The operator introduces the Lowe's Companies' Third Quarter 2023 Earnings Conference Call and hands it over to Kate Pearlman, Vice President of Investor Relations and Treasurer. She reminds listeners that the call is being recorded and introduces the speakers: Marvin Ellison, Chairman and CEO; Bill Boltz, Executive Vice President of Merchandising; Joe McFarland, Executive Vice President of Stores; and Brandon Sink, Executive Vice President and CFO. She also mentions the forward-looking statements and non-GAAP financial measures that will be discussed. Marvin Ellison then discusses the third quarter results, which saw a decline in comparable sales due to a decrease in DIY discretionary spending, with consumers prioritizing experiences over goods.

In the third quarter, Lowe's saw a decrease in DIY sales, particularly in categories like appliances, due to cautious consumer spending. This has a larger impact on Lowe's since they are the market leader in appliances. To improve DIY performance, they are implementing initiatives to target value-conscious customers, such as competitive offers and a Lowest Price Guarantee. However, Pro sales remain strong as many projects are necessary repairs for aging homes. Despite this, Pros are feeling less confident due to the uncertain macroenvironment.

The third quarter saw a positive Pro sales comp, indicating that the company's strategy is working. Investments in improving service offerings, loyalty programs, CRM, delivery, and online experience have created a competitive Pro sales and service model. Online sales declined due to pressures in DIY categories. Operational improvements have allowed for expense management and increased operating margin. The company is exploring initiatives to drive sales with DIY customers, including Lowe's Outlet stores and a rural strategy.

Lowe's has successfully implemented smaller format stores that offer discounted big and bulky items without cannibalizing nearby stores. They have also launched a rural strategy, offering a one-stop shop for home and farm products, including a Petco store within a store. This initiative has been well-received by customers and is performing above the company average. Lowe's plans to expand this rural assortment to more stores and add new product lines based on positive customer response.

The company remains focused on providing value and investing in growth initiatives to become a world class retailer. They are optimistic about the long-term outlook for the home improvement industry due to favorable housing and demographic trends. The company also thanks their associates for their hard work and dedication. Despite a decrease in DIY demand, the company delivered positive Pro comps due to their enhanced product and brand offerings, tailored to local preferences and building codes. They remain focused on highlighting value and convenience for price-conscious consumers in both their physical stores and online.

In the building products category, Lowe's saw positive comps in building materials, particularly in Pro heavy categories like roofing and drywall. The reintroduction of Klein Tools, the number one tool brand for electrical and HVAC professionals, has been well received by Pro customers. Home decor was impacted by lower DIY demand, especially in categories like appliances, flooring, and kitchens and bath. However, private brand products like the Allen and Roth Butcher Block countertops have gained traction with consumers looking for value. In the paint category, Lowe's saw comps above the company average, driven by Pro customers who rely on Lowe's for all their project needs.

Lowe's is expanding its product offerings, including a new line of Sherwin-Williams primers designed for professionals. They saw a decline in DIY sales and an increase in lawn and garden and hardware sales due to storm-related activity. They also announced a partnership with Toro for outdoor power equipment. Lowe's is focusing on value for customers during the holiday season, offering new deals and discounts on popular brands like DEWALT, CRAFTSMAN, and Kobalt.

Lowe's is offering same-day delivery and a Lowest Price Guarantee on holiday and home improvement items. They also have special deals for professionals and are now selling Carhart apparel. The company is also working on improving product costs, inventory productivity, and pricing strategies through partnerships with suppliers and expanding their private brand portfolio. Their goal is to provide customers with the best value while also driving productivity for the organization.

The speaker expresses appreciation to vendors and merchants for their partnership and hard work, before turning the call over to Joseph McFarland. McFarland highlights the company's efforts to reduce operating expenses and improve customer satisfaction through technology investments, such as a customer-centric scheduling system, mobile devices for associates, and an expanded Merchandising Services Team. These improvements have led to increased productivity and better customer service.

