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

Good morning, everyone. I'm Michael Lasser, the hardline/broadline/food retail analyst at UBS. We could not be more excited to have the team from Lowe's with us today. With us from Lowe's is Dave Denton, the company's well-regarded CFO, who's been in this role since 2018. Prior to that, he's held several leadership roles with CVS. We also have members of the company's Investor Relations team, including Kate Pearlman, the Vice President of Investor Relations; and a familiar face to many of us, Paul Taaffe, who has long served in the Investor Relations teams and recently rejoined. So we're super-excited to have our fireside chat. Dave, thank you so much for joining us this morning. I think we should start off every morning this way, but maybe we could talk about that later in our conversation.

Where I want to start our conversation is just on what you know now about the state of housing and home improvement, given what you've been able to see so far, what's going on in the macro. And based on all that, would you tweak any of the market scenarios that you laid out in December? And as part of that, maybe you can talk about how you see the overall state of housing market and subsequently its impact on home improvement right now?

Yes. Great, Michael. And again, thank you for hosting us today. We really appreciate it. We're really excited to be out talking to investors and really talking about the opportunities that Lowe's has in front of us. We're just super-excited about the position of Lowe's and super-excited where we sit in the sector and the opportunity we have ahead of ourselves. I think as you said, Michael, we laid out a series of scenarios at our investor update session in December that had us going from kind of a robust market to kind of a weak market from a housing sector and home improvement sector perspective. And I think we're just a few weeks into '21. So I don't think there's tweaking that now would probably imply a level of precision that we probably just don't have at this point in time. I would say that as we said at our conference call recently, we still see the housing sector, the home improvement sector still very frothy at the moment in the sense that demand continues to be robust across categories and across geographic markets. We continue to see interest rates, although they're ticking up relatively at historic lows, we see the consumers' balance sheet pretty healthy, still a lot of savings rate from a consumer perspective. So cash is building up into consumers' bank accounts. At the same time, you're having stimulus kind of dropped on top of that, which, as you know, typically accelerates demand a little bit within the home improvement sector. And I think finally is that the home is still a very critical asset in everybody's portfolio. I think we're -- we just -- Michael, as we kicked this off, we talked about the fact that we've just been kind of locked down for just about a year or so -- a year ago that we were in Boston together and spending a lot of time in the home has really shown the importance of that asset and the fact that you need to have that asset really configured now just not only for home but for work and in many cases for school. So I think there's just this impetus to continue to accelerate and improve the home. So we're excited about where we are. Again, we wouldn't tweak the scenarios. We feel that we're in a good spot at the moment, though.

And you mentioned that we've all been at home, and it had been a year since we've been together, and we had a blast when we were here together last time, so hopefully it will happen again soon. But given that it is very likely folks are going to be spending more time at home perpetually more than they did before because of work from home and all these other factors we know about. Doesn't that put more wear and tear, more dents in the wall, more scratches in the floor that leads to a structurally higher level of home improvement demand? And I ask this because one of the critical questions facing the sector is how long can this incredible demand persist? So how would you frame that?

No, I think you're absolutely right, Michael. I think if you look just at the utilization of the home, it's probably up tenfold compared to what it was prior to the pandemic. Just -- and to your point, the wear and tear, not only on, let's say, walls, flooring, carpet, but also on appliances, you're just using those more frequently. So I think there is this continued cycle of reinvestment in the home. And it's unclear to me whether that's probably a secular rotation and a tailwind into this industry for a period of time -- in period of times, not quarters, it's probably years as we think about this going forward. Because Michael, I don't know about you, but if miraculously, there was a cure in everybody's vaccine and we're "back to normal," I'm still going to want to make sure that I'm prepared if something like this were to happen again. So I think I'm going to be constantly thinking about how do I ensure that my home is 100% stable if this -- if an event like this were to arise again, hopefully not. But -- so I do think this presents some tailwinds for our sector.

Totally agreed, and it's ironic that you mentioned appliances because the washer repair person is coming to later to household today to repair. So hopefully he doesn't interrupt our conversation.

