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

Thank you. Good morning, everybody. We turn the lights up in here to make sure no one falls asleep on this rainy Wednesday. Thank you for all coming back in person. It's so nice to see people's faces that we've all known for a really long time. And welcome to the 8th Annual Retail Roundup Conference. With me this morning is Dave Denton, EVP and CFO of Lowe's. It's our pleasure to welcome you. Thank you for attending. I really appreciate that. We'll -- I will do the Q&A. And then at the end, we will leave time for questions. There are mics on your table, so feel free to engage and ask questions that you're interested in.

So maybe we can start it out. Lowe's has had a tremendous turnaround really over the past 5 years with the new management team. Can you -- maybe to set the table for the discussion, can you talk about where you are? And summarize from a merchandising, people, supply chain and technology perspective, and where are you in that journey? And how do you think about what the big opportunities are going forward?

Yes. Great. And just first, thank you for hosting us today. And quite honestly, it's so great to be in person yet again. I appreciate everybody coming to understand a little bit about Lowe's and understand just the transformation of the company, the journey that we're on here at Lowe's to improve performance and really enhance shareholder returns. As you said, the new management team has been in place roughly about 3.5 years. And I think we've been on this journey to think about how do we capture more market share within the home improvement space, at the same time, make the company much more productive. And we've been on this journey when in 2018, the company produced operating income of about between 8% and 9% from a flow-through perspective. We posted about 12.5% last year on a march to get above 13% over time. And I think what we've done here is really first, starting with the customer, making sure that we're doing things that are appropriate to really serve our customers both from a Pro perspective and a DIY perspective more holistically and completely. We leaned in, we realized that the company was largely out of stock and service levels were pretty low. We leaned into improving the service model in the stores, improving job lot quantities, leaned into SKUs that really cater to both our Pro business and importantly, our DIY business. We staffed our stores consistent with demand and consistent with the needs of the Pro. Really enhanced that operating model, particularly servicing that Pro customer to make it really easy for them to shop, supportive from a price perspective and just really being holistic around how to better meet the demand that they had. At the same time, over the last 2 years, we've realigned our stores and improved the adjacencies from a merchandising perspective to make sure that our stores are easy to shop, particularly for the Pro to get in and out because they are starved for time and so being able to support that fast transaction, really has allowed us to improve service from that perspective. We continue to elevate our customer service again, also. We've retrained our associates to be salespeople. We've layered in training for product knowledge, but importantly, really enhanced our selling skills. At the same time, we rolled out new technologies and programs within the stores to make it really efficient for our associates to do their day-to-day task. If you look back in 2018, about 60% of an associate's time was dedicated to task and not servicing customers, we've actually inverted that. Now over 60% of their time is actually servicing customers and only 40% of the time is doing tasks that are not customer-facing. So we're on this journey to continue to improve performance there. I would say, at the same time, we're working to enhance our supply chain. We're rolling out and we have it in 3 markets now, a market delivery model, such that we can make our stores much more efficient to really selling and delivering big and bulky items. We're doing that out of a cross-dock facility that services multiple stores within a region. And that's really improved customer service, improved in-stocks and actually alleviated a lot of work within our stores. So really excited about the journey we're on. We have -- we've got a lot of path to continue to improve performance, but I think the company is a really nice space at this point.

Excellent. So maybe you can talk about share opportunities. There's a lot -- moving forward, there's still efficiency opportunities, and you should have some really good flow-through. But over the long term, it's really all about share. So where do you see the greatest opportunities to gain share across the assortment and then within the customer?

Yes. I think the good news is we came into this business model a few years ago, believing a real opportunity around improving our performance in Pro and taking share from a Pro perspective. And we see the pathway to do that and the runway to do that is still pretty robust over the next several years. So I think that is -- if I think about the growth algorithm, first, the Pro business, we -- our penetration is kind of mid-20s. We have competitors in the space that's probably north of 50% or around 50% of Pro penetration. So it just shows you the size of the prize that we have here to continue to lean into that customer segment. Secondly, one thing that we realized and probably miscalculated a little bit at the beginning is our DIY business is really strong. And we have an opportunity to lean into decor, like the decor categories and really improve our penetration from a DIY perspective. And that's probably an opportunity that we haven't talked a lot about, but it's really in the forefront of us. And that's really how we think about private label coming to life in our stores, is leaning into categories like that to service that DIY customer more completely. And then finally, we massively underpenetrated from an online perspective. In 2018, our online penetration was about 4%. We've now grown it to just shy of 10%, but we're still under-indexed from an assortment perspective online. We have really elevated our tools and technologies in that -- on that platform, but we still have optimization opportunities to further penetrate in the online category more completely. And I would say the company has done a really nice job of using our online technologies and marrying it with our store assets to support buy online, pick up at store, buy online, pick up at curb; order online, delivered to home; order online, deliver to job sites. So I think there's just a big opportunity to continue to evolve and improve our online channel, if you will.

