勞氏公司 (LOW) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies' fourth-quarter 2015 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 slides, these slides are meant 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 financial 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 expectation 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. Mike Jones, Chief Customer 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.

We delivered another solid quarter with comparable sales growth of 5.2%, which exceeded our expectations.

Our efforts to drive traffic, which Mike will share in more detail, have resonated with customers, resulting in a 3.6% increase in comp transactions along with a 1.6% increase in average ticket.

Our US home improvement business achieved 5.5% comps for the quarter, with all 14 regions generating positive comps.

And our strong performance in Canada continues with double-digit comps in local currency, the third year in a row.

During the quarter, we generated positive comps in all 13 product categories.

We capitalized on increased demand for exterior products as a result of warmer weather, with strength in lumber and building materials, outdoor power equipment, lawn and garden, and millwork, while at the same time driving strong mid-single-digit comps in interior project categories such as paint and fashion fixtures.

And as a result of our strong brand and service advantages, we continue to drive strong comps in appliances.

Lastly, our Pro business performed above the Company average, as we continue to build deeper relationships with the Pro by enhancing our product and service offerings to meet their unique needs.

For the quarter, we drove 79 basis points of adjusted operating margin expansion and adjusted earnings per share of $0.59, a 28% increase over last year's fourth quarter.

For the year, we delivered comparable sales growth of 4.8% and adjusted earnings per share of $3.29, a 21% increase over 2014.

Delivering on our commitment to return excess cash to shareholders, in the quarter we repurchased $562 million of stock under our share repurchase program and paid $257 million in dividends.

For the year, we repurchased $3.8 billion of stock and paid $957 million in dividends.

As we head into 2016, the outlook for the home improvement industry remains positive.

Continued support from steady job gains and improved incomes as well as favorable trends in housing should keep home-improvement growth buoyant.

Further, despite recent volatility in the financial markets, the fundamentals for continued growth in consumer spending remain intact.

Consumers should continue to benefit from improved household financial conditions and lower gas prices, on top of broader job and income gains.

These trends align with results for our most recent consumer sentiment survey, where favorable perceptions around personal finances remained stable even though respondents' assessment of the national economy declined slightly.

For the home-improvement industry specifically, we continue to see favorable trends as the desire to invest in the home continues to grow.

Roughly half of homeowners believe the value of their home has increased, which is double the number feeling that way in 2009.

And many believe this trend will continue, as we saw a significant increase in future home value expectations.

While most homeowners indicated that their spending levels are staying the same, they are more likely to allocate funds to home improvement compared to other areas.

In 2016, we will continue to leverage the favorable backdrop for home improvement, delivering great service to customers while also anticipating how Lowe's will meet their needs in the future.

We take a prudent approach to managing our portfolio of businesses, making decisions that shape how we serve and connect with customers.

Giving careful consideration to how we position Lowe's favorably for sustainable growth, we invest to obtain compelling returns over the long run.

As we carry out our capital allocation priorities, which remain unchanged from what we shared previously, our first priority is to invest in the business.

We then seek to return excess cash to shareholders in the form of dividends and share repurchases.

We demonstrated our disciplined approach to capital allocation with the recent changes in our international business.

First, after a comprehensive, strategic analysis we decided to exit the Australian home-improvement market by withdrawing from our joint venture with Woolworths.

We made the decision to focus our resources on areas of the business where we see greater potential return on investment.

Second, seeking to reinforce our portfolio of businesses in North America, we committed to accelerating our growth in Canada by announcing our agreement to acquire RONA.

The time is right to strengthen the Company's Canadian operations, to take advantage of the significant long-term potential we see.

We expect to build on the recent progress our team in Canada has made and the positive results RONA has achieved over the past several years as a result of their restructuring efforts.

