Lowe's Companies, Inc.

Good morning, everyone, and welcome to Lowe's Company's second 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 will be used as a reference document following the call. During the call, management will be using certain non-GAAP financial measures. The supplemental reference materials 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 Bolt, Executive Vice President, Merchandising, Mr. Joe McFarland, Executive Vice President, Stores, and Mr. Dave Denton, Chief Financial Officer. I would now turn the program over to Mr. Ellison for opening remarks. Please go ahead, sir.

Thank you, Regina. Good morning. Toll company comp sales grew 2.3% in the second quarter. Our U.S. home improvement comps were positive 3.2%, exceeding expectations despite a lumber deflation and unfavorable weather. In fact, we saw broad-based growth across all 15 geographic regions, generating positive comps. Three of our top four performing regions were in the western division. In addition to the western regions, we also had great performance across the following regions that outperformed the total company comps, Atlanta, Boston, Charlotte, and Tampa. Weather was particularly challenging early in the quarter, exerting approximately 195 basis points a top-line pressure in the month of May. And as the weather improved, we saw broad-based sequential improvement in U.S. comps of a positive 0.7% in May, positive 4.2% in June, and positive 4.7% in July. Commodity deflation exerted approximately 110 basis points of pressure to comp sales in the quarter. However, unit growth in impacted departments such as lumber, and building materials remained strong. For the quarter, comparable transactions grew at a positive 0.3%, and average ticket grew at a positive 2%. We executed very well during key holiday events and converted strong foot traffic into sales. Once again, pro comp significantly outpaced DIY during the quarter, and our strong pro performance was particularly driven by investments in job-like quantities coupled with our improved service models. As Joe will detail, we continue to make progress to better serve our pros, and we receive very favorable feedback on our improved in-store experience with our customer service scores increasing 900 basis points. Overall performance in the quarter demonstrated continued momentum executing our retail fundamentals framework. And with the niches we put in place, we continue to make steady, deliberate progress to better serve customers, position our business for long-term success, and improve our results in categories that have historically underperformed. Bill will discuss some of those categories in a moment. On Lowes.com, we posted comp growth of approximately 4% in the second quarter. There are a couple of key items that contributed to this underperformance. First, we intentionally slowed the number of new SKUs that we added in the quarter while we addressed systems and process issues that negatively impacted our storage productivity. These systems and process issues were resolved in early Q3. Second, we took steps to improve the quality of our online business by eliminating certain programs which were unsustainable from a profit perspective. In taking these steps, we knew that we would stunt our short-term growth. However, we took the necessary actions to position ourselves to grow our online business for long-term sustainable success. In addition to solving these process and systems issues, we're taking aggressive steps to improve the technology foundation of Lowes.com. We're re-platforming the entire site to Google Cloud. At the beginning of this year, our .com site was on a decade-old platform. So we expect to have the entire site on the cloud in the first quarter, which will improve our agility as we redesign the customer experience from search and navigation to checkout. Omnichannel is a tremendous growth opportunity for Lowes, and we have a very detailed transformation plan to modernize our platform and dramatically grow Lowes.com sales in the future. Our goal is simple. We want to serve customers any way they desire to shop, and we look forward to updating you on our progress on future calls. In fact, our commitment to having a world-class technology team is reflected in our announcement to open a new global technology center for 2,000 additional technology professionals in Charlotte. Construction of this new facility began this month with plans to open the center in 2021. The Global Technology Center underscores our commitment to recruiting world-class talent and becoming a best-in-class omnichannel retailer. But in the meantime, we're utilizing