And so how do you think about the 5-year penetration of online? And how does that play out in your business? And does -- because over time, as you add more assortment online, will the buy online, pick up in store and curbside percentage change?

Yes, very well might. What's interesting is I've -- customers have really liked and enjoyed engaging with us online. But they also use that as, I'll say, the starting point, that they've typically chosen to use that platform to get engaged, but ultimately engage us at the store. So I think it's a combination of both. And what we're trying to do is build a seamless environment here so that consumer can really choose how they want to engage with us. We're not going to -- we're not trying to dictate which channel. We want to have the channels available and the consumer decides how they want to engage with Lowe's.

So if you look back over the long history of Lowe's, it was sort of you versus your largest competitor. There was a purposeful shift away from being sort of the -- to them being the nicer warehouse, having more decor, being more DIY friendly and more remodel friendly in terms of DIY and larger seasonal footprint and then more remodel in terms of bigger appliance for kitchen and bath. Investors, long, before you used to say, well, early in the housing cycle, would say, once through a model sort of momentum starts, Lowe's will be a natural share gainer because of how they've sort of assorted their store to be on more of those higher -- more decor and more discretionary items. So to what extent do you think that has maybe benefited you in this sort of mini COVID cycle? And how concerned are you that maybe as we age through the cycle that you could actually see some share headwinds?

That's an interesting theory. I'm not sure I completely agree with that. I think what -- this is an and. This is -- we can be Pro focused and DIY focused at the same time. So it's an and not an or in these categories. I do believe we -- obviously, we skew a bit more DIY and -- but at the end of the day, the consumer is even hiring the Pro. So the consumer coming to life in our stores, understanding what assortments and what decor categories and what decor offerings they have actually, in many cases, goes back and talks to their Pro contractor and say, "Hey, I saw this at Lowe's. This is how I want to remodel my bathroom. I want to remodel my kitchen." So it's aspirational from that perspective. And so I don't believe that that's the case. I think we have still a big pathway to continue to improve performance and gain share in the Pro. And I think we still have opportunities to continue to lean in and grow our DIY business as well. So I don't feel like that's a natural headwind for us.

And so as you think about this is historically a GDP plus category, maybe a 4% type growth rate. You just think about like a normal 5-year over-the-cycle algorithm. How do you think about where you should be relative to the industry growth rate? Does the Pro opportunity and DIY, can we just sort of pencil in maybe 100 bps of share per year?

Yes. What we've said is we're going to outperform the market, and we've been pretty consistent. If you look back over the last 10 years, Lowe's, prior to the new management team, usually lag the market growth by a couple of hundred basis points. I think what we've been very clear is we set forth, our plan is we're going to grow faster than the market, which implies us taking a little bit of market share. And keep in mind, this market is hugely fragmented. It's a $900-plus billion market. The 2 top competitors in the market probably have a mid-20 share in totality. So the market is very fragmented, a lot of small players, a lot of opportunity to improve our position in the market, and we continue to make our business better. And through that, again, servicing both the DIY customer and Pro customer, we think we can take share and outpace the market growth.

And then as you think about, this year, you're guiding Pro up slightly and you're guiding DIY down, how does that express itself at a category level, especially in light of some of the share efforts that you're executing now?

Yes. So obviously, it's going to skew a little bit more to some of the decor categories and appliances and things of that nature, would be a little bit more compressed. But I would say that what we've done is taken a very comprehensive macro view of how we expect 2022 to play out. We've also been built up by category with our merchants and finance team, a very detailed plan both from a core perspective but also from a seasonal perspective. We've tried to understand the overlaps because we are -- particularly this quarter, Q1, we're overlapping a pretty massive government stimulus plan last year. Obviously, that presents headwinds for us as we think about the overlaps. But we planned our business appropriately to that. And as you heard us say on our last conference call, we actually increased our expectations from a top line perspective due to both a little bit of inflation, but importantly, just core strength, particularly within categories that are supported by the Pro business.

