Lowe's Companies, Inc.

Good morning, everyone, and welcome to Lowe's Company's third quarter 2023 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 will now turn the call over to Kay 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 McFarland, 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. For the third quarter, comparable sales declined 7.4%. Our results were driven by a greater than expected pullback in DIY discretionary spending, especially in bigger ticket categories. While we've seen a more cautious consumer for some time now, this quarter we saw some of these consumers increasingly prioritizing experiences over goods, spending on travel and entertainment. As a reminder at Lowe's, 75% of our revenue is driven by DIY customers and 25% by pros, while the broader market mix is roughly 50% DIY and 50% pro. As a result, whenever the DIY customer becomes cautious, it disproportionately affects us. And while we face a softer DIY demand in the third quarter, I'm pleased that at the same time, we once again delivered positive sales comp and pro. Now I'd like to take a moment to dig a bit deeper into our DIY performance for the third quarter. In categories like appliances, decor, flooring, and kitchen and bath, where we have strong DIY penetration, we saw increased pressure on sales of bigger ticket purchases like appliances where consumers are postponing purchases if they can. For example, customers may have previously bought an entire kitchen suite, may now just buy a refrigerator. Keep in mind that the industry-wide pullback in appliance sales has a larger impact on Lowe's since we are the market leader in appliances in the U.S. with 14% of our sales coming from this category. Later in the call, Bill will discuss some of the initiatives we're implementing in Q4 to improve DIY performance with a more targeted effort to reach value-conscious customers, including our most competitive offers on single-unit appliance purchases ahead of the holiday season and the launch of our Lowe's Lowest Price Guarantee so our customers can shop with confidence knowing that they'll always find the best price at Lowe's. Despite the pullback in DIY, pros are still working, and many of their projects are a result of increased wear and tear on aging homes, which lead to unavoidable repairs. This continues to create project backlogs for small to medium-sized pros, who is our core customer. In our most recent survey, nearly 70% of pros reported healthy project backlogs, but given the uncertain macro environment, they're feeling a little less confident. Although pros may be a bit cautious in this environment, our ability to deliver a positive pro sales comp in the third quarter is a reflection that our strategy is working. We're making progress with the investments we've made over the last several years to improve our service offering, including increasing loyalty through our MVP pro rewards, developing a world-class CRM platform, improving job site delivery, enhancing service levels in our stores, creating a more seamless online experience, and a number of merchandising initiatives that Bill will discuss later in the call. Overall, we built a competitive pro sales and service model, which is creating a flywheel effect that will enable us to grow pro sales at two times the pace of the market. Let's now turn to online sales, which declined 4% in the quarter, as the same pressures in DIY bigger ticket categories impacted digital sales. Now let's talk about what we're doing to manage this unique environment. In store operations, we've made foundational improvements to associate productivity that enable us to effectively align labor to demand while continuing to serve our customers. During the quarter, we leveraged these new capabilities to reduce operating expenses, while enhancing the customer experience of both pro and DIY customers at the same time. Joe will provide more detail on these initiatives and our improved customer service scores later in the call. I'm pleased that our disciplined focus on expense management across the organization contributed to a 46 basis point increase in operating margin rate compared to adjusted operating margin in the prior year, despite the sales decline. which led to diluted earnings per share of $3.06. As we explore ways to drive improved sales with our DIY customers, I'd like to provide you with an update on two initiatives, our new Lowe's Outlet stores and our rural strategy. Let me start with our Lowe's Outlet stores. We opened our 15th Lowe's Outlet location in Q3. With these smaller format stores, we can leverage lower-cost real estate in trade areas closest to our core customer, without cannibalizing a nearby Lowe's store. In an environment where DIY consumers are seeking value, we're pleased with the customer response and the overall performance of our outlet locations. These stores complement our market delivery network, allowing us to offer savings between 25% to 70% off on big and bulky scratch and dent items like appliances, patio furniture, grills, all while maximizing profitability and offering our customers enhanced value. We look forward to discussing the potential growth opportunities of this strategy on an upcoming call. Turning to our rural strategy, this one-stop shop concept is designed to give customers located in rural areas across the country everything they need for their home and farm, including a wide offering of farm, ranch, and outdoor products. During the summer, we launched this rural assortment to over 300 stores where we're selling products like livestock feed, pet food, utility vehicles, and apparel from brands like Carhartt and Wrangler. These programs include a pet co-store within a store, which enhances the total home solution we offer by bringing together home improvement and pet care services, products, and expertise under one roof. We're pleased to see this new initiative already gaining traction with strong performance in pet, apparel, and automotive. In fact, these rural customers are our best-performing DIY segment, and these stores are performing significantly above the company average. Given this initial success, we're now exploring expanding this rural assortment beyond the original 300 designated rural stores. In addition, we're planning to add incremental merchandising initiatives within these original 300 stores because the customer is responding favorably to these new assortments and product lines. Looking ahead, we remain focused on our merchandising and marketing efforts that highlight the everyday value at Lowe's for our price-sensitive customers. And we'll continue to invest in our strategic growth initiatives within our total home strategy as we strive to become a world-class omnichannel retailer. And as I wrap up, let me say that we remain bullish on the medium to long-term outlook for the home improvement industry, supported by favorable housing and demographic trends. We expect home prices to be supported by a persistent supply-demand imbalance of housing, while at the same time, 250,000 millennial household formations are expected per year through 2025 And their parents and grandparents, the baby boomers, increasingly prefer to age in place in their own homes. And we cannot overlook the fact that we now have the oldest housing stock in U.S. history, with the median age of homes now 41 years old, which will need ongoing investments in repair and remodel projects. These factors continue to reinforce our optimism about the mid- to long-term outlook for our industry. In closing, I'd like to thank our frontline associates for their continued hard work and dedication to serving customers and our communities. And with that, I'll turn the call over to Bill.