Lowe's Companies, Inc. (LOW) Earnings Call Transcript & Summary

All right. Good morning, everyone. I'm Peter Benedict, retail analyst here at Baird, and thanks for joining me for our virtual fireside chat with Lowe's CFO, Dave Denton. Dave was with us last year in New York. So welcome back. We appreciate your continued support of the conference and for joining this discussion. Also logged in are 2 members of Lowe's IR team, Vice President, Kate Pearlman; and Director, Heather Hollander. So welcome to you guys as well. If anyone in the -- on the webcast has any questions, just please submit them, click through the icon, upper left-hand corner of your screen. I'll do my best to work them into the conversation. And as most of you certainly know, Lowe's is a leading home improvement retailer in the U.S., close to 2,000 stores across the U.S. and Canada. There's been a lot of change at the company over the last 2 years, including a new CEO in Marvin Ellison, a revamped management and field team and several process and systems upgrades. The Lowe's transformation is really just getting started, however, and it's exciting to think about the potential for further improvement that lies ahead. Lowe's stock, the market cap just eclipsed $100 billion this morning. So congratulations, Dave, on that. It's a big stock and we think it can have a big impact on portfolios in the years ahead.

So Dave does not have any prepared remarks, so we're just going to kick it right in here. And so to start off, Dave, maybe a quick look back on your recent trends. You had a robust first quarter, certainly, April, your comps were 20%. You spoke of a strong follow through in May. Maybe you can just share with us what your experience is right now maybe how the customer is behaving and really just decompose anything you want to pull out of that first quarter performance, I think.

Yes. Sure. Well, first, Peter, thanks for hosting us today. We really appreciate it, and thanks to all the interest in Lowe's. As you well know, we're on a journey here to improve the performance of Lowe's with a, really, an eye to improving the operational performance financially in the business and then secondly, improving the long-term returns from a shareholder perspective. And I think we're probably in the early innings of that, but I think we continue to focus on the right things to deliver -- drive performance. Peter, to your point, coming out of Q1, we saw really strong demand kind of across all components of home improvement. Maybe a little weakness in categories where there was an installation component, i.e., someone needed to be in the consumer's home to install either flooring or things of that nature. So there's probably some weakness in those categories. Absent that, core home improvement and the categories within that across essentially all geographies performed quite well. As you indicated, we ended the last month of the quarter at a 20%-plus comp. We continue -- as we said on the call, we continue to see that trend at or above that level as we cycled into Q2. We're optimistic about the future. We continue to work, really, with 3 lenses at this point in time in the very tactical near-term is, one is making sure that we operate in an environment that is both safe for our employees, but also safe for our customers. We've implemented a lot of new protocols on that. Secondly, that we maintain high levels in stock, just given the accelerated demand that we're seeing through our outlets. And then third, making sure that we have a really robust service model so that as customers begin to rediscover Lowe's or shop Lowe's for the first time that those are customers for life. So we're very focused against all those efforts.

Now that's helpful. And I think just looking back on the first quarter, you guys laid out maybe 850 basis points you thought was the impact of COVID. And I think, obviously, a tough exercise. Just clarify maybe how you came up with that number.

Yes. We did some pretty in-depth analysis, both kind of top-down and bottoms-up, looking at kind of by product group and by category and by SKU to understand what our plan was for the period. And then turning around and understanding what the incremental performance was above and beyond our plan and typical trends that we would see this time of year. I would say it's really clear to say, yes, we saw enhancements from a performance perspective in cleaning, cleaning supplies and things of that nature. Obviously, those are, I would say, relatively easy to identify that those are very much COVID-related. Having said that, we saw very robust demand across a bunch of different categories, whether that be paint, whether that be lumber, whether it be tools, whether it be actually seasonal product in the sense of the spring season. So those are a bit more difficult to quantify. But having said that, we saw very strong demand kind of up and down the product categories.