It's a great point, March, April is always a funky time of year in this business. And when spring is breaking and where spring is breaking and the timing of Easter, our major -- provides major shifts of demand in time. And then on top of that, you have the anniversary of the stimulus checks last week. So can you maybe give us a summary of like how did the stimulus checks play out within the quarter last year? How are you thinking about the Easter shift and how weather is playing out so far? And what that could mean as we get through spring in June?

Yes. It's made it very complicated to plan almost by week a little bit. But I think what's interesting is almost at some level, need to take the week overlaps out and look at it just for the first half of the year. And so I think we've done a really nice job of thinking about the first half of the year and feel like we're really nicely positioned to have a great spring. I would say that clearly -- I would say, the last 3 or 4 weeks from an overlap perspective, that was the time in which stimulus was in the marketplace really aggressively last year. We're now weighing stimulus from an overlap perspective, is beginning to wane in the next couple of weeks. So I think you'll get that behind us. And obviously, Easter, the shift in Easter does make the demand move around a little bit, just from a month perspective, but we largely contained within the quarter. And as I said at the last earnings call is that from an inventory perspective, seasonally, we're in a really nice position. We feel like all the seasonal goods that we needed to support a really healthy spring are in our supply chain and in our stores. We feel like we're nicely positioned as spring begins to break across the nation, be really nicely positioned to support our DIY customers as well as our Pro customers.

So we were in the stores last week. And you're at this time, you're actually, I think, running spring test in the Northeast this year. How are you thinking about the planning of the marketing events around spring?

Yes. We're just getting -- we haven't really launched our marketing effort. We're just about to do that for spring here in the next few days. So I think we probably planned it just a tad later this year than we did last year. And I believe if you look at the kind of the weather -- this business is weather impacted a bit. I think, if you look at the weather this year versus last year, we're a little colder at this point in time, but spring is going to come, and it's going to break and it's going to be good. I think we're really nicely positioned from an inventory perspective to take advantage of that.

Yes. So a lot has changed from the time that you reported in the fourth quarter. Obviously, the war, gas prices and inflation continues to march higher across the consumer wallet. Are you seeing any sort of elasticity issues, any trade-down issues? Obviously, outside of the commodity categories like lumber, and then looking back historically, what categories do you look at as sort of the canary in the coal mine, if the consumer behavior does start to change?

Yes. I would say that, first and foremost, it's heartbreaking what's happening in Europe. But our business is not really impacted by that. We have no business in Europe, and we have very, very -- I don't think of any suppliers out of that region. So we're less affected from that perspective. I do think we've been managing inflation now for 18 or 20 months. So I think we know how to do that and been pretty effective. Both, I'll say, managing the cost component of that as our finance and merchant teams work with our vendors to optimize the cost profile of the goods that we sell, and at the same time, marrying that with how we go to market from a pricing perspective. And we've really elevated over the last 18 months, the ecosystem that we have in place to effectively manage that to hold our gross margins. And I think what we've also done is put in a very robust tracking system, such that as we adjust cost and price, we look at the demand patterns that results coming out of that and then potentially adjust, if need be, if the patterns aren't as we expected. And so we've been able to effectively manage in a very volatile time period over the last 18 months, while we have increased our sales performance at the same time enhance gross margin rate as all this inflation pressure has happened. At the moment, I don't think we've seen any inflation pressures that's unanticipated, other than the commodities. We were a little surprised that lumber has gone up so dramatically since late December into the first half of this year. We do expect that to moderate in the back half of the year. And we do look at, I'll say, big ticket items for like, I'll say, maybe as a guide to if consumers start to trade down or slow down their spending, and we have not seen any of that happen at this point in time. Consumers are still engaging with us at higher price points, as well as kind of entry-level price points as well.

You have the advantage of having also more southern in so -- and slightly more rural footprint. So really, the two questions there is like: a, in terms of areas where spring has broke, what have you observed? And then in those rural markets where maybe it's a bit more of a drive to get to the store, are you anything in terms of like trip consolidation being a positive versus, let's say, just not going to the store and not buying some discretionary catalog?

