Lowe’s Corporations, Inc. (NYSE:LOW) Q3 2022 Earnings Name Transcript November 16, 2022
Lowe’s Corporations, Inc. beats earnings expectations. Reported EPS is $3.27, expectations had been $3.1.
Operator: Good morning, everybody, and welcome to Lowe’s Corporations Third Quarter 2022 Earnings Convention Name. My title is Rob, and I will be your operator for right this moment’s name. As a reminder, this convention is being recorded. I’ll now flip the decision over to Kate Pearlman, Vice President of Investor Relations.
Kate Pearlman: Thanks, and good morning. Right here with me right this moment are Marvin Ellison, Chairman and Chief Govt Officer; Invoice Boltz, our Govt Vice President, Merchandising; Joe McFarland, our Govt Vice President of Shops; and Brandon Sink, our Govt Vice President and Chief Monetary Officer. I want to remind you that our discover concerning forward-looking statements is included in our press launch this morning, which could be discovered on Lowe’s Investor Relations web site. Throughout this name, we will probably be making feedback which might be forward-looking, together with our expectations for fiscal 2022. Precise outcomes could differ materially from these expressed or implied because of varied dangers, uncertainties and necessary elements, together with these mentioned within the threat elements, MD&A and different sections of our annual report on Type 10-Ok and our different SEC filings.
Moreover, we’ll be discussing sure non-GAAP monetary measures. A reconciliation of this stuff to U.S. GAAP could be discovered within the quarterly earnings part of our Investor Relations web site. Now, I am going to flip the decision over to Marvin.
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Marvin Ellison: Thanks, Kate, and good morning, everybody. Within the third quarter, our complete firm comparable gross sales elevated 2.2%, whereas U.S. comps elevated 3%. These better-than-expected gross sales had been pushed by improved DIY demand supported by fall nesting developments as journey slowdown and youngsters return to highschool. We additionally noticed continued momentum in Professional reflecting the success of our Professional initiatives and the resilience of house enchancment demand. Along with robust gross sales progress, our persistent give attention to productiveness as soon as once more drove improved working efficiency with substantial enchancment in adjusted working margin of 54 foundation factors and adjusted diluted earnings per share of $3.27, a rise of 20% as in comparison with final 12 months.
These excellent outcomes allow us to make vital investments in our most necessary asset, our associates. On this quarter, we introduced an incremental $170 million funding and everlasting wage will increase for our frontline hourly associates. These will increase are designed to make sure that our extra tenured associates proceed to obtain market-competitive wages. And in additional recognition of the onerous work and dedication, we’re awarding $200 million in bonuses to our frontline hourly associates forward of the vacation season. At Lowe’s, we make each effort to make sure that our associates share in our monetary success, and I’m more than happy that we’re as soon as once more in a position to award a discretionary bonus as a result of our efficiency is monitoring forward of our expectations.
It is a true win-win consequence for the Firm, for our shareholders and for our associates. All of those investments replicate our efforts and our dedication to grow to be the worker of alternative in retail, the place we regularly put money into our associates and assist them help their households and develop their careers at Lowe’s. Now turning to Professional. We delivered progress of 16% and 36% on a two-year foundation, the tenth consecutive quarter that we have pushed double-digit Professional progress. We’re constructing on our vastly improved Professional product and repair choices with our new MVP Professional Rewards and partnership program and our enhanced Professional CRM, which Joe will talk about in a while the decision. We just lately accomplished our annual Professionals survey, which gives real-time insights into what’s on the minds of our Professionals and the way they view their future enterprise alternatives, and we’re inspired to listen to that Professionals stay optimistic with over 70% saying that they count on much more work in 2023 than they’d in 2022.
That is simply one other proof level of the resilience of house enchancment demand even on this unsure macro atmosphere. On Lowes.com gross sales grew 12% this quarter over 4x our U.S. progress fee, representing a gross sales penetration of 10%. We proceed to reinforce the web consumer expertise in addition to our achievement capabilities as we give attention to driving this vital progress initiative inside our complete house technique. Turning to our provide chain transformation. We have made important strides in our rollout of our market supply mannequin for giant and hulking merchandise this quarter, spanning the nation from Southern California to Southern Illinois to Atlanta, Georgia. We have now reached an necessary milestone with eight geographic areas overlaying greater than half our shops transformed to the brand new mannequin, and we’re on monitor to finish the rollout by the top of subsequent 12 months.