MST is using a new app to direct them to high-sales bases, freeing up time for Red Vest associates to focus on customers. Lowe's is also making convenience a priority by extending same-day delivery to in-store purchases and offering delivery of live Christmas trees. They are also implementing self-checkout systems and revamping the checkout experience to increase productivity and make it easier for customers to shop.

In this paragraph, the speaker discusses the company's plans to improve their online and in-store shopping experience. They mention tripling the staging area for buy-online pickup-in-store orders and launching omni-selling in their stores. This will allow customers to easily purchase items from the store's website while in the physical store. The speaker also thanks the store leaders and associates for their hard work and then hands it over to Brandon who discusses the company's Q3 results, including a $3.06 diluted earnings per share and $20.5 billion in sales. They also mention a prior year asset impairment charge of $2.1 billion associated with their Canadian retail business.

In the third quarter, prior year sales included $1.2 billion from the Canadian retail business, and there was a $115 million sales headwind due to a shift in the fiscal calendar. Comp sales were down 7.4%, impacted by lumber deflation and a decline in DIY spending. Gross margin increased due to merchandising initiatives and lower transportation costs, but was partially offset by supply chain expansion costs. SG&A leveraged 30 basis points, and store leadership teams played a key role in managing expenses and driving productivity.

The operating margin rate for the company improved compared to last year, and the effective tax rate remained consistent. Inventory decreased due to aligning purchases with sales. The company generated free cash flow, repurchased shares, and paid dividends. Capital expenditures were made to invest in strategic priorities. The company's 2023 financial outlook has been updated due to a decline in DIY spending and uncertainty in the market. The fourth quarter of 2022 included additional sales, and the company is now expecting a decline in sales and adjusted operating margin, but remains focused on cost management and growth initiatives.

The company expects interest expense of $1.4 billion, capital expenditures of $2 billion, and an adjusted effective income tax rate of 25%. The outlook for adjusted diluted earnings per share is $13. The company will continue to invest in the business, target a 35% dividend payout ratio, and return excess cash to shareholders through share repurchases. The CEO is confident in the company's Total Home strategy, strong balance sheet, and ability to manage the business in any environment. The company's 300 rural stores are performing above average, and the CEO sees potential for more stores to accommodate this assortment. The DIY comp in these stores is also strong compared to the company average.

The company is pleased with the performance of their rural stores and is considering expanding their presence in these areas. They are also looking at implementing successful categories from these stores into non-rural locations. The company believes this will benefit their DIY customer strategy and will provide a good return on investment. They have completed 450 stores so far and are continuing to test and learn in these locations.

Marvin Ellison discusses opportunities for additional merchandising in the store, such as snacks and drinks, as well as other categories like aspirin and band-aids that can complement what they are already selling. This complements the ongoing omni expansion and helps create a better customer experience. The company is also focused on being agile with expenses in case of a potential decline in comp store sales in the future.

Brandon Sink and Marvin Ellison discuss the potential impact on Home Depot's P&L in 2024, but they will not provide any guidance until the Q4 call. They mention uncertainty in the housing market and inflation, and are managing various factors that could affect margins. They also mention the upcoming sunset of an old operating system, which will allow for more technology advancements.

The company plans to continue working on improving their business and driving profitability through various strategies, including merchandising, store operations, supply chain, and technology projects. They are also closely monitoring costs and have implemented cost management teams and tech-enabled tools to negotiate with suppliers and protect margins. The cost environment has leveled off and they are on track with their targets for cost reduction.

Simeon Gutman from Morgan Stanley asked about the company's margin for next year and if they will lose any leverage. Brandon Sink from the company responded by saying they have opportunities to accelerate and mentioned initiatives such as PPI and converting store technology. They are confident in their portfolio of initiatives and believe they can deliver against their targets. Marvin Ellison also added that they are trying to stay away from one-time events with their perpetual productivity improvement initiative.