Well, I think I'll start with the latter point is I do think there's two things that have happened in the marketplace since the pandemic that are fundamental changes in how consumers engage with retailers. One is I think you're seeing people engage a lot more online, and you've seen us -- we've invested heavily in that space and taking advantage of that. And then secondly, people are consolidating trips. I think that's an advantage to big box retailers. Our assortment is quite large compared to other competitors in the marketplace. And so I think it disproportionately allowed us to capture share during this period. And I think that's sticky. I don't think consumers are going to change their shopping patterns due to that. And I think it's even accelerated a little bit to your point as gas prices increase, that consolidation is likely to even be more sticky. I would say in areas where the -- I'd say the market is wide open, I'll give maybe Florida or Texas, where consumer mobility has been very high for a very long period of time. We've seen really strong performance in those markets. We haven't seen when spring -- when weather has been nice, people are leaning into the spring categories very aggressively. So I think we're -- again, I think we're really nicely positioned to have a great spring here.

So those are the two markets where COVID has probably gone the quickest or has never showed up?

That's right. Well, that's correct. I mean I think if you went back a year ago that the Florida markets behave very much like pre-COVID markets. And I think here in the Northeast and somewhere in the West is kind of catching up to those behaviors.

Amen. So the raise question, if you look back historically, we look at pricing has always been called out as the sort of #1 generator of demand in the category and to a secondary extent, turnover, if you run the correlation versus rates, it's to those housing metrics, it's pretty strong. I run the correlation from those metrics back to your comps. It's not nearly as strong, but there's absolutely correlation. So you've had 3% mortgage rate last summer. I think [indiscernible] was looking at like [ 48 ] back to like 2018 levels. So how are you thinking about the risk of mortgage rates slowing down the housing engine? And what research have you done in turn?

Yes. It's interesting. We had this question a lot from investors. And so we went back and did an analysis in understanding in times in which rates were rising and the economy was strong, how did that affect home improvement demand? Was it going to soften the demand? And actually, we saw it the opposite. When rates were rising and the economy was strong, actually home improvement demand actually increased a bit. Now listen, this is a whole new game that we're playing. No one has come out of a pandemic before. But I think what -- but again, back to maybe a fundamental change in the marketplace, is the home has just become a much more critical asset to everybody. I look at my own business in North Carolina. We had 6,500 people in our home office. We now have probably 3,000 people back into the home office, theoretically full time, if you will, I'll put that in quotes with a lot of flexibility. They're in the office, they enjoy being there, but they're not there 5 days a week. The home is still a critical asset that they're spending much more time in. So if you think about wear and tear, so maintenance costs and requirements are going up. People are reconfiguring their home to make sure it's effective to be able to work there efficiently. People with schoolchildren are still -- a lot of schools from home still at some level. So the investment thesis around the home is really strong and actually it's probably going to be consistently strong over the next period, several years for certain, from our perspective.

Do you think there's a -- at what -- is there a rate level that -- it's sort of like the old gas price question, everyone was like $4? By the way, that's a reference point to 2011, a singular point in time, and we haven't necessarily seen that. Is there a rate level that in your head, like that could start to be an issue?

Yes. I don't know if there's a tipping point to that. I wish -- I really don't know the answer to that question. It's something we watch, and I just say while rates have been rising a little bit, they're still pretty low historically. So they're not out of the realm of reasonableness, number one. And number two, the demand, despite rising rates, the demand is still pretty healthy.

So we are in this environment where most of retail had very much price-driven comp growth in the back half of last year. As you're planning out this year, sort of what's your Fed view? Or how are you thinking about what ex-lumber to the decor assortment, how are you planning for inflation as you climb against what was really an inflection in the back?

Yes. I think just in general, we planned for units to be down a little bit and price to make it up to essentially think about comps of being more or less flat for 2022. And that's how we thought about it. It's how we plan, it's how we bought inventory to support our plan. And I think we've done that uniquely around each category. Some category is going to be stronger than others, and we try to make sure that we understood the demand curve and projected demand curve in those areas. Again, I think what we're -- we continue to see really strong and robust demand, particularly in Pro related SKUs and categories within our store. I think the Pro, when we hear -- when we talk to our Pro customers, their backlog is significant. They have a lot of projects currently underway, and they have a lot of projects that they're planning to initiate in the coming months in the future here. So I think the demand backlog there is still pretty significant.

And then from a vendor perspective, it seems like the sort of the current rate of inflation from vendors is probably higher than what it was in February and certainly in December. Is that fair? And to what degree do you think that inflation could be 2 or 3 points or even more contemplated this year?

Yes. I think what's happened a little bit is inflation, put lumber off the side, probably accelerated through 2021. I think, now inflation is continuing, but probably at a slower growth at this point in time. So I think a lot of that is somewhat behind us. I think the rate of inflation, I think, is probably going to -- in our categories, maybe start to wane a little bit.