It is a centerpiece of our provide chain transformation because the market supply mannequin will allow us to additional consolidate our trade management place in home equipment and place us for worthwhile progress in different huge and hulking merchandise like grills, using Lowe’s mowers, inventory cupboards and vanities. This additionally improves the client expertise by means of expanded achievement choices and a seamless omnichannel buying expertise powered by know-how. We additionally simply introduced that we’ll be opening a brand new coastal holding facility within the port metropolis of Suffolk, Virginia. Our expanded coastal holding facility community is opening up capability for us to carry product upstream from our distribution facilities, which creates the flexibleness we have to circulation the merchandise rapidly and the place and when is required.
This helps us to not solely seize gross sales, but additionally mitigates markdown threat as a result of we keep away from stranding product unnecessarily in our shops. And now I might like to debate the macro atmosphere and particularly deal with some misperceptions that I’ve heard in regards to the house enchancment market. You’ve got heard me speak about this earlier than, however demand drivers for house enchancment are distinctly completely different from people who drive house constructing. So it is necessary to not confuse the 2. And as a reminder, at Lowe’s, the three highest correlating elements of house enchancment demand are house worth appreciation, age of housing inventory and disposable private earnings. So let’s begin with house worth appreciation. Even when there’s a broad-based decline in house costs, owners at the moment have a file quantity of fairness of their houses, almost $330,000 on common, which stays supportive of house enchancment funding.
And even within the choose U.S. markets the place house costs have declined after a very steep run-up throughout the pandemic, we’re not seeing any affect to gross sales; second, the typical age of houses within the U.S. is over 40 years outdated and roughly 3 million extra houses constructed throughout the housing increase within the mid-2000s, will probably be coming into prime transforming years by which is a key inflection level for giant ticket repairs. This is likely one of the key the reason why 2/3 of house enchancment spend is nondiscretionary on restore or upkeep tasks that can’t be delayed; third, shopper financial savings are close to file highs, whereas disposable private earnings remained robust. And greater than 90% of householders both personal or house or are locked right into a low mounted mortgage insulating them from rising charges.
On high of those three elements, there’s a persistent $1.5 million to $2 million below provide of houses and 250,000 first-time millennial homebuyers are anticipated per 12 months by means of 2025. This distinctive mixture of things is inflicting owners to commerce up in place, preferring to put money into repairs and renovations to make their present houses meet their households evolving wants quite than shopping for a brand new house. And this is the reason we’re so assured in regards to the outlook for the house enchancment trade even in a interval of excessive inflation and rising rates of interest as a result of the important thing drivers of our enterprise stay supportive. And with the investments that we have made to remodel our enterprise, we even have the working agility wanted to quickly pivot if market circumstances worsen.
And we’ve a really skilled management workforce of house enchancment veterans who’ve developed a confirmed playbook to answer a slowdown. On the similar time, we might not lose our give attention to investing in long-term progress. Now earlier than I shut, I might wish to take a second to debate our latest announcement concerning our intention to promote our Canadian retail enterprise to Sycamore Companions. Lowe’s first entered Canada in 2007 and later expanded with the acquisition of RONA in 2016. Over the previous few years, we give attention to the retail fundamentals of our Canadian operations, which introduced the Canadian enterprise to profitability and improved its working money flows. Nevertheless, for this enterprise to attain the profitability according to the U.S., important incremental capital investments can be required to streamline the banners and enhance working margins.
In contrast, we’ve great alternative for continued market share and worthwhile progress in our U.S. house enchancment enterprise. This transaction will simplify our enterprise mannequin, enhance our working margins and return on invested capital whereas enabling us to ship sustainable worth to our shareholders. Brandon will present particulars concerning the monetary affect of the transaction in a while the decision. I want to thank our total Canadian workforce for his or her onerous work and dedication to our clients, and we stay up for collaborating with Sycamore Companions and executing a seamless transition. I might wish to additionally lengthen my appreciation to our workforce within the U.S. for his or her ongoing dedication to serving clients and the communities. And with that, I might like to show the decision over to Invoice.
