Lowe's Companies, Inc.

Good morning, everyone, and welcome to Lowe's Company's first quarter 2019 earnings conference call. This call is being recorded. Please note, if you pressed star 1 to enter the question queue prior to the start of today's call, your signal did not register. You will need to press star 1 again to enter the queue. Also, supplemental reference slides are available on Lowe's Investor Relations website within the investor packet. While management will not be speaking directly to the slides, These slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non-GAAP financial measures. The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr. Marvin Ellison, President and Chief Executive Officer, Mr. Bill Boltz, Executive Vice President, Merchandising, Mr. Joe McFarland, Executive Vice President, Stores, and Mr. Dave Denton, Chief Financial Officer. I will now turn the program over to Mr. Ellison for opening remarks. Please go ahead, sir.

Thank you, Regina. Good morning, everyone. Our first quarter comp performance is a clear indication that our focus on retail fundamentals is gaining traction. Despite solid top-line results, our gross margin performance in Q1 highlights that we still have work to do as we continue our transformation. We've taken the necessary short and long-term actions to improve our gross margins, which I'll discuss in more detail in a moment. But first, let me highlight what drove our sales performance in Q1. Specifically, our commitment to improving in-stock and customer service, coupled with our focus on winning a pro with Keystar, improved sales performance. For Q1, we delivered total company comps of 3.5%, and our U.S. home improvement comps grew 4.2% per quarter. Weather was challenging early in the quarter, given that we experienced the second wettest February on record. In fact, unfavorable weather exerted 315 basis points of top-line pressure in February. As weather improved, we saw a broad-based sequential improvement with comps of a negative 1.4% in February, positive 3.5% in March, and positive 7.2% in April. We drove increased traffic to stores and to Lowes.com and generated a more balanced top line growth with increasing transactions by 2.2% and increasing average ticket by 1.3%. We delivered positive comps in 10 of 13 merchandising departments, including double digit comps in seasonal and outdoor living and high single digit comps in lawn and garden. We drove positive comps in all geographic regions with the exception of Tampa and Houston, which faced tough prior year comparisons from hurricanes Irma and Harvey. For Q1, some of our best performing geographic regions were Atlanta, Charlotte, Los Angeles, Nashville, New York Metro, Pittsburgh, Philadelphia, and Richmond. Our pro comps significantly outperformed DIY, and we see early evidence that our strategic initiatives with this very important customer are gaining traction. Joe McFarland will add additional color to our pro performers later in the call. For Lowes.com, we posted comp growth of 16% for the quarter. Although we're still not where we'd like to be with our online business, I'm pleased with the progress our new leaders are making to improve the infrastructure of this very important channel. In Canada, we posted negative comps for the quarter as a weaker Canadian housing market exerted pressure on the business. Adjusted diluted earnings per share were $1.22 for the quarter, and a convergence of factors led to gross margin pressure in the quarter. Some of these challenges are a reflection of the tools and process limitations I've discussed on previous calls. But what's important is that we have our arms around the issues and have plans to improve gross margin over the course of the year. But allow me to take a moment to outline the factors that led to our Q1 gross margin shortfall. First, we recognized inventory first in, first out. So cost increases that were agreed to by merchants in 2018 are now flowing through the P&L as we turn inventory. The majority of these cost increases that were accepted in 2018 without any corresponding offset to gross margin pressure. Second, as we are preparing and we're preparing for the business season of the year, we undertook unprecedented levels of change in our merchandising organization. Over the past six months, we've replaced two of our three merchandising senior vice presidents, and we replaced 11 of our 13 merchandising vice presidents. This level of change was necessary to ensure that we have the best talent in position to plot our strategy for the second half of the year, spring of 2020, and to fuel our future growth. However, as