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

Well, good morning. Thank you all for dialing in to this event. So this is our 20th Annual Oppenheimer Consumer Conference, and it's the first year that we're doing the event in this virtual format. So still a bit of a test run here. But my name is Brian Nagel. I'm the senior equity research analyst at Oppenheimer, and I cover the group we now call Consumer Growth and eCommerce. Again, thank you all for joining. So I'm very pleased to introduce my next presenting company, Lowe's, L-O-W, and the company's Executive Vice President and Chief Financial Officer, Dave Denton. Dave, thanks for joining us.

Hi, Brian. Thank you for hosting us. I just want to say always a pleasure to be with you at the conference. And hopefully next year, it will be in person. And I just want to wish everybody that they're safe and healthy and well. And if there's anything that Lowe's can do to help them, please let me know.

Thanks, Dave. So I thought, look, Dave, we prepared a number of questions here. I wanted to just use this as a means to -- for Lowe's to kind of get the latest message out there if you can. Let's start by talking about clearly the retail backdrop. Broadly, it has been very fluid. We've seen with your results recently some very nice strength. I mean Lowe's is performing, I think, extraordinarily well in this environment. First question I have from a bigger picture perspective. Help us understand, from your seat at Lowe's, what you're seeing as far as the overall demand dynamic particularly as maybe some of these COVID-19 headwinds are beginning to abate.

Yes. Well, a couple of things. One, just broadly, as we came out of Q1 and during Q1, we saw pretty broad and solid demand across both geographies and categories across our business platform. And I think a couple of things that are happening underneath there is, one, I think people are shifting more into their home because now not only was it a place to live, now it's a place to work. So I think disproportionately, people are looking at that environment and saying, "Hey, I want to make this as comfortable as possible." And then secondly, I do think there is this notion around making sure that your home in this current situation of COVID is, I'll say, somewhat fortified in the sense that you need to make sure that the air conditioning is appropriate, the air filtration is appropriate, that you -- the last thing you want to have happen during this pandemic is something within your home to break and then requiring someone to be in your homes. So I think there's been this uber focus back into the home and invest in the home. And I think further supporting that, you've also seen folks who normally would be allocating this portion of their income to, let's say, travel and entertainment, a lot of that income has been freed up, and disproportionately, that's gone into that share of wallet, has gone into the home space. So I think that is underlying, has increased the demand for the products and services that we support from a Lowe's perspective. And I think it's constructive to our business as we've seen it through the balance of Q1. As we cycled into Q2, those trends actually continued.

So I was looking very closely to your Q1 results and the commentary you made when you reported those results back in, I guess, May, May 20, that was the day. If you think about -- and again, lots of puts and takes, right, when you talked about the shift in spending towards a home, which makes a lot of sense here. So I guess to what extent do you think in your business the government stimulus has helped here?

Well, I do think it has helped a little bit. But I will say that even before the stimulus checks arrived into the hands of consumers, we saw solid demand across our business. I think the demand took a step-up when stimulus kind of hit the mailboxes of consumers and the bank accounts of consumers. But -- so obviously, I give the government a lot of credit because I do think we're all concerned about the economy. And I think the government learned from '08 and '09 that you need to kind of lean into this, and I think they have leaned into that. I think it has supported the economy. So I do think it's helped us. I don't think that absent the stimulus checks, the demand in our -- kind of in our sector was still very solid despite that.

Then as we think about these markets now day by day, markets across the United States are starting to, so to say, opening up, and other retailers now that were closed, opening. Lowe's stayed open through the crisis as an essential retailer and your primary competitor did as well. How do you see sales tracking in those markets where these other retailers are continuing to open up?

Yes. Very interesting question. It's something that quite honestly, I was a little -- it was a watch-out for me because I was -- as the CFO, was a little concerned. Like what would happen to our trends once these markets begin -- either at a municipal level or a state level start to open up and others -- platforms start coming online? I would say -- so I was worried that, that would actually suppress our demand and suppress our performance. What we've seen is the exact opposite. When the markets and municipalities have opened up, we've actually seen our foot traffic elevated and the demand for products and services within our platform actually grow and increase from a trend perspective. So it's been a constructive development as -- largely as these markets begin to restrict or lessen the restrictions and begin to open back up to kind of, I'll say, somewhat normal behavior but I guess the new normal behavior, if you will.

