Lowe's Companies, Inc.

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Good morning, everyone, and welcome to Lowe's Company's fourth quarter 2021 earnings conference call. My name is Rob, and I'll be your operator for today's call. As a reminder, this conference is being recorded. I'll now turn the call over to Kate Perlman, Vice President of Investor Relations.

Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer, Bill Bolts, our Executive Vice President, Merchandising, Joe McFarland, our Executive Vice President, Stores, 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 2022. 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'll be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP can be found in the quarterly earnings section of our investor relations website. With that, I'll turn the call over to Marvin.

Thank you, Kate, and good morning, everyone. Our results once again beat expectations this quarter, with comparable sales up 5% for the total company and 5.1% for the U.S., on top of over 28% growth last year. This resulted in comp sales up 34.5% for the total company and up 35.2% for the U.S. on a two-year basis. These results cap off outstanding financial results for fiscal 2021 with sales of $96.3 billion, up 6.9% on a comparable basis, and earnings per share of $12.04, up 36% on an adjusted basis. With these outstanding results, 100% of our stores earned a quarterly winning together profit-sharing bonus. This $94 million payout is $24 million above the target payment level, and in recognition for their hard work throughout the pandemic in 2021, we are awarding an incremental discretionary bonus of $265 million to our frontline associates. Altogether, we rewarded our frontline associates with bonuses of over $350 million in the fourth quarter. As Joe will discuss later in the call, financial support of our frontline associates is consistent with our commitment to being an employer of choice in the retail industry. Our total home strategy continues to gain momentum as we grow our share wallet with both Pro and DIY as they increasingly rely on Lowe's as a one-stop solution for all their project needs. In looking at our results this quarter, I'm particularly encouraged that our growth was broad-based and balanced across product categories, across both DIY and Pro, both online and in-store. In Pro, we delivered growth of 23%, and 54% on a two-year basis. And we are building on our momentum with the pro with the launch of our new pro loyalty program, MVP's Pro Rewards and Partnership Program. We redesigned our loyalty program based on feedback from our pro customers who expressed a desire for a business partnership rather than a series of standalone transactions. Our data shows that pros who leverage our loyalty and credit offerings spend 300% more than pros not engaged in these programs. Our pro business is off to a strong start this year, and we're excited about the national launch of our MVP's Pro Loyalty Program. I look forward to providing updates on this critical initiative throughout the year. Now turning to our DIY customer, where we delivered growth on top of exceptionally strong demand last year. Later in the call, Bill will discuss how we continue to grow our DIY market share by elevating our private brands' product assortments in our home decor category. On Lowes.com, sales grew 11.5% on top of 121% growth in the fourth quarter of 2020, which represents a two-year comp of 147% and nearly 11% sales penetration. Our intuitive online shopping experience and expanded on-trend assortments are resonating with our customers. And while we're pleased that our online sales have more than doubled over the past two years, we still have tremendous growth opportunity in front of us. And as part of our efforts to enhance our omnichannel experience, we are expanding our same-day and next-day fulfillment capabilities. With that in mind, we're actively piloting several gig network solutions, including partnering with Instacart in several markets for same-day DIY home delivery. And building on the success we gained in the Florida and Ohio Valley regions with our market delivery strategy, we completed the conversion of our third geographic area, the Carolina region, during the fourth quarter. By way of reminder, in the market-based delivery model, big and bulky products flow from our supply chain directly to customers' homes. This replaces the highly inefficient store delivery model where each store acts as its own distribution and transportation center for these products. As we continue to expand our market-based delivery model, we're freeing up space in our 10,000 square foot store-back rooms, which on average are considerably larger than our competition. And we're testing out different options to drive both greater in-store fulfillment and expanded delivery alternatives for both pro and DIY customers. In a few minutes, Bill will discuss our continued investments in online as we create a best-in-class integrated omnichannel shopping experience. During the quarter, operating margin expanded approximately 115 basis points, leading to diluted earnings per share of $1.78, which is a 34% increase as compared to adjusted diluted earnings per share in the prior year. These results reflect our disciplined focus on driving operating leverage through our perpetual productivity improvement initiatives, or PPI, as well as the ongoing benefits of our new pricing strategies. Joe and Dave will discuss these initiatives in further detail later in the call. Turning to our results in Canada, where performance lagged the U.S., the Canadian leadership team continues to drive productivity through proven technology and processes that have delivered great results in the U.S. Before I close, I'd like to share my perspective on the home improvement market, as well as our opportunity to continue to win share. Our outlook for the home improvement industry remains strong, supported by very healthy consumer balance sheets, especially for homeowners, and continuing home price appreciation. Persistent solid demand for homes despite an uptake in interest rates is also expected to support residential investment. In fact, we're encouraged by the strengthening millennial household formation trends that will support home buying in the coming years. Other trends remain favorable, including baby boomers increasing preference to age in place. With the extension of remote work for some employees, we're expecting a permanent step up in repair and maintenance cycle. And as a reminder, 50% of the homes in the U.S. are over 40 years old and will continue to require investments for upkeep, and approximately two-thirds of Lowe's' annual sales are generated from repair and maintenance activity. Therefore, we're encouraged that the macro environment for home improvement remains very supportive. As we close the year, we continue to give back to the communities where we operate, with total donations of $100 million in 2021 well over our pre-pandemic levels. And we're pleased that our efforts to enhance our brand reputation while supporting our associates and driving long-term value for our shareholders was recently recognized by Fortune Magazine as they named Lowe's the number one most admired specialty retailer for the second year in a row. This is the first time in our history that we received this recognition in back-to-back years. In closing, I'd like to extend my heartfelt appreciation to our frontline associates, As I travel the country every week visiting stores, I continue to be struck by their commitment to supporting our communities while providing excellent customer service. And with that, I turn the call over to Bill.

