Lowe's Companies, Inc. (NYSE:LOW)
Q1 2016 Earnings Conference Call
May 18, 2016 09:00 AM ET
Robert Niblock - Chairman, President & Chief Executive Officer
Ricky Damron - Chief Operating Officer
Bob Hull - Chief Financial Officer
Scot Ciccarelli - RBC Capital Markets
Simeon Ari Gutman - Morgan Stanley & Co. LLC
Gregory Melich - Evercore ISI
Christopher Michael Horvers - JPMorgan Securities LLC
Michael Louis Lasser - UBS Securities LLC
Matthew J. Fassler - Goldman Sachs & Co.
Seth Sigman - Credit Suisse Securities
Mike Baker - Deutsche Bank
Eric Bosshard - Cleveland Research Company
Seth Basham - Wedbush Securities
Kate McShane - Citi Research
Peter Benedict - Robert Baird
Good morning, everyone, and welcome to Lowe's Companies' First quarter 2016 Earnings Conference Call. This call is being recorded. [Operator Instructions] Also, supplemental reference slides are available on Lowe's Investor Relations website within the investor packet. While management will not be speaking directly to the slide, these slides are matched to facilitate your review of the company's results and to be used as a reference document following the call.
During this call, management will be using certain non-GAAP finance measures. The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission.
Hosting today's conference will be Mr. Robert Niblock, Chairman, President, and Chief Executive Officer; Mr. Ricky Damron, Chief Operating Officer; and Mr. Bob Hull, Chief Financial Officer.
I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.
Good morning and thanks for your interest in Lowe's. Comparable sales grew 7.3% in the first quarter, exceeding our expectations. Driven by comp transaction growth a 5.1% in a 2.2% increase in average ticket.
I'd like to thank our employees for their continued efforts in serving customers which enable our strong transaction growth. The team's project expertise and commitment to customer service allowed us to capitalize on the strong and our primer demand in the quarter. Healthy macro fundamentals, favorable weather and our compelling offers drove demand, resulting in strength in indoor as well as outdoor projects. In fact, we recorded positive comps in all 13 product categories with particular strength in lumber and building materials, millwork, paint, lawn and garden and tools and hardware which all placed to comps above the company average.
I emphasis on providing better omni-channel experiences positioned us well, enabling us to connect with customers and provide the advice and assistance they count on when completing their home improvement projects, whether they choose to connect in the store, online, in their home, or at your contact centers. We're also pleased with the investments we've made to build deeper relationships with the pro as our pro-business performed well above the company average.
The work we've done to enhance our product and service offering is allowing us to better serve this important customer segment, and we will continue to deepen those relationships. From a geographic perspective, a US home improvement business achieved 7.5% comps for the quarter with all 14 regions delivering positive comps. And we continue to our strong performance in international markets including double-digit comps in Canada and local currency.
For the quarter, we generate 170 basis points of operating margin expansion. Included in the quarter's results is a $160 million unrealized gain on a foreign currency hitch entered into an advance of opportunity in running the acquisition. Including this benefit, we delivered earnings per share of $0.98; a 40% increase over last year's first quarter. Delivering our commitment to return excess cash to shareholders, in the quarter we repurchased $1.2 billion of stock under our share repurchase program and paid $255 million in dividends.
I'm also pleased with the progress of our previously announced acquisition of RONA. The transaction was approved by RONA's common shareholders in March and in last week we received authorization from the Canadian regulatory agencies clearing the way for closing of the transaction this Friday. The time is right to fortify our Canadian market presence to take advantage of the significant long-term potential we see. We expect to bid on the recent progress our team in Canada has made and the positive results RONA has achieved over recent years as a result of their restructuring efforts.
Turning to the economic landscape for the balance of year, the outlook for the home improvement industry remains positive. Shifting gains in the job market as well as disposal income growth is expected to outpace growth in the economy; should contribute to solid growth in consumer spending. And housing remains a bright spot -- remains first on effort.
Let me turn the call over to Rick.
Thanks, Robert. And good morning everyone. We executed well on the first quarter, growing both average ticket and transactions. In addition to our successful Spring Black Friday events, we grow traffic through compelling offers designed to take advantage of early spring project demand. Leveraging enhanced digital capabilities and improved marketing speed and flexibility to reach the spring customer earlier in the season.
And as Robert shared with you, we delivered positive accounts across all regions and product categories, as we continue to capitalize on a favorable macro backdrop and consumers increasing desire to invest in their homes. These favorable trends ends in home improvement coupled with our compelling product offering and strength in omni-channel retailing contribute to a particularly strong performance in categories such as lumber and building materials, millwork, paint, lawn and garden and tools and hardware.
