please just use your questions.
Our next question is from the line of Christopher.
Thanks guys, and good morning. So I'm going to try to go after the DIY question. A little bit of a different way.
It looks like DIY was maybe down 4. The first half was down about 7. Uh, was this in line with your expectation? Uh, and then thinking forward, if you went back to post the financial crisis, there's a lot of small update projects, like paint some. Appliance replacement made me some decor items.
And, and need. So,
When DIY flips, but how it flips. And do you think that this next cycle, especially considering where rates are, you know, looks like that passed
As you look ahead you know how does the progression of DIY over the year uh influence your view on? Not only like
Period of like, you know, 2010 to 2013.
Yeah, Chris this is this is Brandon. I'll just speak to, you know, high level DIY performance.
This kind of exhausting for the quarter. I would say our trends that we saw largely were, you know, in line with our expectations. As you mentioned, we continue to see strength in some of the smaller project activity. We called out outdoor projects. When we look at the DIY customer, they remain engaged across key events and continue to look for Value. We saw
But, you know, over Labor Day and the Milo's rewards week. But uh, certainly continued underlying pressure in in Big Ticket discretionary so categories, like, Kitchen and Bath.
Uh, you know, flooring and Decor, uh, and really continue to just see that tied to the macro, we look at mortgage rates that continue to remain elevated consumer sentiment.
Uh, and into 25, we are expecting, you know, some level of additional engagement and some acceleration. Uh, as we move from smaller repairs into some of the larger
Housing. Turnover, affordability continue to create pressure uh, here in the near term. So you know, we do see that pressure sort of continuing as we transition from 24,
Projects but really the timing of that and into 25, and when that happens, is still continues to be uncertain. So that's what we're looking for. As as we look for
An inflection point, but as it relates to the near-term, more in line with expectations at this point and Chris this is this is Marvin. So we've we've been very specific over the last few years.
About kitchen and bath showrooms. We have a best-in-class presentation in our stores and we have a best-in-class experience online. When you think about appliances we have
On where we placed our Capital Investments and we spent a lot on it infrastructure on digital and we spent a lot on store Improvement. So if you think about
The besting class appearance in our stores and presentation. We have the best assortment in retail and we have the best experience online. Where we're the only retailer that can ship almost virtually any zip code in the country next day in 2 days. And so, my point is, is we don't know when the inflection is going to occur, but we think it will occur.
In a DIY, do it for me category, and we made Investments to position ourselves to be able to take market share.
And take our unfair share of the demand. That will show up based on this 35 trillion dollars in equity. That's out there in these homes for the Aging, you know?
On average of 41 years old and US history. So, we don't know when the inflection happens, but when it happens, we've been building a Playbook to be prepared and positioned to, to get our fair share and get our unfair share of that market demand, and that's what the intent is for us. And we'll, again, provide more specifics on that, you know, when we update on
Our long-term strategy next month.
Got it more specific. Oh sorry, go ahead, uh, more specifically to your smaller projects. Uh,
You know, things that we've been focused on, uh, our same day, delivery options for paint paint samples, uh, expanding our, uh, gig delivery Network. And then the infrastructure we've been building around our do it for me business. We've been laser focused and things like Central selling uh, to complement. And so again is uh,
we don't know when the inflection point will happen, uh, we're certainly confident in the Investments we're making
Got it. Thank you. And then my, my phone is a, um, a margin question. So
1 was the hurricane actually a net drag to earnings. It it seems like that's what your point is, too. Can you share any detail there and then, uh, I know you change your operating Market.
For the um, uh, for the storm impact. Uh, as you think about the gross margin, you had previously guided gross, margin up and the third and fourth quarter. I think it would have been X. The storm impact. Do you still expect gross margin up in the fourth quarter?
Yeah. Chris um, you know, to the first part of your question.