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Invoice Boltz: Thanks, Marvin, and good morning, everybody. Within the third quarter, U.S. comparable gross sales %, reflecting stable core house enchancment demand throughout each Professional and DIY clients. This quarter, we drove constructive comps in our Constructing Merchandise and Dwelling Decor divisions, fueled by momentum with the Professional and enhance DIY demand. In Hardlines, comps had been down barely as we cycled over important storm prep actions in Louisiana from Hurricane Ida in 2021 and that didn’t repeat on the similar scale when flu scores ready for Hurricane Ian in 2022. Total, progress was properly balanced with 8 of our 15 merchandising departments above firm common. Starting with our Dwelling Decor division, the autumn nesting developments that Marvin talked about led to standout efficiency throughout core inside classes, together with home equipment, paint, kitchens and tub and flooring.
Equipment gross sales had been bolstered by a robust Labor Day occasion and better on-line gross sales as we proceed to reinforce our Lowes.com consumer expertise. For example, this quarter, we started displaying supply dates earlier within the buy course of to spotlight our improved next-day supply choices. If buyer wanted to rapidly exchange a fridge or washer that is simply stopped working, this function now helps them focus their consideration to product that is instantly accessible. That is particularly necessary for Lowe’s as our equipment enterprise is skewed towards substitute inside current houses versus new housing begins. As I discussed final quarter, we additionally proceed to see clients buying and selling up for innovation, like with our new Maytag Pet Professional washer with know-how that removes pet hair from shut within the wash cycle, which is unique to Lowe’s.
This quarter, we additionally launched a brand new unique house heart partnership with Miele, a worldwide chief identified for high-end premium home equipment. This displays our ongoing dedication to making sure that we’ve new high-quality choices throughout all worth factors with main merchandise from All-Star manufacturers like Trex, DEWALT, Owens Carney, John Deere, EGO, Honda, KitchenAid, Samsung, LG, Kohler, Moen, Whirlpool, Husqvarna and Aaron’s. Paint delivered robust constructive comps this quarter throughout each Professional and DIY. A lot of our Professionals, particularly those that give attention to restore and transform work, paint as a part of their bigger jobs. In different phrases, these are Professionals who paint quite than skilled painters. And these professionals are beginning to see the worth of our new MVPs Professional Paint rewards program paired with our expanded job website supply for paint.
These enhanced advantages and capabilities are making it extra handy and cost-effective for Professionals to buy their paint straight from Lowe’s, incomes us extra of their enterprise. In our continued partnership with Sherwin-Williams are additionally upgrading our paint departments throughout the U.S., together with a brand new colour wall that converts all HGTV colours to Sherwin-Williams colours, which reset our new colour wall. We’re bringing all the colours collectively in order that clients can simply match their favourite Sherwin-Williams paint colour at our paint desk. We’re additionally resetting some classes to drag related, increased margin and extra continuously bought merchandise nearer to the entrance of the division, make it simpler for purchasers to get all the things they want for his or her paint mission in a single journey.
We plan to have half of our shops transformed to this new colour wall by the top of this 12 months and roll it out in every single place by the top of subsequent 12 months. We’re more than happy with the progress we have made on this core class in only a few brief years. We’re gaining traction with each the Professional and DIY, and this latest replace highlights only a few ways in which we plan to proceed to take market share in paint. We additionally had robust constructive comps in kitchens and tub, largely pushed by improved in-stocks for cupboards and clients opting to commerce up for bigger, increased high quality in-stock cupboards versus ready for customized orders. Inside flooring, vinyl flooring as soon as once more led the way in which as busy owners returning to sturdy, low upkeep flooring choices accessible in well-liked manufacturers like Pergo and STAINMASTER.
