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

Good afternoon. Thank you all for joining us. My name is Brian Nagel. I'm the senior equity research analyst here for Consumer Growth and E-Commerce Conference. So again, thank you all for joining us. I am very pleased to have with us our next presenting company, Lowe's, and 3 of the company's executives, CEO, Marvin Ellison; CFO, Brandon Sink; and Investor Relations, Kate Pearlman. So thank you very much for joining us.

Thank you, Brian.

Appreciate it.

So we're going to structure this as an informal fireside chat with me asking questions and Lowe's is answering those questions. To the extent there are questions from the audience, send them through the chat, I'll be happy to work them into our conversation. With that, I'd love to start Marvin and Brandon. Just before we dive into kind of the Lowe's specific question for Lowe's, just given your unique position within the consumer landscape, your thoughts on the overall health of the consumer. What you're seeing from a kind of a consumer demand perspective and how that may have been shifting lately.

Great. So Brian, always great to be with you. I'll take the first part and Brandon can add any additional comments. I would say overall, the homeowner is really healthy. They have a strong balance sheet, strong wage growth, low unemployment, record equity, and for the first time in a while, you have personal disposable income growing faster than inflation. So we feel really good about the homeowner, which is in the general customer that we are targeting in the DIY market. But specific to home improvement, I mean, we still are seeing a bit of headwind. And that headwind is driven almost exclusively by elevated mortgage rates. And as you know, I think housing turnover is at its lowest level since the 1990s, and that's almost exclusively driven by these elevated rates. Also, short-term borrowing rates are up, and that's putting a little bit of a damper on discretionary big-ticket DIY projects. So we look at those combination of things and it gives us a little bit of a mixed view, but when we take a step back and we look at the medium- to long-term view of the historic demand drivers and home improvement, we actually remain optimistic with things like the age of housing stock, which, as you know, is the oldest since recordkeeping was maintained, you look at things like equity and the amount of equity available and the home price appreciation has occurred post-pandemic. And then you look at things like personal disposal income, as I mentioned, growing faster in inflation. So we look at all of those things, and it gives us a degree of confidence that the medium- to long-term view for home improvement has positive aspects that we remain confident that our strategy and our focus will allow us to take advantage of it as moment as we start to get a bit of tailwind that we're hoping for. And we hope that, that will occur at some point this year, we're not in the prediction business. I don't know if Brandon has anything on that.

Yes, sure, Brian. I would just add, as Marvin said, consumer overall continues to be healthy, but definitely some near-term affordability challenges just as we look at sentiment rates, inflation and so forth. And then the lock-in effect for us continues to be real, right? We're looking at overall 3/4 of mortgages are at fixed rate below of 5%, I think over 50% below 4%. So when you look at the state of housing and housing turnover, we're roughly -- we're still bumping along the trough roughly 4 million units turning annually, which if you look back, that's kind of a 3-decade low. New home starts continue to be sluggish. So a number of things just in the suit here, short term, we've worked through, for the most part, anything COVID reversion-related share of wallet shifts from goods to services. A lot of that has effectively sort of run its course over the last couple of years, and we're dealing with more of these kind of near-term trends and a lot happening just uncertainty around policy and so forth. So a number of challenges, a number of medium to longer-term green shoots and still committed to making investments in the business, and we're all about preparing when we get on the backside of this, preparing for the transition, so we can get back in growth mode.

That's very helpful. So if I heard you correctly, really the biggest wrong back or standpoint, the biggest hindrance this point is rates, both on the longer term and then maybe shorter-term side effect in both mortgage rates and then, I guess, HELOC rates that's correct. .

Yes. I'd say that's fair. Yes, Brian.

So I mean I know no 1 has a crystal ball to know when rates were go lower. But I would love to get your perspectives on are there levels that if rates got to, you would see an unlock in your business. Then the second question I have is we have seen looking back into our most recent quarterly report, there were some bright spots with respect to seasonal products and such. How much better can be -- from a top line perspective, can the Lowe's business get if rates were not to move or to stay here? .

You want to take the rate piece.