Uh, from an earnings standpoint, it was slightly accretive. So uh, carried a, a lower margin profile, but still a creative earnings. When we look at the incrementality on on the sales, uh,
Market delivery in the early Innings of pro fulfillment network. Uh and then in terms of offsets they are Merchants supply chain. You know, PPI so initiatives, including expanding private.
And then your second part of your question, on the gross margin profile, and I'm speaking for the year now. We still are roughly expecting flat uh, for the full year. So uh, that's inclusive of the hurricane related pressure that we called out from Q3 uh, ongoing headwinds as it relates to margin, our supply chain Investments.
Brands pricing initiatives. And then we're seeing really nice progress on the cost clawback with our suppliers and we've seen that benefit accelerate as we've moved through the year and turn through inventory. Uh and then other items in gross margin items, like credit and Shrink continue to be roughly flat for the full year. So really great job by the teams uh managing those
Pressures.
Thanks so much.
Thanks Chris.
Please assist you with your questions.
Our next question is from the line of Eric, Bossard with Cleveland research.
Is something that's pressuring the consumer. Uh, I'm I'm curious how you're thinking now and even in 25, what you're doing in response to that.
Thanks uh 2 things. Uh, first of all uh bill you talked about in Marvin, you talked about as well, affordability challenges.
I guess she talked about a couple categories appliances where maybe there was some trade-off but curious, if as you think about promotions and price points, if you're doing
Anything in response to that to better position the business for traffic with consumers. Or if where you are now is where you want to stay.
Different ways that I can certainly come through price. Uh, can come through new and Innovative products. And we've seen it really come all 3 ways. And so some of the stuff that I referenced in my preparation,
Yeah. Eric, you know, great question. Um, you know, we've continued to stay focused really laser focused on value and as we've said in, you know, past meetings, you know, value can come in.
Remarks, you know, being able to, you know, Drive some of these smaller projects was really value driven based on, you know, getting the consumer, you know, focused on different, you know, projects and products across the store as we head into the holiday season. You know, we're obviously excited about, you know, some of the new stuff that we're bringing we've got, you know, great values across the board for
You know, Klein DeWalt Craftsman, Cobalt. We've got great Innovation, coming from appliances as well as new products that were introducing as I called out in my
Great Value product. When the consumer looks to combine both the washer and the dryer in 1. And and now it's a category of products where it had only been 1 item in the past.
Remarks from LG in these, you know, laundry, you know, this new innovation in laundry with the all-in-1, uh, is really a whole new segment and that's not a low price point. But it's a
And then, as we, you know, said about Milo's rewards that gives us the opportunity, to differentiate to our members and offer them, you know, you know, best customer offers as well.
As you know, exposure to new stuff ahead of time. So yes to your question, you know, we want to continue to do it through a number of different Avenues and we're going to be laser focused on it as we go forward. Just as we have been
and then, uh, secondly, as you as you think about
challenges, when you think of,
Again related or considering the affordability?
But we do know what's going to happen with tariffs that there's going to be some incremental cost and and certainly on your direct sourced business. Um and then you think about managing expenses, I'm just curious
Uh is you commented sustained pressure on DIY and especially DIY discretionary is you think about um we don't know what's going to happen with terrorists.
how you think about managing expenses as it relates to margin in an environment with
On the horizon, in the area of managing expenses to manage margin.
The sluggish Demand with with probably some incremental costs coming through, you've done a good job in the past and taking cost out uh to manage margins through this environment. I don't know in terms of what's going on now. Is there anything incremental or any incremental opportunity?
Relative to managing expenses. I would
So, Eric is Marvin, I'll take the first part. Then I'll hand it over to Brandon, I think.
look at the reputation of this team and how well we have focus on, not only
And we're going to be laser focused on taking our costs and managing expenses so we can get more of that flow through to the bottom line. I'll let Brandon add any additional. Yeah. Yeah. Marvin Aur.