Yes, Michael, the other thing too is that I think what you're seeing, too, and you know this well, if you look at the retailers out in the U.S., I would say the big 5 to big 7 who are big boxes have done really well. And I think what you're seeing is 2 things happening. One is consumers are choosing different channels to engage with retailers. And so you have to be well capitalized in investing in omnichannel to capture that share from an omnichannel perspective. And then secondly is I think consumers are consolidating trips more so than ever. I think in the past, a consumer might have hit 3 or 4 or 5 specialty shops as they were filling out their project or their basket. Now they're trying to, I'll say, limit their exposure in the environment. So they're consolidating those trips. And you're seeing that with big boxes like us and depot, but you're seeing at Walmart and Target and Costco at the same levels.

Absolutely. So we -- it's clear there's a robust case for home improvement demand to remain quite good for a while. What are the risks? What should the market be mindful? Particularly from a macro perspective, how concerned are you about interest rates? We are seeing the 30-year fixed rate mortgage starting to tick up. At what point does that start to become a concern?

Yes. Listen, I -- it is ticking up, but again, it's still at a pretty historic low. We watch it. I think the Fed has been pretty committed to keeping interest rates low for a period of time. So my sense is we got a temporary rise, and it may plateau here for a while. But I don't know that over the next 6 to 12 months, you're going to see a dramatic change in the interest rate environment. Historically, though, when interest rates do rise, you see a couple of things happen. You see people are less likely to do cash-out refis. So therefore, there's not -- they don't get access to that cash. And you see the housing turnover will begin to slow, which is not -- that is kind of, I'll say, a little bit of a wash in our business because if turnover slows people start reinvesting in their home more dramatically than investing in a new home. So I think that's kind of a mixed bag. But I don't -- right now, I don't really see that dampening the demand at this point in time. I think the watch out is once we get open completely, where does discretionary spending ultimately settle? Does it go dramatically back into entertainment? Does it go dramatically back into dining? Does it go into travel? I think we will see some rotation into those discretionary segments, but I think the -- I still think the home is going to be pretty protected.

And as a result, is that -- in your mind, does that help the market more gracefully lap some of these challenging compares? I mean the unprecedented growth for Lowe's in the home improvement sector and the big question that is on the mind of many is how do you lap these tough compares.

Yes. No, I think it does. And I think the other thing to keep in mind that, again, back to what I just said earlier is you're seeing consumers choose different channels. And so you got to be right in omnichannel, and I think you got to be right from a big box perspective. So I do think geographically around the country, Lowe's and big boxes are disproportionately positioned to capture share in the market and therefore be able to overlap some of these tough comparisons. Keep in mind, just -- if you just look back at our trends for last year, Q1 is probably our easiest compare. Q2 gets pretty tough because of the -- the mandated shutdowns across the country that were overlapping. But as we said, we're working to -- at the end of the day, in '21, we're going to do 2 things. One, we're going to take some market share on the top side -- top line, and we're going to improve our operating margin rate. And we're very -- we're dead focused on those 2 activities in '21.

And on the top line, are there any categories from a product perspective that will be a little easier that maybe were under pressure last year that didn't do as well that should help on a return to normalcy?

Yes, there's a couple of things that are happening and that's happening right now is, if you recall, last year, probably starting in April, you started to have product shortages, particularly in lumber, some shortages in appliances. We probably never completely caught up from some of that. The industry and the supply chain has gotten a lot better, but we're probably not where we -- everybody needs to be. And that should help us overlap some of these compares for next -- for '21.

Got it. And one other question -- and I would point out to everyone listening at home that you feel free to submit any questions you want us to weave into our conversation. One of the questions that we got recently from an investor is, if you look at the consensus forecast, it's essentially on the top line, assuming that the robust market scenario plays out that the Lowe's is able to gain share. On the other hand, there's only a mere 11% operating margin that's embedded in the consensus forecast, whereas the company had guided to a 12% in that scenario. Why do you think the disconnect exists? And what would you say to the marketplace to provide confidence that either the top line is wrong or it should be this and the margin expectation should be this?