Sort of annualize through it.

Exactly. Exactly.

Got it. And then some of the -- there's been some vendors like Traeger and Weber and some of the mattress companies and Wayfair talking about sort of this nonseasonal buying patterns reemerging, pre-COVID seasonal buying patterns, where maybe we're in a rush last February or even October of '20 to sort of start the outdoor season earlier, they are buying products that they wouldn't normally buy in those time frames. So how are you -- you've talked about momentum in the business. How are you thinking about how that could play out maybe later this year? Is there -- and to what extent did you put that in your plan?

Yes. We -- I would say we did probably put a little bit of that in our plan. I think what you're seeing consumers do is probably buying all products a little bit earlier, just because concern of a slowdown in the -- really slow down in the supply chain more than anything else is, it is the product to be available to them. So I think we've almost trained consumers at this point in time with some scarcity of availability of inventory across the U.S., not just within home improvement. And I think because of that, consumers have typically leaned to buying products a little earlier in the cycle than later in the cycle.

Got it. And then maybe just jumping back to some of the margin drivers in the business. We were talking earlier how like legacy Lowe's had this weird effort to manage gross margin rate by having low in-stocks, but then also promoting. You've gone the other direction. I mean Marvin came in immediately, and I think step one was add inventory and then try to add promotional discipline, but you've added technology around that. So like I don't know, the innings or the incrementality of the price and promotional optimization, I think you had maybe 150 bps in your original plan around price and promotion. And where are we in that journey?

Yes. Listen, I think we were all surprised at obviously, the lack of infrastructure at Lowe's back in 2018 and 2019 around managing cost and price within the environment. And I'm an old retailer, so it's better to sell product than not sell product, that helps a little bit.

It's a good rule.

It's a good rule, it's kind of maybe rule #1. But I think what we've done is we've built a really, I would say, advanced cost management and pricing, I'll say, ecosystem because it's not just technology, it's also people and process around it. And I'd say that has really allowed us to, in this period of time of massive inflation, really effectively manage our gross margin to actually enhance our gross margin rate and really be thinking about how we promote strategically and appropriately across our platform in areas that make sense. And so we feel like we're -- we have a really solid platform. I would say the next evolution is to probably take it to a world-class level and it's really enabling some AI technology to just be much more proactive, real-time, dynamic management of price within our platform, almost by store. And so I think we're, again, at a really straight level, the next evolution is going to unlock the next turn of gross margin improvement.

So two sub-questions on that. So at some point, seasonal clearance comes back, right? It's more of the -- one of the most promotional category, maybe appliances, too. But at some point, that comes back into the mix, do you -- can you more than offset that?

Yes. We can. And listen, we still have seasonal clearance even last year, just probably not as much because we sold through a bunch, but there's still always some clearance. You never get it 100% correct. And I think even within that area, that space, just managing the markdown seasonally and appropriately, adjusting price and the discounts over time, we've become much more efficient on that. We've really improved our flow-through, just as we thought about how we -- both how we enter a season but importantly, how we exit the season and making sure we get it right and maximize both margin rate and dollars as we go through those periods of time.

So as you think about going to sort of world-class from a price and promotions perspective, maybe -- can you maybe give us some quantification of like how much did promotional optimization maybe helped '21? And to what degree that is it, is it less than that or -- but still positive over the next couple of years?

Yes. Listen, we probably can't quantify it specifically, but what we've done, really, I would say, 2021 from a promotional perspective, is really the level we think is kind of the go-forward run rate level from a promotional perspective within our platform. We've dramatically -- we really moved to an everyday low-price mentality and being promotional around certain big holidays and seasons, but clearly, not at the breadth or depth of level that we have done prior to the pandemic. In the play that we ran generally from a promotional perspective in '21 is we think the go-forward plan into '22 and beyond, really backing off promotions pretty dramatically. And it does improve gross margin. And listen, we want to make sure that in certain areas, when we would do run a promotion, we partner with a vendor. We lean into maybe a special buy. We give a lot of value to our customer, but we make that in a way that's beneficial to both Lowe's, the customer and our vendor, and we've been very strategic and focused on making sure that we lean in, in those areas appropriately.