Yes. I mean, Brian, as it relates to where we would see unlocks, I don't know that there's sort of an absolute level that we would see. I think coming into the year, and if you were to ask us this kind of this time last year, we would have said, hey, anything kind of closer to 6% was really where we saw some engagement where we saw things change. But I think the longer that we sit 6.5%, 7%, I think you're going to start to get into new life stages, even if rates don't meaningfully move down, folks are going to have to get married by house, transition, add more space. I think it's just going to take longer, and you're going to work through that over time. So I don't know that we're planning for any meaningful step down in rates. I think the thing that gives us a lot of optimism. Marvin said it, there's $35 trillion of pent-up equity and 1/3 of that roughly tappable. And I think when we look at some of these big-ticket discretionary categories, which for us, we've seen a lot of challenge over the last 2 or 3 years, a lot of not just reversion, but over reversion to the extent when we look at home improvement in the industry as a whole, there's about $50 billion now of pent-up demand because, as you know, home improvement, these projects don't get canceled. They just get delayed. And I think we're now officially in that delay phase where you have this pent-up demand that's happening. You have equities that are there, and we just really need that catalyst and that inflection point, and that's kind of what we're waiting to see within the business.

And look, on the question about how much better can the business be up? I mean, it's really -- it's a difficult one to answer, but I'll give you some perspective. So I'll be celebrating my seventh year anniversary here in July. And just comparing where we are today versus just back then on what I call just the fundamentals of retail, things like being in stock, having the brands that customers desire and that are -- they are attracted to, having robust loyalty programs for both Pro and DNY, having seamless omnichannel experiences. So a customer can easily pivot between online store, mobile app, some of the recognition we received nationally on some of the things we've done from service to IT infrastructure to our digital platform to the major investments we've made in supply chain and our supply chain transformation. So there's no element of our business that we haven't been working on and investing capital then for the last 5-plus years. And so we are positioned to really respond well when we see just any moderation in the market. I mean we're not looking for the great days of housing or historic days of home improvement demand, just getting to a normal market, specifically for the DIY customer a homeowner, we think our business is set up to perform really well, and that really drives our confidence.

Are you seeing any -- from a demand perspective, the overall health of your business, are you seeing any noticeable geographic differences across the United States?

Not really. What I will tell you at this time of the year, particularly the greatest correlating factor to our business performance is weather. And as we look geographically, that is almost always the driver of good performance and performance that's under expectation. So other than that, there's nothing really material that we can put our finger on relative to any other factor that's driving overall performance.

Yes. Brian, I would add Helene and Milton late summer, late -- early fall late summer last year, drove demand Q3, Q4, and that's turning into the year, there's expectation we're going to continue to see some hurricane recovery demand. So that is creating some regional benefits as we look at Florida and the Carolinas. But outside of that and just normal weather challenges ongoing. Nothing really from a macro standpoint to Marvin's point that we're seeing influence the business. .

So on the seasonal side, I mean putting aside the impact, as we've discussed, these persistently elevated rates. When the weather is cooperate, either market by market or markets where weather is generally better, that seasonal demand is meeting your expectations?

Yes. It has been for really and Q2. And again, Brian, that, to me, supports the fact that we feel good about our business strategy. When I think about the pressure that we've experienced really for the last 3-plus years with the DIY customer. I feel pretty confident that, that is almost exclusively macro driven. That's that lock-in effect that Brandon talked about with these elevated rates customers choosing to just stay put while they monitor the rate environment and the short-term rates, again, is delaying their decision to do some larger discretionary projects. But from an execution, strategic positioning, we feel really good about where we are.

Another big topic -- another topic that's very much on the mind of investors. I'd love to get your perspectives on is tariffs and global trade policy. Obviously, it's fluid shifting by the day, if not by the hour. So where does the loan stand on what you're seeing from a tariff perspective? Maybe you can discuss the mitigation efforts you've started to put in place.