And then along the same lines, one of the elements, so to say, that my team and I have been watching very closely is this overall housing activity. What I've been surprised, I guess, is just surprised, pleasantly surprised is how -- to the extent to which housing activity by various measures is starting to improve here even as this crisis is, so to say, persistent. I mean are you -- I guess one question, are you seeing now the data? And then second to that is how does that -- how is it potentially strengthening housing market? Would the other factors we've already discussed with -- potentially help Lowe's from the sales perspective?

Yes. I do think -- oddly enough, I do think this whole -- that whole thesis around what has happened from a housing sector perspective has actually helped the sector a bit. I think you continue to see really low supply. You're seeing that low supply support at least maintain housing prices kind of around the nation for the most part. I would say that also, again, this whole notion of people now not only living at home but working from home has disproportionately had consumers think about what's the next investment I want to make in the home so that I can be more comfortable as I live and work there and actually support my family there because I'm not only there by myself. I'm there with all of my wife or my spouse and my children and how do I make this all comfortable for all of us. And so I think this has actually leaned into people spending disproportionate amount of share of wallet back into the home at this point in time. So again, I think a constructive development at this point.

How would you characterize -- again, I know this is sort of a moving target, but this overall competition is -- particularly with regard to price competition within the home improvement space at this point. Are you -- because you have made -- going back to the Q1 comments, you and your team have discussed really pull back in promotions within the space. I guess this is quite somewhat of a follow-up to the question asked previously. But we still see that -- and particularly some of these other retailers that may compete with you generally as prices grow this month?

Yes. I think a couple of things are happening. One is just strategically, it was always our objective to move this company a bit more to an EDLP-like platform. We're always going to have promotions. We clearly want to win the big holidays or the season. So we're clearly going to lean in and demonstrate a lot of value during those time frames. So that's kind of a given. I will say that what has happened in this environment because of COVID is we probably accelerated our shift into that kind of a platform. We're continuing to not promote nearly as broadly as we did last year. Part of that was despite COVID, we really pulled back and focused our promotional efforts to be more effective. So part of this is just our actions that we took in the back half of last year cycling into this year. But just importantly, where we are today is we're an essential retailer. We want to make sure that we provide the essential goods and services to support our communities around the nation. But we also don't want to drive incremental traffic into our stores that cause us to potentially break with some of the social distancing regulations that we have. So it's a balancing act here. We want to make sure that people understand that we're open, that we're here for them, that we have the right products and services to support their household. But it is -- in practicality, we're pulling back on promotions from a macro perspective. And I do think that's going to continue for a while. I think even as others have come back online and maybe even been a bit more promotional than what they were previous to COVID. I don't think it's really affected us much at this point in time. There's a lot of value in our stores. And I think what you're seeing is people are concentrating their shopping trips and trying to consolidate those into 1 as opposed to hitting 3, maybe 2 or 3 specialty stores, they're consolidating those trips into 1 trip. And because of the breadth of assortment and categories that we have, we're probably disproportionately garnering that trip versus others.

Great. One more question on COVID. I want to move on to just the business. But again, going back to the commentary that you and your team made on your Q1 call. There's this trend. People have more time on their hands now. They're in their homes. They may be catching up on these projects that they've been thinking about or contemplating for a long time. Did you run the risk about we're just going to go through those? Or do you think that's more of a sustained-type phenomenon for why so long as we're, sort of, say, operating as consumers in this environment?

Yes. Listen, I don't think there's -- I don't feel like there's a risk that we've taken projects that we're sitting now in Q3 or Q4 and just pulled them into Q1 and Q2. I don't think we've seen -- my guess is not a pull-forward. I think what you are seeing is some incremental projects to support the home. And I think you're going to see that continue through the balance of the year to some degree. It's really hard to predict. I mean, Brian, I told this to someone earlier, is that all the models that we have historically run here at Lowe's and used those models to predict the sales performance for the out-periods, they -- if you went back into January and ran those, they all gave me very different answers to what is actually happening. So I think just trying to predict the future is very difficult right now. But I will say, I see, again, continued strong demand in our channel. I think people are leaning into the home and investing in the home. And I don't think this is just -- I was planning something for September. Now I'm going to do it in June. I don't think that's the case. I think people have had a little time on their hands. We want to make these investments to make sure that if a second wave comes around and they're locked in their home that, that's -- their home's up-to-date, relevant, in pristine condition to support the needs of their family.

