Lowe's Companies held their second quarter 2023 earnings conference call, which was led by Vice President of Investor Relations and Treasurer Kate Pearlman. With her were Marvin Ellison, Chairman and Chief Executive Officer; Bill Boltz, Executive Vice President, Merchandising; Joe McFarland, Executive Vice President, Stores; and Brandon Sink, Executive Vice President and Chief Financial Officer. The company discussed their forward-looking statements and non-GAAP financial measures. For the second quarter, comparable sales declined 1.6%, due to a strong Spring recovery, growth in Pro and online, and pressure from lumber deflation.

In the second quarter, Lowe's investments in their total home strategy paid off with positive comps in Pro and 6.9% comparable sales growth online. Pros reported healthy project backlogs and lead volumes remained consistent. Lowe's launched a new same day delivery option on lowes.com and their mobile app and are rolling out a market delivery model for big and bulky products. Operating margin expanded 18 basis points, leading to diluted earnings per share of $4.56. Lowe's is continuing their productivity journey and have driven significant operating margin leverage since beginning their transformation five years ago.

Lowe's is in the process of modernizing their operating system and increasing productivity with the use of touchscreens and rural product assortment. They are also leveraging their stores to drive sales productivity and implementing PPI initiatives to improve operating margin. They are also using mobile applications, automation, and robotics to improve throughput and minimize damages, as well as piloting a new brake pack process. Lastly, they are also focusing on sustainability and have recently published their 20th Corporate Responsibility Report.

Home price appreciation has slowed, but is still up 35%, and real disposable income has been pressured by persistent inflation and elevated interest rates. Consumer sentiment has improved slightly, but remains below pre-pandemic baselines. Home improvement shoppers are cautious with their spending and are more focused on smaller repair and maintenance projects. The aging housing stock, millennial household formation, aging in place, and persistent remote work are all positive indicators for mid to long term demand. The company is focused on customer centricity and taking share in any macro environment, and is confident in its ability to deliver in the short and long term.

Lowe's second quarter comparable sales were slightly above expectations, with growth in rough plumbing, building materials, paint, seasonal and outdoor living, lawn and garden, and hardware. This was partly offset by deflation in lumber and pressure on big ticket DIY discretionary demand. Hardlines sales were driven by a strong spring recovery, with lawn and garden being a standout category in partnership with vendors. Seasonal and outdoor living also benefited from the weather recovery, with momentum in outdoor power equipment. This put them in a better inventory position than last year as they move into the second half.

This quarter, Lowe's saw strong performance in the hardware, tools, home decor, and appliances categories. Hardware saw increased sales due to attachments and fastening with key brands. Tools saw the rollout of Klein Tools, the number one tool brand for electricians and HVAC professionals, while home decor saw growth in paint sales driven by the MVPs paint rewards program, paint job site delivery, and Spec Right Paint. In appliances, Lowe's continued to outperform the market and saw an increase in bundled appliance purchases due to Red Vest associate selling, auto applied supplier rebates, faster fulfillment through the market delivery model, and improved online customer experience. Building products also saw strength in key Pro categories, despite the pressure from year-over-year lumber deflation.

This quarter saw strong Pro demand, reflected in the highest unit comp in the company, and the expansion of the Specs product line in rough plumbing. Private brands such as Kobalt, Bosch, DeWalt, Rubbermaid, and Scott's are seeing increased penetration, and the rural expansion to 300 stores ahead of schedule includes a store within a store concept with Petco. Lowes.com and the mobile app have been improved with same day delivery nationwide, leading to increased conversion.

Lowe's has introduced several initiatives to improve the customer experience, such as a digital Will This Fit capability, refined search experience, and Halloween and holiday sets. They have also seen better than expected performance from their Lowe's One Roof Media Network. Additionally, they have expanded their merchandising and services team and are adding MST assistant store managers. Lastly, they are awarding over $100 million in bonuses for their frontline hourly associates in recognition of their hard work.

Lowe's has seen an improvement in their customer service scores this quarter compared to last year, and they have invested in their associates through wages and development. They have also implemented omni-channel investments to reduce the time it takes to pick orders, and have enhanced their workforce management tools to better align staffing levels with customer demand. For Pros, they have delivered positive comps despite lumber deflation, and have launched online tools to generate quotes, track orders, and authorize purchases.

This paragraph discusses solutions to improve customer service and shrink management for retailers. These solutions include QR codes for Pro customers, an industry leading asset protection program, RFID technology embedded in power tools, and improved technology for freight flow. These initiatives are designed to control expenses and improve customer service scores.

Joe expressed his appreciation for the frontline associates in Kentucky, New York, and Vermont who supported flood relief and those in Hawaii who are responding to the wildfires. The company is donating $1 million to provide food, emergency shelter, and supplies to those affected in Maui. Brandon Sink then discussed the company's Q2 results, which included diluted earnings per share of $4.56, sales of $25 billion, and a 1.6% decrease in comparable sales due to lumber deflation and a late Spring. Gross margin was 33.7% of sales, up 42 basis points from the prior year.

In Q2, the company generated $3.5 billion in free cash flow and returned $2.8 billion to shareholders through dividends and share repurchases. Gross margin benefited from ongoing PPI initiatives, favorable product mix, and lower transportation costs, but was somewhat offset by costs associated with the expansion of supply chain network and shrink. SG&A delevered 16 basis points due to lower sales and a one-time legal settlement, and operating margin rate levered 18 basis points. The effective tax rate was 24.6%. Inventory was down 3% compared to last year, and capital expenditures totaled $385 million. Adjusted debt-to-EBITDAR stands at 2.69 times.