a temporary space in downtown Charlotte for the technology professionals that will ultimately be based in our new Global Technology Center. In Canada, we posted negative comp sales for the quarter. Our negative comps was driven in large part by our ongoing RONA integration. After a strategic reassessment of the Canadian business, we decided to make adjustments to the original RONA integration strategy. Although we remain confident in long-term potential of this business, this shift in strategy has temporarily slowed growth. But once again, we're sacrificing short-term growth to position ourselves for long-term success. And I look forward to providing you with additional updates on future calls. Diluted earnings per share were $2.14 for the quarter and adjusted diluted earnings per share was $2.15, supported by solid top-line growth and expense leverage. Now I want to take a moment to provide an update on the progress to deliver gross margin improvement in 2019. The improvement since the first quarter reflects immediate benefits from the actions that we've taken. In fact, we realized compounding benefits as we moved through the second quarter with marked improvement in gross margin for the second half of the quarter as compared to the first half. Our second quarter performance coupled with actions still to come give me confidence that we're on the right path to sequential gross margin improvement in the third and fourth quarters. Although we're pleased with the progress we made in Q2 to recover gross margin dollars, we have additional work to do to modernize our systems and our pricing tools. Therefore, over the next 12 months, we'll be focused on two major initiatives to deliver this modernization. Our first initiative is focused on the deployment of our new price management system, which will allow us to better systemically analyze, prioritize, and implement retail pricing actions. This new system will create a single repository of pricing to provide better visibility for the merchants to understand the impact of all pricing decisions. This new price management system will be in place by the end of the year and will get us to comparative parity with most retailers. Our second initiative is focused on fully integrating our acquisition of the Boomerang Retail Analytics Platform. Integrating this platform will allow us to incorporate Boomerang's technology into our core retail business, bolster strategic data-driven pricing, and also allow us to make better merchandising decisions across the business from an assortment perspective. This retail analyst platform will be fully integrated with our price management system during the first half of 2020, and will provide us with a best-in-class pricing analytics system. We're confident in our strategic initiatives as we enter the back half of the year, and we expect to continue our strong top-line performance while delivering margin improvement. And we'll also begin to manage down our inventory to more sustainable levels. So now allow me to take a moment to discuss inventory in more detail. This year we invested in inventory to support efforts such as earlier seasonal load-ins, crafting resets, increased presentation minimums, and job-like fondness for pros. This strategic investment in inventory helped us to deliver improved sales performance in Q1 and in Q2. And although our inventory has increased year-over-year, we have very minimal seasonal inventory, which limits our risk of unplanned markdowns. In the back half of the year, we will refine our in-stock expectations and begin to reduce inventory in certain categories. One key initiative tied to our supply chain transformation strategy is the rollout of predictable delivery to all stores. This more predictable product flow will enable us to lower safety stock across many SKUs. In addition, we'll execute a list of strategic initiatives in the back half of the year that will allow us to strategically manage our inventory while protecting our in-stock position and our margins. Though we made great strides and we're pleased with our second quarter results, we're not taking victory laps. We have a lot of work to do, and we're fully committed to driving top line growth, improving our growth margin while intensifying our commitment to expense management. We're very excited by the upside potential of our company, and we believe we're on the right path to generate long-term, profitable growth. And lastly, I want to take a moment to thank our associates for their hard work, dedication, and commitment to each other, and commitment to serving customers. And with that, I turn the call over to Bill.