Dovetailing to the supply chain side, there was a time, probably 6, 7 years ago, where there was this dominant view that you had to build all these fulfillment centers. You have to build all these fulfillment centers for e-commerce. You had to transition to the entire supply chain to that. And then yourself and targeted really been more pioneers about leveraging the existing space in your store and your larger stores have definitely enabled that. So the big question is that we often get from investors, it's really two parts. One is if you're moving to same day next day, is there an incremental infrastructure need and to what degree could that be sort of an upfront investment? And then the second thing as you think about the Pro runway, given what you have in the ground, materially what you have in the ground today, how long is that runway of gaining share on Pro to where you have to start to consider adding more centralized fulfillment?

Yes. So a couple of things. Maybe I'll just step back and say and tell you what we're doing from a supply chain perspective, we're building market delivery -- a market delivery system, and we have it in 3 of our 15 markets. And basically, what this does is take big and bulky products that are currently housed in the store and delivered from the store is taking them up one node in the supply chain into basically a cross-dock facility, such that now that facility can service 15 or 20 stores. So I can better leverage inventory across my platform, improve the delivery model because now I have it centralized that I can optimize those routes and relieve a bunch of store SG&A because I'm not now, not managing a complete assortment of appliances in the back of the store and having to deliver out of the store. So I'm already building an ecosystem to really support next day for big and bulky in our environment. And we -- over the next 24 months, essentially, we'll have that rolled out across our platform. And that will improve our top line performance because we'll be better in stock. It will improve our -- lower our damages because we're touching that product much less frequently and then further enhance the store productivity, because now I don't have to put labor against that in the store. The flow-through economically is really beneficial to us. I think at the same time, that also then frees up space in our backroom, pretty dramatically. So now I can leverage the backroom to support parcel and next-day or same-day delivery out of the store. So what we're trying to do -- we have a different mentality is -- we have now a set of assets that once this is deployed, I'm freeing up capacity and now how do I best optimize that capacity. So I don't have to run out and build new fulfillment centers to support that. I now -- I'm freeing up that space to be able to do that. And then secondly, if you just look at the Pro penetration of our business back to the Pro comment, is we're, I'll call it, 25% penetrated. I have a lot of latent capacity in my -- the Pro end of my store that I can continue to grow that Pro business pretty dramatically, probably for multiple years before I begin to bump up against delivering capacity constraints from a Pro fulfillment perspective. So I can leverage and really grow my business without adding a bunch of fixed costs and fixed assets in support of that Pro customer.

Interesting. So maybe a couple of quick hits on the supply chain in terms of -- you mentioned not having an exposure in Russia and Ukraine. But how are you feeling about the cost to deliver? You have ocean freight seem to be -- and everything around ocean freight and the ports seem to be the big pressure last year. Now we've got this rising gas, which -- in diesel, which seem to really impact most retailers back in 2018. So how do you think those puts and takes? And what's sort of in your plan around the margin is like?

Yes. I think we actually forecasted much of this in our plan. I think, obviously, gas prices are going up in the market today. So we're working to manage that. I'd say the good news is we have leaned in, we have great strategic partners and contractual relationships with many vendors in this space. So we -- while we're seeing rising costs in the space, we're probably dampening the cost a bit compared to others because of those relationships that we have. So we feel good about that. And then secondly, from a delivery perspective, you just heard the dialogue around how we're rolling out an environment that's just more efficient from a delivery perspective. So while we're experiencing rising costs from a fuel perspective, we're optimizing the routes and the stops per route to be much more efficient from that perspective. So we're trying to minimize the demand for fuel within our environment. So within our plan, we feel confident we're going to be able to manage our way through it. This is what happens in business. You get thrown a little wrinkle and you manage your way through it, but we feel good about it.

Yes. The '20s have been -- what a decade so far. I have some more questions with about 13 minutes left, but I wanted to open it up to those of you in the room to see if you have any questions that you also want to ask. The mic is right in the middle.

You mentioned inflation in your categories maybe starting to wane. Can you just walk through, as you think about working with your vendors and your channel, how much of that is your changing perspective or changing your perspective in that partnership? My sense of the channel has been very accepting of inflation, how important is going back to the old way and managing your vendor relationships important to that gross margin outcome?

Yes. Listen, I think we have great relationships with our vendors. I think we've leaned in aggressively with vendors who could support the demand that we were experiencing within our stores. We work hard to make sure that we do everything we can, that if there is inflation in a product category that the vendor is experiencing that we figure out a way to help offset that, whether it's creating maybe a bigger run for them to minimize changeover in their factories or consolidate loads to minimize the impact of fuel for them. But at the same time, we're making sure as we take a cost increase from a vendor, we're understanding why we're taking it and the components that are causing it such that when it goes back to normal, we go back and now can reverse that cost increase because as if resin prices go down and we took the price up because of resin costs went up, we want to make sure we understand that and are proactive from that perspective.