And I know you called out kind of a rural versus urban location performance gap, which is not surprising. I'm just curious as those economies are reopening, is there a narrowing of that gap? Are urban stores joining the party per se? Or is it still pretty stark?

Well, I think the urban locations, as they begin to open up a little bit and as spring begins to hit, mostly in the north, you're seeing that performance improve. Despite it was still okay to begin with, but it's actually accelerated a bit. I will say just across the board, when you look at whether they're a municipality or whether it be a state, when that reopens, you're actually seeing our performance from a sales perspective accelerate, not deaccelerate, which quite honestly, I was a little worried that once states opened up that there will be more opportunities for consumers to go into different channels in the environment, which obviously is true. But having said that, we've actually not seen customers leak out of our channel. We've seen people actually move more aggressively into our channel specifically.

That's good. That's good to hear. How about with the Pros? They held up pretty well for you in the first quarter. I know your Pro profile is a little different than that of your main competitor. Maybe talk about how you're positioning business to serve them better. And any successes that you want to call out or things that are on tap?

Yes. Well, I think the good news is from a Pro perspective through Q1, our performance was solid. DIY outperformed the Pro in the quarter. But having said that, the underlying foundation of Pro was very robust. I would say a couple of things of note in there is during the quarter, we did see Pros begin to pivot a bit from interior projects to exterior projects as the COVID concern escalated through Q1. I would say as we cycle to the back half of Q1 and into early Q2, we're seeing some glimmers of hope into the installation categories that lead a little bit into the Pro. So we're beginning to see those recover, and particularly in markets that are opening up, you see healthy demand in those areas. Just keep in mind, there's a few things that we've done to, I'll say, to elevate our Pro business, and that's actually really helped us through this period: one is we did change the service model in the sense have put more labor at the Pro desk, staff the Pro desk, made it more convenient for us to service that Pro as they came into the store; secondly, we leaned into job lot quantities and depth of inventory. So as demand accelerated, we're actually -- we were actually in stock and able to serve them, which historically, we would have probably struggled with a little bit. And then finally, as we cycle in the back half of Q1 and for the first half of this year, we now have Pro loyalty implemented, and we have a CRM tool that's allowing us to capture more data about that Pro. So now as these Pros are shopping us, we'll be able to use that data to lean into them more completely going forward and actually make them more of a customer for life as we think about that. So we're looking at this as an opportunity for us to, one, people experience Lowe's yet again, but also lock them in to some degree as a customer for life.

Yes. Now, and I'm going to circle over to the CRM opportunity here in a second. Just wanted to ask one last question. Just how you guys think internally around the potential demand curves over the second half of this year? I mean, obviously, there's a lot of moving parts, and no one's got a perfect crystal ball here, but how are you kind of thinking about planning the business over the second half of the year?

Yes. It's really tough to imagine what that could look like. I would say that's why we're watching it real time, day in and day out and being connected both to -- I'll say, some macro indicators, but also boots on the ground, understanding what's happening with our Pro customers, how is the consumer feeling about the economy, what's the consumer pipeline for DIY jobs. So we're watching carefully. I would say the good news that was a little -- I guess, now in retrospect, shouldn't have been surprising, but now it was a little surprising is that just given what's happened with COVID, I think people have migrated, obviously, not just to living at home, but now working at home. So they're spending a lot of time there. They've identified incremental projects to do to make that home more comfortable for them because now they're there 24/7. And so I think that's accelerated some demand. Secondly, I don't -- I can't recall a time in my lifetime where the home is not more important right now because as you went through this lockdown, you want to make sure that your home was secure, it was functional, it was safe and you're wanting to make sure that you invest in the home in a way to ensure all those capabilities for your family. And so I think if anything is accelerated, it increased demand through our channel. And so with that, we're looking at the back half, probably optimistically, but we just really don't -- we don't really have a good sense at this point in time. I think people have asked whether you think we'll expect negative comps in the back half, and I would say we're not planning for that.