We achieved double-digit comps in lumber and building materials driven by a continued surge in outdoor construction projects coupled with stronger demand from the pro customer. Millwork also have been affected from this dynamic as outdoor projects grow strong performance in windows and doors. And as customers looked to improve and enjoy their outdoor living space, the outdoor living experience we introduced in 2014 continued to pay dividends delivering housing digit comps in patio and outdoor fashions for yet another year.
We also continue to see robust attachment of accessories as the showroom fell in created style help customers envision and create our outdoor space. Our targeted offers and advance designed to capitalize on early spring drove demand high single-digit comps in lawn and garden category. With particular strength in garden hardware, lawn goods, soil and mulch.
Our landscape lighting expansion was also a success. Helping customers visualize their outdoor living lighting projects and making a selection and installation easy. Our offering in the light of technologies like LED. This project strength extended to inside the home as well, as we also saw strong performance interior project categories. Within fashion fixtures, we leverage our customer experience design capabilities to optimize our recent lighting resets, showcasing an expanded collection of lighting stalls, finishes and brands available both in store and online. Including the introduction of Kichler and Quoizel lighting, both home channel exclusives, along with progress lighting, we now offer the top three lighting brands in the industry, providing our customers with an exceptional rate of options in the stalls.
We combined our extended product offering with a simplified presentation; designs with the needs of the customer in mind. Grouping lighting textures bussed down in collection to provide a cohesive degrading solution and simplify selection. Customers have responded well. Driving double-digit comps in interior to core lighting and chandlers. And we're now extending this approach just so many times. To leverage our relationship with other patents as well as our private label brand in sourcing capabilities.
We say a mid-single digit comps in appliances flowing and kitchens further demonstrating the consumers continued willingness to engage in interior projects. Paint performed above the company average, during the bus creating both interior and exterior projects. Our paint lineup which showcases thus far Sherwin-Williams and PPG Olympic provides customers with a full suite of top brands they trust for the paint projects.
Tools and hardware also been affected from the increased project activity from both DIY and Pro customers. We were able to capitalize on this demand by improving our tool brand assortment, which exclusives like Hitachi and Bostitch, the number one and number two pneumatics. And the extension of the brands like lawn along with our extensive private label line of Kobalt tools.
Whether working on indoor outdoor projects, our omni-channel capabilities help customer achieve great results. Customers can engage without associates instore for expert advice are content on those dotcom for inspiration, our contact center for ongoing support or our project specialist who work with the own in their homes. On those outcome, we have upgraded our home lawn shopping experience with enhanced product counting and search functionality. Improved visual tools such as 360 degree product views, improved video content and the continued expansion of click to chat capabilities to better support the customer's digital experience.
As a result, we continue to see positive customer response and very strong growth in our online channel. Our inspiration into your project specialist, to link with customers in their homes to design, plan and complete their home improvement projects represent another critical element of our omni-channel strategy. Our exterior project specialist are available across all US home improvement stores and we are expanding our interior project specialist program, reaching all US stores by the end of this year.
Our in-home sales program continues to outperform with above average comp growth again this quarter. Our expertise in project inspiration, project design and project execution are setting a support as the project authority in home improvement, any time when the consumer continues to demonstrate a willingness to take on home improvement projects.
We continue to strengthen our Pro business, driving comps well above the company average, by further advancing our product and service offering to better serve the Pro customer. Beyond improvements in our tools offering, we've also strengthened our portfolio Pro focus brands with the addition of GAF roofing, Owens Corning insulation, Lennox HVA, and Masonite entry in their interior doors.
We continue to collect feedback from Pro customers, our outside sales team and store employees, are working closely with our field based merchandising managers to address our local market opportunities and brands to further optimize our offering for Pro. We have also advanced our omni-channel resources for the Pro. We continue to utilize feedback from our Pro customers and Pro services team to enhance the features and functionality at our LowesForPros.com site that we relaunched last year; making it easy for Pro's to manage multiple properties and quickly purchase items station wide.
Thus far we have been pleased with the program rollout given the positive customer response in the early results which have exceeded our expectations. Another critical element of our omni-channel offering for the Pro customer is our account executive Pro services or AEPs. AEPs work with larger regional customers to have them order and replace products across multiple geographies and locations. Our AEPs are a key component of our strategy to grow our business with larger Pro customers.
We currently have over a 180 Pro outside representatives in the field and have experienced great success with the program with continued strong growth in AEP comp sales. Building on this success, we will continue to grow the program adding additional AEPs to continue catering market opportunity with large Pro customers.
We are also reaching out the Pro to targeted marketing and special advance such as credit events, bonus days, as spring propitiation days to drive awareness and generate new business. We have been pleased with these results in driving both incremental purchases with existing Pro customers and doting relationships with new customers.