And we’re gaining momentum throughout our personal model portfolio, particularly in STAINMASTER, Origin 21, Allen + Roth and Cobalt as that is simply one other indication of the traction that we’re gaining with our Complete Dwelling technique. Turning to our efficiency in Constructing Merchandise division. We proceed to see broad-based balanced progress throughout Professional and DIY in millwork, tough plumbing, electrical, lumber and constructing supplies, pushed by robust project-related demand. We’re inspired by the DIY power that emerged in constructing merchandise this quarter as lumbering participating in house enchancment tasks they’d beforehand placed on maintain resulting in double-digit lumber comps within the quarter. In our Hardlines division, as lumber demand elevated in order demand for associated detachment classes like fasteners resulting in our robust constructive comps in {hardware}, we additionally proceed to see a development of shoppers investing in innovation.
Our EGO battery now powers 75 completely different instruments, all the things from conventional out of doors energy tools like mowers, trimmers and leaf blowers to life-style merchandise like tenting turbines and misting followers. And with the accelerated progress in battery-powered merchandise that we’re seeing, it is not shocking that EGO continues to guide the pack in battery-powered out of doors energy tools. Given the issues within the market, a few of you’ve gotten requested if we’re seeing a shift away from discretionary purchases, which is what we sometimes count on to see in a softer macro atmosphere. And the simple reply is, no. We had a robust sell-through in Halloween this 12 months with an early sell-out of our 12-foot lighted animated mummy at a worth level over $300.
One might argue that this is likely one of the most discretionary objects we promote. And with Halloween in complete being a extremely discretionary class, this continues to offer us a constructive indication of the power of our shopper. We kicked off the vacation season with our trim and tree units early within the quarter. We’re seeing early sell-through on taller, higher-end synthetic Christmas bushes, which is one other instance of each discretionary buying and customers buying and selling up. Earlier than I shut, I might wish to thank our retailers, provide chain workforce and our vendor companions for his or her onerous work and the continued partnership as they proceed to offer our clients with the merchandise that they want as we help our shops and communities within the restoration efforts from Hurricane Ian.
Thanks and I am going to now flip the decision over to Joe.
Joe McFarland: Thanks, Invoice, and good morning, everybody. Let me start with a heartfelt thanks to our associates. Our robust efficiency this quarter is a direct reflection of their onerous work and dedication to offering glorious customer support. That is why we’re so targeted on changing into the employer of alternative in retail the place associates select to remain to construct their careers. At its core, meaning offering good, secure jobs, complete advantages, aggressive wages and bonus alternatives. As Marvin talked about, this quarter, we introduced $170 million in everlasting wage will increase and we’re awarding $200 million in bonuses forward of the vacation season for our frontline hourly associates. This interprets to as much as $1,000 for eligible full-time associates and as much as $500 for eligible part-time associates.
As somebody who began my profession as an hourly affiliate in house enchancment, I perceive how significant any such monetary recognition could be. Our govt management workforce is captivated with rewarding our associates and caring for our clients, which is demonstrated within the investments we make in each our folks and within the communities we serve. One other instance of those investments in motion is the transformation of our catastrophe response capabilities over the previous few years, which dramatically improved our potential to help communities by means of devastating storms like Hurricane Ian. Yr spherical, Lowe’s now has a cross-functional command heart devoted to supporting our catastrophe response efforts. In truth, it was these enhanced capabilities that enabled us to reply so successfully to the pandemic.
We additionally deploy our emergency response groups to the toughest hit areas. These associates volunteer to guide their house shops, giving their colleagues within the impacted areas, an opportunity to give attention to their households, and we go a step additional to assist affect the associates by deploying refueling stations and our cellular catastrophe aid trailers with showers, washers, dryers and meals and providing monetary help by means of our Lowe’s worker aid fund. Along with demonstrating the significance of our improved catastrophe response capabilities, Hurricane Ian additionally spotlighted the worth of our expanded omnichannel achievement choices. Earlier within the quarter, Lowe’s rolled out same-day supply nationwide with greater than 1,700 shops now supported by Instacart.