Thanks, Marvin, and good morning, everyone. In the fourth quarter, U.S. comparable sales increased 5.1% and 35.2% on a two-year basis. We delivered positive comps in all three merchandising divisions in the quarter with growth across pro and DIY customers. Growth was well balanced with 12 of 15 merchandising departments comping positive and was broad based on a two-year basis with all 15 departments up more than 18% in that time frame. Beginning with our home decor merchandising division, flooring and appliances delivered the strongest comps in the quarter. In flooring, vinyl flooring once again led the way as we continue to see consumer preference shifting towards this affordable and stylish solution. Lowe's already offers a wide selection of vinyl flooring products, including several Pergo wet protect options. And this year, we look forward to extending our own trusted stain master brand with its high performance characteristics and lifetime stain resistant warranty across a full range of flooring products, including laminate, tile, and vinyl. Within appliances, sales of ranges, cooktops, along with dishwashers were the strongest in the quarter. As we continue to extend our private brand offering, we recently launched Origin 21 across several product categories and home decor. This is our new, modern brand designed for the trend-setting millennial consumer, while our ever-popular Allen & Roth brand is tailored to the more traditional style. Now turning to our performance in Hardlines, the team delivered an exceptional holiday season. Customers were active early and shopped often in our trim and treat category, which drove excellent sell-through in this holiday category. Seasonal, outdoor living, and lawn and garden delivered standout performances as customers continue to enhance their outdoor living spaces with new grills, patio heaters, fire pits, as well as live goods for the yards and garden. With the home serving as a center for entertainment, our customers are making the most of their homes inside and out. We continue to build on our number one position in outdoor power equipment with further share gains in battery outdoor power equipment as we drove over 37% growth in this area for the quarter and over 118% on a two-year basis. Both DIY and pro customers enjoy the convenience, reliability, and the power of our innovative battery-powered products available in the EGO, Cobalt, Craftsman, and Skill brands. And this spring, we're thrilled to expand our exclusive lineup of EGO battery products with their new 52 inch zero turn riding mower with features that include a fabricated deck and power to mow up to four acres on a single charge. Also new for EGO is the industry's most powerful handheld battery powered blower with power that will outperform the leading gas blower with 765 cubic feet per minute of blowing capacity. These new products will complement our existing lineup and assortments from powerful brands such as John Deere, Honda, Husqvarna, Aarons, and Craftsman. This spring, we will launch our new Origin 21 patio collections, as well as our new style selection replacement cushions. These cushions are made with 100% recycled plastic bottles, and they are fade-resistant, UV-protected, as well as easy to clean. Now turning to the building products division. Our comps were very strong, driven by broad-based, balanced growth across lumber, electrical, rough plumbing, millwork, in building materials. We are pleased with the continued momentum we are building with the pro as we work to expand our brand and product offerings to meet their project needs. New this year will be a full range of CertainTeed roofing, insulation, and gypsum products. As a leading manufacturer of building products for both residential and commercial construction, CertainTeed is an important strategic partner that we are proud to add to Lowe's as we continue to enhance our pro offering in the building materials category. We also continue to build out our Pro Power Tool program with the introduction of the new DeWalt PowerStack battery technology, which is the smallest and most energy-dense battery pack on the market. These new products and new brands are strong additions to our Pro brand arsenal, which already includes other great brands like Bosch, Eaton, S-Wing, Fass & Masser, Flex, GRK, ITW, Let's Go, Little Giant, Lufkin, Mansfield, Marshalltown, Metabo, Shark Bite, Simpson Strong Tie, Spax, Spider, and Werner. Moving to Lowes.com. As Marvin mentioned, we delivered sales growth of 11.5% in the quarter and 147% on a two-year basis in the fourth quarter. We are focused on further enhancing our omni-channel capabilities in 2022 across three key areas. Expanding our online assortment, enhancing the user experience, and improving fulfillment. First, we are expanding our Lowes.com assortment to meet our customers' design and lifestyle needs. For example, within Lowes livable home products, we will offer a range of products to help our customers adapt to their changing mobility needs. At the same time, we will continue to enhance the user experience with continued upgrades to the visualization and configuration tools like kitchen visualizer, and measure your space. Finally, as we continue to improve our fulfillment capabilities, our customers can now track their appliance delivery in real time, and we will soon be leveraging enhanced technology to further streamline the buy online, pick up in store experience for our customers through an improved store execution process. As we look ahead to spring, we are well positioned to capitalize on what we expect to be another strong spring season. Consistent with our approach over the past year, we have worked hard to land our spring product early. Through an expansion of our network of coastal holding facilities, we are better able to manage the flow of imported product, enabling us to quickly flow product where needed as spring arrives across the country. As one of the largest importers in the U.S., we continue to leverage our scale and carrier relationships to secure capacity and work to mitigate and manage the impact of cost increases across our supply chain. Before I close, I'd like to extend my appreciation to our merchants and inventory and supply chain teams, along with our vendors, for their hard work and continued support. Thank you, and I'll now turn the call over to Joe.