Our work to strengthen our portfolio brands as well as expand our omni-channel offering through a growing Pro services team with Pros.com are part of a broader commitment to build on a strong foundation with the Pro. This foundation includes dedicated service in our stores, inventory depth along with the needs of the Pro, job sat delivery and our value proposition including a 5% of everyday low key program, for Pro's using those proprietary credit as well as reduced delivery rates.
In addition to our efforts to drive topline growth, we continue to focus on profitability for the quarter, gross margin contracted as strong performance in lower margin categories such as lumber building materials led to a negative mix impact. And while we plan targeted promotions to capitalize on strong spring demand, the participation rate in those offers exceeded our expectations which together with markdowns associated with reset activity led to a negative rate impact.
Our stores once again effectively manage payroll hours on very strong comp sales growth, driving payroll experience leverage. They grow this leverage while achieving continued strong customer satisfaction scores. As you can see we had a strong first quarter. We continue to make progress on our initiatives to drive topline growth and are focused on improving productivity and profitability.
We look forward to sharing further progress with you to over the course of the year. Thank you for the interest in Lowe's and I will now turn the call over to Bob.
Thanks, Rick. And good morning everyone. Sales for the first quarter were $15.2 billion, an increase of 7.8%. Total projection count increased 5.5% an average ticket increase 2.2% to $68.08. Comp sales increased 7.3% grew by comp trends transaction increased 5.1%, an average ticket growth of 2.2%.
Looking at monthly trends, comps were 8.3% in February, 9.1% in March and 4.9% in April. Comps were stronger earlier in the quarter as we capitalize on favorable weather to brought above plan comps. April sales were consistent to the plan coming into the quarter. Gross margin for the first quarter was 35.04% of sales, a decrease of 43 basis points from last year.
An increasing gross margin as a percent sales was due to rate structure as well as the mix of products sold. The rate pressure related to targeted promotions in markdowns associated with recent activity. SG&A was 22.28% of sales which leverage 188 basis points. In anticipation of the RONA acquisition, we entered into a four currency hedge to lock in the purchase price in US dollars.
In the quarter we recorded a $160 million unrealized gain driving 105 basis points of expense leverage, also store payroll leverage 13 basis points as we continue to optimize our staffing model. Utilities leveraged 11 basis points as a result of warmer weather relative to last year. Lastly, there are numerous other expenses that leverage between 5 basis points and 10 basis points in Q1.
Depreciation for the quarter was $357 million which is 2.34% of sales and leverage 25 basis points compared to last year's first quarter as a result of higher sales and ad sense becoming fully depreciated. Earnings before interest and taxes increased 170 basis points to 10.42% of sales. The other realized gain on the FX hedge accounts for 105 basis points of the increase versus last year.
Interest expense at a $156 million for the quarter deleveraged the 8 basis points to last year as total debt increased $4.1 billion versus the first quarter of 2015. We issued $3.3 billion of unsecured bonds in April. The transaction consisted of three, 10 and 30 year issuances with a weighted average interest rate of 2.72%. The proceeds will fund the RONA acquisition as well as refinance current year maturities.
In fact, tax rate for the quarter was 38.2%. Earnings per share of $0.98 for the quarter represents a 40% increase over last year $0.70. The $0.98 includes a $0.11 related to the FX hedge gain. We exceeded our earnings plan for the quarter even without the gain.
Now, to a few items in the balance sheet, starting with assets. Cash and cash equivalence at the end of the quarter were $4.6 billion. The higher cash balance is a result of the April bond deal. Our first quarter inventory balance of an $11.1 billion increased $441 million or 4.2% over the same period last year. Inventory turnover was 3.83 times, an increase of 5 basis points over Q1, 2015.
Moving on to the liability section of the balance sheet. Accounts payable $8.8 billion increased $798 million or 10% over Q1 last year. The increase in accounts payable is due to the timing of purchases in the quarter versus last year and a three-day improvement in day's payable outstanding.
And in the first quarter, lease adjusted debt EBITDA was 2.45 times. The higher the target leverage was a result of the April bond deal. We expect to be back in line with our 2.25 times the target within one year of the RONA transaction closing. Return on invested capital increased 64 basis points for the quarter to 14.98%. The net impact of the noncash impairment charge recognized in the fourth quarter related to the exit of our joint venture in Australia and FX hedge gain this quarter reduced ROIC by 145 basis points.
Now, looking at the statements of cash flows. Operating cash flow is $3.2 billion, capital expenditure for $208 million resulting in free cash flow of $3 billion. Free cash flow was $766 million or 34.1% over the same period last year.
In February we entered into a $500 million accelerated share repurchase agreement. We expect to receive approximately 6.8 million shares but the ultimate number of shares will be determined upon the completion of the program in the second quarter. We also repurchased approximately 9.7 million shares for $700 million through the open market.
In total, we repurchased $1.2 billion in the quarter. We were approximately $2.4 billion for meeting on our share repurchase authorization. The remaining $53 million of share repurchases shown on the statement cash flows relates to shares with help from employees to satisfy statutory tax withholding liabilities.