Is there a dynamic where availability changed our calculus a little bit? [ Now I can ] go back less constraint on that and flatten out inflation that we go back to an [indiscernible] nothing to change?

I don't think much has changed there. We have long-term relationships with our vendors. So I don't think that was really at play here. We were all working hard to make sure that we could get enough product to support an elevated demand cycle. And that's gotten better, by the way, as you well know.

I had one over here. To the point you made on dampening the impact of inflation with your partnerships, can you talk about your price gaps versus your larger direct competitor and independents today versus where they used to be in the context of the inflation you've seen?

Yes. We look at our pricing by market, almost daily, I would say. And I would say that we're very competitively priced, certainly against our major competitor. I would say typically, it would be category dependent, but we're really effectively priced against some of the regional players. They don't have the same cost advantage that like some of -- maybe some of our relationships might garner for us. So that gives us a little bit of a competitive advantage as we think about how we present ourselves to the consumer. But we monitor it daily. We adjust as needed. But I think we feel really good about how we're priced in the marketplace to support the consumer in the Pro.

We have a good -- I'll wait one second. Go ahead.

You alluded to big-ticket purchases sort of holding up and a good sign of the consumer resiliency. Can you just talk about sort of the evolution of that? What you've seen in the past in dips and consumer confidence or whatnot? And what we should be looking for in that?

Yes. I would say that what we just monitor, I do think it's kind of the health of the consumers if they start -- if those big tickets start to wane or they start to trade down a little bit, it's a sign of you're bumping up against either an economic concern or a price point that maybe consumers pull back on. We've not seen that take place, certainly over the last 24 months at all. We've seen really strong demand at the high end. We've seen a little bit of slower demand in the low end, not because the demand is not there, just there was such a spike in -- think about cleaning products and things of that nature a couple of years ago, the spike in demand was significant. And obviously, now that's gotten back to a more normalized level. And those typically were lower price point SKUs. So you're seeing that just normalize itself out in the marketplace.

So the first step is people -- so the first step is people still buy a drill, but buy something more basic and then they make tough decisions on whether to rent or buy?

That's right. That's probably right.

And you're not seeing that?

Not seeing that. No, sir.

A couple -- two quick questions. One is just picking up on kind of that conversation on seasonality you guys had. I'm just wondering, was that -- did you -- was that prevalent in 2021? Or 20 -- it's because I'm just trying to understand, logically speaking, if I have this right, it would -- like you'd see stronger sales gains in traditionally nonseasonal periods. And then obviously, the offset would be during seasonal periods, some of that demand was already filled. Do I have that right in kind of the timing? And then kind of the second question which is different is just on these Pro backlogs that are -- they're massive, obviously. I mean, obviously, your business you're seeing. How do you get comfortable in measuring it, that it's not just a little bit more backwards looking? In other words, kind of the pipeline filling and the back end of that backlog to make sure that the projects are still sticking out 6 months or whatever they are?

Yes, yes. I guess, first and foremost, let's take the seasonal topic first is, obviously, we have a very strong kind of core business. And then really, the first half of the year, there's a lot of seasonality in our business, really promoted through spring. That's really the seasonality of this business. And you'll see that seasonality play out between Q1 and Q2. So you almost need to look at the first half of the year in totality. And I would say that -- and it is a little weather dependent about when it starts and -- but it's not that spring is not going to come. But we, again, continue to see really strong demand from a spring perspective. Albeit, we're just now entering probably the height of the spring market from that standpoint. And I do think, historically, probably last year versus this year, people were more probably at home. So spring maybe -- they started maybe a little bit earlier, but I don't think we've seen a dramatic change in the pattern, if you will. So number one. And then, I guess, the Pro backlogs. First and foremost, we talk to our Pro customers. We have -- I don't -- we have a council of Pro contractors that we constantly are engaged with. So they give us insights on how they're seeing the marketplace, number one. Number two, we've just rolled out a loyalty program. So now that's going to allow us with the loyalty program and the wraparound CRM tool that we've engaged with, we'll now have even better insights into the projects that they have in front of them so that we can help support their bidding process and their fulfillment process as they scope out that work. So I would say that now we probably don't have as robust of a viewpoint as we will have in the future based on the ecosystem that we're building around that CRM tool.

I was surprised to hear you say that ex-lumber, that you think inflation is actually starting to moderate now. Which...

