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

Good morning, everyone. Thank you again for joining us at the Goldman Sachs 27th Annual Global Retailing Conference. My name is Kate McShane. I cover the Hardline's and Broadline's retailers here. And it's my pleasure today to introduce members of the management team of Lowe's companies for our fireside chat. Demand for home improvement remains very strong, while DIY outperformed during the pandemic, Pro accelerated in Q2. Lowe's noted August to date trends materially consistent with July, and they continue to be focused on investments in long-term productivity initiatives, supply chain enhancements, e-commerce capability transformation, improved inventory availability, along with other initiatives. Today, we have with us Marvin Ellison, President and Chief Executive Officer of Lowe's. Marvin joined Lowe's in 2018, and has more than 30 years of leadership and operational experience in the retail industry. And we also have with us Dave Denton, Chief Financial Officer of Lowe's. He joined in 2018 and has more than 25 years of finance and operational experience. Marvin and David, thank you for joining us today.

Thank you for hosting.

I'm going to start off with just asking you to give maybe a quick state of the union. Lowe's is a little over 1.5 years into its transformation strategy or it was, I guess, with pandemic first hit. You had already been making a lot of progress, and then the pandemic hit and home improvement took off. Your team mobilized to support the comp growth of over 30% in Q2. So I wondered if you could just talk about how the company has navigated through this uncertainty in the past 6 months, especially in the context of you're still trying to transform the business. What were some of the bigger challenges that you had to overcome? And where do you think you excelled?

Well, Kate, I'll take that. And first, it's a pleasure to be here, and thank you for the invitation. Well, look, I think everything starts with gaining trust of the customer. And we work very hard to create the safest possible environment, and probably the most difficult set of circumstances that any of us have worked in. But first and foremost, was how do we maintain the safety of our associates and our customers in this really unique environment that we're operating in? And that was first and foremost. And we simply believe that the extraordinary efforts that we took to make that a priority allowed us to gain the trust of the customer. And because of that trust, we're starting to see that customers come in for repeat visits. I think even Forbes ranked Lowe as #6 on a list of companies that responded effectively to this pandemic that none of us anticipated and many of us didn't have really a robust playbook to understand how we manage it. So I think that's point number one, and that's going to always be our focal point until we're fortunate enough to come out of the other side of this really unique environment that we're in. I think second, we talked a lot about retail fundamentals for the last 18 months. And when we arrived, Dave and I, along with other members of management, it was very obvious that fundamental things that really world-class retailers do very well, were absent here, things like an efficient supply chain, a robust and dynamic e-commerce platform, having good operational mechanisms to manage labor effectively based on rate of sale, having efficiency around how we operate to drive productivity. And so we've been invested in all of those things. And one data point that allowed us to have a little more agility and flexibility to maneuver and to respond to the uniqueness of the customer is our e-commerce platform. I mean we talked last year about the fact we're on a decade-old platform, and we started this re-platforming effort to the cloud. And because of that, we're able to meet this increased demand that customers now have to shop online by being able to have a one of the best and highest-rated mobile apps that's out there from a retail perspective, being able to transition to curbside pickup and to just respond to the needs of the customer. But none of those things would have been possible if not for the investments that we made in our overall e-commerce platform and modernizing it. So I mean these are challenges that we're facing. But I'm just very proud of the team at all level that we've been able to step up and meet those challenges head on.

When it comes to investments, as you kind of pointed out, with e-commerce and the anticipatory nature of those investments, are there any investments where you are now leaning in maybe more so than you would have thought prior to the pandemic?

Yes. I think the good news is that we had a very robust investment plan and very robust thesis of investments over the next several years. If anything, we probably leaned in a little bit more aggressively during the pandemic here, focused primarily on what do we need to do to support the dynamic shifts in consumer shopping behaviors, primarily moving into omnichannel. So if anything, we've leaned in, pushed on e-commerce, we're pushing in the supply chain to make sure that we can adequately support from the service perspective that channel more robustly and completely across the nation. So as we think about the next several years, we're pulling forward some of those investments, getting them done more rapidly so that we can come out of this pandemic, more in a better company doing -- having better service levels and actually working to capture additional market share in the future.

And Kate, the only thing that I'll add. We talked on our second quarter call about steps we're taking in the store to do some resets, to just create better adjacencies. And what we really mean by that is that in many of our stores, they're just very hard to shop and are not very intuitive for the customer. An example will be -- it's not uncommon to walk in one of our stores. And if you're buying lumber building material, let's say you're buying draw wall, and the draw wall screws are literally on the opposite side of the store, which makes for a really tough shopping experience for Pro. Or if you're buying something as simple as a toilet, the toilet seats are 4 hours over. And so this is a long-standing need for us to go in and create a more intuitive shopping environment for our customers. And so we're investing in the necessary reset activity over the next 6 months to try to fix some of these adjacencies that will create an easier shopping experience, a more intuitive shopping experience, and we think that pays dividends over the long term.