Looking ahead, like to address several of the items detailed in Lowe's business outlook. -- The impact of this transit transaction.
Finally, while we did outperform our Q1 sales and earnings plan, we continue to think about spring within the context of the first-half of the year. We are confident our plants and hope a sustain a momentum but we are in the middle of the spring season to believe it's prudent to make in our previously provided outlook.
Now, let's get into that outlook. As Robert noted, the forecast for home improvement industry remains positive. For 2016, we expect total sales increase of approximately 6% driven by a comp sales increase of 4%, the impact of the 53rd week and the opening of approximately 45 stores which includes 20 offshore locations and 12 source in Canada.
For ease of modeling, the EBIDT growth rate excludes the impact of last year's Australian joint venture impairment charge and this year's FX hedge gain. We are anticipating an EBIT increase of 80 basis points and 90 basis points. Its effective tax rate is expected to be 38.1%. For the year on a GAAP basis we expect earnings per share of approximately $4.11 with the increment of $0.11 from our prior guide coming from FX hedge gain.
We are forecasting cash flows from operations to be approximately $5.4 billion. Our capital expend for 2016 was approximately $1.5 billion. This resulted in estimated free cash flow at $3.9 billion for 2016. Our guidance assumes approximately $3.5 billion share repurchases for 2016. The share repurchases option is not expected to be affected by the RONA acquisition.
Regina, we are now ready for questions.
[Operator Instructions] Our first question will come from the line of Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Good morning guys. I hate to kind of lead with a short term factor like weather, but is there any estimate you guys have in terms of what kind of impact the weather had on the comp in the quarter in total and by any chance would you have what’s called the monthly cadence kind of on weather adjusted basis month by month?
Scot, so we estimate that weather impacted to our performance by roughly 150 basis points as I mentioned in comments. That impact was more pronounced first part of quarter I don't have the 150 basis points dissected by month at this time.
Okay and then just I appreciate that. And then just on the margin you mentioned the couple different things impacting it from the promotions to mix. Can you give us any color regarding the relative size of the impact of each of the factors?
Scot, look three factors that we mentioned the mix of product sold, the recent activity target promotions each had relative basis points impact.
It's roughly even. Alright thanks a lot guys. I will pass the torch.
Your next question will come from the line of Simeon Ari Gutman with Morgan Stanley & Co. LLC. Please go ahead.
Simeon Ari Gutman
Thanks. So first, I guess the follow up to Scot's first question regarding the 150 basis points Bob you answered on the seasonal impact can you talk about how much or the weather impact how much that could have been from projects that were got started earlier versus outdoor seasonal products that's sold through?
Yes. As I mentioned in my comments Simeon we think about spring as more first half of it we spend a lot of time dissect what might have sliced between quarters so certainly the mild winter weather enabled extra re-projects we saw that show up in some of the categories that Rick mentioned out performed but the impact will be determined I think in the second quarter when we review our spring results.
Simeon Ari Gutman
Got it. Okay and then thinking through gross margin are you able to share with us the difference in product margins and some of those categories seasonal lumber and building materials and should we see the gross margin bounce back to that to some extend in the second quarter reflecting the product mix?
So what I would say is the volume share of the mix impact related to lumber building materials so it's a demand for those category remain strong we could have additional mix pressure in the second or the remainder of the year however we would also generate additional sales from that demand. In additional the other two items the targeted promotions and the reset activities are largely Q1 events and we don't expect a lot of residual impact beyond Q1 for those items.
Simeon Ari Gutman
Okay great. Thank you.
Your next question comes from the line of Gregory Melich with Evercore ISI. Please go ahead.
Hi, thanks. Two questions. One is -- from the fact that it was a good strong start of the year. And if we keep that 4% comp guidance my math it implies that the rest of the year is going to be somewhere running like 3 or 3.5. Is that what you are seeing now specially given if I remember correctly May is actually an easier comp than April as a year ago. Then I have follow-up.
This is Robert, I’ll start and I will turn it over to Bob, I think just as we have done over the past few years generally coming out of the first quarter we have not changed our guidance for the year. So we are following a cadence very similar to what we have done in the past. We think it's too early in the year to be changing our guidance this is very consistent with what you have seen for the past few years. We have started off with a robust our first quarter that was let's say, weather challenges we had a couple of years ago but Bob if you would like to.
Yes, a couple of things reiterate from my comments first we felt good about April was our plan second we hope to sustain minimum debt we are seeing so we are starting about our plans remain confident and our ability to execute there is nothing suggestive that we are not able to execute the guidance we put forward.
So if April was on plan just as presumably May is on plan?
As we talk about the guide annually we feel good about opportunity to deliver our results. We are not going to get into the short term nuances of this quarter versus that quarter. But we are confident our ability to execute.