Thanks, Bill, and good morning, everyone. I would like to begin by thanking our frontline associates for delivering tremendous results in 2021. In recognition of their outstanding efforts, we awarded the discretionary year-end bonus of $6,000 for assistant store managers, $1,000 for department supervisors, $800 for full-time hourly associates, and $400 for part-time hourly associates. As Marvin mentioned, the combination of winning together and this discretionary year-end bonus will result in a payout of over $350 million for our frontline associates this quarter. As someone who started his career in home improvement as an hourly associate, I understand how meaningful this type of financial recognition is for our hourly associates. At Lowe's, our people are truly our most valuable asset. When it comes to recruiting and retaining top talent, we strive to be an employer of choice. From the moment that a candidate applies for a position at Lowe's, we are committed to creating a positive impression. We have invested in leading technology that accelerates the hiring process so that we are processing applications in a matter of minutes rather than the weeks that the manual process required as recently as last year. We also continue to improve our onboarding process so that our new hires can quickly come up to speed leveraging the technology and product knowledge that is readily available to them on their handheld mobile devices via the Lowe's university application. As I mentioned on our last call, we are also leveraging our new Lowe's university in store training labs. to provide the ongoing training that our associates need to build their skills and confidence so they can continue to progress in their career. Over the last three years, we have created valuable career opportunities for our associates with the incremental 10,000 department supervisor roles and the 1,600 ASM positions that we have added. Since 2018, we have also invested well over $2 billion in incremental wage and equity programs for our frontline associates, to ensure that we continue to offer a strong, competitive wage and benefit package to our associates. I'm really pleased to report that our investments to position Lowe's as an employer of choice are paying off. Heading into spring, we anticipate being even better positioned than last year from a hiring perspective. And we are also confident that we will continue to drive productivity in our operations through our Perpetual Productivity Improvement, or PPI, initiatives. As a reminder, this is not a single win, it is a series of improvements that are scaling across our stores over time. In fact, we are working on over 20 different PPI initiatives in our store operations this year. To highlight just a few key PPI initiatives, we have just launched a new store inventory management system or SIMS across all of our stores. This platform gives store associates real-time visibility to inventory in their store. This includes inventory in the home bay location, as well as product in the top stock, end cap, off-shelf, and back stock room. This new system will eliminate the countless non-productive hours associates have been spending looking for product. I'm also excited about our continuing efforts to eliminate the ancient green screen technology with the launch of our simplified user interface to other selling stations throughout the store. First introduced at our front-end registers, we are beginning to implement this new technology across the sales floor. With this new platform, we are accelerating the associate training process and facilitating cross-training in other departments. This new technology will free up our associates to focus on providing excellent customer service while reducing customer wait time. While these two initiatives are just a few of the PPI deliverables planned for this year, we expect that these two initiatives alone will drive $100 million in productivity this year. Looking forward, we will continue to leverage technology to reduce manual tasking for our associates while also enabling them to deliver better service to our pro and DIY customers. I would like to close once again by thanking our store associates for their continued hard work and dedication. and the great results we achieved together this year. With that, I will turn it over to Dave.

