Lowe's Companies, Inc.

Good morning, everyone, and welcome to the Lowe's Company's first quarter 2020 earnings conference call. My name is Michelle, and I will be your operator for today's call. As a reminder, this conference is being recorded. I will now turn the call over to Kate Perlman, Vice President of Investor Relations. Thank you. You may begin.

Thank you, and good morning, everyone. Here with me today are Marvin Ellison, our President and Chief Executive Officer, Bill Bultz, our Executive Vice President, Merchandising, Joe McFarland, our Executive Vice President, Storrs, and Dave Denton, our Executive Vice President and Chief Financial Officer. I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on Lowe's Investor Relations website. During this call, we will be making comments that are forward-looking, including our expectations for fiscal 2020. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors. including those discussed in the risk factors, MD&A, and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release and on our investor relations website. With that, I'll turn the call over to Marvin.

Good morning, everyone. This is an unprecedented time as we all navigate the ongoing global economic, social, and health impacts of COVID-19. I'd like to start out by extending my best wishes for the health and safety to you and to your family. Like most retailers, we began the first quarter focused on meeting our internal financial plan while executing our Q1 retail strategy. However, due to the global health crisis caused by COVID-19, everything changed in late February. And we immediately pivoted by establishing a cross-functional COVID-19 task force, opening a company-wide command center in reprioritizing our Q1 objective. As a company, our focus shifted from running a business to achieve our financial plan to functioning as an essential retailer operating in a pandemic with three key priorities. First, creating a safe store environment for our associates and our customers. Second, providing support for our community, including healthcare providers and first responders. And third, financially supporting our associates during this unprecedented time. As a result of these new priorities in the first quarter, we invested $340 million to support our associates, healthcare workers, first responders, and community. In addition, we've committed $50 million of charitable contribution for our communities to do our part in this time of need. I'd like to begin by highlighting a few of the operational actions that we took in response to COVID-19. And later in the call, Joe will provide more details on these efforts. In early March, we shortened our store operating hours by closing three hours earlier each day at 7 p.m. so we could increase third-party cleaning routines and restock shelves. During the hours that our stores were open, we implemented several operational changes to ensure the safety of our associates and our customers, including the garden centers, Our stores average 144,000 square feet of space. To develop our social distancing safety procedures, our team took a strategic, data-driven approach, tracking historical customer traffic patterns and identifying areas where customers tend to congregate. Based on this analysis, we implemented additional safety and social distancing protocols in three distinct areas, point-of-sale checkout, outside garden, and the paint desk. Our store team was so effective at implementing and executing the enhanced safety guidelines that our customer service scores improved 200 basis points year-over-year in the first quarter. This is truly an incredible accomplishment and a reflection of our commitment to customer service, even in this unprecedented environment. Also, to provide our valued associates with a much-deserved day off to spend with their families and their loved ones, we closed all stores and distribution centers on Easter Sunday. This decision negatively impacted sales and operating income, but it was absolutely the right thing to do for our associates. We have a unique and resilient business model that operates well when our communities need us most, whether it's a hurricane, flood, tornado, or global health crisis. We are committed to being there for our customers. And I am pleased that over the past 18 months, we've established the agility to provide our customers with the essential products they need to keep their home safe and functional and their businesses running. None of our success in the first quarter would have been possible without the outstanding commitment of our store sources working under unprecedented conditions. Our field leaders also distinguished themselves during the quarter. Division presidents, regional vice presidents, district managers, and field merchants abandoned their normal routines and spent time each week visiting stores to provide leadership support and guidance for our store managers and frontline leaders. As someone who started out their retail career as a $4.35 an hour part-time store associate, I understand the importance of seeing the leaders of the company out on the frontlines during a crisis. Let me now turn to our first quarter results. which reflect the benefits of our retail fundamental strategy, the improvement in our overall execution, and the strength of our home improvement business model. For the first quarter, we delivered strong sales