Yes, Brian, I'll start just with the fact that the team over the last several years has done a tremendous job merchandising, global merchandising specifically, just as we've looked at exposure, supply chain, diversification, really working across the globe to develop new opportunities, new efforts continue to diversify, in particular, out of China. As we sit here today and probably the biggest risk that we're working around continues to be China. We have about 20% of our cost of goods sold or of our purchases are exposed to China. One point of clarification there. That is both direct, so where we have private brands, and we're importing directly as well as purchases from our domestic suppliers that are importing from China. So it's a combination of both of those. 6, 8 weeks ago, when the tariffs were escalated at 145% we had essentially shut down any and all activity out of China, complete pause. We got the 90-day reprieve, and really have spent the better part of the last several weeks, reengaging and reevaluating what we flow, how we manage the business. So I would say multi-prolonged efforts across a number of different functions. How can we -- for the categories that we want to stay committed to, how can we continue to diversify and see how quickly we can move to other countries of origin in the back half of '25 and into '26. I would say there's other categories, maybe slower moving or where we have longer tail inventories. Maybe that's a category that we rationalize altogether. So we're going through those efforts. I would tell you, negotiation of where we can share, where we can split and how we can allocate the cost of the tariffs across our supply chain with our vendor base. And then lastly, as it relates to price, as we always do, we're taking a portfolio approach. We're going to continue to be competitive. We're going to ensure that we're not losing market share as we're continuing to lean into these categories. So a lot of efforts, a lot of engagement across the organization. I would say we've proven in the past that we can manage through this. We've been through tariffs. We've been through other inflationary environments, and we believe we have best-in-class tools, teams, capabilities to manage through this. It's reflected in our expectations for our guidance and over the balance of the year, and we expect to be able to manage through it successfully.

And Brian, also, I know there's been a lot of conversation about competitive positioning and taking market share because certain retailers may be in a more advantageous position. That's just not going to happen in home improvement. There is no special formula for managing this regardless of who you are. If you're a large retailer, we are pretty much dealing with the same set of circumstances, and we feel incredibly pleased with the team that Brandon just outlined from finance, global sourcing, supply chain, merchandising, price management systems, all the work we've done really the last 6-plus years has positioned us to manage this as well as any large retailer in the world. And so we're going to be competitive. There is no way we're going to sit back and lose market share because there is somebody out there that's going to manage this better than us are going to find a way to have lower prices vis-a-vis us. That's just not a realistic assumptions. So we're prepared to manage this. And our objective is to give our customers innovation and give them value. And to Brandon's point, we'll manage the entire portfolio to make that happen, and we're going to just work and we'll make sure that we continue to have this collaboration across factually that has really served us well in the past.

So with regard to China, that's why where we see most headline sale the trade discussions between the United States and China, and we've got some, I guess, maybe some big announcements today, but what's a manageable level? I mean, Brian, you mentioned it was 145. that's kind of a no go. But is there a tariff level that you view as manageable.

Yes, I don't know that I would put a number on it, Brian. I guess I would say at 30%, it's obviously opened things back off. But I would say still creating challenges at the end of the day, even at that level. So we're working across, as Marvin said, within all of this, we're continuing to ensure that we're providing value to our customers in all directions, innovation, competitiveness, that's through our private brands. through credit through a number of different avenues through our loyalty program. So undoubtedly, a challenge for us, even at 30%. We do have the benefit from FIFO accounting standpoint, I mentioned this on our earnings call, there's roughly a 1 quarter delay. So just as we're looking across managing this for what we are staying committed and what's continuing to flow over from China with 30%. We're dealing with the majority of that as we get into Q3 and Q4. So that has given us some visibility to just how we approach again negotiations with our suppliers, our portfolio approach and the timing in which we can kind of pull and manage these levers.

So Marvin, I want to talk about -- you mentioned just a moment ago, you're approaching your 7-year anniversary congratulations. Under your leadership, we've seen the Lowe's model improved significantly. A very successful repositioning over the past several years. So the question I want to -- and I know we've had this discussion before, but kind of where are we on that repositioning? Maybe talk about some of the big wins you've had in driving better results for the company and then kind of where do we go from here?