With this transaction we see opportunities to further increase revenue and operating profitability in Canada, including: enhancing customer relevance by utilizing our strengths as a leading omnichannel home-improvement company and drawing on our customer experience design capabilities; expanding customer reach and serving a new portion of the market by applying our expertise in certain product categories, including our best-in-class appliance offering; driving increased profitability in Canada by leveraging shared supplier relationships and enhanced scale, as well as Lowe's private-label capabilities, in addition to eliminating RONA's public company costs.

At the same time we're reinforcing our international businesses, our US home-improvement business, with the dedicated focus from Mike and Rick's team, is diligently working to drive profitable share gains within the US market.

In 2016 their efforts will continue to focus on improving our product and service offering for the Pro customer and differentiating ourselves through better customer experiences that make us the project authority.

Across the enterprise, we strive to be a customer-centric omnichannel Company, so we will continue to enhance our omnichannel abilities.

Evolving from a multichannel offering to an omnichannel experience where all of our channels work in concert with one another, we will support customers at every step of their home improvement journey and build greater affinity for the Lowe's brand.

This strategic framework, along with our efforts to improve our productivity and profitability, give us confidence in our business outlook for 2016.

Bob will share those details in a few minutes.

This is an exciting time for Lowe's, and I would like to thank our employees for their incredible contribution they make every day.

It's their hard work and commitment to delivering outstanding customer service that makes this Company great; and I look forward to what their efforts produce in 2016.

Thanks again for your interest; and with that, let me turn the call over to Mike.

Thanks, Rob, and good morning, everyone.

As Robert shared with you, we delivered another solid quarter, with positive comps across all regions and product categories.

We executed well in the fourth quarter, growing both average ticket and transaction.

We drove traffic through our Black Friday event, which drove sales increases of 8% overall and 26% online, with compelling offers and special buys in tools, holiday decor, appliance, and other traffic drivers, creating strong values for customers while remaining true to our strategic focus and core strength in home improvement.

We drove increases in traffic for the quarter through competitive offers, enhanced online selling capabilities, and improved marketing speed and flexibility from our digital capabilities where we tested new concepts like Deal of the Day.

We also rebalanced year-end promotions to take advantage of the extended outdoor selling season.

Looking at product category performance, we recorded above-average comps in lumber and building materials, appliances, lawn and garden, and paint.

We saw particular strength in outdoor project categories, led by lumber and building materials, lawn and garden, and to a lesser extent outdoor power equipment and millwork, as customers took advantage of mild weather to complete exterior projects such as roofs, fence, and decks.

In outdoor power equipment we drove double-digit comps in off-season products such as pressure washers, walk-behind and riding mowers.

And in lawn and garden we saw double-digit comps in soil, mulch, and lawn care.

Our new landscape lighting experience drove strong performance as well, bringing outdoor lighting projects to life by providing inspiration and making selection and installation easy for customers, while offering new product technologies like LED.

We also achieve strong comps in appliances for yet another quarter, leveraging our investment in customer experience both in-store and online.

In-store, our 17 appliance suites showcasing coordinated appliances allows customers to visualize how their appliance purchase will look in an existing or remodeled kitchen, not just as a same replacement purchase but as a full set of new appliances, and allows us to showcase innovations such as black stainless steel, a new appliance finish, and new product collections like the Frigidaire Professional collection, a Lowe's Home Channel exclusive.

Online, we have enhanced our customer experience and presentation on lowes.com, including improved product search, integrated and upgraded product videos, enhanced product presentation like 360-degree views, and simplified product groupings to make it easy for customers to make their selection.

Our continued focus on the omnichannel customer experience together with leading brands, breadth of assortment, competitive price, knowledgeable sales specialists, as well as delivery and haul-away service combined to drive our sustained share gains in appliances.

In fact, J.D. Power and Associates ranked Lowe's the number-one appliance retailer for 2015.

Paint benefited from increased project activity as well as growing awareness of our three brand offering.

With the launch of HDTV Home by Sherwin-Williams at the beginning of the second quarter, we are now providing customers with the full suite of top brands they trust for their next paint project.

Olympic provides quality at a great value and easy application.