Okay. Now that's great. So onto the CRM question. So obviously, this crisis has created kind of an unprecedented customer acquisition opportunity for a lot of companies. You mentioned some of the things you're seeing on Pro. Talk a little bit about the new customers, how do they look maybe relative to your current base. And what you're doing -- what you're seeing in terms of repeat rates? And how are you going to work with them to keep them as customers when we get post pandemic?

Yes. I think a couple of things. One, just first and foremost, is understanding who they are, identify and understand the kinds of professions they're in, whether it be a plumber, electrician or a general contractor. I think just capturing that data and understanding how to communicate with them is going to be really important. I would say that our -- at the moment, our service model leans a lot more to, I'll say, the pickup truck Pro, which is a little smaller than the kind of the multimillion-dollar Pro. And I think what we're trying to do is really lean into that marketplace. We're doing a few things to enhance that. One is, obviously, we've rolled out Pro loyalty, which gives that Pro customer more economics, if you will, to shop in our channel. We're also making sure that we're pivoting our assortment to make sure that we lean in and have depth to product in certain areas to make sure that we can help them. And then furthermore, we have a sales program, exterior sales effort that goes out and actually are working with these Pros as they think about their pipeline, as they think about how they bid on incremental projects going forward. It was the idea of how can we help them stay busy? How can we help them be employed? How can we help them drive their business forward? And so we're actively working to make sure these are Pro customers for life.

All right. Great. So process improvement and systems modernization, those are key parts of the -- I guess the Lowe's transformation story. What's kind of been most effective here of late in terms of helping you capitalize on the surge in demand that you've seen? And then what's on tap for the balance of the year and in 2021 from a systems process implementation standpoint?

Yes, yes. Well, I think just if you look at the robust nature of our online sales program and just the transactions going through Q1 just is a testament to all the work that we've done to improve the foundation of our technology. Peter, if you recall, I know probably a couple of years ago now, we had a fairly sizable systemic failure on Black Friday when our system went down from the e-comm perspective. We've spent a lot of time fortifying that infrastructure. We spent a lot of time putting tools in our stores to allow our associates to be more efficient, all of which have really stood tall through this period of time. As we cycle through the balance of this year, there's a few things that we're really focused against from a technology perspective, specifically. One is we've got the front end of our website but not the back end of our website up on Google Cloud. The back end should be transitioned by the end of the second quarter onto Google Cloud. Once that the entire site's on the cloud, that gives us a lot of flexibility to make enhancements that's more important to the consumer to really drive traffic in the back half of the year. So that's a really important milestone. So we have a lot of enhancements that we're leaning into. Furthermore, we implemented kind of on a moment's notice buy online, pick up at curbside. And we did that -- good news because our operators are very flexible and our technology is very flexible, but we did it really just muscling it through. So we have enhancements that we're working to make that process a lot more productive and relieve strain on our associates to be able to fulfill those orders in the back half of this year. So obviously, a big program for us and a big push. Clearly, just as consumers reacted to COVID, they have shifted like in most sectors of retail to the online channel. And I think that channel is here to stay. And I think we just have to make sure that we're supportive and working to constantly enhance that and improve that process.

Yes. No, that's fair. And yet, I mean, obviously, a clear standout, e-commerce in the first quarter, I think it was up 80% year-over-year. It's about 8% of sales. Again, not bad for a new platform that wasn't fully rolled.

That's right. A year ago, kind of at that level, would not have been able to process that level of...

Yes. No, terrific. How does the acceleration in digital that we're seeing here impact the supply chain transformation plans and time line for Lowe's? I mean there was -- you guys are doing a lot. You had to cadence things. And I think supply chain -- some of the bigger supply chain investments were kind of more down the road. And of course, you didn't maybe foresee this step function increase in digital penetration. So maybe talk about the supply chain transformation and what this means for that time line.