Thank you, Joe. I'll begin this morning with a few comments on the US economy as it relates to the home improvement sector. As Marvin indicated, the consumer backdrop remains favorable as we are confident that home improvement demand will remain strong despite an uptick in interest rates. Historically, when interest rates have risen against a strong economic backdrop, the home improvement sector has delivered solid growth. During these periods, housing affordability was supported by growth in jobs and personal income, which offset the impact of higher borrowing costs. Today, housing affordability remains above the pre-pandemic average. The market is expecting moderately higher interest rates in the coming quarters. But keep in mind, rates are increasing off historic lows. Home equity has increased due to rising home prices, and consumer savings are about $2.5 trillion higher than pre-pandemic levels, positioning consumers for continued residential investments. Given all these factors, we are expecting another strong year of demand in the home improvement market. Now, let me turn to capital allocation. We remain committed to being best in class when it comes to our ability to create value for our shareholders through our strong capital allocation program. In 2021, we generated $8 billion in free cash flow driven by outstanding operating results, and we returned $15.1 billion to our shareholders through both share repurchases and dividends. During the fourth quarter, we paid $551 million in dividends and repurchased approximately 16 million shares for $4 billion. This brought the total to $13.1 billion in share repurchases for the year ahead of our expectations of $12 billion. This reflected better than expected financial performance and our commitment to return excess cash to shareholders. Capital expenditures were $597 million in the quarter and nearly $1.9 billion for the full year as we continue to invest in strategic initiatives to both drive growth and enhanced returns across the business. Our balance sheet remains very healthy. Adjusted debt to EBITDA stands at 1.98 times, well below our long-term leverage target of 2.75 times. As I mentioned at our December 15th investor update, we are planning to return to our leverage target over the next two years, driven by our shareholder-focused capital allocation strategy. With that, I'd like to turn to the income statement. In the fourth quarter, we reported diluted earnings per share of $1.78, an increase of 34 percent compared to adjusted diluted earnings per share last year. This increase reflected better-than-expected sales growth, improved gross margin rate, and favorable SG&A leverage driven by our productivity initiatives. In the quarter, sales were $21.3 billion, reflecting a comparable sales increase of 5 percent. Comparable average ticket increased 9.4% with higher ticket sales in appliances, flooring, and seasonal and outdoor living, and 90 basis points of commodity inflation in both lumber and copper. In the quarter, comp transaction count decreased 4.4%, but on a two-year basis, comp transactions increased 8.9%. We continue to gain traction with our total home strategy as reflected in pro growth of 23% and positive DIY comps on top of extremely strong DIY growth last year. On Lowes.com, sales increased 11.5% in the quarter. U.S. comp sales increased 5.1% in the fourth quarter and 35.2% on a two-year basis. We saw acceleration in both our pro and our DIY comp sales trends from our third quarter performance. By month, our U.S. comparable sales were up 8.1% in November, up 7.4% in December, and down 1.3% in January. Recall that we cycled over government stimulus in late December and early January of last year. But looking at U.S. comp growth on a two-year basis from 2019 to 2021, November sales increased 33.8%, December increased 37.4%, and January increased 33.9%. Gross margin was 32.9% of sales in the fourth quarter, up 115 basis points from last year. Product margin rate increased 65 basis points, driven by our disciplined pricing and cost management strategies. Improvements in both shrink and credit revenue benefited gross margin by 50 basis points and 25 basis points respectively. These benefits were partially offset by roughly 30 basis points of pressure related to higher transportation and importation costs, as well as the expansion of our supply chain network. I'd like to spend just a moment addressing the recent increase in lumber prices. We are confident that we have an effective strategy to carefully manage our inventory and rapidly adjust pricing. Although we are planning for our lumber margins to be compressed when prices decline, we are confident in our outlook for gross margin rate to be up slightly in 2022. Turning to SG&A, we leveraged 15 basis points versus LY, driven by higher sales and our relentless focus on productivity. This quarter we incurred $50 million of COVID-related expenses as compared to $165 million of COVID-related expenses last year. This reduction in these expenses generated 60 basis points of SG&A leverage. Additionally, we incurred $150 million of expenses related to the U.S. stores reset in the fourth quarter of last year. As we did not incur any material expenses related to this project in 21, this generated approximately 75 basis points of SG&A leverage versus LY. These benefits were pressured by 100 basis points related to the discretionary year-end bonus of $215 million for our store-based frontline associates. Operating profit was over $1.8 billion in the quarter an increase of 21% versus LY. Operating margin of 8.7% for the quarter increased 115 basis points over last year, largely driven by higher gross margin rate as well as favorable SG&A leverage. The effective tax rate was 25.3% in the quarter, which is in line with prior year. At year end, inventory was $17.6 billion, up $920 million from Q3, and in line with seasonal trends and consistent with our effort to land spring products earlier. Driven by both improved operating performance and a disciplined capital allocation strategy, we delivered return on invested capital of 35% for the year, up 760 basis points from 2020. Now turning to our 2022 financial outlook. We closed out 2021 ahead of the expectations that we presented at our December 15th investor update. Month to date, February U.S. comparable sales trends are in line with our fourth quarter performance on a two-year basis. And based on the continued momentum that we are seeing in pro sales, as well as higher expectations for commodity inflation, we are raising our sales outlook for 2022 to a range of between $97 to $99 billion for the year, representing comparable sales of down 1% to up 1%. Now, please keep in mind that our outlook assumes that lumber pricing will return to a more normalized level in the second half of the year. We continue to expect Pro to outpace DIY in 2022. Keep in mind that we are cycling over an estimated 300 basis points of stimulus in the first quarter. Also, as a reminder, our 2022 sales outlook includes a 53rd week, which equates to approximately $1 to $1.5 billion in sales. We now expect gross margin rate in 2022 to be up slightly as compared to the prior year. With higher projected sales, improving gross margin outlook, and continued execution of our PPI initiatives, we are raising our outlook for operating margin to a range of 12.8% to 13% from a prior range of 12.5% to 12.8% for the full year. We are also raising our outlook for diluted earnings per share to a range of $13.10 to $13.60 from a prior range of $12.25 to $13. In 2022, we continue to expect capital expenditures of approximately $2 billion and share repurchases of approximately $12 billion. Finally, we are raising our outlook for return on invested capital to above 36% from our original outlook of approximately 35%. In closing, we are off to a great start in 2022. We have significant runway ahead of us to both grow our market share, expand operating margins, and deliver meaningful long-term shareholder value. And with that, we are now ready for questions.