Okay. If I could maybe go into DIY versus Pro. And my first set of questions are going to focus on DIY. DIY obviously has had a surge in demand, both in the first and the second quarter. Can you talk a little bit about pull forward? That's a question that we get a lot. Now that people maybe are going back to work, Labor Day has come and gone, how do you think about DIY opportunities going forward and the level of demand for it?

Well, look, it remains high. I mean -- and you don't have to take an overly sophisticated analysis to understand why. I mean most of us are spending more time in our homes than we probably ever have. And so as you spend more time at home as they do-it-yourself customer, you're going to find projects that you are going to invest in to make your home most functional. If you just get snapshot to the normal American household right now, you have individuals finding ways to repurpose their home, did they have to create workspace because many people are fortunate enough to work from home. They have to create space for their kids, in many cases, to go to school from home. So they're repurposing space for that. In the repurposing space to just try to find ways to relax and to just have more social activity at home without venturing out. And so that creates investment in the home and outside of the home, let's say, in the backyard. And then you take those 3 things and combine it with just a simple home improvement projects that you take on because you're physically there so much, you start to see these little maintenance items that need to be repaired. And so for us, all of those things started to occur in the month of May. They occurred in a significant way in the second quarter. And that demand is continuing. I mean Q2 was a significant outperform on the top line, and we think that's going to moderate somewhat in the second half of this year. But that DIY demand still remains high. And we were also pleased to see the Pro business come back in the second quarter. And if you think for a second, many people were just a little overly cautious for all the right reasons to allow a general contractor or installer to come in their home in this COVID environment. I mean it was something that we all had to think about because we're trying to just be very safe. But over the course of the second quarter, we started to see customers become more and more open to let contractors and installers come in, and our Pro business comped in the mid-20s in the second quarter. And we got positive comps in our Install business for the first quarter in a very long time. So we start to see those things come back as well. But make no mistake about it, DIY continues to drive the overall demand.

And I don't think as we look at the analysis of the shopping patterns, it's pretty consistent across geographies and across categories. We don't really think there's pull forward. I think it's just an increase in demand. And we're seeing that, to Marvin's point, the demand continuing. And when we talk to our Pro customers, their backlog is growing. So I think there's still a very structural shift in demand into the future here.

Yes. So that -- so you kind of answered my next question on the Pro. The question that we get is just how much is the demand, kind of in the same vein, how much is the demand that you're seeing now from the Pro is catch-up from March, April, May, when things were shut down and when people weren't coming into their homes versus true demand?

I think there's still true demand out there. I do think you saw -- when this first hit, you saw a pivot of the Pro going inside the house to outside the house. I think now you're seeing a much more balanced perspective as that Pro, one is back to work inside the house. And importantly, now, that the amount of jobs that are coming to that Pro is continuing to elevate. So I think we're getting back to a new norm, if you will, from that perspective.

Then probably a question I should have asked before diving into Pro and DIY, but it really has to do with the state of the housing market. I mean I think when all this started, the obvious reaction was we were going to be plunged into a recession, maybe it would be quick, maybe it wouldn't. And you would see a lot of stress on the homeowner, and that's the complete opposite of what we've seen. And right now, there seems to be a lot of positive signs, too, around home sales, housing starts, and we're starting to feel more question on the risk from just lack of overall inventory. So how do you think about housing inventory and existing home sales when it comes to the drivers of your business?

Well, look, I think for us, having limited new home inventory is actually good for the home improvement business. We do very little business with new home construction. I mean we're in the home improvement business, which lends itself to home turnover as customers are buying new homes, they're selling their existing homes, and we tend to pick up business from those -- owners buying those existing homes and those prospective home sellers putting their homes on the market because you want to put a new code of pay, you want to repair floor, you want to improve the landscape, and you want to do all those things before you pay on the market. And when you buy a home, you want to personalize it. So new home construction is not big for us. And limited inventory in new homes is actually good for our business. I think I read somewhere recently that you have more homes over the age of 40 that are in existence today in the U.S. than since World War II, and that bodes really well for us, in addition, because if you're living in one of those aging homes, it's going to lend itself to you making those investments to modernize the kitchen, the bath, and also those maintenance and repair items. So overall, the home improvement environment is very positively translating to the macro environment relative to homes.

Yes. Kate, the only other thing I'd add to this is it's not so much the home environment. But if you look at discretionary spending and you look at what's happened, there's been a reallocation of that discretionary spend. If you used to go to restaurants, entertainment, maybe travel, now households -- the opportunity to do that is limited. So you're seeing a pivot, if you will, to that discretionary spending more into the home. And I think that, and to Marvin's point, as we said earlier, people are using the home differently. So there's a big opportunity to reconfigure that space and think about it and invest in it more productively.