Valspar specializes in color authority, with their Love Your Color Guarantee.

And HDTV home by Sherwin-Williams provide strong brand recognition, designer-coordinated colors, and quality that customers trust.

We are also proud to announce the expansion of HDTV Home by Sherwin-Williams with the introduction of [Infinity], our premium one-coat paint and primer with exceptional hiding power and coverage, available in our stores in March.

As customers engage in both indoor and outdoor projects, we leverage our omnichannel capabilities to help them achieve great results, not only in our stores and online but also through our through our Project Specialists who meet the customers in their homes.

This capability represents another important element of our omnichannel strategy.

We have Project Specialists who focus on the exterior of the home available across all US stores, and we're expanding our Interior Project Specialist program, reaching all stores by the end of 2016.

We are very pleased with our in-home sales program performance, with above-average comp again this quarter.

With our ability to coordinate style, provide design expertise, and find the right contractors for the job, we are rapidly becoming the project authority in home improvement.

Our customer experience design capabilities continue to pay dividends.

Leveraging our larger store format and space initially created for the outdoor living experience, we again showcased our holiday decor experience, an inspirational holiday showroom where customers can see everything from poinsettias and artificial trees to indoor and outdoor decorations and gifts, developed a collaboration between our merchants, stores, and dedicated customer experience design team.

The holiday decor experience inspired customers to decorate, raised their awareness of the breadth of our holiday decor and gift offerings, and provided project solutions relevant to the holiday micro seasons.

The customer response was very positive, driving strong sales and attachments for the products included in the set.

We're now transitioning this space back to our outdoor living experience in preparation for the critical spring selling season.

Toward the end of the quarter, as winter storm Jonas approached, we were able to serve customers needs as they worked to prepare for and clean up from the storm.

Our supply chain demonstrated agility and flexibility as we worked to move inventory such as snow throwers, generators, ice melt, and heaters to the areas in the path of the storm.

We're proud of the way our supply chain teams and associates responded to the needs of our customers during winter storm Jonas.

We also continue to strengthen our Pro business, driving comps above the Company average by continuing to advance our product and service offering to meet their unique needs.

Throughout the year, we strengthened our portfolio of our Pro-focused brands, with the addition of Goldblatt masonry tools, GAF roofing, Owens Corning insulation, Lennox HVAC, and Masonite entry and interior doors, in addition to leveraging our long-standing partnerships with Hitachi, Stanley Bostitch, Bosch, Vaughan, and Paslode to develop a broad Pro-relevant selection of tools and fasteners.

We're also proud to introduce Cabot stains, one of America's most recognized stain brands, rolling to our stores in the first quarter.

We continue to incorporate feedback from the Pro customer and store employees into a better offering and experience by working closely with our field-based merchandising managers to identify local market opportunities and introduce products optimized to local norms, to further increase our relevance with Pros.

Along with strengthening our brand portfolio, we relaunched lowesforpros.com at the beginning of the second quarter, making it easy for Pros to manage local properties and easily purchase items for the locations nationwide.

We're also actively serving the Pro through our Account Executive ProServices, or AEPs.

AEPs call on regional customers to help them order and replenish products across multiple stores.

Our AEPs have been very effective in growing our business with larger Pro customers, especially maintenance, repair, and operations or MRO customers.

We currently have over 160 Pro outside sales representatives in the field and are very pleased with the program's results.

Excluding the AEPs we added this year, we saw double-digit growth in AEP sales, which contributed to solid Pro comp sales growth in the quarter.

Building on this success we plan to add an additional 35 AEPs in the first half of 2016.

We're also reconnecting with Pros who have not recently purchased from Lowe's, to show them what's changed in our stores and online, using targeted marketing as well as Pro focus events to drive awareness and generate new business.

For example, our Pro services team engaged with customers at the International Builders Show in Las Vegas, driving awareness of the platform and services we provide.

We then extended the interaction to our stores for a first-time Builder Week with special product and credit offers for the Pro.