Thank you. We're now ready for questions. If you'd like to ask a question, press star 1 on your telephone keypad. To withdraw your question, press star 2. In order to allow questions for as many individuals as possible, please limit yourself to one question and one follow-up. Our first question comes from the line of Kate Machine with Goldman Sachs.

Hi, good morning. Thanks for taking our question. I wondered if you could maybe talk a little bit more about inflation, how you're viewing inflation as part of the Comp Sales Guide for 2022.

Yeah, Kate, good morning. Thanks for the question. As we think about next year, And if you look at our guide of down one to up one, we would expect units to be modestly down and our average ticket offsetting that almost dollar to dollar.

Okay, thank you. And based on what you said about February, it does seem like there may have been an acceleration from what you saw in January into February on a one year. Is it right that you're seeing better trends in February than January? I should really just be thinking about things on a two-year stack.

Kate, it is true. We are seeing better trends in February than January. But on a two-year basis, you need to think about it. Are trends in February consistent with the two-year trends for the fourth quarter, which is really solid.

Thank you.

Our next question comes from the line of Mike Baker with DA Davidson. Please receive your question. Mr. Baker, your line is live for questions.

Hi, thanks. Sorry. On the pro side, in the past you've talked about it as being anywhere between 22% and 25%. Your orange competitor yesterday bumped their talk of what the pro is to 50%. They used to say somewhere in the low to mid 40s. I understand that it's hard to get the exact number, but any update on what you think on an annual basis the pro penetration is? And then more importantly, what do you think it can get to?

I think your first statement is directly correct on where the penetration is. We just know the business continues to be very strong. If you think about 23% comps in the quarter and 54% on a two-year basis. I mean, we feel great about this business, and I think you know that we spent quite a bit of time over the last three-plus years making not only investments in adding products to our soil, but also our service levels, fulfillment, and we're very pleased, as I mentioned in my prepared comments, with the launch of our new Pro Loyalty program. And as I mentioned as well, we're seeing a 300% increase in pro sales for pros engaged in our loyalty and credit program. And so pro is going to be a significant part of our growth this year, and we still feel very encouraged by the progress.

Okay. And as a follow-up, DIY, you said up on strong gains last year. Is it fair to say up in the low single digits, slightly up, something in that range, just what the math suggests?

That's correct. We saw expansion in growth in both, obviously, the pro, but importantly, the DIY as well. Thank you. You're welcome.

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Good morning, everyone. My first question is on EBIT margin. Now that it looks like you could get to 13% in 22, if you look at the model in the out years, and I know you haven't really given anything past this, is the correct way to think about moving past 13? It's productivity driven, meaning it's all throughput as sales per foot keeps rising?

Yeah, I think that is correct. We're excited about in December to come back as a complete management team and really outline the building blocks for our progression above and beyond our 13% level as we think about our even margins. But yes, I think about productivity as the main driver of that as we continue to lean in to both the pro business as well as healthy growth in our DIY business.

Thanks. And my follow-up is on inventory. There's this big divergence in Q4 now between you and Home Depot. And if we try adjusting to see if there's a catch-up, it doesn't look like it's the case. And so, Marvin, when you got to Lowe's, I think it was the first and maybe even the second spring where you put Lowe's on the offensive in terms of inventory. So the question for you is, are you pleased with what you've bought so far, and are you pleased with the visibility of what's coming in for this spring and even for the year?

Short answer is absolutely. I give a lot of credit to Bill and the merchant team, Don Friesen and the supply chain team. for working in a very collaborative fashion to make sure that not only are we feeling good about what we have from the product category, but also the quality of the inventory. As Dave mentioned in his prepared comments, the coastal holding facilities that we established on both the east and western coast have given us the ability to land import product early. take possession of it, which on a temporary basis will elevate inventory levels, but we feel it's a prudent thing to do to make sure that we have that product available out of that global supply chain so we can get it to our RDCs and our stores. But we do feel good about where we are. We feel good about the investments we've made in job-like qualities for the pros. And we think headed into spring, which, as you know, is a significant sales period for us, we're in really good shape.