You know Michael, I mean, there's no secret. Lowe's historically has always been a little bumpy as far as delivering on their commitments. And I think what Marvin and team here has been trying to do is making sure that we stay the commitment, but we also deliver upon that commitment. So I think from an investor standpoint, when I speak to people a little bit still the show-me story. And I think we have to earn our strikes by putting numbers on the board. But I think if you look back and take a really big step back and say, okay, how do we get there, first and foremost is we spend a lot of incremental costs in '20 that's coming out. So we have a tailwind from an SG&A perspective as you think about that. Secondly, we accelerated a ton of investments mostly from technology as we thought -- as we leaned into omnichannel. We're lapping those, and actually those are becoming, I would say, mature in the sense that we did BOPUS, and we did curbside, but we did it in a not a very efficient way. So we're now maturing that process and driving SG&A efficiencies kind of across the board. Third, we're continuing to evolve our labor management and labor scheduling effort, and that's increasing the productivity in our stores. We've leaned into the Pro business. So I think that -- we haven't talked much about that, but I think we see our Pros, one, very busy and have a very robust pipeline. And I think we are pretty confident we're going to take a bigger share of their wallet over time. And Michael, as you know, when we start driving incremental sales in that side of the building, a lot of that from a gross margin perspective is nice flow-through because I'm already staffed up. I have the labor in the store. It's just kind of really improving our productivity. So I think those are areas in which if leaning into will allow us to get to that expansion of operating profit margin in '21.

Got it. That's helpful. And we'll get into all of these factors a little bit more throughout our conversation. The question I was going to ask, which was do you see any of behavior stick that have occurred here? And I want to touch on that. But as part of that, could you also talk about -- we've seen varying degrees of reopening across the country. So have you been able to observe any differences in markets that are a bit more reopen versus those that are not? So those kind of 2 elements.

Yes. No, not really. I think our -- what's interesting, Michael, is the demand across the country has been pretty consistent. And I will -- maybe I'll look at a couple of areas. If you take Florida, Florida has probably been more open than most states throughout this pandemic, and demand continues to be very robust in Florida. I look at maybe Dallas and Texas as a different example. They've opened up recently pretty dramatically, I think. Demand is high in Texas, but I think demand is being fueled a bit by the weather conditions that created a lot of repair requirements in that market. So you're seeing that repair and rebound take place in Texas at the moment. So you're seeing demand elevated there, but it's not necessarily probably because of opening up or closing, I think.

Got it. In longer term, presumably, e-commerce more here to stay. DIY folks have realized they can do see some things, maybe some folks have realized they can't do things, but that's all a different conversation.

Yes. But Michael, it will be interesting too is that coming through spring here, keep in mind, and Marvin keeps reminding me of this, last spring, we went into lockdown basically mid-March, call it. Everybody had been out -- we've been out traveling. We've been at work. We locked down mid-March and spring hit. So people hadn't really been cooped up much. This spring now, people have been cooped up for about a year. And so I think spring may behave a little bit differently. I mean I think people are anxious to take on a new project, particularly outside, which really leans into an area of strength for Lowe's. We've always had a bigger garden center, always had a really expansive assortment and offering in that segment. And I think we're nicely positioned as we go into that holiday, if you will, in '21.

Absolutely. I mean you mentioned the Pro. It's been a clear area of focus as the transformation has been taking place at Lowe's. Give us a sense for all these different initiatives on the Pro side, where they are with respect to implementation and how you connect those initiatives to driving growth in the Pro segment in 2021, even you lap some tough compares across the entirety of the business?

Sure. So maybe I'll take it in kind of a couple of 3 segments here or I guess, phases, if you will. I'll say Phase 1, I would say, is fixing the service model. And so we -- as you know, about probably 18 months ago improved our staffing position, put in a Pro supervisor over that end of the building, improved our drop-lock quantities, put in loaders, put in Pro parking, really enhanced if that Pro was shopping Lowe's really enhance the experience. We then move to, I would say, the next phase of that, which -- or the next phase, which was the big investment we made last year in what we call Project 51, which is really our merchandising adjacency project to get adjacencies primarily for the Pro correct. So it's easier now for that Pro to shop in and out of the store quickly what they need for their projects side-by-side, so it's much easier to shop. We also created lay-down areas for DIY, but also for the Pro. So again, shutting some value and making sure that good presentation of product that's appropriate for that channel. So Phase II. Phase III now is we have our CRM tool and our loyalty program in place. So now it's maturing that and then layering on top of that over the next several years is tool rental because we do think tool rental ultimately is a core offering that we need to have to support that Pro customer shopping the store more broadly. So I think that's where we are. I think this year is largely about loyalty and the CRM tool maturing as we think about implementation.

And what has been the response? Like how -- have you been able to alert Pros who may be in a little averse doing business with Lowe's in the past to, hey, we're a different Lowe's today? And what has been the response?

