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

Okay. Good morning, everyone. Thank you for joining us for our second day here at the Goldman Sachs Consumer and Retail Conference. It's my pleasure to introduce Lowe's and have with us Marvin Ellison, Chairman and President and Chief Executive Officer. Thank you for joining us today.

Good morning.

We probably could spend most of the time speaking about the macro, although I know there's a lot of other things to talk about, but I wondered if we could start there.

I guess the question that I have is in the state of the world we are right now with regards to the housing environment. Is there a scenario in which you could see better growth than kind of the flat to up low single digits that you've seen for the last year or so?

No, Kate, it's a good question. I would say for us, we really expect the second half of the year to look a lot like the first half of the year. And again, that's not based on our view that things will get better or things will get worse. We just believe that the year is going to look a lot similar both front in second half. Having said that, we still believe that we can grow in any macro environment. I'm really pleased by the fact that in spite of the fact that over 60%, 6-0% of our sales is driven by the DIY consumer, we delivered 5 consecutive quarters of positive comps. In addition to that, we've seen really strong growth in our digital channels. For 2 consecutive quarters, we've had growth of over 15%. So even in what you could debate and argue is one of the toughest housing macros we've seen in a very long time, we are finding ways to grow. We're finding ways to take share. But we think the broader macro is going to look similar front in second half, but we think we can grow irrespective of that.

I think it's come up in a couple of articles I've read that you're seeing -- or the home improvement space is seeing maybe what maybe I would deem as like piecemeal reservation -- renovation. So if you're not seeing necessarily the full kitchen renovation or the full bath renovation, you're seeing a vanity replaced or something like that, is that something you're seeing? And what would a scenario like that kind of look like over time in terms of incremental dollars and growth?

Yes. So specifically to that point, we are seeing homeowners take what we'll call smaller, more deliberate projects versus these larger discretionary projects. But let me take a step back and provide some context of that. So if you take a look at our consumer, meaning the Lowe's consumer, it's a homeowner with an average household income north of $100,000 a year, average equity of roughly $400,000 of personal disposable income growth, wage growth and someone who has a really good personal balance sheet. The caveat to that is that consumer is a bit cautious based on all the things you talked about, elevated interest rates and also some of the geopolitical uncertainty that they're seeing that's causing them to just be cautious relative to discretionary large-ticket span. And one of the largest discretionary tickets you expand is a kitchen renovation, to your point. And so because we've done a really nice job in our Total Home strategy of making capital investments in our physical infrastructure, in our stores, meaning kitchen showrooms, bath showrooms or showrooms, flooring showrooms, we're able to get that customer to come in to buy countertops and cabinets, but on certain occasions, we're also seeing the customers come in and do kitchen renovations, but not on the same degree that we had seen in past before this really difficult housing cycle. But we're really, really optimistic that our Pro customers are incredibly resilient, and our core Pro customer in the store is a small to medium pro. And because they're resilient, they're finding ways to keep their book of business open. And if they can't do a full kitchen, then they will do control. So they can't do a full kitchen and they would do cap. So we're seeing a resilient consumer. We're seeing a resilient customer. And overall, we feel like that we can manage in any environment.

Great. I think you mentioned with regards to market share. I mean, I think overall, the category or some of your competitors are down double digits, but you're not. And so can you maybe talk a little bit about the change you've seen in the competitive landscape with some of the smaller players? And just where do you think you're gaining some of this market share?