Thank you.

My next question comes from the line of Scott Ciccarelli with Truist Securities. Please proceed with your question.

Good morning, guys. Obviously, business is still exceptional, but what kind of impact are you projecting from higher interest rates on the housing market, and what is your framework for those projections? Thanks.

Yeah, Scott, kind of in my prepared remarks, we talk about if interest rates do have an impact to some degree, But if you go back and historically look at periods of time when interest rates had risen, at the same time we had really good economic backdrops, actually the home improvement sector has benefited from that. And I think if you cycle into 22, you see that same kind of economic climate now. So we feel like the demand profile in this sector is really healthy, number one. And number two, many of the efforts that we're embarking upon and actually beginning to gain some traction, we're going to actually disproportionately take share in the marketplace. We feel like we're really nicely positioned to deliver a really solid 22 and think about the future growth of this business in a really healthy manner.

Scott, this is Mark. There's just one point to add. I do think that home improvement oftentimes gets combined with home building. relative to interest rates. And obviously, the sectors are entirely different. And I think that historically, that's why I think Dave's comments are so important, that historical trends will show convincingly that high interest rates combined with other positive macro indicators do not have a negative impact on home improvement. Now, home buying, I'm sure, is a totally different equation but we want to make sure that there's a lot of delineation between the two sectors.

So just to be clear, guys, so at this point, there's no assumed degradation in sales trends because of higher interest rates.

That's correct.

Got it. Thank you.

You're welcome.

Our next question comes from the line of Chris Harvers with J.P. Morgan. Please receive your questions.

Thanks. Good morning, everybody. Can you just delve into the factors a bit more about what's driving the increase in the comp outlook in 2022? So to what extent are you expecting a higher level of market growth versus what you laid out in December? To what extent are you assuming more share gains? And then how does that compare to your expectations on price inflation and how lumber will play out?

Yeah, I think there's really three things that are driving our increase in our guide from a top line perspective. One is we do think the market's going to perform a bit better. And by the way, we still think we're going to believe and plan for us outpacing the market from a growth perspective. Secondly, we are seeing higher levels of commodity inflation than what we planned back in December, largely in lumber. So that is kicking our sales progression up slightly in the first half of the year. And then third, we're seeing really strong sustainable performance in our pro business, and that demand has been really consistent through Q4, and we're leaning into Q1 in a very consistent manner and healthy manner from a pro business perspective.

Chris, I'm going to just add a little commentary on the pro business. This is Marvin. We did a post-survey of your stated pro that we issued out publicly, and just a couple of interesting data points. When we talked to pros and DIY customers, both said that they see continued investments in the home. The DIY said at a pace over 50% that they were going to do DIY projects, and roughly 50% said they were going to hire a pro. And then when you talk to our pro customers, and we have in detail, they continue to let us know that their book of business is more robust than they've ever seen it, that they have projects lined up for the balance of this year. Some projects may carry over into 23. And the health of that business is very strong. And I think all the investments that we've made in our merchandise assortments, in our service levels, in our stores, in our supply chain is driving that business. Again, two-year comp and post, 54%. You know, that's pretty good.

Understood. And then can you also talk about the gross margin a little bit? The shrink and the credit performance were quite strong and gross margin came in better than expected. How did these sort of proceed into 2022 and what's elevating your gross margin outlook relative to what you talked about in December? Thank you.

Yeah, listen, I think first and foremost, we're just extremely pleased with the performance from a shrink perspective. I think the store teams and the loss prevention teams have just done an excellent job of managing that. And now it's becoming a bit of a tailwind for us as opposed to a headwind, which was historic. I think as we lean to 22, think about a few things happening. In general, for the full year, we expect the gross margin to be up slightly. Product margin to really lead the charge there as we really manage price and cost very effectively. Our strength in credit programs, think about that as largely neutral to our performance versus 22 versus 21. And then we'll have a little bit of headwind as we think about both rates and supply chain and our continued build out in the supply chain ecosystem.

Thanks very much. Best of luck.

Thank you.

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Good morning. Thanks a lot for taking my question. Marvin, I think you mentioned earlier today that about half of Lowe's sales growth in the second half of last year was due to product inflation. Home Depot mentioned yesterday they got around 800 basis points of comp benefit from product inflation. At what point does the consumer start to push back or the industry experience an elastic response from all the inflation that's being passed through, especially as there's a return to normalcy, mobility increases, and the interest in other categories shifts on a return to normalcy? Thank you.