Well, I think it has demonstrated just, one, how important the supply chain is to the health of the business and the future performance of the company. I would say the supply chain has really been able to pivot a lot to support this peak in demand. I will say that we're continuing to factor -- we meet now pretty frequently on an every other basis to review -- every other week basis to review kind of our programs in supply chain and the investments that we're making. Reality is we still have a 24 to 36 month road map to get our supply chain where we want it to be. We probably are trying to pull some of that forward and make that shorter, but the reality is there's just some building out of infrastructure, building out a technology to support the supply chain, it's just going to take some period of time. It was always the -- always said it was the always the longest pole of the tent, if you will, to get the transformation complete.

Yes. No, that makes sense. So I had a question just get e-mailed in here, and it was kind of when you're talking about inventory, you were talking about job lot quantities, how that's been helping with the Pro. Are there any areas of the business where you're seeing challenges getting inventory? I'm sure there are some, but any notable categories or parts of the business where it's particularly challenging today? And how do you expect that to play out?

Yes. A couple of things. One is, I would say the international supply chain, mostly out of Asia, I would say, is pretty much back to normal, if you will. So it's recovered very nicely. I think Mexico, South America supply chain is a little constrained right now, just given what's happened and the impact of COVID, kind of, I'll say, south of the border here, which is a small piece of supply chain, but still an important piece at some level. Domestically, we're continuing to work with our suppliers to keep pace with the demand that we're seeing in our stores. I would say that's probably most constrained at the moment because many of -- many manufacturers here in the U.S., their plants might not have been engineered for social distancing as an example and/or they might not be an essential business in certain regions. So they're working not at full capacity. Having said that, we're kind of working and leaning in, bringing on new vendors and new suppliers to support the demand. And yes, we have pockets where we're working actively every day to keep pace and being in stock. But we're -- I think we're in good shape. We've -- as you know, we've invested, Peter, if you look back probably 18 months, we probably increased our inventory in a $2 billion range. And that's actually allowed us to have a little bit more flexibility as this demand peaks. So we're probably better positioned, Peter, now than we've ever been to handle an event like this. But doesn't mean we're not chasing inventory all the time to keep up with these high demand rates.

Yes. No, that's fair. It leads me into kind of my next question I want to ask, Bill Boltz, who heads merchandising furloughs, went out of his way to praise several vendors on the -- on your first quarter conference call last month. Maybe talk about the progress you're having attracting Pro-relevant brands. I know that was something that Marvin was talking about when he first arrived at Lowe's. And curious how your partnership with YETI is progressing, rolling it out during obviously unique time in the business. Any disruptions there? Is the plan still on track? How is that performing for you?

Yes. No, I think we're still on track. We're very happy with our partnership with YETI. And they're probably more of a consumer brand than they are a Pro brand. But having said that, they do resonate a bit with the Pro. Simpson Strong-Tie is another very relevant Pro brand that we're rolling out as we speak. We're largely on track with that rollout despite a lot of things happening in our stores. So we're continuing to run our playbook from a merchandising perspective, for the most part. Now listen, we -- there are things that we know from a space productivity perspective, we wanted to change our assortment a little bit, flex space up or down in certain categories that largely postponed out of Q1 and getting done in either Q2 or Q3. So there's probably more work from a planogram perspective that was pushed out than pulled in. And we continue to have really robust dialogues with a lot of different Pro brands that are available to us over time. I would say it's not constraining us at this point in time. The breadth of products that we have to support the Pro is meaningful, and I don't think we're leaving a lot of dollars on the table. Would we like to extend our assortment over time? Absolutely. And I think this is -- if anything, this is demonstrating just how powerful our business is and now what kind of demand levels that we can support. So I think it's a good opportunity for us to go back and have some really interesting dialogues with those brands.