If I could ask some questions around merchandising. Marvin, you mentioned earlier about changing the store a little bit to just make more sense with how the customer is shopping. But before that, you've had a lot of exciting announcements around brands that you've brought into the store, like CRAFTSMAN and Char-Broil and Weber, and just a few examples like that. We wondered if there's more to come. How you feel about your progress when it comes to bringing more brands into the store? And have there also been improvements related to brands that really resonate with the Pro's? Maybe that are not necessarily household names to the DIY, more for the Pro customer.

Yes. I mean, we are extremely pleased with bill boards and the merchandising organization, and how we've started to go out and identify brands that not only resonate with DIY but to your question, to Pro as well. I mean we announced that we're bringing in Simpson Strong-Tie, which is one of the premier Pro brands relative to framing hardware. And in some cases, when a Pro comes in with a construction spec, it's spec specifically for a SKU from Simpson Strong-Tie, and we didn't even carry that brand. And so the ability to have that brand now in our assortment is incredibly important to giving us credibility with the Pro customer. We have other brands that we're excited about, expanding Metabo in power tools, SPAX in fasteners, and we have other brands that we'll be announcing here over the course of the next months and quarters. So this is an ongoing process. But getting those brands continue to give us credibility with the Pro customer because, in large part, those brands matter more to Pros than they do to DIY customers. But if you think about the DIY customer and what's important to many of our customers is the ability to stay focused on the environment. And we just announced that we're going to have the #1 brand in outdoor power equipment as battery-operated in Eagle, will be exclusive to Lowe's starting in December. We're extremely excited about that because it's going to give us the ability to have in our assortment the #1 brand in battery-operated push mowers, riding lawn mowers and all outdoor power equipment exclusive to us. And that's just going to give us a broader assortment in a broader variety. You're going to see new brands coming in cleaning, you're going to see new brands coming in storage and organization, and you're going to see them across the store. But part of what we're trying to do as well, okay, just execute and sell effectively what we have. And new brands are important. They're exciting. But if you look at what we have today in our assortment, our brands are adequate enough to continue to serve our customers both on the Pro and DIY side of the business really well, if we continue to be customer-centric and how we are thinking about serving those customers. And you're going to see us continue to bring those brands to light. So more to come on that. We're excited about it. And we think part of that is one of the reasons why you're seeing our business continue to outperform our closest competitors and why we're continuing to take market share.

I think that's been very clear from your earnings calls that while you've seen this very strong demand that has happened during the pandemic, it's what you're flagging in most of your calls is very specific to a lot of the new strategies that you've put in place and what it's driven. And one of those strategies where you've done a lot of work is inventory management, is very high on the priority list, in terms of better in stocks, better job-lot quantities. I think you were saying that from the very beginning, Marvin. So we wondered where you are in that journey. Does the demand or this unprecedented demand that you've seen in the business set you back at all in terms of how you're managing that? And how do you think about the longer-term benefits of inventory management, especially with the Pro?

Well, look, I think for us, inventory management is just one of the fundamental things that every retailer has to be really good at. And like most retailers, we found ourselves in a situation where customer demand in Pro and DIY outpaced supply that was available from an inventory perspective, and that really started in late April, going into May. So we've been, as we described at chasing inventory for the last 3 or 4 months, trying to get a good flow of product to meet this really unprecedented demand. I've been incredibly proud of Don Frieson in the Supply Chain team, and Joe McFarland in the Store Operations team and how they manage this really unprecedented demand exceptionally well, and our ability to maintain an increased flow of goods to meet this demand that we've been seeing. As we think about the back half of the year, we're being very surgical, and we're looking at this from a geographic perspective, we're looking at this from a SKU base for Pro and DIY, primarily making sure that we are leaning into the SKUs that are required to meet this increased demand, while not putting ourselves at risk of bringing in a lot of seasonal inventory that may be subject to markdowns. So we have a really good balance of leaning into those core home improvement SKUs that are what we call 12-month of the year SKUs that are not going to give us markdown risk and where we have those seasonal SKUs use that come in and out, we're being very careful not to overinvest in those so that we don't get ourselves in a tough position for markdown. So we're chasing demand. We feel good about where we are. And we think our back half of the year plan is very efficient, and we think that's going to carry us into 2021 with a really good inventory flow process.

And Kate, remember, in the last half of last year, we actually made a lot of investments in job-lot quantities, we increased the depth of assortment in key areas. And that really set us up well as demand began to escalate. And we've also made some really critical investments in the supply chain to increase capacity and flow through. So to Marvin's point, yes, we're chasing supply, but we're able to move that supply through our pipeline pretty effectively. So we're pleased with where we stand. Kate, are you still there?

Hi, can you hear me now?

I hear you now.

Sorry. I'm not sure just -- I lost the signal, I guess. I'm not sure what happened. I apologize.

No worries. It's the new world here.

It's the new world. I don't think you can see me anymore. It's just my picture, but I'm here.

Okay. That's fine.