Okay, great. And I guess the follow-up was about for the margin progression in the first quarter and more on the gross margin side, you talked about targeted promotions some related to reset are there other categories that you are going to be resetting doing this with we should expect in the second and third quarter or just the rest of the year. Or was that something more specific to the first quarter as we think about the rest of the year now as it plays out?
Greg, it's more specific to the first quarter and normalized throughout the balance of the year.
Got it, thanks. Let’s others have a chance.
Your next question comes from the line of Christopher Michael Horvers with JPMorgan Securities LLC. Please go ahead.
Christopher Michael Horvers
Thanks. Good morning. So following up on the margin so was gross margin in line with your plan and then the other side of it the SG&A came in much better even if you back out the foreign currency hedge games so that was very strong so was that also in your plan and as you think about putting up 7% comp in the first quarter which is fantastic the flow through I guess wasn't very large and I know that you talked about that that 1Q was going to be light but you also I think in that more of a like 5% comp so I guess that there was actually two points and drive as much flow through as one would have thought?
So the gross margin came in a little below our plan for a couple of reasons. First as Rick talked about take rate in the targeted promotion so we had estimate of the impact the customer activity was stronger than anticipated which is certainly a good thing and kudos to the team for identifying that resonate with customers. Second, we expected impact from the reset to be little more balanced Q1 and Q2 we had good sale through on the reset activity therefore the impact was more pronounced in the first quarter as I mentioned that kind of clears the debt Q2 going forward. And the lastly the mix structure was higher than anticipated based on the strong demand lumber building materials. As relates to the flow through, so the lower than anticipated flow through is obviously entirely attributable to the declining gross margin versus playing the game based on the factors that I just described.
Christopher Michael Horvers
Understood, understood. So the SG&A came in where you thought would be and there was no up and down because of -- like you talked about in the fourth quarter switch between financing offers versus promotional offers?
No, there was a subtle nuance within credit as it relates to our partner and they made the change that impacted us last year regarding the low lost reserve the trailing impact of that hit Q1 does some modest pressure in Q1 that's largely done that's pressure Q1 that we will see in Q2 going forward. But not otherwise nothing out of the norm.
Christopher Michael Horvers
Understood. Thank you and then as a follow-up there are a lot of companies who are sort of talking negatively about the consumer target for example this morning following other companies, department stores last week being a little bit light, so is there anything as you feel back demand what are originally California is ticket versus traffic deceleration in the quarters or anything that you are seeing that would suggest deteriorating consumer back drop?
Chris this is Robert. As I outlined in my comments have we seen the consumer we look through our consumer segment survey what their intentions are around spending what their intentions are around investing in the home as we are seeing continued improvement in the job market we are seeing continued improvement in wages we are seeing continued improvement in home values this driving continued improvement in their intentions for discretionary spending which I think the best evidence of that is in the 5.1% increase that we saw on top transactions during the quarter and that’s we have seen in our surveys has let us to be believe that the consumer when they risk high -- six months out with regarding purchase nothing shows any change in their intentions as we survey them today. So that I think is what Bob took you through strong first quarter where others are saying out there with regard to consumer, but we take this the our strong first quarter performance and we hear from the consumer home survey it gives us confidence in reiterating out guidance for the year that Bob is taking through.
Christopher Michael Horvers
Your next question will come from the line of Michael Louis Lasser with UBS Securities LLC. Please go ahead.
Michael Louis Lasser
Thanks for taking my question. So this is the second quarter where you were little bit more promotionally feel to have maybe a greater impact this quarter can you talk about the influence that some of the increased promotional activity that you engaged in had on the comp and what are you learning about consumer price elasticity across various categories – I know this is three four questions I apologize it is the promotional activity more pronounced in store or online? Thank you.
I can take that. First let me just start where we focus our promotions and little bit about how we went about it first quarter. We are more focused lawn and gardening seasonal living, hardware major appliances and interior projects because we thought those would be the types of products and projects consumer mindset would be geared towards. We leverage ourselves in operation planning process and what’s important about this process is it allows us to have a better sense on the micro seasons that apply to the consumer's mindset that we hit the consumer with the right promotion at the right time. We are much faster in being able to flex our promotions and our digital assets because of the investments that we made in our digital capabilities and what we saw was the higher take rate and as Bob said earlier that's certainly a good thing.
Our flexible supply chain allows us to make adjustments to consumer making purchases and making sure that we don't -- by not having the product but I wouldn't say that the intensity and depth of promotion was great. What I would say is that our execution around promotions continues to get better. So, we are doing a much better job at getting the right promotion in front of customer at the right time leveraging our digital capabilities as well as some of the process that we put in place.