Our focus on strengthening our portfolio of brands, serving Pro customers through our Pro services team, as well as our relaunch of lowesforpros.com are part of a broader product commitment to building our strong foundation with the Pro.

In addition to our efforts to drive top-line growth we continue to focus on driving productivity and profitability.

Gross margin was flat year-over-year as improvements driven by our line review process and inflation were offset by the impact of product mix and promotions.

Once again our stores effectively managed payroll hours on solid comp sales growth, driving 25 basis points of payroll expense leverage, but also driving strong customer satisfaction scores.

We also continued to drive productivity in marketing by optimizing our media allocation, increasing our presence in targeted digital advertising, expanding our social media presence, and reducing print advertising, thereby increasing the efficiency and effectiveness of our media buy, while improving our advertising spend, all while maintaining our customer reach and improving exposure.

And we continued to identify and implement additional expense efficiencies by consolidating the procurement of similar types of goods and services across our Corporate and store functions.

During the quarter, we demonstrated the flexibility and capabilities of our supply chain, as our distribution teams worked efficiently to move inventory to meet customer needs, not only as they prepared for winter storms in the mid-Atlantic and the Northeast, but also to meet the heightened demand in the Pacific Northwest.

While inventory at quarter-end was up 6% to last year, it reflects our commitment to being in-stock for items that are most relevant to our customers, as well as timing of spring buys including the impact of Chinese New Year's and a higher level of inventory to support strong sales growth in categories such as appliances.

As you can see, we are pleased with our fourth-quarter results in a progress we're continuing to make on our initiatives to drive top-line growth, productivity, and profitability.

We look forward to sharing further progress with you over the coming quarters.

Thank you for your interest in Lowe's, and I will now turn the call over to Bob.

Thanks, Mike, and good morning, everyone.

Sales for the fourth quarter were $13.2 billion, a 5.6% increase over last year's fourth quarter.

Total transactions increased by 4%, and total average ticket increased 1.5% to $67.15.

Comp sales were 5.2% for the quarter.

As you heard from Mike, solid execution drove balance performance in the quarter.

Comp transactions increased 3.6% and comp average ticket increased 1.6%.

Looking at monthly trends, comps were 2.8% in November, 7.3% in December, and 5.3% in January.

For the year, total sales were $59.1 billion, an increase of 5.1%, driven by comp sales of 4.8% and new stores.

For 2015, comp average ticket increased 2.5%, and comp transactions increased 2.2%.

Gross margin for the fourth quarter was 34.66% of sales, which is flat to last year.

In the quarter, product cost deflation and value improvement aided gross margin, but were offset by pressure from the mix of products sold and promotions.

For the year, gross margin of 34.82% of sales represented an increase of 3 basis points over 2014.

In January, we made the decision to exit our joint venture in Australia.

There is a process in the joint venture agreement for purposes of determining the value of our portion of the joint venture.

We're working our way through that process and expect it to be completed in the next month or so.

We recorded a $530 million noncash impairment charge in the fourth quarter.

The charge includes the cumulative impact of the strengthening US dollar over the life of the investment.

The valuation is based on our best estimate of our one-third interest in the joint venture.

This valuation is subject to potential adjustment as additional information becomes available as we complete the process.

For the quarter, the impairment charge impacted SG&A leverage and EBIT by 401 basis points and earnings per share by $0.58.

For the year, the SG&A EBIT impact was 90 basis points, while the earnings per share reduction was $0.56.

Finally, as a majority investor we have been recognizing our share of the losses, which were reflected in SG&A.

In 2015 we recorded $11 million and $48 million for Q4 and the year, respectively.

As a result of our decision to exercise our put option, we are no longer required to make capital contributions or absorb future operating losses.

My comments from this point will be focused on our operating performance and will exclude the impact of the joint venture impairment.

Adjusted SG&A was 24.55% of sales which leveraged 69 basis points.

The leverage came from a number of areas.

Mike mentioned two, store payroll and marketing, which leveraged 25 and 20 basis points, respectively.

