Lowe's Companies, Inc.

Good morning, everyone, and welcome to Lowe's Company's fourth quarter 2022 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 and Treasurer.

Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer, Bill Boltz, our Executive Vice President, Merchandising, Joe McFarlane, our Executive Vice President, Stores, and Brandon Sink, 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 2023. 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 U.S. GAAP can be found on the quarterly earnings section of our Investor Relations website. Now, I'll turn the call over to Marvin.

Thank you, Kate, and good morning, everyone. In the fourth quarter, our total company comparable sales declined 1.5%, while U.S. comps decreased 0.7%. For the quarter, commodity deflation impacted U.S. comps by 75 basis points. Our investments in the pro customers continue to pay dividends for the company reflected by our continued strong pro sales in the fourth quarter. In fact, this is the 11th consecutive quarter that we've driven double-digit pro growth in the U.S., despite stronger than expected commodity deflation. And while there was continued solid DIY demand in core home improvement categories, as expected, we saw a DIY pullback on holiday gift buying. Despite a modest decrease in sales, we once again improved our adjusted operating margin by maintaining our disciplined focus on productivity. During the quarter, adjusted operating margin expanded approximately 88 basis points, leading to adjusted diluted earnings per share of $2.28, a 28% increase compared to last year. These results cap off solid financial performance for fiscal 2022 with sales of $97.1 billion, adjusted operating margin of 13%, and adjusted earnings per share of $13.81, up 15% over the prior year. With these results, we're awarding $220 million in discretionary and profit-sharing bonuses to our associates, which includes an incremental $70 million to our assistant store managers and supply chain supervisors who hold two of the most critical frontline leadership roles in the company. This builds on our recent $170 million investment in permanent wage increases for our frontline hourly associates, which went into effect in December. Since 2018, we've invested over $3 billion in incremental wages and share-based compensation for our frontline associates, including increasing associate wages by over 20%. And as we mentioned at our December Analyst and Investor Conference, we are committed to additional frontline wage investments over the next several years, which are contemplated in our long-term targets. These compensation investments are just one reflection of our commitment to becoming the employer of choice in retail, which Joe will discuss in more detail. Throughout the quarter, we continue to gain traction with our total home strategy as consumers remain engaged in home-related activities. In PRO, we delivered U.S. growth of 10% and 36% on a two-year basis. We are capitalizing on our momentum with our PRO by growing our MVPs, PRO rewards, and partnership program, building relationships through our CRM tool, and continuing to enhance our product assortment to meet PRO needs. One example of enhancing our pro product assortment is the exciting news that Klein tools will be coming back to Lowe's. We know that our pros are fiercely loyal to certain national brands and Klein is the number one hand tool brand among electrical and HVAC professionals. This creates immediate credibility across trades. Bill will share more detail on this exciting addition to our assortment later in the call. Now, One question many of you have asked is about our pro backlog and if they're still healthy. We're in constant communication with our pros through formal surveys, our pro counsel, and countless day-to-day conversations. In our January survey, more than 70% of pros stated that they were booked out the same or more compared to 2022, and they remained confident in their ability to find jobs and hold on to their backlog. We believe this dynamic is being fueled by all the things we talked about at our December Analyst and Investor Conference, which includes homeowners with strong balance sheets and record levels of equity. On Lowes.com, sales grew 5% on top of 11.5% growth in the fourth quarter of 2021, partly due to strong appliance sales. This represents a two-year comp of 17% and more than 11% sales penetration. We continue to remove friction from the customer's online experience, which includes adding Apple Pay this quarter to improve conversion. We also focus on removing friction from our customers' omnichannel shopping journeys, like for appliances where customers often shop our showrooms before making a purchase online. We also continue to make strides in the rollout of our market delivery model for appliances and other big and bulky products. we added two new geographic areas this quarter, bringing us to 10 geographic regions across the country, supporting more than 1,000 stores. And as a reminder, in the market-based delivery model, big and bulky products flow from our supply chain directly to customers' homes, replacing our inefficient store delivery model. This delivery model is enabling us to further consolidate our industry leadership position in appliances, and it positions us for profitable growth in other big and bulky product categories like grills, riding lawn mowers, and stock cabinets. Turning to Canada, we completed the sale of our Canadian retail business of Sycamore Partners this quarter. As a result, we're now solely focused on the transformation of our U.S. business, where we estimate we have a $1 trillion addressable home improvement market, enabling us to invest more into higher return opportunities to grow our business and to take market share. I'd like to extend my appreciation to the entire Canadian team for their commitment to serving our customers, and I wish them the best as they move forward under new ownership. Before I close, I'd like to share my perspective on the home improvement market. And as you know, there's a wide range of conflicting opinions on what's going to happen in the macro environment in 2023. From our perspective, The core drivers of our business, disposable personal income, home price appreciation, and the age of housing stock remain supportive. Consumer savings are still roughly $1.5 trillion higher than pre-pandemic, with 85% concentrated in the top 40% of income earners who are more likely to be homeowners. Homeowners continue to enjoy record levels of equity in their homes, nearly $330,000 on average. Even if there's a modest decline in home prices, the level of equity built up during the pandemic would not be meaningfully eroded. And the housing stock continues to age, with 50% of U.S. homes over 41 years old, the oldest since World War II. These factors, along with strong millennial household formation, baby boomers' increasing preference to age in place, and more widespread remote work, will continue to be tailwinds for our business. And given the slowdown in housing turnover is driven by higher rates and low supply rather than demand, we continue to see a nationwide trend of trading up in place with consumers opting to upgrade their existing home to meet their evolving needs. All of these dynamics give us confidence in the medium and longer term outlook for the industry. That being said, we also know that consumers are weary of a potential recession. which is reflected in some of the discretionary pullback we experienced during the holiday season. We're closely monitoring trends, and we have a proven playbook to pivot quickly if the macro softens. Our results in the fourth quarter demonstrate our operational agility, which is reflected in our ability to leverage expenses and deliver productivity in a negative comp sales environment. This gives our experienced leadership team confidence in our ability to effectively manage the business in a wide variety of macro scenarios. In closing, I'd like to thank our frontline associates for their commitment to serving customers day in and day out. As I travel the country every week visiting stores, I continue to be impressed by their passion for helping customers and their communities. And with that, I turn the call over to Bill.