Yes. Well, a couple of things. I mean we're constantly surveying the Pro. So we feel pretty good about what -- in fact, very good about what we're hearing from customer feedback perspective, number one. Our comps continue to remain elevated. And so we're feeling that some momentum from that perspective. Number two, we're having a lot of sign-ups in our loyalty program. So that's really encouraging. So now we can see and touch and feel those Pros and that we can overlay that with our outside sales force. So now we know who they are specifically and we're calling on them. So we're kind of -- we're trying to lean in, making sure that we have really strong relationships from that perspective. And so we feel like we're in really nice a nice spot.

And Lowe's has talked a lot about smaller Pros. Presumably, that's where there's been some early successes. Is there enough opportunity with the smaller Pros? And do you have to further penetrate larger Pros in order to meet your aspirations?

We do not to meet our aspirations. Yes, at some point, Michael, 5 years from now, yes, maybe we need to tick ourselves up a little bit maybe. But the other thing that's happening, too, that I didn't mention it, is I do think that because of some of the supply shortages across the industry segments, big boxes like us and depot have probably disproportionately had access to some of those materials. Well, people who might have been shopping specialty supply houses are now giving the opportunity for us to experience Lowe's again. And they might not have been shopping Lowe's for the past 5 years because we've been out of stock, and they had a poor experience. Now they're getting the chance to see a new Lowe's. And I think this has been an opportunity that we tried really hard to capitalize on as we go into '21 here.

And is there any missing tool that needs or initiative that needs to be put in place? Or is it really just about executing what's already were there?

Michael, we're going to continue to always have the next turn of the crank here, but I don't think there's anything that's dramatically mix. I think a lot of this now is we need to get -- I came from CVS. We had a big loyalty program. It took time to build that database and to really fine-tune it. So I think we're in that phase here at Lowe's.

Got it. And 2 more questions on the Pro. Number one, do you feel like culturally within the stores, there's been an embrace of that customer in a way that is necessary to drive the performance there? And then I'll have one more.

Yes. No, I do. I think we see it. It really comes from the top. Marvin and Joe McFarland are constantly talking about the Pro and rallies across that. So I think there's just a lot of excitement in our stores. I'm actually just couldn't be more pleased if you go out into our stores, people are really excited about the business right now, surely.

That's right. And what are you hearing from Pros about their backlog? There is this expectation that the Pro is going to be the driver of home improvement in 2021. Are you seeing signs of that?

Yes. It was hard to measure, Michael, but any Pro -- as we collect information from Pros, they're super busy, big backlog, can't get to the work. And I think that's pretty consistent, pretty much around the country.

Okay. And you would expect that to continue and be a driver for quite some time?

Yes. I mean this is not -- these backlogs, when I talk to these customers, it's not like I'm a month or 2 backlog. I'm 6, 8, 12 months backlog, and the funnel keeps getting bigger.

Right. Pivoting to a bit of an area of debate on the story, which has been the gross margin over the last few quarters. And quite frankly, the market has seen some volatility in the gross margin for -- over the last couple of years, and it is hopeful that you meet the expectation that you laid out, which is, over the long term, this is something to expect that will be flat. So can you unpack how you think about what's this gross margin journey that Lowe's has been on? And how do you go from kind of these surprises that have been popping up to from some level of consistency from?

Yes. Sure. Sure. Listen, And what we said is over the long time, Michael, is that gross margin is going to be largely flattish. There will be some periods, which will tick up a little -- some areas that will likely tick down a little bit, no doubt about that. But I think as we cycle into '21 and going forward is, one, is we have built a very robust and efficient, I'll say, cost management infrastructure here at Lowe's. So where we're analyzing costs coming in, we're proactively analyzing the commodity cost and cost of our products that we're procuring and pushing back to our vendors proactively now. And we're also tying that, if you will, into our pricing ecosystem such that if we do absorb a cost, how do we offset that cost from a gross margin perspective, either on that SKU specifically or within that product group. And so I think we have a very robust process in place. We're constantly investing in technologies to make it more sophisticated, but I think we have the essence, the core of it done. So we feel pretty good about that. And I think if anything, we're seeing our product margins expand because of that effort. At the same time, we're pivoting from a high-low retailer to more of an EDLP like -- type retailer, and that's allowing us to harvest more margin in kind of steady our top line. And so we're well underway there. I feel good about the progress. We are experiencing a little pressure from lumber inflation, obviously, puts pressure on margin, but we're managing our way through that. At the same time, we're investing in the supply chain. So those investments are kind of eating away, if you will, of the expansion of margin from a product perspective. And those will largely eat away at one another. So they'll largely end up being flattish from a gross margin perspective because of those efforts.

