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Lowe’s (NYSE:LOW)
Q2 2021 Earnings Call
Aug 18, 2021, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, everyone and welcome to Lowe’s Companies second-quarter 2021 earnings conference call. My name is Darryl and I will be your operator for today’s call. [Operator instructions] I will now turn the call over to Kate Pearlman, vice president of investor relations.
Kate Pearlman — Vice President, Investor Relations
Thank you and good morning, everyone. Here with me today are Marvin Ellison, chairman, president, and chief executive officer; Bill Boltz, our executive vice president, merchandising; Joe McFarland, our executive vice president, stores; and Dave Denton, our executive vice president and chief financial officer. I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on Lowe’s investor relations website. During this call, we will be making comments that are forward-looking, including our expectations for fiscal 2021.
Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we’ll be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning’s press release in our investor relations website.
With that, I’ll turn the call over to Marvin.
Marvin Ellison — Chairman, President, and Chief Executive Officer
Thank you, Kate and good morning, everyone. I’d like to begin by taking a moment to extend my thoughts and prayers to those who are impacted by the ongoing pandemic as well as the many wildfires. At Lowe’s, we remain committed to the health and safety of our associates and customers while supporting the communities in which we operate. The resilience of our customers and our associates is something that I admire on a daily basis.
Now, turning to our results. We are very pleased with the performance for the second quarter. During the quarter, comparable sales declined 1.6% for the total company and 2.2% for the U.S. And on a two year basis, comp sales were positive 32% for the total company and for the U.S.
Our outstanding two year performance was driven by great execution of our total home strategy, which allowed us to win with both the pro and DIY customers while meeting the aggressive growth demands across Pro, Lowes.com and our installation services business. As anticipated, during the quarter, we saw a decline in DIY demand versus last year as many families transition back to pre-COVID purchase patterns and weekend mobility after Memorial Day. But because of the agility of our total home strategy, we were able to capitalize on pro demand driving growth of 21% this quarter and 49% on a two year basis. This level of pro growth would not have been possible without our intense focus on the pro customer over the past 24 months.
This intense pro focus includes our U.S. stores reset project that we executed last year. This reset has allowed us to create a more intuitive store layout for the pro aligned across product adjacencies, so pros can quickly and easily locate all products they need for their jobs. And as a reminder, our core pro customer is a small- to medium-sized business owner.
These customers shop frequently across the store, impacting numerous product categories. And as we continue to capture more of their spend, we will continue to increase productivity across the top and bottom line of our stores. Later in the call, Bill will discuss how we will continue to expand our pro product offerings and then Joe will discuss our enhanced online experience for the Pro. We also delivered double-digit growth this quarter in our installation services.
We continue to expand the products available for installation and we’re leveraging our enhanced e-commerce platform and our revamped business model to deliver a better customer experience. We expect our installation services business to continue to play an important role in our total home strategy as customers increasingly look to us to provide an end-to-end turnkey solution for their home project needs. And at Lowes.com, sales grew 7% on top of 135% growth in the second quarter of 2020, which represents a 9% sales penetration this quarter and a two year comp of 151%. Our enhanced omnichannel offering continues to resonate with our customers who increasingly expect total flexibility in shopping however, whenever and wherever they choose.
We’re also pleased with the performance of our Canadian business. In the second quarter, Canada delivered comp growth in line with the U.S. despite several COVID-related operating restrictions. We also continued to elevate our product offering, which is another pillar of our total home strategy as we help fulfill the aspirations of our customers to upgrade their homes and style.
And we delivered strong positive comps across kitchen and bath, flooring, appliances and decor on top of 20% growth in these categories last year. The 17% growth we experienced in ticket over $500 was in large part driven by these categories, reflecting continued consumer confidence in investing in their homes. This also reinforces the consumers’ confidence in Lowe’s as the right destination for their home decor needs. And during the quarter, operating margin expanded approximately 80 basis points leading to diluted earnings per share of $4.25, which is a 13% increase as compared to adjusted diluted earnings per share in the prior year.
In the face of unprecedented lumber price volatility during the second quarter, our improved operating performance reflects the benefits of our new price management system along with our disciplined focus on perpetual productivity improvement, or PPI. Bill and Joe will discuss both these initiatives in more detail later in the call. I’d now like to take a moment to discuss a very important milestone in the company’s transformation. When I joined Lowe’s as CEO back in July of 2018, I discussed the importance of transforming and modernizing our supply chain.