Yes. I'll go back again to our Total Home strategy, which for us is not only a business strategy, but an investment thesis on how we run our business. We're investing in the small to medium Pro. We're investing in our digital channels. We're investing in loyalty. We're investing in key categories like appliances. And so as we look at the broader total addressable market for home improvement, there is a large belief that we operate in a duopoly. But as you know, this is a really large total addressable market. And if you look at -- our view of it is roughly $1 trillion. And if you combine Lowe's and our largest competitor, we're roughly 1/4 of the total addressable market. So when we think about competitors, it's more than just 1 company. It's a broader spectrum. And many of those competitors are small regional players. And so as we think about where we've been able to take share, we've been able to take share in categories like appliances. I mean, we remain the only retailer in the U.S. that can deliver and install a major appliance same day and next day in virtually every ZIP code in the U.S. I mean no one else can do that. And that is the result of a very deliberate action to build a big and bulky fulfillment network that doesn't exist anywhere in the marketplace. And so because of that, we have the ability to really grow share in a really, really important category for us. And specifically, if you think about appliances, the #1 area of appliances that's growing is what we call the dress category. In other words, if your refrigerator breaks, it needs to be replaced. And so we are in a position that when a customer has an emergency need, our fulfillment network gives us a great opportunity to take share because we can deliver same day and next day. And when you are a smaller player in the space, you just don't have the capital or you don't have the ability to invest capital in a network like we did, and so we're incredibly blessed to have a strong balance sheet. We're incredibly blessed to have a disciplined approach to how we're thinking about the business, not just quarter-by-quarter, but we're thinking about what we will look like when the housing recovery happens because it will have to recover. I mean we're right now in many estimations, well, 1 million homes short of current demand. There's credible data that shows by the next decade, you're going to need as many as 14 million new homes. And so we know that this market is going to recover, it may recover gradually, but we have built a strategy that we can compete aggressively real time, but we also believe we've built a strategy that when the market recovers, we're going to be in a great position to grow disproportionately.

The pricing environment, I think, has been harder to navigate lately. You've had this multiyear inflationary backdrop, which was accentuated by tariffs last year and then companies began to see tariff refunds, and especially in Q2, we heard a lot across all of retail about promotions, price investments, sales. So could we maybe take a step back and walk through how you approached the pricing environment as a whole? And how you think about the role of tariff refunds and its impact on pricing in the short term and home improvement?

Well, obviously, pricing is really the foundation of any retail strategy, and we've invested significant capital and just back in systems and processes. And so I remember going back in time when I arrived here in 2018 at Lowe's, we had literally no pricing system architecture at all. It was all done manual spreadsheets. For a company our size, it's hard to believe that's where we were. Fast forward to today, I would argue we have some of the most sophisticated pricing systems of any retailer in the world, and that's been a very methodical, very deliberate investment strategy to do that. And so for us, Kate, number one, we're always focused on value. That's the foundation. And we're very pleased that we're the only home improvement retailer that has 2 distinct loyalty programs, one for our DIY customers and one for our Pro customers because those customers shop very different, and they have different value propositions. And so because we have these 2 distinctly different loyalty platforms, we can offer member-only value promotions events without making it a broad promotional strategy. So it gives us a distinct advantage. And it gives us differentiation as that data and what we learn from the customers' shopping behaviors is incredibly valuable. But as we think about the tariff environment, tax refund environment, what you saw in the second quarter was probably more price reductions and promotional activity in this space than I've seen in my 25 years in the home improvement business. What we believe is transitory. We believe is simply the result of companies receiving tariff refunds and trying to find ways to drive business value and give some of those refunds back to the consumer. So we don't see that as a new normal in home improvement. But for us, we're going to remain disciplined. We're going to remain focused on providing value. We're going to remain focused on ensuring that whatever we do is going to be first based on serving our customers well, but also based on having fiscal discipline around how we drive profitability and understanding that whatever we do today, we have to comp against that next year. And so making good short- and long-term decisions. But again, we think this second quarter pricing environment was more transitory. We think we'll get back to more of a normal set for the balance of the year, but we're going to be focused always on taking care of the customers from a value perspective.

And I think that's obviously a very core tenet that you've been very focused on is value. I know job lock quantities and being in stock has been a core tenet as well. But 1 thing I wanted to ask you about today was the emerging need of speed in the business with just same-day delivery and everything that the consumer is now expecting from all of retail. Could you talk a little bit about the supply chain, where you are in the supply chain in terms of, again, how you feel about the speed of that, of delivery? And just if there's any room that needs to be made for investments to continue to pursue that?