Well, I appreciate the question, and it's really indicative of just a really great team effort. Some of the great transformation initiatives have been driven by individuals -- they need to join me around a 7-year mark who came in after the fact, Brandon has probably been in 5 different roles in the 7-year time spend and then all of them have delivered significant value in different parts of the finance organization. I think it's appropriate to just kind of go back in time and just talk about in 2018 look like, and you had a company that had an outstanding balance sheet, had great frontline associates in our stores that really had no modern strategy to grow in a retail landscape that forces you to be omnichannel. It forces you to have a seamless interaction between digital and physical. And just as a reminder, for some of the people who may be watching -- that is reflective in having a 30-year old green screen operating system that literally hardwired everything to the store. Supply chain, receiving systems, point-of-sale, e-commerce, everything. And it literally took us over 5 years to retire that system because the risk of some big ERP taking the company physically down to his knees. We did it in phases in a very methodical approach. And now we -- for all intents and purposes, we've totally retired that there operating system, which has opened up lots of opportunities for us to do innovative things from an IT standpoint that we literally just couldn't do as recent as 2 years ago, modernizing our supply chain. I mean we were selling appliances from our stock rooms of our stores and from storage containers behind our stores. And we transformed our supply chain into a market delivery system where we are best-in-class, not only in having appliances deliver it next day today in virtually every ZIP code in the U.S., but best-in-class in shipping and delivering big and bulky, things like our service initiative, where our labor system was literally manual and driven by revenue of sales. Now we can drive it activity base by day, by hour, by department. And we're pleased that we can drive great reduction in expense and great productivity at the same time be recognized from someone like J.D. Power for being best in customer satisfaction and home improvement. Doing those 2 things conversely is very difficult, but we're doing it because we're driving productivity the right way. And some of the great work that we've done in merchandising, where in 2018, the previous management had made a decision to go all in on private brands to chase the margin rate and in franchising a significant percent of our Pro customers who are very brand loyal as you know. And so we work really hard under Bill Boltz leadership to get a lot of those national brands back into our assortment. And now that's been one of the reasons why we've had such success with our small to medium Pro initiative. And so that entire transformation started with just looking at those retail fundamentals of things again that every retailer has to be good at to just get that foundation showed up. And now our total home strategy is designed to allow us to take market share. And as Brandon mentioned, I mean we understand that we're in this really difficult growth environment today in home improvement, but we also understand that this is cyclical. And when we cycle out of this specifically for the DIY customer, we believe that we are going to be really well positioned just based on what our Total Home strategy has allowed us to do, areas like home installation that we know that when the customers start tapping into that $33 trillion of equity we know exactly what projects are going to be first in their list, and we want to be best in class at that. We want to look at things like e-commerce and how we continue to serve our customers really well in that regard. Our merchandising strategy, our operational excellence and PPI. And so all of these things give us confidence, as I've said, that we've taken the transformation from foundational to now the building blocks to take a market share. So we are positioned really well for growth. But as the old saying goes, there is no finish line. And so the transformation is not completed because as -- the market continues to evolve, as the competitive landscape continues to change, as the consumer gives us different demands on how they desire to shop and what they want to buy, then we evolve and Marketplace is a great example of that evolution on e-commerce. So again, I could go on and on and on, but we feel like that we have put ourselves in a great position that when we see recovery in this DIY market, that we are very well placed to take advantage of that.

So specifically on the -- I guess, on the DIY side. On topic, we've discussed a lot, but I think it's still one more interesting aspects to me the segmentation. You've been able to look at your different groups of stores and really decipher what the key productivity initiatives for those specific stores. Maybe you can just talk about that and kind of where we are in that effort? .

Yes. I'll give you some thoughts. I'll let Brandon jump in if he has anything to add. I think for us, again, if you go back in time, the only segmentation we have was every store looked like there was in North Carolina, because we design everything based on the local market because our systems were so rigid that we couldn't have any localization. We couldn't have any differentiation from an assortment standpoint, from a store layout from a pricing perspective. And so now that we've modernized our assortment planning, our pricing, et cetera, we're able to take a step back and focus on rural customers in a more specific way to focus on urban customers in a more specific way and then be very specific in those categories. I mean, one of the big successes that we've had with the rural customer is the introduction of workwear. I mean, that's a growth category for us. That's performing exceptionally well to the point where it started in rural America, and now we're expanding it to other markets. And as I've said before, one of our best-performing workwear stores in the company is Brooklyn, New York. And we never would have known that if not for the continued iteration of the strategy. Another one is pet that kind of was borne out of this segmentation strategy and listening to what the customers are saying that they wish they could buy in one trip from Lowe's versus having to go to multiple locations. And we continue to learn and iterate that as well as many other categories that fall under that rural initiative, we continue to expand. And on the urban side, I mean, I never forget walking into my story in Philadelphia with Joe McFarland, Bill Boltz and seeing a patio set with 12 chairs and riding lawnmowers. And we can imagine what happened to that product in Brooke, I mean, in Philadelphia got marked out. and basically clearanced out because we had no ability to sort our urban stores in a way that serve those customers. So -- we spent a lot of time working on getting those stores sort of the right way, making sure that we have the right staffing levels. And so it's been an iterative learning process, but we have gained lots of benefit. And again, we're well positioned for the market to turn. And the lessons we've learned over the last 5 years in this segmentation has given us a lot of confidence. And our loyalty program with the DIY customer, having roughly 30 million members gives us a whole different level of customer data and customer shopping patterns and customer information that allows us to serve those customers even better beyond just the segmentation in our stores.