Utilities expense leveraged 12 basis points, primarily the result of warmer weather.

Employee insurance leveraged 12 basis points in the quarter due to a reduction in both the number and severity of claims.

Also, given the sales growth, we were able to leverage fixed costs.

For the year, adjusted SG&A was 23% of sales and leveraged 62 basis points versus 2014.

Depreciation expense was $369 million for the quarter, which is 2.79% of sales and leveraged 10 basis points.

Adjusted earnings before interest and taxes for the quarter were 7.32% to sales, which represented a 79 basis point increase.

For the year, adjusted EBIT of 9.31% represented an increase of 78 basis points over 2014.

Interest expense at $144 million for the quarter deleveraged 3 basis points as a percentage of sales.

Regarding the reported tax rate, the impairment gives rise to a capital loss versus an operating loss and therefore is not immediately deductible.

To the extent the Company has future capital gains, we will be able to offset this loss.

Adjusted net earnings for the quarter were $541 million, which increased 20.2% versus last year.

Adjusted earnings per share of $0.59 for the quarter were up 28.3% to last year.

For 2015, adjusted earnings per share of $3.29 were up 21.4% versus 2014.

Transitioning to the balance sheet, cash and cash equivalents at the end of the quarter were $405 million.

Inventory at $9.5 billion was up $547 million or 6.1% over last year.

Roughly $200 million or 2.2% of the growth was driven by the timing of Chinese New Year, with the rest of the increase to support sales growth.

Inventory turnover was 3.92, an increase of 7 basis points over last year.

Moving on to liabilities, accounts payable at $5.6 billion was up $509 million or 10% over last year.

The increase relates to both higher inventory levels and a two-day improvement in days payable outstanding.

At the end of the fourth quarter, lease-adjusted debt-to-EBITDAR was 2.14.

Return on invested capital increased 18 basis points to 14.1%.

We estimate that the impairment charge negatively impacted ROIC by 238 basis points.

2015 was the third consecutive year that ROIC improved by more than 200 basis points.

Now looking at the statement of cash flows, cash flows from operations was $4.8 billion.

Capital expenditures were $1.2 billion, resulting in free cash flow of $3.6 billion.

During the quarter, we repurchased [7.6 billion] shares or $562 million through the open market.

For the year, we repurchased almost 54 million shares, which included $3.8 billion from the Company's share repurchase program as well as shares withheld from employees to satisfy statutory tax withholding liabilities for a total of $3.9 billion.

Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook.

But first I want to highlight that fiscal 2016 will include an extra week in the fourth quarter for a total of 14 weeks and 53 weeks for the year.

Lowe's fiscal year ended on the Friday nearest the end of January.

This means we have a 53-week year roughly every five years.

Our last 53-week year was 2011.

For 2016 we estimate that the 53rd week will aid total sales by approximately 1.5% and earnings per share by $0.05 to $0.06.

Secondly, while we have reached agreement to acquire RONA, we have shareholder and regulatory approvals ahead of us.

As a result, our outlook excludes the impact of the RONA transaction.

Now let's get into the outlook.

As Robert noted, the forecast for the home-improvement industry remains positive.

While we're optimistic about that forecast, we've taken a prudent approach to our 2016 outlook.

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 Orchard locations and 12 stores in Canada, largely the result of the Target lease acquisition.

For ease of modeling, the EBIT and EPS growth rates exclude the impact of the impairment charge.

We are anticipating an EBIT increase of 80 to 90 basis points from a combination of gross margin, SG&A, and depreciation.

As you've heard from others, there is wage pressure in the marketplace.

Our outlook for 2016 assumes roughly 7 basis points or $0.03 per share of pressure associated with above-average wage inflation.

For 2016 we expect 25 to 30 basis points of EBIT expansion per point of comp above 1%.

While this is our expectation for the year, there will be some choppiness quarter to quarter.