This partnership permits us to ship over 30,000 objects stocked in our shops that weigh as much as 60 kilos to our clients. Within the days main as much as the storm, we obtained 1000’s of those same-day orders to assist clients put together and defend their houses. Prospects had been in a position to get vital objects they wanted like water, sand, buckets and batteries with out having to go away their houses, and it continues to be a useful possibility for a lot of who want provides within the wake of the storm. And we proceed to optimize our parcel community in Q3, one other necessary step in our journey to reinforce our omnichannel achievement capabilities. We rebalanced our community to make sure our parcel shops are optimally positioned near delivery hubs, and we’ve upgraded our know-how and {hardware} to help quicker achievement.
Forward of the vacations, we’re on monitor to satisfy our purpose of lowering delivery occasions by 50%. And these are only a few of many examples of our tenacious give attention to perpetual productiveness enhancements or PPI which might be scaling throughout our shops over time. Shifting to Professional, I might wish to thank our Professional workforce for delivering excellent outcomes as soon as once more this quarter, driving Professional comps over 16% for the quarter and 36% on a two-year foundation. We’re leveraging our new MVPs Professional Rewards and partnership program to capitalize on this continued demand by participating Professionals and incentivizing purchases and constructing long-term loyalty. Our program is laser-focused on serving to Professionals develop their enterprise as a result of we all know that when Professionals succeed, we succeed. This partnership-based method is already paying off with higher-than-expected adoption charges and constructing overwhelmingly constructive suggestions from our Professionals.
We just lately requested all of our regional vice presidents to seek out Professionals who are not looking for to join our loyalty program so we are able to speak to them and perceive why, however that proved to be an actual problem as a result of as soon as Professionals right here the advantages, they’re keen to hitch. So consciousness and continued execution would be the key to our ongoing success. As I shut, I want to thank our associates as soon as once more for his or her dedication to Lowe’s and our clients. With out them, the robust outcomes that we delivered this quarter wouldn’t be attainable. Now, I am going to flip it over to Brandon.
Brandon Sink: Thanks, Joe. I want to start this morning by offering extra particulars concerning our latest announcement of our intention to promote our Canadian enterprise. As Marvin talked about, regardless of making significant progress in enhancing our Canadian retail enterprise over the previous few years, it has continued to lag our U.S. operations and gross sales progress, working revenue and return on invested capital. In truth, the Canadian enterprise represents roughly 60 foundation factors of dilution on our full 12 months working margin outlook. And throughout the quarter, we recorded a pretax non-cash impairment cost of $2.1 billion associated to this enterprise. Trying forward, this transaction makes us a U.S.-focused enterprise and offers us a transparent line of sight to significant long-term enchancment of our gross sales productiveness, working margin and return on invested capital particularly.
We’re excited to share our up to date monetary targets at our upcoming analyst and investor convention in December. Turning to our Q3 outcomes. We generated GAAP diluted earnings per share of $0.25 in comparison with $2.73 final 12 months. Now my feedback from this level ahead will embrace sure non-GAAP comparisons the place relevant. Excluding the $2.1 billion asset impairment cost, we generated adjusted diluted earnings per share of $3.27, a rise of 20% in comparison with third quarter of 2021. This enhance was pushed by a mix of high line progress, robust P&L administration and disciplined capital allocation. Q3 gross sales had been $23.5 billion with comparable gross sales up 2.2%. Comparable common ticket elevated 8%, pushed by product inflation, 80 foundation factors of commodity inflation and better professional gross sales.
Of observe, FX represented a 30 foundation level headwind to consolidated comps. Our common ticket was partly offset by comp transactions declining 5.8%. Of observe, comp transactions have improved considerably as we transfer by means of the 12 months with Q3 over 730 foundation factors increased than Q1 and 60 foundation factors increased than Q2. U.S. comp gross sales had been up 3% within the quarter, whereas gross sales in Canada had been down 10.2% in USD, with roughly half of the decline attributable to a stronger greenback. Professional gross sales had been up 16% within the quarter, pushed by broad-based power throughout all classes. DIY gross sales developments improved from Q2 with robust efficiency throughout many core house and classes as customers spent extra time at house following summer time journey exercise. DIY project-related demand additionally elevated sequentially resulting from decrease lumber costs.