Well, Michael, look, I'll give you just a more of a philosophical perspective based on the trends that we see. So we are very confident that there are certain trends that will sustain. You have millennial household formation trends that are much more robust than any of us had anticipated pre-pandemic. You're also seeing the investments in the home that will maintain simply because There are so many millions of people working from home permanently that even as we hope and pray the pandemic will dissipate, you still will have millions of people who will permanently work from home. That's gonna drive certain investments in repair and maintenance that we think will sustain through past 2022. And the work that the merchants and the finance team's done to draw costs out and to make sure that whatever price increases driven by inflation we're pushing toward our customers, we're still doing that at a very competitive price because we're taking a multitude of other actions to ensure that we're trying to drive other factors or costs down. Look, you know this. I think we're one of the only large retailers that's reporting an increase in gross margin for a quarter and for a year from a basis point standpoint. And also we're guiding that for the balance of 22, we're going to see gross margin rate continue to improve. That gives you an indication that we have some degree of confidence we can manage this. I'll let Dave provide more of the financial specifics on kind of what we've seen and what we see going forward.

Yeah, Michael, I would just add that to Marvin's comments here, we've really put in a very robust process and analytical tools around this such that we're measuring and monitoring as we take increases from a cost perspective, first we push back on that when appropriate. We take a portfolio approach to adjusting our pricing. And then we measure and monitor the performance from a unit velocity perspective. And we adjust as needed when we need to do that, such that we get the best price point from a consumer perspective, but importantly, what also drives the economic value here at Lowe's.

Thank you. My follow-up question is, Lowe's has some very interesting initiatives that are either in the early stages or just about to launch, most notably the supply chain transformation and the launch of the pro-loyalty program. So could you give a breakdown of the financial impact that you've seen from both of those programs as you've tested them and then what you've factored in as far as the contribution from each of those in the year ahead?

Well, maybe I'll make the contribution just from a planning perspective. These programs are well planned and well thought out. We have a substantial financial model associated with that. We test and learn as we go. And so we feel like our plan for 2022, we have a very good line of sight for performance being driven out of those two programs. So first and foremost, we'll kind of check that box. And then I'll let Marvin chat about the programs he likes.

No, look, I'll just repeat what I said on the pro. We tested a loyalty program all of 2021. We've made different tweaks to it based on feedback and surveys from our pro customers. We feel like we have a program that's going to drive differentiation and adoption. And as I mentioned, when customers engage in the pro loyalty and our credit program, we're seeing a 300% increase you know, in sales, and we think that we're going to see some level of retention and engagement with our pro customers based on the loss that will be happening within the next couple weeks. So, again, excited about the test and learn environment we've created, and to Dave's point, I mean, we put a lot of robust processes in place to ensure that we have good visibility to what we think each of these programs will deliver.

Thanks a lot, and best of luck. Thank you.

The next question is from the line of Steven Zaccone with Citi. Pleased to see you with your questions.

Great. Good morning. Thanks for taking my question. I had a question on the DIY side of the business. So it sounds like most of the guidance raised is contemplated on the pro and then commodity inflation. But can you comment if your DIY outlook has changed in 2022? And in larger picture on DIY, you know, there's a thesis we'll eventually see a give back of spending in the category of but it seems to still be accelerating as of late and is still strong. What are you seeing in terms of purchase activity or project sizes from your customers that gives you confidence in this sustained strength in DIY?

You know, Steve, thanks for the question. You know, our DIY sales were very, very strong in 2000. So year-over-year, we had tough comparison. We were able to grow that business even on top of some really aggressive sales last year. One of the things that we're leaning into as part of our total home strategy is private brands, and private brands specifically in the core-related categories. I'm going to let Bill Boltz talk a little bit about that. you know, where we're leaning in there and how we believe that that's going to give us some level of continued growth and differentiation.

Yeah, thanks, Marvin. And, you know, just a little more color around the DIY business. I think, you know, as we head into spring, you know, as we mentioned in our prepared remarks, we talked about a couple of key private brands that will play a big role in the spring. It will be Origin 21, which we're excited about that. That's a new modern brand. So you'll see it introduced in patio. You'll see it in some decor categories in our stores. And then Allen & Roth, we've worked really hard over the last 18 months to enhance that brand, and so that's more of a traditional style, and so that will play a big role as well. And then we're really excited about the expansion of Stainmaster. Stainmaster, as you know, we acquired a year ago, was largely a carpet brand, but we have opportunities to use that in other categories in flooring. really building off of its characteristics. And then along the same lines, as we look into the spring season, our live goods and nursery business, very strong, has been on a really nice run over the last couple of years, and that plays a large role in our DIY business as we go into spring as well. So we're optimistic around the DIY business as we head into the first half of the year.

And Steve, we're students of history, and we know that one of the strategic mistakes historically at Lowe's was to overcompensate and overpenetrate in private brands in pro-related categories. And so Bill and his team have been very, very specific to continue to lean in to national brands on the pro side, but on the DIY side, specifically home decor, the customers are telling us, you know, overwhelmingly that they love, you know, our design capabilities of private brands. And so we're going to lean into that for differentiation and also for a margin rate benefit. And, again, we think we're off to a great start.

Great. Very helpful. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Liz Suzuki with Bank of America. Please receive your question.

