Lowe's Companies, Inc.

Good morning, everyone, and welcome to Lowe's Company's third quarter 2019 earnings conference call. This call is being recorded. Please note, if you press 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 materials 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 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 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.

Good morning, everyone. For the quarter, total company comp sales grew 2.2%. Our U.S. home improvement cost was 3% despite low single-digit online growth and hard-to-expect lumber deflation. We saw consistent growth across the business with all three U.S. divisions and all 15 U.S. geographic regions generating positive comps for the second consecutive quarter. These results reflect our continued progress on our transformation plan. Four of our top five performing geographic regions were in the western division, driven by strength in pro, appliances, outdoor project category, improved in-stocks, and customer service. In addition to the west, geographic regions that outperformed the total company comp in the quarter were Nashville, Boston, Tampa, and Houston. Commodity deflation exerted approximately 95 basis points of pressure on comp sales in the quarter. However, unit growth in impacted categories remains strong. Let me now take a moment and discuss what drove our success in Q3. Let's start with pro. Our focus on the pro continues to be a catalyst for our U.S. sales growth. And during the quarter, we continue to receive very positive customer feedback from pros experiencing firsthand what is new and different at Lowe's. And we're pleased with the pros' willingness to grow their business with us. Our pro comp significantly outpaced DIY in the third quarter, and the pro customers responded very positively to our investments in job block quantities, department supervisors, and our improved in-store experience. The result of these investments in pro not only delivered positive sales growth, they are also reflected in a 700 basis point improvement in our pro customer service scores in the third quarter. Despite this early success, we're focused on... on the work ahead to better serve this very important customer. And later in the call, Joe will detail some of the strategic investments we have planned for the pro customer in Q4 and in 2020. In addition to the pro, our success focusing on retail fundamentals is also evident as we again drove strong sales performance in merchandising departments that have historically underperformed. In total, eight merchandising departments delivered positive comp performance above the company average. and Bill will add additional color on our merchandising performance shortly. Turning to Canada, in the third quarter, we posted negative comp sales below our expectations, which exerted significant pressure on our total company comp. In the third quarter, we initiated a more detailed strategic review of our Canadian business, inclusive of leadership changes, with a focus on improving execution and profitability. As such, we plan to take the following steps. beginning in Q4 to improve our long-term results in Canada. We're closing 34 underperforming stores and expect to substantially complete that process in Q4. Given that the Canadian business is operating five banners with multiple legacy systems, we're undertaking a banner simplification process to reduce operational complexity and drive back-office synergies. As part of simplifying operations, we plan to rationalize skews across the simplified banners to present a more coordinated assortment to our customers. Implementing a simplified banner strategy will allow us to gain efficiencies in marketing, supply chain, and merchandising. We're also reorganizing our corporate support structure across Canada to more efficiently serve our stores. And we plan to migrate Canada to the US IT platform to eliminate inefficiencies and unnecessary technology duplication. We're committed to the Canadian market and we're taking decisive actions to improve Canadian operations and provide a better customer experience while improving profitability through margin improvements and SG&A reduction. Dave will take you through the anticipated financial impacts of these actions in a moment. Despite pressure from lower than expected comparable sales growth in Canada, we delivered adjusted diluted earnings per share of $1.41 for the quarter. which exceeded our expectations, supported by improved merchandise category management, enhanced process execution, and expense leverage. Later in the call, Dave will outline the steps we took in the third quarter to continue to improve our profitability. During the third quarter, Lowell's.com delivered comp growth of approximately 3%. And as we noted last quarter, our e-commerce business is under repair, and we are addressing legacy issues with the platform. Our first step in improving our online business is creating stability. To that end, we're working diligently to improve the foundation of Lowes.com by replatforming the entire site to Google Cloud from a decade-old platform. This work is critical to improve the stability of our ecosystem and increase our agility. We expect to have the entire Lowes.com site on the cloud in the first half of 2020. With a modernized, stable architecture in place, we have the ability to provide our customers with basic online functionality and address legacy e-commerce capability gaps. Let me give you four examples of things we're fixing while we're temporarily slowing our dot-com growth. First, we're taking steps to separate freight from product costs to improve our price perception versus our competition. Second, we are improving our systems and processes to allow us to quickly add SKUs and drop ship vendors to more rapidly expand our online assortment. These enhancements will reduce onboarding time from months to days. Third, we're building capabilities to ship certain SKUs requiring special handling. which will allow us to sell basic home improvement items like lithium ion batteries, cleaning supplies, and fire extinguishers online. Fourth, we will improve the customer experience on our website, including a dynamic home page, simplified search and navigation, the ability to schedule a product delivery, and one-click checkout. We know how to repair all of these capability gaps, and we have a detailed roadmap combined with an exceptionally talented team with deep omnichannel experience. It will simply take time and proper sequencing. We expect to see our Lowes.com growth rate start to accelerate in the back half of 2020. In the meantime, I am very pleased that we can deliver a 3% U.S. comp in the third quarter with virtually no benefit from Lowes.com. This only speaks to the upside sales benefit we have in upcoming quarters when the e-commerce business is repaired. Transforming our supply chain will also support acceleration of our growth as we look to build a true omnichannel ecosystem. We're investing $1.7 billion to transform our supply chain over the next five years. Part of this transformation can be reflected in our opening of two new bulk distribution centers and three cross-stock terminals this year. This infrastructure improvement will be key to Lowe's' transitioning from a store-based home delivery model to a market-based model. We believe our future is bright at Lowe's, and as we enter the fourth quarter, we expect to deliver strong top-line performance. We plan to capitalize on robust consumer project demand and excitement for the holiday season, with strong holiday event execution while driving margin improvement and operational efficiency. Before I close, I'd like to take a moment to thank our associates for their continued hard work and commitment to the company. The best days of my week are when I'm out visiting stores. And during these visits, I continue to be proud of the men and women that represent our company on a daily basis. And with that, I turn the call over to Bill.