And we got a question from the field, which is what gives Lowe's the confidence that it will be able to pass along some input costs inflation if it is more structural in nature, whether it's -- and you mentioned commodity inflation, but I think the heart of this question gets more at wages and transportation. And as part of that, can you give us a sense for how you see the overall pricing and inflationary environment playing out this year? How much do you expect inflation to contribute to Lowe's comp this year compared to where it's been the last couple of years?

Yes. I would say it's obviously going to be a bit higher this year. I don't have a good forecast for that specifically, but inflation is going to help more so this year than it has -- 2020, let's put 2020 off to the side because I think it's just an anomaly. But if you compare '21 versus '19, I think '21 is going to have more inflation, no doubt about it, would be my sense, particularly in lumber and building materials. And I think we feel pretty confident about being able to pass those along. The commodity piece like in lumber, that's kind of industry practice and industry standard. So kind of no worries there. I think where you get into -- where you have to really be thoughtful and sophisticated is in those categories where there's kind of embedded inflation and raw materials that is either unique to home improvement or unique to your box versus the other box, and how do you manage your way through that. And I feel like we have a very sophisticated tool to kind of benchmark where we are, understand elasticity across the different SKUs and categories and have a good handle on how we push and pull on that at this point.

And speaking of elasticities and the tools that you've put in place, another question we got to be a field was, can you ask Dave to describe the high-low everyday low-price journey? How far along is the company in that journey? And what is enabling company to move down this stat?

Well, I think first and foremost, it was always our plan to get there. I do think COVID has allowed us to accelerate our journey in that space dramatically. I would say, our original plan pre-COVID would have been in the third or fourth inning. We're probably in the seventh or eighth inning now. And I think that we've -- and really what it has done, Michael, it is really, I will say, embolden a bit our merchants to really understand that, yes, we have a lot of value in the products that we sell in our box. And I don't think they fully appreciated the value that was there and that we don't need to play this high-low game all the time to drive demand. That's not saying we shouldn't market very aggressively. We can market without being high-low, and we can do special buys without being high-low as well. That adds a lot of value to consumers and ourselves and to our vendors. So I feel like we're in good shape. We're going to continue to push and evolve here, but we've accelerated probably a couple of years.

And Dave, can you put a little more texture around this. What would be a practice -- an example of a practice Lowe's might have done in the past that it's just -- it was ineffective and now how does that practice look?

Sure. So we would, at times, take, let's say, vanities. We put all vanities on market on promo 20% off. And now what we've done is we've created, one, we don't do that, number one. We have really high-quality vanities. At the same time, once a quarter or once every 6 months, we'll do a special buy with one of our vendors in the entities and maybe do a special 20% off that 1 unit or the 1 segment of units. And that's the way in which we're adding a lot of value. We're not spreading that discount across the entire category. And when we do lean into that specific item, our vendors are there to support us. And they see the benefit because of the acceleration of demand as well.

And so this is a new mindset. Because for a long time, Lowe's watchers, if you remember a project many years ago, which was, all right, take some SKUs out of the store, go back to vendors, buy a little deeper, and that's where you're going to make the margin where this is more of a front-facing approach to say, let's not do that. Let's just become smarter and more scientific about how we're going to approach on pricing.

Without a doubt, and listen, we've been working, I'll give Bill Boltz and crew a lot of credit. They've been not only from a promotion standpoint, but just from an assortment standpoint making sure that we have the right SKUs and the right depth across our platform. And that's largely a Pro comment because I think what we -- where we -- where Lowe's has really struggled is having the right assortment and the right depth to service a Pro customer.

Got it. And that's been one of the enabling factors to be able, along with some systems investments and having a better line of sight. Is that your...

Yes. That is exactly fair, Michael. And I think the thing that we're also -- when we did our merchandise realignment this year in our adjacency project, we've also put in tools to measure space productivity. So now we can actually make sure that those bays that are servicing the Pro, are they as productive as we think they should be? And if not, why not? And how do we tweak and adjust to make it more efficient?

And shrink has been a little bit of an issue across home improvement. Why is that? It's kind of hard for outsiders to understand.