No, absolutely. So for us, in the home improvement space, we're fortunate because of our 1,750 semi-stores in the U.S., those stores are not only destinations for the conventional traditional customer that comes in, in shops, but there are also fulfillment nodes for us for our online and digital platform. So specifically, if you look at our online business, roughly anywhere between 60% to 80% of our fulfillment comes out of the stores. And that just depends on the category, and it depends on the time of the year. So our stores are essential to our ability to provide speed. And a lot of that is pickup in store, whether you do it at our pickup desk with our lockers or whether we do it from a same-day standpoint. So speed is essential. And what I will tell you is there is no retail CEO in the world satisfied with their current delivery speed. So we're working every day to get faster to make sure that we are having a market competitive advantage by giving the customers what they want and being able to get to customers what they need within the time they need it. But I'll go back to what I said earlier, we have a distinct advantage in big and bulky because the fulfillment network that we built out primarily for appliances that gives us the ability to do same day and next day in every ZIP code, we can use the same network, and we are using it for other big and bulky categories. I mean think writing a lot more, think grills, think patio furniture. And so what we envision is let's build this for appliances because it's our largest merchandising category. But we also understood that those same rails that we built for appliances could also work for other big and bulky categories. And so we're doing some really innovative things. We'll speak more specifically about some of the innovative ideas we have coming at our December investor conference because we have some initiatives that I'm really excited about that we've yet to talk about publicly that we will share in December. But to answer your question, big and bulky speed, we're best-in-class, and we'll continue to build on that best-in-class perspective. From an investment standpoint, we're investing significant capital, not only in the physical infrastructure of our supply chain, but also in warehouse management systems, leveraging AI from a product assortment allocation standpoint. And so we're pleased with where we are, but we have a long road map to continue to get better and to continue to get better, and that's something that's going to be a commitment from us.

Okay. I think one area that's changed over the last couple of years is just your focus on increasing the TAM. And with your recent acquisitions of ADG and FBM, you've significantly expanded the addressable market for Lowe's. So maybe could you walk through just where you see that going longer term? I know the business itself is under a little bit of pressure right now due to residential construction demand. But maybe we could start with just your longer-term vision and how we should think about that?

No, and really, Kate, if you're looking at this, to your point, from just a real-time perspective, it's hard to understand the value of those 2 acquisitions. But as I said earlier, we're thinking about this from a medium- to long-term perspective for the company and for our shareholders. If you again come to the realization that we're 1 million homes short of demand today, we're estimating 14 million homes needed within the next decade. New home construction is going to have to come back in some shape, form or fashion. And historically, Lowe's generated virtually no revenue from single-family, multifamily construction. And we felt with the demand that we knew was going to be in the near term that this was a unique opportunity for us to invest in 2 really good assets. ADG primarily focused on flooring, countertops, cabinets in a very simplistic way. And FBM primary focus is drywall, systems, insulation. And so 2 different businesses, but our vision in the acquisition and our vision today is if you could take FBM's competencies, ADG's competencies and combine it with Lowe's' competencies, you create what we call an interior solutions platform. So that is a fancy way of saying we can give a builder, virtually everything they need on the interior of the structure. We can give them flooring, cabinets, countertops, drywall, ceiling insulation. And then on the Lowe's side, we can give them a places. We can give them faucets and fixtures. And so we're already in the process of running pilots where we're being able to go to a builder, and we can take all 3 of the competencies of Lowe's, ADG and FBM and provide this for builder. For a builder, the key metric that you want is, can I build the structure faster, can I get the closing sooner because the sooner you get the closing, it's the sooner you get paid. And so if we can create a value proposition that we can help you reduce your closing time your construction time, then that's something that is really, really interesting to a lot of builders. And so we're building that competency, and we think that's going to give us pure differentiation and it's going to give us a way to participate in this market recovery that again, the only way it doesn't happen is that the way of life in America will change because we will have to increase the ability to build new homes because the need is simply there. And so we feel great about the future possibility. To your point, short term, we're feeling pressure because with elevated mortgage rates, you're seeing tons of macro pressure on single home and multifamily construction. Having said that, FBM is in a really unique position because roughly 55% of their revenue comes from the commercial construction side. And so what's being built on the commercial side, data centers, sports venues, hotels. A lot of universities are doing lots of capital investments. FBM is getting pieces of all of those businesses. As a matter of fact, one of the largest segments within right now is to build out of data centers. And so we're participating in a lot of the of the commercial side, and that's really good for them because it's kind of helping to balance out the pressure they're feeling on the residential side, but still, they're not immune to the pressure. We're managing it really well. We're adapting to them some of the disciplines we have around perpetual productivity improvement, being very fiscally focused on driving costs. So we're managing that in this really challenging environment, but we feel great about the acquisitions. We feel great about what it's going to do for Lowe's in the future, and we think our shareholders are going to greatly benefit from it.