I said it's increasing, but at a lower rate than it was.

Okay. So the increase -- the higher increase is it decelerating?

Correct. Correct.

So if it was going from 5 to 7, it might go 7 to 8. Is that what you're saying?

Yes. So I think -- I'll just make up a number. If it was 10% last year, maybe it's going up another point or 2 this year. So it's building, but it's not 10% on top of 10%.

So it's still increasing in rate, is just not increasing in the rate, rather than accelerated.

Correct. That's correct.

And which areas do you think account for that moderation?

Well, listen, I think what's happened is you've seen a lot of suppliers kind of get back online. And so now you're seeing -- in many cases, you had vendors and suppliers that were operating their facilities at 50% capacity. And therefore, the cost to produce product was much more dramatic during those periods. Now they're getting back to 80%, 90% or 100% capacity. So now they'll be able to leverage the infrastructure they have in place. So that's what's driving. It's really the, I'll say, the supply chain beginning to kind of catch up from a product fulfillment perspective.

Can I just ask one more? What level do you think across your business inflation is running at?

Well, you've got to put -- let's take, obviously, commodities off to the side. Probably mid-single digits, somewhere in that neighborhood.

So I guess earlier, you were discussing some of how you expected category performance to evolve with the shift back from Pro to DIY. So I was just a little -- and you referenced appliances, I think, specifically within that and decor. So I was just wondering if you do sort of just expand on and clarify those comments?

Yes. I just -- what we -- what I want to make sure we understood is that we plan for the DIY business to be down a little bit in 2022 and the Pro business to be a little stronger and outpace the marketplace. And that's just a factor that the DIY business over the last 2 years has been just very, very robust. So it's more of an overlap issue than anything else. Demand is still solid, but maybe just not quite as solid, given stimulus, particularly last year in 2021, particularly first half of the year. And again, our Pro business, we've done a lot of things. You heard me talk about all the efforts we put forth to enhance the Pro business. And coupled with the fact that demand continues to be really strong in that. So the really strong demand overlay onto the Pro business and then getting better improvement story on top of that with Lowe's as we lean into that customer segment.

And how that [indiscernible]?

Yes. So if you look at that, then that will feed into, if you think about rough plumbing, rough electrical, lumber, building materials from that perspective, hardware, cement categories, all of those were some really dominant Pro categories. You see those categories really strong demand and steel appliances.

So how -- can you talk about the rollout on Petco shop-in-shops? I think you said about 14 by the end of March? How that's going? Is that something we should see more of?

Yes. I think they're going well. But it's early days. I mean, this is a category in an area where, particularly within our rural customer base that -- the demand is there, and this is an area that we're leveraging expertise with, I guess, a strategic partner to be really relevant in those categories. We think there's an opportunity as we think about -- this is all about localization and this is just one small element of being local and being right to consumers in certain marketplaces. We'll have, again, 14 to -- 13, 14, 15 of these stores rolled out here before long. We're going to -- like we always do at Lowe's now as we roll something out in a small pilot, we monitor its performance, we test and learn and then grow into it after that as we understand how to optimize it going forward. But we're excited about it, but it's early days.

So I have one last question in the last minute here. So there's been a lot of cost put into the business, COVID, wages, incentives and so as you -- and you've talked about your ability to control their earnings structure within a barrier of sort of comps. Like I guess, to what degree -- and there's this flex in the labor model. So to what degree sort of how bad would comps have to be to put maybe the earnings guidance at risk?

Well, listen, I think we have really good line of sight to how we thought about our financial plan for 2022. I think we built it both top down and bottoms up. I think we continue to monitor it very effectively and adjust as needed as variables come to the forefront. And so I feel very confident in our outlook for 2022, number one. Secondly, we've also built in a lot of, I'd say, agility, both to manage the labor model, but also the supply chain is demand or as the demand curve or profiles would happen to shift, we can pivot pretty quickly and adjust to be able to maintain kind of the flow-through from a profit perspective. So I feel like under the scenarios that we see for 2022, we feel very confident that we can deliver on the expectations that we set forth. And keep in mind, we've been very consistent. So listen, we're going to we're going to outperform the market from a top line perspective, and we're going to expand operating profit. And we're -- that's the mantra, that's the focus. That's where the team is leaning into, and I feel like we've built the environment to be able to -- for us to be able to effectively deliver on that promise.

Excellent. Well, thank you very much. And let's thank Dave Denton and Lowe's.

Thank you. Awesome.