growth, with total company comp sales growing 11.2%. Our U.S. home improvement comps was 12.3% due to strong demand from both DIY and pro customers. Overall demand strengthened as we moved through the quarter, and that sales momentum has continued into the month of May. For the quarter, DIY comps slightly outpaced pro comps, and the uptick in DIY demand was partly driven by the arrival of spring weather in many western and southern geographies, as well as a customer mindset that was heavily concentrated on the home. We serve broad-based project activity, ranging from outdoor landscaping and other beautification projects, to essential indoor repair and maintenance work, and long-deferred home projects, the to-do list that customers hadn't previously tackled given their busy schedule. CommSales for Pro was strong, supported by our focus on retail fundamentals, including job-like quantities, more flexible delivery, and the improved service model that we put in place in 2019. And as you would expect, we saw increased demand in COVID-related products, such as cleaning supplies and appliances like refrigerators and freezers. Partly offsetting these gains was softness in heavy indoor installation categories, such as kitchen and bath, as customers were reluctant to invite people into their homes. In total, we estimate that the net impact of COVID-related sales contributed approximately 850 basis points to our total company comp growth, which includes 80 basis points of cleaning product, 70 basis points of refrigerator and freezer sales, and 700 basis points in acceleration of projects, primarily for the DIY customer. As we moved through the quarter, there was also a sharp uptick in sales on Lowes.com. As customers began to shop more and more online, our investment in online infrastructure and progress to date with the Google Cloud migration greatly improved site stability and allowed us to effectively handle the increased traffic. For the quarter, Lowell's.com sales were up 80% overall, with even stronger growth rates for our pro customers. Online penetration increased to 8% of total sales. From a geographic perspective, we had broad-based growth with positive comps in all 15 geographic regions and all three U.S. divisions. Regions that outperformed the total company comps were Atlanta, Charlotte, Dallas, Houston, Nashville, Los Angeles, St. Louis, and Seattle. And once again, the West was our top performing geographic division. The geographic footprint of our stores in the US also played a role in our strong sales performance in Q1. The COVID-19 crisis created less disruption in rural areas of the country where approximately one quarter of our store base is located. Our rural stores outperformed the company comp in Q1 by over 250 basis points. Conversely, on average, our urban stores experienced more demand disruption from the COVID-19 crisis. Approximately 10% of our U.S. store base is classified as urban, and this subset of stores underperformed the company comp by more than 400 basis points. In Canada, we posted negative comp sales as performance was adversely impacted by store closures and other regulatory-related operating restrictions. We have initiatives in place to improve performance and remain confident in the long-term potential of our Canadian business. During the quarter, we shifted our marketing efforts by dramatically limiting our promotional messaging and instead highlighting our commitment to our communities and our appreciation for our frontline associates. In fact, as the presenting sponsor on ESPN for the NFL Draft, which posted record-setting viewership, we ran a campaign to spotlight and thank our associates and how they support their communities and the first responders in a time of crisis. Although actions like closing on Easter, reducing promotions, closing stores three hours earlier each day, and limiting customer access to key areas like paint and garden limited our sales in the quarter, they are a reflection of our culture, and to the fundamental commitment to the safety of our associates and our customers. Our Q1 results also show that while consumers were sheltering in place this quarter, they had an opportunity to rediscover Lowe's both in-store and online. And the improvements we made in our business over the last 18 months allowed us to meet the customer demand. I am also pleased that during this time of high levels of unemployment in our country, Lowe's has hired over 100,000 store associates for the spring season. In addition to assist other retails in operating safely in this exceptionally challenging environment, we shared our best practices with the Retail Industry Leaders Association. In fact, the only competitive threat we're focused on right now is the COVID-19 virus. Although our current and future environment is unpredictable, I am confident in our ability to execute and continue to provide the essential products and services that our communities need. And in closing, I am tremendously proud of our associates and would like to, again, express my heartfelt appreciation for their hard work and their dedication. And I also want to thank our vendor partners for their great efforts to step up to the challenges that this pandemic has presented. And with that, I will turn the call over to Joe to discuss the actions that we've taken to support our customers, operate effectively, and keep our associates safe.