And Brian, on the localization initiatives, in particular, we've been very methodical and disciplined over time, as you know, as we've rolled these out, but excited to say, by the end of this year, roughly 500 stores in total, we have the rural set. Marvin mentioned workwear not just limited to the rural initiative. But going to be in roughly 1,000 stores. So just financially, as we look at space productivity, sales per store, sales per square foot, Gilroy, some of those things, really pleased with the results and what we've seen and excited to be able to get these at scale by the end of the year.

Brandon, on that point, I mean, maybe using the baseball analogy, what you need to be in here as far as seeing the benefits from segmentation?

Yes. I would say just as we assume the rollout is going to be largely complete by the end of the year, just based on what we saw through the early test stores. I mean it takes 12 to 24 months, I would say, from rollout to really -- so the customer sees, they understand you have a different set. They understand you have a different shopping experience. So I think just as we look beyond into '26 and '27, I still think there's a decent amount of upside in these new stores where we continue to roll these initiatives out.

So I want to jump over to Pro. Marvin, you mentioned a moment ago, this -- the refocus, if you will, upon having branded products in stores and to the extent that allowed you to connect much better with your professional customers. So Kind of where are we on for right now? What are the other big unlocks? And then maybe you can discuss the acquisition -- the acquisition you recently announced? .

Yes. I mean we're -- we've been really focused on the small to medium customer. That's been our core pro customer for a couple of reasons. Number one, we believe that we had the capacity to serve that customer really well, and we believe that customer was being ignored in the marketplace. And so that was our focal point. And the brand transformation that I talked about bringing some of those national brands back an example be client tools back into the assortment and those initiatives really start to give us credibility back with the customer to work we've done on fulfillment and job site delivery has been significant. The work we've done on our loyalty program and the relaunch of it to simplify it and give that small to medium customer a way to earn points faster, so that we can take advantage of the fact that their spend level may be different from a larger customer and give them the incentive to shop with us more frequently. And also, this whole endless aisle initiative that we've rolled out that now gives us the ability to have a seamless digital catalog for some of these really large pro suppliers, and in many cases, not only do they give us great volume pricing that we have access to 7 days a week, but they also can deliver directly to the job side of our customers. So that small to medium Pro remains our focal point, and we believe that within that $500 billion target market that, that Pro represents that we still have significant share we can gain. But then we took a step back and actual question, how do we more diversify our portfolio and how do we find a way to start to build a presence in the planned Pro spend, and that led us to the ADG acquisition. The analysis we did was pretty straightforward, and that is the real estate market is a little depressed now. I think we've all shared the data. But the question is when this recovery happens, where will it happen? And we believe, based on the data that tells us that you're going to need roughly 18 million homes by 2033, we want to be positioned in this planned pro spin area that we virtually today do $0 in revenue and that's a $50 billion target market in residential construction and multifamily, and ADG gives us a really nice foothold in that space. And we were very diligent in deciding who we would target it. We felt like that their best-in-class brand position. They're one of the market share leaders as well gives us a great entry into this planned Pro spin space. And I'll let Brandon add any more.

Yes. Brian, really excited about the transaction just closed on it last week. So just now welcoming ADG in the Lowe's family. As Marvin said, I mean we're looking at this as a broader comprehensive interior solutions platform for us to go after the homebuilder. So I think as we look a number of synergies there today in roughly 18 states, 60 individual markets, a lot of parts of the Sunbelt that are high-growth areas and geographies. But I think our opportunity is additional fill-in as we look more nationally to take the platform. We bring a number of relationships and expertise in other categories as we look to add that potentially to the interior solutions platform and then just as we leverage vendor relationships and as we introduce potentially private brands. So new type of customer, $50 billion TAM. Able to diversify and potentially get into a larger plan Pro spend and really excited about what this brings, what we can learn and how we can grow it going forward.