This paragraph discusses Home Depot's 2023 financial outlook. They are expecting sales to range from $87 to $89 billion, with comparable sales down 2-4%. They are expecting adjusted operating margin to be 13.4-13.6%, with adjusted diluted earnings per share of $13.20 to $13.60. They are also expecting up to $2 billion in capital expenditures. Home Depot is confident that their investments in their Total Home strategy will help them grow their market share and deliver long-term value to shareholders.

Marvin Ellison and Brandon Sink of Home Depot responded to Christopher Horvers' question about what drove the difficult comparisons in the third quarter last year and whether DIY discretionary spending is starting to reach a baseline level that can be grown from. Ellison noted that the macro environment and consumer sentiment are different this year and that Home Depot is focused on outperforming the home improvement market by 100-200 basis points. Sink added that July and August are traditionally lighter volume weeks until Labor Day and that Home Depot is cycling their toughest comparable of the quarter in August.

In Q3, there will be less seasonal benefit and lumber deflationary pressure will be more modest at 75 basis points. Gross margin performance is expected to be roughly flat across the year with benefits from private brand penetration, supplier claw backs, lower transportation costs, and pricing initiatives offset by investments in supply chain and the expansion of market delivery.

Marvin R. Ellison states that there has been a pullback in DIY discretionary spending, but they remain bullish on the mid to long-term view of the home improvement market. He points to traditional data points such as a lack of available homes and 90% of homeowners having fixed mortgage rates as evidence of the health of the sector. He believes that, with their Pro to DIY initiatives, they will outperform the marketplace by 100 to 200 basis points.

Marvin R. Ellison and Brendan discussed how the PPI initiative has been successful in reducing expenses in store operations, merchandising, supply chain, and other functional areas. They have a multiyear roadmap to understand the tech investments they are making and the productivity they will gain from those investments. They also discussed the importance of remote stores in reducing expenses.

Brandon Sink explains that PPI is expected to gain more momentum in the second half of 2023, with improvements to store tech architecture, self-checkout, BOPIS experience, pricing, private brand expansion, and automation in the supply chain. He also states that the guidance assumes that comps will be down 1% on the high end and 5% on the low end, depending on economic scenarios.

Marvin Ellison reinforced the company's confidence in their ability to outperform the market in the second half of the year by 100 to 200 basis points by executing their Total Home strategy and maintaining organizational alignment and agility. Elizabeth Suzuki then asked the operator to move to the next question from Zach Fadem with Wells Fargo.

Brandon Sink explains that inflationary benefits are expected to normalize in 2022 and that there will be minimal cost increases from suppliers. He states that lumber prices will be more normal in the second half of the year and that appliance pricing will begin to cycle more normally in Q4. He goes on to say that DIY discretionary will continue to put pressure on ticket prices, leading to more pressure on transactions overall. Finally, he comments on how cost controls and operating margins have been able to show progress even on a negative comp and talks about what kind of margin progression should be anticipated as comps eventually become positive.

Marvin R. Ellison states that there are no regional differences in terms of housing prices or home prices that are material to speak to. He further states that they are looking at this as one of the key internal macro indicators and that they are assessing it, but there is nothing significant to report.

Lowe's has made progress in localizing its stores to better meet the needs of both rural and urban customers. In the second quarter, 300 stores were completed with specific products tailored to rural customers such as utility vehicles, livestock feed, and apparel. In urban markets, the company is focusing on products related to security and safety, as well as building codes to meet the needs of pros. They are continuing to adjust and tweak their localization efforts as they go.

Marvin R. Ellison of Lowe's stated that the company is focused on being customer-centric and does not pay much attention to what their competitors are doing. He believes that if they take care of the customer, their results will be sustainable. To do this, they will focus on their total home strategy, localizing their stores and connecting them to customers via omni-channel, and creating a great place for associates to work.

Brandon Sink, of a company, is discussing their results for the quarter and their Total Home strategy. He explains that they are investing in supply chain IT infrastructure, omni-channel, and their Pro initiative, in order to take care of the customer and outperform their competitors. He then discusses the sales environment for the back half of the year, noting that they are seeing similar performance in DIY discretionary areas as in the first half of the year, which is reflected in their expectations.

William P. Boltz explains that the company is focused on providing value to customers through initiatives such as rolling out client tools in stores, offering a large assortment of client products, and having better seasonal inventory than a year ago. Additionally, they are rolling out Coca-Cola and Carhart in their stores, and are excited to offer these products to both DIY and Pro customers.

Brandon and Eric discussed how the company has cycled through price increases and how volume has been affected. Brandon expects pressure on transactions to remain for the rest of the year, but believes there will be a better balance of transactions and ticket similar to pre-COVID levels in the long-term. Marvin Ellison also provided his thoughts on the matter.

The CEO of the company is confident that they are still in the early innings of making best-in-class business operations in their omni channel area, localization, and technology infrastructure. They are retiring a 30-year-old operating system to give them more agility and to improve operating margin, space productivity, and consumer sentiment. The CEO is expecting to see improvements in their Pro, online, and fulfillment capabilities. They are planning to introduce appliance promotions in the second half of the year, with expectations for the side of the business.

William P. Boltz explains that the appliance industry has returned to a more normalized promotional offering, which has put pressure on average ticket and average selling price. Brandon Sink adds that they still expect 40 to 60 basis points of expansion in gross margin and SG&A cadence in the third quarter versus the fourth quarter, but they are cycling over $400 million of associate discretionary bonuses that were paid out last year that they are not expecting to recur.

Marvin Ellison and Joseph McFarland III discussed the successes Lowe's has had in the retail environment, such as their proprietary self-checkouts, best-in-class awareness platform, and high-strength program. They have also seen a 92% voluntary participation rate. Kate Pearlman concluded the call, thanking everyone for joining and looking forward to speaking with them on the third quarter earnings call in November.

This summary was generated with AI and may contain some inaccuracies.