Similar to last year, 2000 (sic - see slide 10, "2016 Business Outlook") EBIT expansion will be stronger in the second half of the year, primarily driven by gross margin, bonus, and the impact of the 53rd week.

As a result, we are forecasting EBIT expansion of 50 to 60 basis points for the first half and 115 to 125 basis points for the second half of the year.

Looking at our guidance model relative to First Call, the mean estimate for the first half of the year appears to be heavy by about $0.02 per share in both Q1 and Q2, and the fourth quarter looks light, likely as a result of the 53rd week.

The effective tax rate is expected to be 38.1%.

For the year, we expect earnings per share of approximately $4, which represents an increase of 21.6% over 2015 adjusted EPS.

We are forecasting cash flow from operations to be approximately $5.4 billion.

Our capital plan for 2016 is approximately $1.5 billion.

This results in estimated free cash flow of $3.9 billion for 2016.

We expect to issue incremental debt during the year as we manage to the 2.25 lease-adjusted debt-to-EBITDAR target.

We had approximately $3.6 billion remaining on our share repurchase authorization at the end of the fiscal year.

Our guidance assumes approximately $3.5 billion in share repurchases for 2016.

The share repurchase assumption of $3.5 billion is not expected to be affected by the RONA acquisition.

Regina, we are now ready for questions.

(Operator Instructions) Simeon Gutman, Morgan Stanley.

Thanks; good morning.

Bob, just a quick follow-up on the progression of the flow-through for the year.

I guess we were under the impression there were some indirect costs that had come out in the middle part of the last year and that would still roll through the model in the first part of 2016.

So why, I guess, isn't that the case?

And then can you just put a little more color around why bonus and GM -- I don't know if those were mentioned any part of the year, but what are the factors that are going to, I think, help you with flow-through in those areas?

Simeon, there is a variety of factors that contribute to flow-through being a little bit heavier in the second half of the year -- gross margin, really based on the mix of products primarily.

We had a greater mix impact in the fourth quarter and the second half of the year than we did on the year as a whole.

That's the primary difference driving a little bit heavier gross margin expansion in the second half than the first half.

For bonus, we came into the year expecting to leverage bonus roughly 10 basis points.

It ended up being flat as a percent of sales for 2015 relative to 2014.

A lot of that difference came in the fourth quarter on the strength of our sales performance.

Our bonus programs are predicated on sales and earnings performance; and based on the strength of the sales results for the fourth quarter we increased bonus accruals.

As a result we'll have the opportunity to leverage against that build in Q4 2015.

Another smaller item is store environment; so just the timing of projects weighted more in the first half versus second half as we think about 2016 versus 2015.

And then impact of the 53rd week, we have roughly $900 million of additional sales in the fourth quarter; that's going to drive roughly 15 basis points of higher EBIT in the second half of the year as a result of that.

So those are the major factors giving rise to the difference in flow-through second half versus first half.

To clarify, are there incremental indirect costs that could come during the year?

And then I'll just ask my follow-up in case I get cut off.

Just the volatility or the variability in the months in the quarter: November was weak.

I think you mentioned Black Friday was good, I think, but November was a little weak.

December was great against tough compares.

Does anything explain that?

Anything strategically?

Does it synch up with promotions, etc.?

As it relates to the second question, really tough weather first half of November, primarily in the Southeast.

So as you think about our footprint, our Southeast orientation, that had an impact on the first half of November.

After that we saw much improved performance in the second half of November; and as Mike indicated, we had very good Black Friday performance.

As it relates to other indirect costs, we continue to work on our indirect spend and would expect to see the leverage throughout 2016 from those efforts.

Okay, thanks.

Michael Lasser, UBS.

Good morning.

Thanks a lot for taking my question.

It's about the promotional activity that you undertook during the quarter.

Is that something that you had planned on doing?

Or was it more in response to what you saw in the marketplace and then responded in kind?

Good morning, Michael; this is Mike Jones.

I'd say, see, it's like this: Most of it was planned.

We do make adjustments as we see the competitive activity in the marketplace, and we will at times move out of one form of promotion to another.