Michael Louis Lasser
Are you learning anything about price activities -- last quarter it was focused on the [inaudible] this quarter was more on seasonal and tools and so maybe the construct of the home industry which -- says that it's there is not elasticity isn't great here as in other categories may not be true and you can push that a little harder to drive more traffic. That's the right way -- you are thinking about it?
So Michael we have got tools allow us to understand the effective promotions and elasticity of items that's the magic is to have the right level promotions that resonate that customers not too much because too much promotions create some linkage in the system and less. So we do have a some tools in place to allow us to evaluate the effects of the promotion to draw customers in try to get the sense of close rate as well as elasticity of the item so we are continuing to turn knobs and pull leverage to maximize the effectiveness there.
Michael Louis Lasser
And Bob you mentioned that you think promotions that would be less of an impact on the gross margin in the second quarter is that because you are going to pull back on the promotions or you think this is more effective unless -- and then I am gone. Thank you.
Yes so it's Mike said one of the key areas that was close in Q1 was lawn and garden and so the higher take rates and higher effective promotions were around that category those are not the things we expect to repeat in the second quarter or beyond that matter regarding lawn and garden which is comfortable that the impact was largely contained in the first quarter.
Michael Louis Lasser
Okay, good luck for the spring, thank you.
Your next question comes from the line of Matthew J. Fassler with Goldman Sachs & Co. please go ahead.
Matthew J. Fassler
Thanks a lot and good morning a couple of quick ones here. [inaudible] cadence as reported did Easter calendar shift impact some of the cadence at all?
It did Matt as we think about Easter impacted. It with the change Easter would have impacted March would have been 9.7%, April would have been 3.4%.
Matthew J. Fassler
Got it that's very helpful. Second question can you talk about what you saw directionally for online growth this quarter and any changes and how the customer DOI end or pro if using Lowe’s.com?
Yes, Matt Lowes.com an e-commerce grew 23.5% for the quarter and we saw strong growth in traffic as well as conversion, to the sides we feel good about the investments that we made over the past year and really beginning to drive increased shop ability of the site, I think the key aspects there is when we go back and we talk about the things we done to the side to really make it more customer friendly like I said in the comments the enhanced video content that we are adding to the site the improved product descriptions as well as increased content there is also a resonating wealth of the customer. So those aspects of it I think continue to help us drive the incremental growth of from the .com platform. Lowe’s for pros from an e-commerce perspective is performing extremely well as we said exceeding our expectations. And we are extremely pleased with what we are hearing in the feedback we are getting from consumers as well as our APs in the field about the usability of the site the functions of the site enables to make the ability for the pro to shop much more easily with us. So we are really proud of those two things as we continue to go forward, we have not seen a shift in the mix of business regarding the in store pick up. We still see that as roughly 60% of all e-commerce transactions that are picked up that's even heavier as it relates to Lowes for pros delivery. Still continues to grow as a deponent of that and parts is about 30% of our .com sales.
Matthew J. Fassler
Thanks so much for the answer, I appreciate it.
Your next question comes from the line of Seth Sigman with Credit Suisse Securities. Please go ahead.
Thanks. Good morning. So one follow-up question on the gross margin in the past you guys have talked about some offsets in either product cost deflation or value improvement which I don't think was called out in the quarter. Can you speak to those items and if you see that as those as bigger opportunities as we move through the year?
So Seth those items continue to be in play. We did see some modest effort from both those items in the quarter but they were offset by the three negative factors that we mentioned.
Got it okay. And then just a specific question on the appliance category. I think that category saw one of the biggest swings in the quarter went from out-performing in the past to below the company average and I think that's just optics to some extend as I think you said the category was still up mid single digits, but is there anything else to read into that as we try to understand both where we are on the cycle and also perhaps how the competitive landscape maybe changing in that category specifically? Thanks.
No, we don’t have anything else to read intuitive if you look at our appliance business it out-performed for the last five quarters it's over double digit comp to two year stack it's well above the company average. We continue to have one of the best assortments with all of the national brands. We continue to take advantage of next April delivery Holloway in house facilitation repairs and maintenance we are really proud of the fact that we controlled the last three feet of the appliance experience. We don't outsource that. JD Powers just a recognized as the best in appliance retail satisfaction the investments that we made in floor space gives us one of largest floor space in the industry and the reason why we think that's important is that we consider our floor space and appliance coupled with our floor space and cabinets it positions us well to take advantage of the 2016 as played through. And the last thing I would say is that in kitchens in particular if you look at the high ticket items in kitchens things like cabinets and -- we saw a strength there. It suggests to us that the cycle was still well intact.
Okay makes sense. Thanks very much.
Your next question will come from the line of Mike Baker with Deutsche Bank, please go ahead.
Thanks. One follow-up question to earlier one. How much did the greater uptake on the promotional activity impact the comps?