The fundamental management of the business and being really, really prudent on taking out costs and expenses, but also on our PPI initiatives and how that's permeated to every functional area of the company. And so that's going to maintain irrespective of the macro environment, irrespective of our Topline Revenue.
Um, yeah, Eric just to add on what Marvin said, sgna, excluding, you know the hurricane benefits for this year largely in line, uh, with our expectations. We're super pleased as to how we've been managing the business over the last 3 years. Amidst, you know, significant Topline pressures. We've continued to make investments in our strategic initiatives.
Continue to manage our margins. We have great alignment across the organization to maintain discipline expense management effective cost controls. And then, as Marvin mentioned our PPI initiative.
Of PPI initiatives. We're going to talk through in December as we look ahead and uh, continue to be pleased with the progress that we're making their on Sue. And I
Thanks.
Where those have come in to play continue to flex the muscles, to manage the p&l. Uh, really outrun our expectations for this year, so we're going to continue with that. Uh, we have next in
Thank you. Our next question is from the line of Karen short, with melly's research, please receive your questions.
Hey, thanks very much. Um, just a few questions. Um, the range in 4 q is very wide, when I look at operating profit growth and margin,
Expansion specifically. So maybe can you talk to that a little bit and then
I, I don't know where your philosophy is. On breaking out, storms, just going forward. But can you give an impact of the storms specifically on October?
Uh, you know, first question on the Range and really is it relates to operating margin and EPS, just a function of the 50 basis, point range, uh, that we have for top.
um, so Karen, I'll I'll talk about
On again, that assumes no improvement. Underlying, you know, macro pressures. We still expect Big Ticket DIY pressure, uh, kind of across both ends of
The range and then really, when we look at Q4, weather can be volatile. Uh the time and kind of intensity of storms can can impact demand and we also have you know, 1 less
Shopping week, uh, between Thanksgiving and Christmas which, you know, this year could create some volatility, uh, and that could impact how, you know, kind of holiday demand plays out. So we try to be prudent uh in setting those expectations and allowed for a bit of that uncertainty, as it relates to the Top Line range and that's reflected in the operating margin, uh, in EPs. And then I think this
Second part of your uh question. You know, we're comfortable giving the guidance on the Storm related impact for the full quarter, the 100 basis points. And we're we're not going to get into the details of break.
That out, uh, about a month.
Okay and then just my follow-up as it relates to your analyst day. Uh are you still thinking about a format that gives 3 scenarios or is that maybe too complicated?
An update on financial expectations, uh, 1 for the Home Improvement Market. Uh, and then as you mentioned, we're also looking forward to sharing some initial scenario planning views.
Yeah, Karen. We're uh, we're excited uh, for analyst day. We will provide uh
Uh, for 2025 and Beyond. So we are preparing to have that discussion here in a few weeks.
Okay, thanks.
Thank you, Karen.
Seth Sigman with Barclays, please receive your questions.
That's on the vendor clawbacks, just the progress with that. Um, it'd be great if we could quantify the benefit this quarter. And if you could just remind us, is this a 1?
Hey, good morning everyone. Uh, just a couple of margin follow-up questions. So if you could just update
Sometimes step up like kind of building up through this year. And then we should expect, you know, more gradual gains from here as part of some of the processes you put in place or any other way to think about that. Thank you.
Cost management is an ongoing process that the teams are always involved in. And, you know, we're obviously pleased with the progress that we've made this year to help reduce costs and, you know,
So Seth, this is Bill. I'll take the first part and I'll let Brandon have the second part of this but I think it's important to remind everybody that you know,
Claw. Some of those back. And as we've talked about before you know really appreciate the support of our supplier Partners in order to do that and then we're looking to, you know, invest you know those
You know, some of those dollars to remain competitive in the market, as it relates to price, using it to drive traffic and sales on, you know, seasonally relevant offers that make sense.
As well as investing in marketing, and in store merchandising efforts so that we can put that money to work, um, but yeah. Ongoing ongoing efforts and will remain an ongoing.