So shifting gears a bit. Lowe's has been, I think, undergoing this, feels a very successful transition. We've repositioned for now the past several quarters. Marvin met with me at this conference last year I was visiting. And we talked a lot about some of the inventory initiatives. So as you look at the business now -- and again, I think maybe some of this has come more to light with the COVID crisis. But how would you really characterize as the underlying improvements that you and your team have made to the Lowe's model and how we're seeing the benefits of that now?

Well, I think first and foremost, I think if this situation in the -- around the world had happened 1 year or 1.5 years ago, I'm not sure Lowe's could have withstood the increase in demand and service requirements that the company had since that's now facing at this point in time. Recall 2 years ago, basically, on Black Friday, our website went down because there was increased traffic and demand from a technology -- from an e-comm perspective, and the infrastructure just wasn't there to support it. So I think just going back and making the investments in our store labor model, our store technology, making sure that our supply chain from a product flow perspective was -- we still have work to do, but it's been modernized a little bit, is updated from a supply chain perspective, that we've won back and from a fundamental perspective, fixed the core infrastructure from a technology perspective such that we weren't off-line. And I do think the fact that we leaned into fixing our out-of-stock problems, we had the right inventory assortment. We had the right depth from a job-lot quantity perspective. We now have the replenishment algorithms working more appropriately. I think all of that has allowed us to, one, meet this escalated demand from a product perspective but also do it at the same time our service levels have increased during this period of time. And we were able to flex and implement curbside delivery literally over the weekend. And I think a year ago, I think being able to ask our operations team and our technology team to be able to do that most likely would have been impossible to do. And I think that just shows you the strength of what we've done, which some of that is not visible yet because it's kind of behind the scenes operationally fixing the business, but you'll begin to see it as we deploy new processes in our stores.

So coming at -- so let me ask maybe just to tweak the question a little bit. As we come out of this crisis, which I hope we will in the near future, what still needs to be done? What's still not working in the Lowe's stores and maybe as best as it could?

Yes. We still have a lot of work to do here. So don't get me wrong that we've now waved the magic wand and everything is done. Let me take them in pieces here. From an e-commerce perspective, we have the front end of our e-commerce platforms on the Google Cloud. The back section, the checkout is not. That's going to be done here in the first half of the year. So that's got to get done. Once we've migrated everything to the cloud, then we can turn around and very rapidly make enhancements that consumers and pro customers will see. So it'll be easier checkout. We'll be able to buy collections online more effectively. We'll be able to more quickly decouple product costs from shipping. So there's a lot of work to be done, but the Google Cloud platform enables us to do it more quickly. From a supply chain perspective, we're still early innings. We're still muscling through some of these shipments and deliveries really from our store, which we know we're in the process of building, I'll call them, regional cross-dock facilities that will allow us to take big and bulky items up one node in the supply chain and allow us to be a lot more efficient, allow us to put technology around that to be able to track deliveries to consumers and to job sites, all of which has work to be done. And so we have a lot of work from that perspective. And then finally, we're not 100% satisfied with how our stores from an adjacency perspective are laid out. So we're making modest improvements in that. We'll probably slow some of that down because we can't get our stores as completely now as we had liked to. So we have probably the back half of the year into next year probably working more rapidly using our merchandise service team to enhance the adjacencies across our platform. So those are just a few areas that we still have a lot of work to do. We have line of sight to it. These were on our road map since day 1, and they remain on our road map. And so we're not backing off of these things. We may have reprioritized a little bit but still making the right investments, we think, for the long-term growth of the business.