Yes. Well, there's a couple of things that happened. One is we've had just a ton more foot traffic through the stores. So it's just a lot more opportunities, right? Two, we've had a lot more throughput of product through the store, which particularly where someone like us, where we don't have the most sophisticated tools to manage inventory in the supply chain from, let's say, vendor to DC, DC to store and checking into stores, checking it out, so you get some paper shrink in there. So I think we've got a little bit of just that tightening it up. And third is that I just think that there's been a heightened theft issue across home improvement. I think there's -- unfortunately, with probably economic conditions in some categories has really accelerated that. I think the team has done a nice job of putting in controls around this, like I'm optimistic, knock on wood that we're going to get better here. But this is a lagging indicator. As you know, you kind of accrue the shrink until you do the fiscal inventory. So we're kind of going to see that level of shrink really for the next 12 months, for the most part.

Yes. And then once -- between initiatives and then some changing conditions and then the physical inventory beyond 12 months, the expectation is that you'll get that under control.

That's correct. That's correct. But I think we feel good about all the efforts we've taken here. And so we're optimistic, but the numbers have got to come through, right?

Totally. In packaging a lot of this together, the investment community, the market has always come to rely on the margin stability within the home improvement sector. It's one of the key tenets why folks invest in here. And there was a little bit of fear as Lowe's was transforming and maybe the competitive intensity in the industry heightened that the promotional activity would heat up. Last year totally defied that expectation. So is it your expectation that between what Lowe's has done all the steps it's taken moving an everyday low price approach that the market can continue to rely on the margin stability and not getting overly promotional in the sector?

Yes, I think so. That's our expectation. Listen, Mike, we started out this conversation. Two things are going to happen at Lowe's this year. One, we're going to take some market share. Two, we're going to improve operating margin. And part of that comes through managing gross margin very aggressively. And that's our expectation. And we think that's going to hold.

And I just want to make sure that, that message is realistic that you could take market share without sparking excessive promotions in the sector.

We absolutely believe that. We have demonstrated it over the last year. I know it's a weird environment, but we're still competing with a lot of people today. So we feel very good.

For sure. And an area of focus has been on the supply chain. There's been some investments that have already begun. So can you describe where the supply chain for Lowe's is today? Where you would see it going over the next few years? And what investment is needed to be able to get to the endpoint on that journey?

Yes. So what -- Michael, ultimately, what we're trying to build is market-level delivery systems. And really, what happens now is all of our -- this is largely big and bulky. Largely big and bulky comes out of our stores, and it's a very inefficient model. So what we're trying to do is really create cross stocks, if you will, within each market to be able to cover 30, 40, 50 stores at a time. And so we have this model in place in a couple of markets. It's still, I would say, in test, largely not because of the infrastructure, building the cross dock and the consolidation center is pretty easy. The technology to manage and have visibility of inventory, kind of up and down the supply chain and even into the delivery schedule into the home is more complicated And so we have rolled that out as well, but in a test market, and we're continuing to refine that. So my sense is we have a couple of years journey, if you will, to get that fully baked, fully implemented across the nation. And I think that's probably the biggest unlock that we have, Michael.

And what is that allow Lowe's to do that it has not been able to do before?

Well, a couple of things. One, it's going to drive a lot of efficiencies. It's going to put more cost up in gross margin from a supply chain perspective, but it's going to take out labor in the back of the store and relieve of track inventory and appliances in the back of the store. So now freeing up probably 15,000 square feet for other use. So that's number one. Secondly, the customer service experience around that, we're working through technology to make that much more enhanced. And so therefore, you, as a consumer, have a lot more visibility to that delivery. And that's something we just don't do very well today. And so I think those are the 2 efforts we're focused against.

And how does this unlock more potential for the Pro customer? I think there's an expectation that your large competitors building similar capabilities but to serve the Pro customer deliver job lot quantities to work sites. How is Lowe's going to be able to compete on that side?

No. Mike, what that does is, as I just said, it unlocks about 12,000 to 15,000 square feet in the back of the store that now we can actually repurpose and use that for same-day, next-day delivery to the Pro job site. The cycles are big unlock as we think about pulling really inventory that's not that productive in the back of our store because we have -- every store is trying to create a full assortment of inventory for appliances, and it just clogs it up. So getting that up one node in the supply chain now frees that space up. Now we can dedicate that space to really servicing the Pro in a much broader and more efficient manner.