Certainly it had some impact Mike as lawn and garden one of the best performing categories so it was certainly a driver of the quarter but as the tram described there are many actions impacting the pro, impacting the paint category, impacting a variety of things help thrive the totality of the performance in the quarter.
Okay, the four product categories I think was Mike mentioned as where you focus promotions. Two were above two or below company average so I was looking for more color on that but okay understood. Another question, you did keep the 80 to 90 basis point guidance for the year on the margins which means for the comp point above 1% you are going to look for between 27 and 30 basis points improvement you are obviously below that here. So is the reason you didn’t change that is it what you said earlier about not change of the comp outlook just too early in the year or are there specific reasons to believe the fall through will be not only better than it was in the first quarter but better than that 27 to 30 typical rule of thumb?
So, I would just say Mike we think there is potential upside on the sales line again we feel good about the momentum we saw in Q1, we hope to sustain the momentum however we feel it's way too early to start thinking about changing outlook for the year so we do think there is some upside in the top line. We talked about some gross margin pressure in the first quarter that will continue, so we certainly taken that into account however we do feel even better we did 90 days about our ability to continue to drive expense productivity in leverage which gives us confidence in the outlook to the extend sales are better and some of that is driven by lumber and building materials categories and they flow through like the closer to 25 basis points but again it's too early to start changing pieces of the outlook.
Okay. Thanks. Understood.
Your next question will come from the line of Eric Bosshard with Cleveland Research Company. Please go ahead.
Two things, first of all from a bigger picture perspective just wonder Bob if you could comment on how we should be thinking about gross margin understand the moving parts in the first quarter but as we think about this year or the next couple of years strategically how you are thinking about balancing promotions and sales relative to gross margin and what path does that suggest for gross margin?
So two things one and ties back to previous answer and secondly long term gross margin. So as I mentioned earlier we do have tools that allow us to evaluate the effective of promotions as we think about promotions some are specific to drive specifically drive sales some are specific to grow the basket and some are just general awareness around the brain and the categories we carry. So we continue to turn the knobs and pull the levers to maximize the effectiveness there. Taking a step back Eric as we think about gross margin we do expect some modest gross margins improvement annually as we think about gross margins it's probably not going to be 2017 to actually clips the gross margin rate we had in 2010. So it's not like we are forging new ground and looking for gross margin peaks have never occurred before so roughly over the eight year period it's called flattish gross margin over a long period of time.
Okay and then secondly, I understand the influence of weather and you desire not talk about the very near term but the difference in performance in April and May relative to February and March anything that you learn and looking through that? Can you isolate the weather or is there anything else different than that's going on that explains the magnitude of the step now?
Two things regarding weather, so I mentioned 150 basis points impact of the quarter. If you exclude the weather we would still be in the sales plans. So underlying demand for our category is strong macro fundamentals that drive our business housing and incomes continue to be constructive beyond that, no other nuances impacting the monthly cadence.
Okay. And within I guess your commentary within April being unplanned which suggest that's where you expect it to be despite whatever happening for others at the preparative re-bid.
That is correct.
Okay, thank you.
Your next question will come from the line of Seth Basham with Wedbush Securities. Please go ahead.
Thanks a lot, and good morning.
Good morning, Seth.
My first question just around Pro and specifically lowest for Pro's, you've had that in place now for a couple of quarters. Can you give us an update on the effectiveness and the traction you're gaining from that initiative?
Sure. As is said it earlier, we've been very pleased with the receptivity from the consumer and the Pro customer regarding lows for Pro's. We continue to see strong growth quarter-over-quarter as the customers come aware of the site. If you will look at Q1, we saw a sniffing growth in new register gross on the side, as well as conversion and growth is a percent of total dotcom business. So, we feel great about what we're seeing, we continue to improve the functionality of the site through feedback from our customers and our sales teams to make it more conducive and easier for the customers to navigate.
The other thing I would say is we continue to look at the site is to keep in mind the functionalities that it did provide that we did not have the capabilities of before. So, the Pro's for example, we are not allow -- we are not capable of using the in-house credit. They can now, Pro's did not receive their 5% value prop usage on prior Lowes.com they can today. Tax exit accounts weren’t available to them prior usage they are today.
So, all of those things are resonating extremely well and we continue to work on making this out more effective, more efficient. But today we've been extremely pleased with what we're seeing both from a risk reducer content as well as sales performance.
Great, that's helpful. And then secondly on cost control, great performance this quarter. As you look through the balance of the year, Bob, when you think about labor optimization, marketing and direct cost, can you give us some order of magnitude of the benefits you expect from each of those?
Seth, I'll give you some high level perspective. For the year, we continue to think indirect spends is going to pay dividends for us, that's in a 50 or so basis point range, bonuses is 10. Like we talked about the analysis around plotters, we could do the same thing regarding resets and things of that nature. We think we'll get about 10 basis points of leverage on that spend this year.