we transitioned from legacy merchants to new merchants, there was much more disruption in Q1 than we anticipated. and this disruption was primarily driven by a lack of visibility in our pricing ecosystem. Our new merchants simply did not have a clear line of sight to the cost increases that were accepted by prior merchants as we transitioned. Based on the really limited systems visibility, we could not quickly analyze and offset these cost increases with appropriate pricing action. Our challenges with pricing tools and processes aren't new to Lowe's. However, we did not anticipate the impact of fully communicated cost increases, significant organizational changes with 11 new merchandising VPs, and legacy ineffective pricing tools and processes. Now let me take a moment and outline the decisive actions we're taking to improve our gross margin for the balance of 2019. First, our CIO, Samantha, is leading an effort to implement changes to our pricing and point of sale systems. With these changes, we will streamline who can affect cost and pricing changes and sequence those pricing actions to prioritize those that have the greatest impact to gross margin. We'll also have better visibility for the merchants to understand the impact of all pricing actions without having to view multiple systems and numerous reports. We're establishing a more efficient process to systemically analyze, prioritize, and implement pricing actions to offset cost pressure. Second, our recent acquisition of Boomerang's retail analytics platform, a leading pricing analytics practice, is a significant step forward towards modernizing our approach to pricing by digitizing our business processes and increasing our agility. This acquisition reflects our commitment to modernizing our systems and reinforces our philosophy to buy versus build capabilities if that approach is more advantageous for the company. And finally, as our merchant leaders accrue more time in their roles, they have better view of their categories and assortment plans, and stability in any organization is important, and now we have that stability for the balance of 2019 in our merchandising organization. With enhanced visibility, the merchants are better able to offset cost pressure with adjusting prices within their portfolio products. In addition, we are building improved pricing analytics to help offset future cost pressure and protect gross margin to impact the top line sales. It's important to mention that we believe our pricing issues hurt top line sales as well as gross margin in Q1. By not taking pricing action on our intellect excuse to offset cost increases, we simply decremented top and bottom line at point of sale, which we believe negatively impacted sales. As I've discussed on previous calls, this is a multi-year transformation and we're in phase one of a three-phase process. However, our first quarter results clearly reflect two things. First, our 4.2% comp in the U.S. clearly illustrates that customers are responding to our changes and our approach to retail fundamentals is working. From my experience, there are three things you hope to see during the early stages of a transformation. You want to see positive customer transactions, You want to grow average ticket while reducing expense and improving efficiencies to leverage SG&A. We saw all three in Q1, which gives us confidence that we're taking the right strategic steps. Our first quote also reflects that as we encounter systems and process limitations during this transformation, we now have the experience and the internal expertise to address the issues and minimize the impact on future periods. The issues that impacted the lowest gross margin in Q1 have been identified and are being addressed with process changes and system adjustments. Consequently, we expect to deliver improved gross margin performance over the balance of the year. We've made a lot of progress, but our transformation is clearly ongoing. Our first quarter comp and our improved sales floor productivity, driven in large part by the pro customer, gives us confidence that our strategy is working. and we're committed to making the investments and taking the actions necessary to address legacy issues and position loads for sustainable long-term sales and profit growth. My most enjoyable time as CEO is a weekly business I spend in the stores. Our associates have demonstrated to me their passion for our customer and for this great company. So before I close, I'd like to thank them for their hard work and their commitment to serving the customers and serving their communities. And with that, I turn the call over to Bill.