And it sounds like this is the year to test and learn, refine the model. And is it reasonable to expect over the next few years that then you move into full-scale deployment phase?

Yes, that's right. I would say you've got 2 to 3 years to kind of get the thing baked fully would be my guess. But I do think this year is largely get the model just perfect and humming so that when you roll it out, we can roll it out pretty quickly with no issues.

Got it. And speaking of supply chain, there's been some well document -- well-documented challenges in the ports. Has this had any sort of impact on home improvement? Do you feel any constraints on your ability to get product at this point?

We're pretty good for the most part, Michael. There's always pockets here and there. But for the most part, we're, I think, the fourth largest importer in containers in the nation. And I think because of our scale has allowed us to make sure that we protected ourselves there. But throughout 2020, there was always a little -- there was supply constraints in various segments of the industry. But we feel we're probably better positioned than anybody else in the market right now, Michael. Would we like to be better in stock? Sure. We're in pretty good shape.

And coming back to where -- a point that we made earlier in the conversation, which was about what's going to get you to the margin expectations that you have, it will be in part because of some of the operating cost flexibility that you had, where last year, operating costs increased $3.2 billion. Some portion of that is going to -- expected to go away this year. So how do you have levers to navigate around that? And we are seeing some rises in wages across the retail sector. So how much do you have to reinvest of the $3.2 billion increase this year?

Yes. The good news, Michael, is that we've -- over the last couple of years, we've already kind of made a lot of those investments from a levers perspective. You're seeing others kind of catch up to us from that standpoint. So yes, there's probably some wage pressure baked into kind of our plan to expand operating margin this year. So we feel confident where we are, and we're continuing to kind of invest in technology and process to take hours out of our stores and/or reinvest some of those hours to customer service that drives incremental sales flow-through.

And as a follow-up to that, you had expected to move from 40% service -- or 40% of the labor hours in the stores being focused on service. So that being 60, you've got -- you accomplished that task pretty rapidly to Lowe's credit. Is there still more flexibility? And where does that flexibility come from? Maybe you could describe the way labor is allocated in the stores?

Yes. We still have a lot of work to do there, Michael. We've done a nice job. I think we're continuing to be more sophisticated in allocating hours by department. We still have functions that are in our stores today that can be centralized and moved into either a centralized call center or be automated. So we're -- we have a series of programs and efforts underway to do that. So we feel there's still a lot of opportunities for us there. They're still a lot. And Michael, the biggest opportunity, quite honestly, it's not so much a labors hours reduction effort is to be able to push more sales through that box without adding incremental labor. And I think that's a big opportunity to back to our -- as we started this conversation, winning more share of wallet of the Pro going to dramatically improve flow-through as we go down that path.

And we should see that unfold over the next couple of years, where the SG&A dollar growth at a slower rate than sales growth presumably?

Absolutely.

Okay. And we are coming up on the culmination of our very enjoyable conversation. And I want to finish on one of the legacies of Dave Denton's 10-year at Lowe's is really aggressive approach to capital deployment, returning capital to shareholders and rightfully so. The expectation is that you have actually $9 billion of stock. Is the expectation that that's going to be pretty consistent quarter-to-quarter? Will there be conditions where interest rates go up and maybe we have to moderate that or should we expect it to be consistent?

Yes, Michael, I would say, yes, we have a $9 billion program. We're going to at a minimum do $9 billion. I would say that if anything, we're going to probably front-end load -- think about it a little bit more front-end loaded than back-end loaded because I do think there's a lot of value here. I've always been a big proponent that this is a big opportunity to drive shareholder value in the longer term. And this will be a really big tenet of unlocking value for shareholders, not just in '21, but for the next several years. And my expectation is over the next several years as we'll get back to our 2.75x adjusted debt-to-EBITDAR target and that we will make the appropriate investments from a capital management perspective, and we'll be very judicious on making sure we put those dollars in the right area. We'll have a 35% payout ratio and then any "excess cash" above and beyond that, my expectation is that those go back to shareholders in the form of share purchases.

Well, it's going to be a lot of fun to watch. We congratulate you for all the success you've achieved thus far, and we look forward to seeing much more. Thank you, Dave. Thank you, Kate. Thank you, Paul. We should do this every morning...

Well, Michael, I'm not sure. I enjoyed it, but I'm not sure every morning is going to be.

It might be a little over more.

It might be a little much.