On Lowes.com, gross sales elevated 12% within the quarter partly pushed by robust equipment gross sales. Lastly, we estimate that the online impact of storm-related gross sales year-over-year was comparatively flat as we cycled over Hurricane Ida within the prior 12 months. Our U.S. month-to-month comps had been up 4% in August, 3.4% in September and 1.4% in October. On a three-year foundation, U.S. comps elevated 33.5% in August, 37.8% in September and 42.1% in October. Gross margin was 33.3% of gross sales within the third quarter, up 20 foundation factors from final 12 months. Product margin fee was up 110 foundation factors versus the prior 12 months as we cycled over a lumber margin stress within the third quarter of 2021, which was triggered by a steep decline in costs that started final July. Greater product margin fee was partly offset by 30 foundation factors associated to increased home and import transportation prices in addition to the enlargement of our provide chain community, together with 35 foundation factors of stress from shrink.
Adjusted SG&A of 18.7% of gross sales levered 41 foundation factors pushed by increased gross sales and substantial enchancment in productiveness. Adjusted working revenue was $3 billion, up 7% versus the prior 12 months. Working margin fee of 12.71% of gross sales leverage 54 foundation factors, pushed by each increased gross margin and SG&A leverage. The adjusted efficient tax fee was 24.5% under the prior 12 months fee. Stock ended the quarter at $19.8 billion, up $3.1 billion from the identical quarter final 12 months largely pushed by product inflation and better freight prices with items roughly flat to prior 12 months. This morning, we’re growing our full 12 months 2022 monetary outlook primarily based on stronger-than-expected flow-through year-to-date. Please observe that our outlook for working margin, diluted EPS and return on invested capital are all adjusted to exclude asset impairment and anticipated transaction prices related to the sale of our Canadian retail enterprise.
We now count on 2022 gross sales of roughly $97 million to $98 billion, representing comparable gross sales of flat to a decline of 1% as in comparison with prior 12 months. Please observe that on the midpoint of the vary, this suggests that fourth quarter comparable gross sales will probably be barely constructive. This displays our expectations of continued robust Professional efficiency and regular DIY developments. As a reminder, our 2022 gross sales outlook features a 53rd week, which equates to roughly $1 billion to $1.5 billion in gross sales. We proceed to count on gross margin fee to be up barely as in comparison with the prior 12 months. As you stay up for the fourth quarter, take into account that we’re biking over the second spherical of lumber inflation in 2021, which benefited product margins. We additionally count on continued shrink stress subsequent quarter.
Given our disciplined give attention to expense administration, we now count on adjusted working margin of roughly 13% for the total 12 months. And we’re elevating our outlook for adjusted diluted earnings per share for the 12 months from $13.10 to $13.60 to our up to date vary of $13.65 to $13.80. This displays better-than-expected SG&A leverage in addition to higher-than-planned share repurchase exercise. We count on capital expenditures of as much as $2 billion this 12 months. Moreover, given our larger-than-expected $4.75 billion notes providing in Q3, we count on to speed up share repurchase exercise that we had initially deliberate for 2023 into this 12 months. We now count on $13 billion in share repurchases in 2022. And at last, we’re elevating our outlook of adjusted return on invested capital to above 37% for the 12 months.
Now turning to our best-in-class capital allocation technique. In Q3, the Firm generated $1.7 billion in free money circulation. And thru a mix of each dividends and share repurchases, we returned $4.7 billion to our shareholders. Throughout the quarter, we repurchased 20.5 million shares for $4 billion. We additionally paid $666 million in dividends at $1.05 per share. Capital expenditures totaled $403 million within the quarter as we proceed to give attention to high-return tasks that help our progress targets. We ended the quarter at 2.5x adjusted debt to EBITDA and we’re properly on monitor to succeed in our goal leverage of two.75x in 2023 whereas additionally sustaining our BBB+ score. Lastly, we delivered return on invested capital of 27.6% inclusive of a 590 foundation level affect associated to the asset impairment recorded within the third quarter.
In closing, I am assured that we’ll proceed to ship shareholder worth by means of our main capital allocation technique whereas investing in our associates and our enterprise to drive long-term sustainable progress. And with that, we’ll open it up for questions.
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