Thanks, Marvin, and good morning, everyone. As Marvin shared with you, we capitalized on spring demand in the first quarter, posting U.S. comparable sales growth of 4.2%. We transitioned into the spring season more efficiently. We began setting our stores from south to north three weeks earlier than last year, and we adjusted our store inventory load-in to 60% versus 35% last year. These actions ensured that we were ready for the spring season and positioned us to have adequate seasonal inventory on hand to capture that spring demand. Our teams also significantly improved sales floor productivity through better use of end caps and a redefined strategy for off-shelf side stacks. We leveraged our spring Black Friday event to take advantage of seasonal project demand with strong messaging and attractive offers, more personalized marketing, and a continued shift into digital and localized marketing channels. And, as Joe will share with you in a moment, our associates delivered very well in the aisles and executed a very successful event. Our success in driving strong spring sales was supported by the improved service model in our stores and a better in-stock execution. For the quarter, we achieved double-digit comps in seasonal and outdoor living, led by double-digit comps in outdoor power equipment, where we continue to leverage the top three brands in riding equipment with John Deere, Husqvarna, and Craftsman. We also drove double-digit comps in grills through our offers from Weber and Charbro, the top two brands in outdoor grilling. In addition to seasonal and outdoor living, we also delivered high single-digit comps in lawn and garden with the strength in our lawn care and landscape products through the power of the Scotts brand. And in live goods with our nationwide Bonnie Plant offers, along with the extension of our Monrovia plant program, a home center exclusive. In the first quarter, we also saw strength in our tools and our appliance businesses. We posted above-average comps in tools as the Craftsman Reset continues to drive strength in categories like tool storage and mechanics tools. We're excited to be able to complete the Craftsman Tools Reset by the end of the second quarter, and we look forward to introducing the brand into additional categories in the second half of the year. The Craftsman brand, along with our proprietary Cobalt brand, continues to drive traffic, and they both create a loyalty-building opportunity for us. We are proud to be able to offer both brands and to be the exclusive destination in the home center channel for the Craftsman brand. We also drove above-average comps and appliances, as we continued to leverage our leading market share position through our top brands, our breadth of assortment, and our strong events. Though paint performed below the company average, the category still delivered positive comps, even with the significant weather pressure early in the quarter. Our intense focus on our retail fundamentals, while leveraging our exclusive partnership with Sherwin-Williams, has allowed us to continue to drive progress in this category. And as Marvin indicated, we are in the early stages of implementing change, which did create some disruption in Q1. However, I'm very pleased with the talent and the deep retail experience we've been able to recruit and to infuse throughout our merchandising organization. Our new leaders are now firmly established in their roles, and we expect this leadership stability to drive sustainable improvement for the balance of 2019 and beyond. We are encouraged by the early results that we are seeing from our new merchandising service team. These teams are supported by our vendors, and they are responsible for the day-to-day bay maintenance and resets in our stores, along with setting and maintaining end caps and help executing off-shelf displays. The MST teams are a critical component to improving our merchandising reset execution at store level. as they take these important and time-consuming tasks off the shoulders of our Red Vest associates so that they can be freed up to serve our customers. The early results of our MST program show reductions in out-of-stocks, an improved sales productivity, and an increase in base service per hour. The MST has also provided critical support during our successful Spring Black Friday event, as well as for our Craftsman outdoor power equipment and tools reset. As Marvin stated, we were very pleased with our pro business in Q1, and we are focused on leveraging our improved in-stock position along with our key brands to drive additional sales with this very important customer. As an example, in the first quarter, we announced that Little Giant Ladder Systems, a leader in safety and innovation, has chosen Lowe's as their exclusive home center partner. Our teams continue to work to add more key pro brands to our assortments, as well as leveraging our existing partnerships with brands such as DeWalt, the number one power tool brand in the industry, and the new and innovative products we have from Bosch and Metabo HPT that are all focused on saving the pro both time and money. In the first quarter, we also took steps to driving merchandising productivity and localization through the investment and rollout of our field merchandising teams. The teams are now in place, and we expect to see the continued benefits from their work with our merchants and our stores in the second half of 2019. As we look ahead to Q2, we remain focused on carrying our momentum forward. We expect to drive sales and traffic with our compelling Memorial Day, Father's Day, and July 4th events. The power of Craftsman as we complete the rollout of our Craftsman Tool Program is and our pro categories as we continue to capitalize on our job lot quantity investments and our focus on this very important customer segment. We also remain focused on driving improved growth on Lowes.com as we work to increase our online assortments, continue to improve the shopping experience, and work to shift slower-moving SKUs out of our stores and onto our website to improve inventory productivity. We're excited about the opportunities that are ahead of us. and we're working very hard to position Lowe's for the future and to capitalize on a strong demand in a healthy sector. Thank you, and I'll now turn the call over to Jim. Thanks, Bill, and good morning, everyone.