Effort, as we go forward.
At gross margin, more significantly, as we move through, uh, the back half of the year. But also, as, as Bill mentioned, we're continuing to invest, uh, in traffic driving initiatives.
And Seth just as it as it relates to quantification of that, I would just say meeting our expectations as we outlined it at the beginning of the year. And it was, we did know, it was back half loaded. So as we've made progress with our suppliers taking cost out, uh, we expected that to flow through inventory and, and positively impact
Could be through, uh, you know, better offers reduced price investments in advertising. So it's going to kind of be sprinkled across different areas of the PO at different times of the year, but just in terms of our overall goals that we set out at the beginning of the year, uh, really nice progress against that in Seth. This is Marvin. I just add just 1 additional comment, you know, when when I
I arrived here. You know, cost discussions with suppliers, were emotional conversations with no internal data. Uh, and and we've now built out a team
Bill Stein and Brandon's team, the ability to sit down and have very data-driven conversations with suppliers relative to any cost increase or cost.
About systems processes that are data driven. Would component calls with raw material costs and with a very detailed analysis that that gives
have before and and that's 1 of the main reasons why is we get into this, you know, unpredictability of a tariff environment, you know we're going to be very positioned to
Clawbacks and to Bill's point, this will be ongoing, it will be ongoing based on a much more robust process that we have in place that we didn't have.
Manage that as well as any other retailer in the world.
Put out an algorithm that points to operating margin expansion based on certain Revenue targets as you think about next year you're going to be lapping lower gross margin in the first.
Thank you for that. I guess, even with the idea that you can continue to reinvest back in the business, you have
Order, you'll be lapping, some of these incremental hurricane costs, although I guess net net, you've had a positive impact to ebit, but I'm just curious has your view changed.
All about the operating leverage in the model, the type of comp you need to um to to get that break even or operating leverage. Thank you.
and then I would say, you know, you highlighted, kind of our flow through rule of thumb and I would just say it, it's just that right directional, framework on how we expect to manage, uh, you know, through different
Yeah, this is brand.
Sales environments. This team, as we've mentioned, proven our ability to manage profitability. Well, through the downturn that we've been experiencing continued to deliver on PPI commitments um and as it relates to kind of reframing that and how we're thinking about specifically 2025, uh, scenarios and even Beyond, we're going to hold off. Uh, really on that.
Discussion. I look forward to sharing details, uh, plans next month at our AIC. On that.
And Rob with that, we have time for 1 more question.
At our final question comes from the line of Chuck grow with Gordon haskett.
Efforts to continue to be the the gift that keeps on giving can can you guys size up the opportunity to set as we look ahead? You know are there significant significant buckets that the source from and then my thought
Hey, thanks. Um, good morning, just to follow up on on Eric's. Question earlier. Uh, your your PPI
Up is you you called up 5 of your uh, 15 regions? Outperforming are there any commonalities across those areas 1 of your competitors called out the West, as being uh pretty strong region?
Over the past few quarters. Just curious if you're seeing that too, thank you.
At the December Allyson investor meeting. Uh, but at a high level, we think we're in the early Innings. Uh, this is
So relative to PPI, we're going to give a really robust update. Uh,
We keep on working the gift so it can continue to keep on giving and a lot of its technology driven and a lot of it is process driven. Uh, and we're really excited about the
a gift that keeps on giving, because
Possibilities. And you will hear from almost every presenter, you know, at our upcoming conference, in December, on ways they are identifying
PPI value within their functional areas and relative to Regional breakouts. I would say relatively consistent with the exception of hurricane impact.
back to the areas if you remove that our overall performance was consistent,
Relatively from coast to coast.
Great. Thank you.
Thank you all for joining us today. We look forward to speaking with you at our analysts and investor conference on December 11th.
Thank you.
Includes the lowest third quarter 2024 earnings call. You may now disconnect