The foundation of this transformation is transitioning the company from a store-based delivery model to a market-based delivery model for big and bulky products. I’m pleased to announce that this quarter, we completed the conversion of our Florida region to a market-based delivery model for appliances and other big and bulky items like grills, riding lawn mowers and select patio furniture. In this new delivery model, product flows from the bulk distribution centers to cross-dock terminals directly to customers’ homes, bypassing the stores altogether. This replaces a legacy store delivery model where we hold appliances in stockrooms and storage containers behind our stores and then leverage store-based trucks and associates to deliver these products to customers’ homes.
To say this legacy process is inefficient would be an extreme understatement. The new market-based delivery model is already driving higher appliance sales, improved profitability, lower inventory, higher on-time delivery rates and improved customer satisfaction. And we’re freeing up space in our stockrooms, which will enable us to expand our same-day and next-day pro and DIY fulfillment capabilities in the near future. We plan to roll out the market-based delivery model across additional regions by the end of the year and then complete the rollout across the U.S.
over the next 18-plus months. With this new delivery model, we will continue to drive sales, inventory turns and operating leverage through a technology-driven, simplify and customer-centric process. Before I close, I’d like to share my perspective on the home improvement market as well as Lowe’s opportunity to win in this market. The outlook for the home improvement industry remains very positive.
Residential investment is expected to remain high due to historically low mortgage rates while home prices continue to appreciate. We’re also pleased that we continue to see higher household formation trends and longer-term wallet share shift to the home. It’s also worth noting that any near-term pressures on housing turnover is not related to an economic downturn as typical. In fact, there is more housing demand than supply, resulting in home prices continuing to rise.
And because of this, consumers have an increased confidence in repairing and remodeling their homes. As a reminder, approximately two-thirds of Lowe’s annual sales are generated from repair and maintenance activity. Further, our research shows that it will take years for the supply of homes to meet the projected demand. This remains a very positive indicator for home improvement.
In addition, the customers’ mindset regarding their home is very straightforward. As long as their home is increasing in value, they see upgrades and enhancements to their home as an investment and not an expense. Looking ahead, although the business environment remains uncertain, we are confident that our total home strategy provides us with the agility to operate with profitability in times of high and low customer mobility. And finally, I would like to extend my heartfelt appreciation to our frontline associates.
As I travel the country on a weekly basis visiting stores, I’m continually inspired by the hard work and commitment of our associates to support our communities while providing excellent customer service. And with that, I will now turn the call over to Bill.
Bill Boltz — Executive Vice President, Merchandising
Thanks, Marvin and good morning, everyone. U.S. comparable sales were down 2.2% in the second quarter but up 32% on a two year basis. We drove solid positive comps in our building products and home decor divisions.
And while we delivered a terrific spring over the first half of the year, the pivot in consumer behavior after Memorial Day resulted in negative comps in our seasonal categories this quarter. However, growth was broad-based on a two year basis with all product categories up more than 15% in that time frame. In building products, we delivered double-digit comps in electrical and lumber driven by strong pro demand as well as high levels of inflation. And as Marvin mentioned, our merchandising and finance teams navigated through unprecedented lumber price volatility this quarter.
Our enhanced pricing systems enabled us to effectively mitigate the impact on our product margins. Dave will provide more detail on the near-term impact of the lumber price decline on our margins and sales, but I’m confident that our talented teams have the right pricing tools and processes to continue to manage through elevated levels of inflation and pricing volatility. I’m also pleased with our performance in home decor as DIY customers continue to rely on Lowe’s for their home remodeling needs. By leveraging our total home strategy, we delivered positive comps across appliances, kitchens and bath, flooring and decor on top of over 20% growth in these categories last year.
Capitalizing on our No. 1 position in appliances, we delivered strong comps in the category this quarter with particularly standout performance in washers and dryers as well as refrigerators and freezers. Countertops, kitchen cabinets and vanities were the strongest contributors to our kitchen and bath comps as our customers continue to appreciate the new on-trend, coordinated styles that are available in our own allen + roth brand. Vinyl flooring was the top-performing category within flooring driven by new and innovative WetProtect product from Pergo.
It’s a leading brand in this category that is exclusive to Lowe’s and this product provides peace of mind to our customers…