So as COVID-19 and the manner in which consumer spending has shifted online, Lowe's has been very focused, and you mentioned here, what we've seen from prior comments, very focused on enhancing that online shopping experience. It's been a part of Lowe's now for a little while. Does it -- what you're seeing now with how the consumer is shopping your stores or connecting with your stores, does it make online even more of a priority for you?

Without a doubt. I mean I think there's no doubt that we felt like the online opportunity at Lowe's was significant. I think that we -- as you recall, when we cycled into 2020, we said that -- I'll say the first half of the year was a rebuilding year from an e-com perspective. The second half of the year was starting to increase the trends in e-com. Obviously, that's pulled all that forward a little bit. We probably reinvested more heavily in e-com in the first half of the year than we had prioritized in the second half of the year. And e-com, if anything, has grown in importance. I think the shift in how consumers engage with retailers has shifted permanently. Now there might be some pullback, don't get me wrong about that. But I think people now say, "Well, I can shop online and pick up at curb. I can shop online and pick up in store. I can shop online, delivered to home. All of that's available to me. I might not have tried it before. Now I, out of necessity, have tried it. And actually, I like it and it works for me." And so I think you're going to see that continue indefinitely.

Going back. So sales have tracked very, very strong. I think stronger than you expected and most of us expected, so congratulations on that. Now it's -- I guess one question. To what extent do you think that Lowe's system catering to or serving a new customer? And how do you as an organization then retain those? And I guess back to question asked previously about the stores. How does Lowe's feel about retaining those customers?

Yes. I think there's no doubt that people have rediscovered Lowe's, both in-store and online through the past 12 or 16 weeks. I think largely that there's 2 things to do. From a consumer perspective -- I'll put consumer and pro, I'll separate the 2. From a consumer perspective, probably the biggest thing we can do is obviously give the best service possible. And I think the good news is we leaned in to service training for our associates about a year ago and just -- we call it smart training. I think that has enabled us to continue to elevate our service profile to consumers. And I think continuing to lean into that will help us longer term. And what we've always found is that if you do well with your first visit in spring, you typically earn a second and third trip from that consumer. And I think all metrics indicate that we've done really well there. So I think that's number one. Number two, we're really supporting those consumers from downloading our Lowe's app. We made a lot of improvements to that app. We're with our associates working and the -- our downloads have increased significantly. So getting people tied into the apps can be really important again from a consumer perspective. Leaning to the pro side of the house. Good news is that we just recently rolled out pro loyalty. We're going to make a big splash about it, but we haven't because of COVID. But the platform is there. And tied to pro loyalty is our CRM tool supported by Salesforce.com. And so now we have a platform. As these new pro customers utilize Lowe's, we're capturing all that data. So we now know who they are and what specialty they support from a trade perspective, their contact information. And now we have a way to actively communicate with them and call on them and support them going forward. So that's really -- and keep in mind that, longer term, the biggest opportunity that Lowe's always had was winning a bigger portion of the pro customer. And so this has probably accelerated that to some degree and allowed us to really lean in and understand that pro customer better and more rapidly than what we thought.

So have you been surprised of just the overall resiliency of your pro customer through this?

Yes, I have been. I really had -- I've been surprised a little bit about just the resiliency of the market in general and, certainly, our business and our ability to maintain our business and keep up with it, just given, as you know, 1.5 years ago, the business was a little fragile from an operational perspective. And I think we've hardened that. I do think that getting -- leaning in into the pro customer and watching them really shift from doing a lot of interior work, pivoting very rapidly to doing work outside the home when people felt more comfortable, probably having a pro customer doing an outside project versus an interior project. And now as we cycled in, as I said, coming out of Q1 into Q2, seeing people begin to come back into the home and support installation of whether it be flooring or carpet, et cetera, seeing a little bit of green shoots in those areas as well.

And we're trying to start to wind down here. But I wanted to -- I'd actually spent quite a bit of time in your stores a couple of -- not too far from my hood. Obviously very crowded, very well going. How do you think about just the potential for operating expenses changing in those stores? Clearly, now I see more people. You're doing a great job of moderating or regulating between coming to stores and cleaning things. How does the store level expense model change after this?