Thanks, Marvin, and good morning, everyone. We were pleased with our second quarter performance as we capitalized on the continued spring demand and strong event execution. We posted a U.S. comparable sales growth of 3.2%, exceeding our expectation. On a two-year stack, U.S. comp sales accelerated from 4.7% in Q1 to 8.5% in Q2, During the quarter, we leveraged our successful Memorial Day, Father's Day, and July 4th events, taking advantage of the seasonal project demand. And we also drove traffic with our compelling values, relevant assortments, and our continued shift into digital marketing channels. We were well prepared for our holiday events with excellent coordination and alignment between store operations, supply chain, and our marketing teams. Our success in driving spring sales was supported by the improved service model in our stores and better in-stock execution. Joe will share more of that in a moment on how well our associates delivered in the aisle. Our continued focus on retail fundamentals drove strong performance in areas of technical strength and, more importantly, helped deliver improved performance in categories which have historically underperformed. In fact, we had seven departments perform above the company average in the quarter. For example, we began the implementation of our retail fundamentals framework in the paint department two quarters ago. Prior to that implementation, paint had delivered comps below the company average for 10 consecutive quarters. This quarter, because of an improved service model, a better in-stock position along with compelling offers, paint led the merchandising department growth with the strength coming from both interior and exterior paint products. all of that being done despite some weather pressure early in the quarter. This marks the first time in 10 years that paint has led the merchandising department comp growth. We will continue to invest in this important area given that paint is a traffic driving category and that painting is the number one DIY project. We are working closely with our suppliers to roll out an improved pro-paint offering, and we see a significant opportunity to drive an increased pro-penetration in paint. All of this by better serving the repair remodelers who need paint to complete a larger project, such as a kitchen or bathroom remodel. Prior to our implementation of retail fundamentals, our decor department had performed below the company average for 12 of the last 13 quarters. In Q2, we drove mid-single-digit comps in decor with double-digit comps coming in blinds and shades. The improved performance was largely driven by job lot quantity investments and and our improved product offerings in both our private and national brands. Millwork is another merchandising department that has historically underperformed. In 11 of the past 12 quarters, Millwork had posted comps below the company average. This quarter, with a heightened focus on the pro, an improved in-stock position, a refreshed department, an investment in job lot quantities and some new product introductions, Millwork delivered comps above the company average. For the quarter, we also continued to achieve strong comps in areas of historical strength for Lowe's. In tools, we delivered strong mid-single-digit comps and continued to see market share gains as a result of our Craftsman resets. The strength in Craftsman came from categories such as power tools, tool storage, and mechanics tools. We're excited to now have completed the Craftsman resets this quarter, and we're proud to be the exclusive destination in the Home Center channel for this iconic brand. During the quarter, we also leveraged key pro brands, such as DeWalt, the number one power tool brand in the industry, along with the introductions of other new and innovative products from Bosch, Spyder, and Metabo HPT, all to help drive strong comps and tools. Within our appliance department, we drove solid mid-single-digit comps, building on our leading market share position with our top brands and breadth of assortment. In hardware, We posted solid mid-single-digit comps with strength coming from our framing hardware and our fastening categories. The investment we made in job lot quantities and new product introductions helped deliver the results in these two categories to support the pro-demand in hardware. And lastly, we again delivered above-average comps and saw market share gains in seasonal and outdoor living. led by double-digit comps and pressure washers, as well as riding lawnmowers, where we continue to leverage the top three brands in riding equipment with John Deere, Husqvarna, and Craftsman. We continue to be pleased with the results that we are seeing from our new merchandising service teams, or MST. These teams are supported by our vendors, and they are responsible for day-to-day bay maintenance, the resets in our stores, setting and maintaining our end caps, and executing off-shelf displays. The MST teams are a critical component to improving our merchandising reset execution at the store level as they continue to take tasking activities off the shoulders of our selling associates so that they can be freed up to dedicate more time to serving our customers. The early results of our MST program are positive, and these teams have shown a reduction in out-of-stocks, an improved sales productivity, and an increase in base service per hour. Now, as we look ahead to Q3, we remain focused on our retail fundamentals and driving profitable sales with our upcoming Labor Day and Fall Harvest events, leveraging additional target events throughout the quarter that will take advantage of the fall micro-seasons, continuing to drive the strength of the traffic power of craftsmen, building on the responsibilities of our field merchandising team who will be instrumental in driving the localization in our stores along with executing our seasonal transitions, continuing the focus on the pro categories as we continue to capitalize on our investments and our focus on this important customer segment. And lastly, we look forward to leveraging our new NFL partnership, including introducing new exclusive products and events that will help drive a strong connection with both the DIY and our pro customer. As I've shared on previous calls, we're in the process of implementing our category management strategy. This cohesive strategy is going to be critical to driving merchandising productivity by ensuring that we are allocating our resources to the areas of greatest opportunity. The merchandising team is committed to aggressively driving top-line sales while growing gross margin dollars. Thank you, and I would like to turn the call over to Joe.