So I want to -- I know, we time starting to wind down here, but 2 other -- a couple of the comments I want to address. One store growth. I mean how do you think about growth in the United States and elsewhere -- and then also maybe I'll take another question on that. Marvin, you had mentioned on the e-commerce strategy and the improvements Lowe's made there. So how do we think about the growth in terms of stores, growing stores and then that e-commerce backbone to serve customers.

Brian, I'll speak to new stores. Really excited. We mentioned space productivity initiatives, getting Pro penetration now to 30%. I think that gives us a renewed focus around just the ability to drive additional market share, customer base, sales, ROI through new stores. We've essentially been out of that business for the last 5. I think we've opened less than 10 stores in the last 5 years. So we've looked at population shifts, geography shifts, demographic changes over the last 5 years, and there's a number of strategic markets where we believe we can add a presence. There's also markets where we want to continue to protect and defend -- so we're looking at that as a continued opportunity. We have that in our capital plans over the next several years. We expect to open 10 stores this year, and then we're on a run rate of 10 to 15 over the next several years. So excited to see what we can do in some of these new geographies and Marvin speak to the online piece.

So look, online has been another growth opportunity for us. When I arrived, almost 7 years ago, it was about 4% of our revenue. Now we're around 12%, and it's been an effort. I mean, just to give you a perspective, One of the first request I made in 2018 was the need for e-receipts because we couldn't even do e-receipts. 7 years ago, if you can imagine that. And now, I mean, we have wanted to be hot regarded online sites, mobile apps, not only in retail, but just in the industry-wide due to great work by our digital and our IT team. As we analyze how do you grow online and what are some of the correlating factors just around the globe for retailers that have had exponential online growth, we found the presence of a marketplace was almost exclusively combined to the traditional e-commerce site of a retail company. And so we felt like that we are now in a position with great performance of our or app, great performance of our site, much improved UX, much improved search functionality that the marketplace would be now the key area to have accelerated growth. And so our recent partnership with Miracle, the best online integration system for marketplace sellers. We felt like that this would be a great opportunity for us to create accelerated growth online. And so we're eager and happy with where we are. This partnership with Miracle was just announced and we're in the early stages of it, but we have high hopes for what our online business will continue to do and how we believe it's going to continue to be a growth vehicle is in the foreseeable future.

Yes. Brian, I would also add just heavy investments on the fulfillment side of the house on the online experience as well. Marvin mentioned market delivery appliances is our biggest online category. The ability now to have that nationwide and what that's been able to do for that category as well as big and bulky categories. We've enabled our gig network to offer same-day delivery. Uber, Instacart, we have our own integrated platform through One Rail. And then over 50% of our online orders are fulfilled through our stores. So we've had our front-end transformation. Our ability to offer a unique customer experience to pace and speed in which we can pull pick and stage and enable that experience. So that's been a big investment and a big contributor, I think, to the online success, and we continue to be excited about that looking forward as well.

So last topic, line, the -- I think it's really one of the big key positives among many of the Lowe's story is the capital generation, capital allocation. So any kind of update or you want to get there?

Yes, sure. Brian, really no change to the priorities. They've been consistent through the last several years. We're going to continue to invest in the business, organic and inorganic, we're going to continue to target 35% dividend payout ratio, and we're going to funnel remaining excess cash through share repurchases. I think a couple of nuances. We have paused on share EPO for this year to finance through cash, the ADG transaction. So digesting that, we continue to be focused on our 2.75x leverage target. We're committed to our BBB credit rating, and we're going to continue to manage the business through that. We have about $2.5 billion of debt that we're going to pay off and is going to come due this year. We're not going to be issuing or refinancing any of that. So Again, those are our priorities, and they continue to remain unchanged. .

Well, once again, I very much appreciate the time. Thank you for the participation here. Congrats on the ongoing success.

Awesome. Thanks, Brian.

Thank you.