Risk insurance is going to be less of a drag, that's about 5 basis points employee insurance also less the drag. Advertising about 5 basis points, and then a couple of kind of indirect out of this fixed cost leverage 10 or so basis points. And then you pack at the 53rd week is just about 5 basis points. So, a lot of good items to drive expense leverage for 2016.
That's helpful detail, thank you.
Your next question comes from the line of Kate McShane with Citi Research. Please go ahead.
Thank you. Thanks for taking my question. One area that I just wanted to make sure, I just today is just about the supply chain. I know something that has been discussed by both you and your biggest competitor in the home improvement channel as a competitive advantage. And way not to get disrupted. Can you walk us through any efficiencies achieved in the supply chain this quarter and what opportunities you are working on over the next six to 12 months?
Sure. The aspect of supply chain, it's been a selected advantage for us for years as we talk about how we build out supply chain and the avenues that we have. I think as we look at the omni-channel environment over the last several years we've enabled several new functions to the supply chain to allow us to continue to meet that demand flexible fulfillment which allows us to ship from a store group as well as our RDCs.
So, we're able to meet 94% of our customer demand with next-day shipping rates by utilizing that flexibility within the system. We continue to maximize the productivity of the supply chain through new initiatives such as project rhythm which we work with vendors and smoothing that orders and order flow to make sure we're as effective as possible. We continue to drive labor efficiency in the supply chain through utilization of links and similar practices and processes and making sure that we're able to get the effective use of cubing-out the trailers and the trucks to move forward.
Fleet and fuel cost continues to be an advantage in the tailwind currently. So, we continue to see those ad news playing significant dividends for us over the next several months, and quite frankly the next couple of years. As we look into the construction of possibly the internet fulfillments center or the FC, direct customer Fulfillment Center, which we have currently plans underway and being built out for by forecasted opening in the 2018 time horizon.
Regina, do we get time for one more question?
Okay. Our final question will come from the line of Peter Benedict with Robert Baird. Please go ahead.
Hi guys, thanks for taking one more here. So, a couple of questions. First, you made a comment about Pro being well above the company average, I know it was above average in the fourth quarter but it sounded obviously the tone to that comment was a lot stronger. Anyway to quantify that this GAAP relative to maybe historical trend. Is this about a stronger GAAP as you've seen? Just trying to get a flavor for just how strong that momentum is right now.
So, Pro performance, Pete, in first quarter was approaching double-digits.
Okay, good. That's all for Bob. Thank you. And then on the online business what are the largest categories that you guys are selling online right now and then what are the fastest growing. I mean, are there certain categories that are kind of coming on strong. Just curious how that works?
A comp insight. I'd say for the most part where you see simple replaced items, they tend to do better online like playing scissors an example. But what the difference is in our strategy is that help customers putting up the projects. And that tilts the lens up more towards omni as the best tool to serve those customers need. But our incursion of online is automated by the fact that we tend to be more project oriented than -- replace thus we talk about being the project authority and not talk to just product.
Yes. And I want to add to that. As we continue to look at overall traffic resources earlier, we've been extremely pleased with receptivity to move functionality of the site from the consumer. And I think that's represented in the results over the last couple of quarters, as well as the investments that we're making to make content more affective for the customers from a aggregation of data perspective as well as product information.
As such, we've been extremely pleased with the sales from the site, the visits to the site have continued to grow as well as improvements in conversion and average ticket. So, as Mike talked about, we continue to see those core fundamental categories continued to do well. The single product categories particularly in appliances are and those categories. And again, I think it's important to highlight that the store still plays critical role in the omni-channel world where our customers are choosing to either pick up or have delivered 70% of all of our transactions from those outcome, from the store with 30% still be in parcel.
So, we feel good with where we are, we feel good with the traction we're making and making the stat much more effective and user friendly.
Very helpful. Last part would be on lawn and garden, obviously strong in the quarter but curious about the spread North versus South. I mean, certainly a lot stronger in the South I think than the North. How large was that GAAP and what kind of opportunity do you see in lawn and garden in call of the North, Northeast over the balance of the second quarter. Thank you.
We think spring is still to come in the Northeast certainly. So, we think there is still some lawn and garden business to go get. But I do want to just say one thing, if you think about our business, we had some shop motions in lawn and garden. The best of this is continues to extremely well. So, if you look at paint as an example, what we had really high counts above the company average. Applicators, exterior stains, exterior paint, spray paint coat, anterior stains or double-digit.
So, we feel good about some to spring that's ahead of us. We think that's going to drive our lawn and garden business, we saw even better about some of our big initiatives that are also driving our business.
Terrific. Thanks so much, guys.
Thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our second quarter results on Wednesday, August 17. Have a great day.
Ladies and gentlemen, this concludes today's conference. Thank you all for joining. And you may now disconnect.
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