One of the things that you saw us do was move from credit as a primary form of promotion at certain points in the quarter into other forms of promotion.

But the total activity level is exactly where we planned it to be.

The execution towards that activity level, we can make adjustments within the quarter.

Just to try and interpret what you're saying, Mike: You had planned to do some promotions in the fourth quarter; you were going to move away from offering extended terms and the free financing towards more pricing and discounting.

That's how it happened.

And is that a right interpretation of how it unfolded?

I'd say a little different.

We planned to do promotions within the quarter.

We promoted to the level that we planned to promote to.

And one of the adjustments that we made in the quarter was less financing and more towards discounts is what we did in the quarter.

So total level is exactly where we expected it to be, with some adjustments within the quarter on how we got there.

Are there signs that the sector is becoming more promotional?

Maybe as some struggle just with their survival, they're doing things to be more relevant, and so you're having to respond.

Or is it just that this is the direction the world is heading?

I don't think so.

I think where those are having challenges, the challenges are probably something other than just straight price.

I think there are folks having challenges around their format, and I'm not sure they're going to promote their way out of those kind of challenges.

So I would describe the market as very rational.

When we go after -- where we target for share gains we do it in a way that's rational.

I think the majority of us do exactly that.

So I don't see it becoming more promotional.

I don't think I see anyone doing anything that's going to suggest that the market goes in a bad space as a result of people survive.

I just haven't seen that.

Michael, this is Robert.

Also keep in mind it's not just the promotional cadence that we execute in the quarter versus our plan.

It also comes into play, the success of those promotions.

For example we didn't plan on appliances to be high-single-digit comps for the quarter.

There was opportunity there, obviously, as we've talked about in the past, that particularly the fourth quarter that's a category of merchandise that from a competitive standpoint is something that gets promoted through the holidays.

And we had great receptivity, great success with the appliance offering, the suites the Mike talked about being in the store.

So part of it is not only staying on the program but the success of what we saw, which drove some of that mix impact as well.

Understood.

Thank you so much.

Just to clarify, so the product promotions impact gross margin.

We called out the negative impact to gross margin based on the product promotions.

The reduction in financing promotions hit SG&A.

So roughly speaking the EBIT impact of promotions in Q4 was about as planned.

The complexion, as Mike described, between gross margin and SG&A was a bit different.

Chris Horvers, JPMorgan.

Thanks; good morning.

A couple follow-up questions.

In January was there any benefit from the weather in January?

I'm assuming the warm weather -- Home Depot talked about yesterday that being mainly a December phenomenon.

Was there a benefit from the big storm in January?

Trying to get an understanding of what a real good indication of the underlying run rate of demand in the business.

That was like a 5.3% and you're guiding to a 4% for the year.

I'll start, Chris, and then I'll let Bob talk specifically about how things fell in January.

Just as we said in our comments, if you think about the quarter, El Nino year or what, but certainly overall warmer weather for the majority of the quarter.

That extended the season for the outdoor product categories, which is what we went through here: lawn and garden, lumber and building material, those that we saw really strong -- and outdoor power equipment -- that we saw really strong performance for.

But then we add stuff like hurricane Jonas hit -- I'm sorry, Super Storm Jonas hit.

We were really in great shape with the products that customers need at that point in time.

So any time that you're selling snow throwers and ice melt and those things, you're not selling a lot of other stuff.

But when the customer needs that product, being in supply of those products -- which our merchants did a great job with having secured the access to the product, as Mike took it through our supply chain, did a great job of getting that product in the market where the customer needed it, where it was impactful for the customer to have that product.

So all in all there was great execution in the quarter and taking advantage of the opportunity that was there.

Bob, you want to talk specifically to the weather impact to January?

As Robert said, with extreme weather you're selling the -- impacted products, but your traffic is basically down.

You're not selling any of the exterior products.

The weather impact for the quarter was largely contained to December, a roughly 50 basis points impact for the quarter.