Well, I think there's no doubt that if you look through our data in Q1, we spent an excess of $30 million through the quarter just in kind of cleaning COVID-related expenses. And I think that wasn't a full quarter worth of spend as we think about February is probably pretty light and March and April probably picked up. So think about it kind of at that level going forward. And I think those are probably permanent costs into the future. We'll probably be able to do it a little bit more efficiently because we implemented those more or less overnight. But still, we're going to have an elevated cost associated with cleaning in our stores, no doubt about it. I do think, too, right now, just because of the fluid nature, we're probably running a bit more overtime than we would have run kind of normal hours. So our cost per hour is a little elevated, but our hours are down because we've had certain associates that, by and large, if they're -- if they have children who are in school, the school got moved to home, and they had real child care needs, and they couldn't be in our stores. And we allowed that to happen, which was a good thing. But because of that, we replaced those hours with overtime. So I think there's some opportunities to lever that a little bit over time. Keep in mind, we were on a pretty steady march of improving our operational efficiency within our stores, mostly store labor. And we probably have a 2.5, 3-year road map that's by project. And as we invest these new processes and these new technologies, we can pull store hours out, either out of the store completely and pocket the savings or reinvest those dollars and those hours into more service-focused items to drive top line performance. And so you should expect us -- this year is kind of a weird year just because of everything going on. But over time, you should expect us to lever those store expenses as we get more productive. And I think this is -- we're on a good path to get that done.

My final question, Dave. You very smartly, early in the crisis, undertook a number of liquidity measures -- measures in terms of liquidity, improve the balance sheet. Now where do we -- the question, where do we stand now? And what -- Lowe's is performing clearly very well. Of course, there's risks out there, but Lowe's has been performing very well. What are you waiting for to, sort of say, reverse some of these -- these measures you took?

Yes. So listen, as you can well imagine, you're sitting there in probably late February, early March, seeing the credit markets melt down. You're seeing a lot of concern globally. So we took pretty decisive actions to put some cash on the balance sheet just in the case something unforeseen really locked down. I think what -- and so we're obviously sitting on a lot of cash, a lot more cash than I'm used to sitting on. It's my expectation that we will get back to the 2.75 adjusted debt-to-EBITDAR leverage ratio over time. What I really want to see a little bit is -- I'm not as worried probably with the sector and our performance within the sector. I'm a little bit more worried about the global credit markets and what could possibly happen there. So I think as we cycle through the next several months, and we see what happens with the second wave, do we have any issues that caused the credit markets to dislocate or the financial market to dislocate. Once we kind of get past some of that and we have a little bit more certainty, I think you would expect us to start unwinding and kind of getting back to our normal playbook after that happens. But I do think just structurally speaking, it will be interesting to see what happens just from an industry perspective, not -- I'll call it, a retail -- but probably even a total business perspective, how people think about their balance sheet just given these shocks that have happened in the system. So we'll watch it closely. I think we're -- the good news is we're in really great positions. We have a lot of options on the table that -- how to unwind this and how to use that capital to really drive our business forward and to reward shareholders as well.

And specifically, with regard to buybacks, I mean buybacks have been a big piece, so to say, or a large piece of the Lowe's growth algorithm over time. Smartly, you pulled back. How are your initial thoughts of thinking about the buyback program going forward?

Yes. Listen, I -- as you well know, I've been a CFO for a long time, and I've been a big proponent of buybacks. I think they're a really nice way to reward shareholders and return value to shareholders. Having said that, we'll come back and evaluate our capital allocation program in the back half of the year. The one worry that I have, and I've said this very publicly, is that from a policy -- from a government policy perspective, you see a lot of policymakers kind of rattling their sabers about these bad things called share repurchases. I think that's misguided, but I think it's a good sound bite. And so I think what -- we want to make sure we reward shareholders. But we also don't want to step right into -- we don't want to get crosswise with any of that notion from that perspective.

Well, Dave, thank you very much for your time. Congratulations on managing through this very, very well. I appreciate it.

Great. Thank you so much. Again, as always, thank you for your interest in Lowe's. And again, as I said earlier, Lowe's is very committed to supporting the communities that we serve. And if you have any issues that you need our help, please reach out to myself or Heather, and we'll be happy to do everything we can to help you.

Thank you.

Be well.