Thank you. And just a question on the promotional environment or at least the plans and the marketing plans. I mean a lot of companies have been kind of finding their footing as -- how do you -- what's the right level of promotion to have at a time when you're trying to mitigate maybe traffic flow to the store, but demand is high, and so there's a lot of moving parts there? Maybe talk about how you guys are setting up 2Q going forward from a promotional standpoint. What are you seeing in the industry? How are people acting?

Yes. I think keep in mind, Peter, that our plan, as we cycled into 2020 was to be a bit less promotional than we were in 2019. So I think our natural inclination was to kind of pull back on some of that. Obviously, as we -- the back half of 2019 or the back half of Q1, we did very few promotions because we didn't want to drive incremental traffic into our stores. I think where our plan, as we cycle to Q2, is obviously to be less promotional. We do need to kind of look at what the competitive landscape is, the competitive market is and make sure that we're appropriate. But I think it does show and demonstrate that there's a lot of value in our stores that consumers realize. Sometimes we think of that we have to run a promotion to just scream that value, and that's not always the case. And I think what we've learned through Q1 is how do we make sure the consumer understands the value in the stores without having to put things on promotion. And so our plan is obviously to move towards more EDLP-type promote -- EDLP-type environment. That's not going to happen overnight, but that's kind of the plan. And listen, we have to be right during the holidays in key events. We're going to -- we're certainly not going to back off of that for sure. But I think you'll see us be less promotional over time.

Okay. I think that makes sense. So I think in the last few minutes we have here, I'll just kind of close with a question kind of on your long-term financial targets. I know there's not near-term guidance out there, but $307 sales per square foot, 12% operating margins were kind of the bogeys that were laid out for the business. Maybe talk about how the dramatic step-up in digital penetration we're seeing. Does that influence the timing of these objectives, the absolute level of these objectives? Any thoughts kind of around that would be helpful.

Yes. It's a really good question. It's a little bit kind of hard to answer. I will say that, obviously, our focus, and we still believe we have a very clear pathway to get to the 12% operating margin rate over a reasonable planning horizon. I think COVID is teaching us things around the shift in consumer demand and the channel in which consumers are going to engage with our business model. I will say, though, that one component, we've always talked about this to drive our performance forward is to be a very complete and an effective omnichannel retailer. And so the digital component of this is an essential piece of that. So I would say, if anything, this has probably accelerated to some degree the way in which consumers now engage with us and have confidence in using that channel as a way to interact with Lowe's. And so I'm real confident that we're going to get there. I think we, again, have a lot of processes and plans to work it. It's something that we, as a management team, focused on a lot. We talk about our near-term and our long-term financial targets. We review them with the Board pretty comprehensively at different points of time throughout the year. And we have a series of programs that are going to allow us, if we just execute now, just deliver upon those promises.

Okay. That's great. And I guess just the final part would just be around your capital spending plans. It doesn't sound like you're pulling back at all. But just how should we think about the CapEx plan, maybe as you see here today, relative to maybe what you were thinking, 3, 6 months ago, not just for this year but maybe longer term?

Yes, I don't think it's going to materially change it. I think, obviously, we're moving our spending around a little bit in quarters, spending a little bit more in technology in the first half and probably less on stores in the first half as we think about refresh, remodel, replanning a store or reassorting the store. But if anything, we're running -- the playbook that we have to drive performance, we think, is really solid. And so we're not backing off our playbook that we laid out at the investor conference over a year ago. And all the things we're doing to improve both the top line and the bottom line of this business to drive really healthy returns. And we're not backing off that.

Good. Well, it's great to hear. And look, congratulations on a good start to the year, and certainly, good luck the rest of this year. I appreciate you spending the time with us. And hope to see you in person soon, but thanks for doing the virtual Q&A.

Great, Peter. And I'll just close by saying, one, thank you for hosting us today. I just want to wish everybody to stay healthy and stay safe, and if there's anything that Lowe's specifically can do to help you, please let us know. We're here to, one, support our associates, but also we're very focused on supporting the communities that we serve. So if you have any issues, please reach out to us. We're here to help.