Thanks, Marvin, and good morning, everyone. We posted U.S. comparable sales growth of 3% in the third quarter as we continued to capitalize on robust customer demand, which drove strong traffic to our stores. along with improved in-store execution, which helped to convert that traffic into sales. We also had terrific execution over Labor Day, which drove record sales within our best-in-class appliance offering during the event. Turning to our merchandising department performance, we delivered above average comps in appliances, decor, hardware, lawn and garden, millwork, paint, rough plumbing and electrical, and tools. Lumber and building materials comps were positive, but below the company average. Paint, which had been a serial underperformer for us, outperformed the company average again this quarter. As we continue to refine our paint business, we will continue to work closely with our suppliers to introduce an improved propane offering to better serve the repair remodelers who need paint to complete a larger project, such as a kitchen or bathroom remodel. Previously, our decor department had performed below the company average for 12 of the last 13 quarters. However, in Q3, for the second consecutive quarter, decor performed above the company average with mid-single-digit comp growth, led by strong double-digit comps in blinds and shades. Millwork is another merchandising department which had historically underperformed. In Q3, for the second consecutive quarter, Millwork performed above the company average. Our improved comp performance in these departments is a clear indication that the implementation of our retail fundamentals is gaining traction. For the quarter, we also continue to drive strong comps in areas of historical strength for Lowe's. Tools led the merchandising department growth with a continued strong customer response to our craftsman reset. We are proud to be the exclusive destination in the Home Center channel for this iconic brand, which continues to drive market share gains within key tool categories. We also continue to drive sales with our key pro brands, such as DeWalt, the number one power tool brand in the industry. And during the quarter, we launched an exclusive line of DeWalt 12-volt compact tools, which focus on delivering more power in a smaller and lighter weight tool. In addition, we introduced new and innovative products from Bosch, Spider, and Metabo HPT as we continued to introduce new and innovative products in our exclusive Cobalt line of tools. In appliances, we delivered solid mid-single digit comps and further increased our market share with record sales during Labor Day and drove high single digit comps in refrigerators and freezers with great values and special buys. We also posted above average comps in hardware with double digit growth coming from our fastener categories supported by investments in job lot quantities and the full rollout of GRK, PowerPro1, and FastenMaster, which drove pro-demand. Lastly, we again delivered comps above the company average in lawn and garden, with double-digit comps in live goods and landscape products, benefiting from an improved in-stock position and the extended growing season. Within our seasonal and outdoor living business, we're excited about the announcement of our national home center launch with Yeti, a leader in coolers, equipment, and drinkware. The Yeti brand, along with the expanded product offering, highlights our commitment to providing our customers with relevant, innovative, best-in-class products. As part of our ongoing effort to further drive merchandising productivity, we are continuing to implement a category management process. and are taking aggressive steps to improve our cross-merchandising efforts and adjacencies in our stores. We are optimizing our store layout to ensure that products typically used together to complete a project are located in the same aisle to make it easier for the customer to efficiently shop their whole project. Looking ahead to Q4, we are very excited about our plans for the upcoming holiday season, driven by strong Black Friday and Cyber Monday events, along with a compelling tool gift center. We will continue to highlight our best-in-class appliance offerings and showcase strong values and special buys on the most sought-after brands and home improvement products this holiday season with exciting values such as select buy-one-get-one deals across DeWalt, Cobalt, Bosch, and Craftsman, and the opportunity to receive a Lowe's gift card when buying two or more select major appliances. We'll showcase great gift ideas across the store, including great values for both the DIY and pro customers. We're also excited to be one of the first retailers to introduce the new Weber SmokeFire Pellet Grill on Lowes.com as part of the pre-order product launch on Cyber Monday. Weber's Pellet Grill is their initial entry into this fast-growing category and is built to let grill users discover what's possible with pellet grilling. We are proud to partner with Weber to introduce this exciting new product. This Black Friday, we plan to leverage our NFL partnerships turning holiday shopping into a chance to win the experience of a lifetime at Super Bowl 54. As the official home improvement sponsor of the NFL, this year on Black Friday, each U.S. Lowe's store is offering its first 300 in-store customers the chance to enter to win two tickets to Super Bowl 54 in Miami. As we look to close out the year strong, we remain focused on retail fundamentals and driving sales and margin productivity by continuing our focus on the pro, leveraging the strong customer response to craftsmen, enhancing our space productivity improvements, and expanding our brand message with our exclusive NFL partnership. Overall, we see significant upside from the initiatives that are underway. and we are confident that we are building the foundation to provide home improvement solutions that will continue to drive sales and grow our market share. Thank you, and I'll turn the call over to Joe.