The company has a roadmap of initiatives for ongoing improvement and productivity gains. This culture of perpetual improvement is sustainable and consistent. The specifics of these initiatives, such as store operations, merchandising, supply chain, and IT, will be discussed in more detail during the Q4 call. OpEx productivity and PPI are the two biggest unlocks, and their success is not solely dependent on business comps. The company will intensify their focus on PPI regardless of the comp outlook.

The speaker addresses concerns about the company's top line and explains that the decrease in big-ticket sales, particularly in the appliance category, has had a disproportionate impact on their revenue. However, they are seeing positive results in the Pro business and have made investments to cater to smaller to medium-sized professionals.

The Pro segment of the business is expected to remain healthy due to the age of homes and the likelihood of repairs being needed. The company remains cautious, but confident in their backlog and their ability to handle any changes in the market. They have seen improvement in operating margins and are focused on remaining agile and attracting both DIY customers and Pros through relevant assortments and brand acquisitions.

The company has announced the addition of Toro to their outdoor power equipment line and is expanding their range of products with the inclusion of Klein in the electrical and tool categories. They are focused on localized assortments and their rural strategy, as well as meeting customers where they want to be met. They are adjusting to the softening of the appliance industry by making sure they are present for the 100,000+ appliances that break in the US every week. They are also enhancing their online presence and offering convenience for customers through features such as Apple Pay and same-day delivery. They are focused on staying competitive and relevant every day. The company is also focused on their Pro side.

The speaker discusses the momentum of the Pro side of the business, noting that they have launched new capabilities and are exceeding expectations in core metrics. They also mention the elevated promotions in appliances, which are being funded by vendors, and state that the industry remains stable and rational.

The company is focused on offering relevant promotions and staying within profitability targets. They also recognize the importance of highlighting value to consumers, whether it's through price reductions, new products, or vendor-funded promotions. The company has simplified their low-price guarantee message and believes it will resonate with consumers during the upcoming holiday season. They are confident in their ability to achieve flat gross margins for the year.

The speaker is asking about the company's plans for share repurchases and capital allocation. The company's focus is on investing in the business, maintaining a dividend payout ratio, and funneling remaining funds to share repurchases. They expect to fund share repurchases through operating cash flow in the near term and do not anticipate significant share repurchases in the fourth quarter. The company also plans to manage leverage according to their credit rating and expects to pay off debt as it matures. The speaker then asks about potential sales strategies if the company sees a decrease in sales next year.

During a conference call, Marvin Ellison, the CEO of a company, was asked about their plans for 2024. He stated that they would discuss it in more detail on the Q4 call, but reiterated that their PPI (perpetual) approach would remain in place regardless of their top line and would be adjusted accordingly. When asked about their sales by region and how it relates to housing trends, Ellison stated that their performance is relatively balanced and there are no significant outliers. He also mentioned that any changes in housing costs have not had a material impact on their business. Another caller wished them a happy holiday and they moved on to the next question.

The speaker is responding to questions about the company's top line, specifically in regards to appliances. They mention a normalization in promotions and a shift in the market, potentially due to a weaker demand backdrop and seasonal factors. They also discuss their market leading position and competitive offers for the holiday season.

The weakening trends in the DIY category can be attributed to various factors such as resumption of student loan debt, sustained inflation, and interest rates. People are choosing to spend their discretionary dollars on experiences rather than DIY purchases, which is impacting the DIY category. This is further compounded by the fact that over 100,000 appliances break in the marketplace every week, and the company needs to be there for the consumer as the market leader. Looking ahead to Q4, the company expects a continuation of the macro and traffic trends seen in Q3, with a slight impact from lumber deflation and cycling Hurricane Ian. The company has taken all these factors into consideration and believes its Q4 expectations are achievable.

Kate Pearlman thanks everyone for joining the Lowe's third quarter 2023 earnings call and wishes them a Happy Thanksgiving and a great holiday season. She also mentions that they will have a fourth quarter earnings call in February. The operator then concludes the call.

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