Right. Thank you. How much market share do you think you've taken in the last three years? And if the supply chain disruptions normalize and some of your smaller competitors are able to get product again, do you see some of those share gains moderating?

It's a fair question, but I will repeat what I've said a couple of different times. Home improvement does not have great market share data that we can glean very specific answers to. What I can tell you based on just our on the ground analysis is that we are in fact taking market share. It's hard to grow a business this size by over 35% on a two year basis and it's not coming from somebody. We also are aware that there are winners and losers in retail based on the efficiency of your supply chain. We are fortunate that we are one of the largest importers of containers, and we have great supplier relationships that the merchants continue to foster. So do we believe that we're winning? We do. Do we think we'll continue to take market share in 2022? As Dave said earlier, we absolutely believe we will. And we think we'll take it across pro and DIY, both in-store and online. But again, it's hard for me to give you a lot of specifics because the data set is not great.

And Liz, but from our internal data, we continue to, our data suggests that we're performing 200 to 300 basis points ahead of the market pretty consistently. And that will be our expectations going forward as well to outperform the market.

Great. Thank you. And just, I mean, how much do you think that the expansion into home decor and new product categories increases your total addressable market?

It's a great question. We can only go by the feedback that we receive from our customers when we do surveys and when we do different types of focus groups. And what they are telling us is that they are more brand agnostic when it comes to home decor related categories and they're more concerned with quality and good style and price. What Bill has seen done with the launch of Origin 21 and with the continued improvement in Island and Rock as an example, gives us a lot of confidence and we're really excited about Stain Master. As Bill mentioned, you're going to see it go into more hard surface flooring, but we have some other really exciting ideas that we'll be sharing over the next couple of quarters where we're going to extend this very, very a recognizable and high quality brand in the other home improvement categories that customers, I think, will be very excited about.

Great. Thank you so much. Rob, we're going to take one more question, please.

Yes, the final question will be coming from Eric Bossart with Cleveland Research.

Good morning. Two things, if I could. First of all, the last two years have been relatively unique in terms of pricing and promotion and mix. with a pretty aggressive consumer and pro customer. As you think about 22, and it sounds like you think 22 kind of largely feels like the last couple of years, is your strategy the same with pricing, promotion, and mix, or do those efforts normalize a bit towards what we had seen historically?

Yeah, Eric, I think they're going to be fairly consistent. Our plan is fairly consistent in 22 versus 21. I'll let Bill comment on that too.

Eric, it's Bill. As you know, over the last couple of years, we've been on this journey of getting to more of an everyday competitive price and trying to wind down what has historically been here a very high-low approach to marketing and promotion. We've very successfully been able to do that. That's now given us the runway to continue to provide value in a number of different ways to our consumers both through special buys special values unique offerings and so you know that's that's the journey we're on and that's what we're excited about but being able to get off of that what historically high low approach allows us to be in this everyday competitive price in this in the home improvement business and that's what that's what we wanted to be on okay and then and then secondly within the guide for 22 which i think you spoke to

negative units and price offset in that to get to comp dollar growth. Haven't had a negative unit plan or outlook in quite some time for your business. I'm curious how you'd marry that up then with your inventory strategy and also with how you manage labor specifically in terms of the investment or the growth in both of those areas in a year where the outlook is reasonably for negative units.

So, Eric, I'll take the first part of that, but I'm going to let Joe just talk a little bit about how our new labor system allows us to make real-time adjustments by store, by department, based on ticket and transaction. You have to understand that one of the reasons why you're going to see negative units is because the DIY customer in the heart of the pandemic made types of purchases that they're not going to make in an era where there's less concern around the virus and less nesting at home. We had thinning purchases that drove a lot of transactions, not a lot of ticket. We had a lot of garden purchases that drove a lot of transactions, not a lot of ticket because people were at home and they were staying busy. Categories like paint, a lot of activity, not a lot of ticket. And so as we normalize year over year, we've got to see those activities are not sustainable. So when we say negative ticket, it's not as though we believe that we're seeing less customer traffic. We're just seeing DIY customers have different projects than they had when they were confined to their homes and staying busy with just random different projects around the house. And that's the difference. So when we look at that, we're just being really transparent around how we view the inputs to what's driving sales. We have no concerns. that we have a traffic issue or we have a customer demand issue. This is just more normalizing over unique activity in the middle of a pandemic. I'll let Joe talk about our labor system and how we can manage it based on all those inputs.

Thanks, Marvin. Eric, you remember just a few years ago we put together just a top-notch workforce management team and we developed a labor model that is activity-based. This labor model has served us well. as sales have taken off and exceeded expectations from an appropriate leverage standpoint, and does the same in balancing out the ticket and transaction. So we're very pleased with our staffing and our outlook for 22. Thank you.

Thank you all for joining us today. We look forward to speaking with you on our first quarter earnings call in May.

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.