But as I mentioned, most of that impact was felt in December.

Then as a follow-up to that, the 5.3% in January, maybe thinking about that and then reflecting on the comp progression throughout the year, and how you are thinking about the first quarter, first half, or second half.

As we think about 2016, we see the four quarters in a relatively tight band.

There's some movement up or down, but it's not substantial for the year.

So as we think about the 4%, it should be fairly consistent across the four quarters.

Understood.

Then one follow-up, which is on the EBIT line.

We had modeled, I think, almost 20 basis points of bonus leverage in the fourth quarter, and it sounds like that was flat.

Was that basically the delta versus your model in terms of driving the leverage?

As you think about getting to the 25 to 30 basis points next year, it seems like sales upside results in less margin flow-through, as you saw in the fourth quarter.

So I guess trying to reconcile those two things.

Flow-through was impacted in the quarter and for the year by two factors.

We've talked about those: bonuses, one; and the mix impact on gross margin is the second.

If you -- rough math would suggest, Chris, that those items combine for a 5 basis point flow-through impact on the year, which would get us into the 25 to 30 basis point range.

We are comfortable with the guided range for 2016 that would also be in that 25 to 30 basis point range.

Understood.

Thank you.

Peter Benedict, Baird.

Yes, hey, guys.

Just a question on the spring upcoming.

How does the warmer winter set you up for the spring?

Have you guys made any adjustments in terms of the timings of your sets, how you are approaching the spring business?

Good morning, Peter; it's Mike Jones.

(multiple speakers) From an inventory perspective, I talked earlier to having brought in inventory a little sooner to be sure that we're prepared for the spring.

But we're also looking at category performance so that we can take advantage of what we think there is going to be some upside, with the way we've made some adjustments to how we're doing our resets in terms of outdoor patio and some of those categories.

So, yes, we're ready for the spring.

We think it could be a good spring for us, and we want to be there to take advantage of it.

You saw us do that on the other side of the fall as well, taking -- carrying some of the fall lines longer into the year to take advantage of what looked like a longer fall season.

Yes, Peter; this is Rick.

I'd also add to that just from an inventory perspective, Bob talked about the impact of Chinese New Year and the timing of that and the impact that had on inventory layers for the quarter.

The majority of that product is spring related, so we have that in our systems; it's in our DCs and being loaded into the stores.

So we feel good both from a stacking perspective as we plan the quarter as well as the flow of inventory, that we won't have or won't see any significant gaps if the weather continues to hold as is or accelerate into an early spring.

Okay; that's helpful.

Thanks.

Then on the big-ticket comps, they were solid, 6.6%, those transactions above $500.

But they did so a little bit or decelerate from the third quarter.

Just curious given what's gone on in the stock market, some of these energy markets, just curious if you're seeing anything when you peel back the onion.

Any wealth effect impacts on some higher-ticket project demand?

Again it doesn't look like it's impacting the overall business.

But anything in particular you can point out there, either regionally or what have you.

Thank you.

We're not -- Peter, our business continues to be driven by income and housing.

So really solid progress on the number of jobs added throughout 2015 as well as late in the year you're starting to see some real wage appreciation.

As relates to housing, continued solid turnover through 2015 as well as (inaudible) home price appreciation.

So all of those factors continue to drive demand for home improvement.

And we see similar factors going into 2016.

Okay, great.

Thank you.

Greg Melich, Evercore ISI.

Thanks.

A couple questions.

One to start with deflation, what you've seen in lumber and copper in the quarter and what the outlook you think is into this year.

Those two items, lumber and copper, they only impacted Q4 by 35 basis points.

We expect roughly similar impact in Q1, but the impact dissipates as we progress through 2016.

Okay, great.

Then second, I just wanted to make sure I got the CapEx, cash flow, buyback tied together correctly.

It looks like you will be generating $3.5 billion of free cash flow, but buying back $3.5 billion of stock; and that's excluding the acquisition or anything you might get from the Australian joint venture.

So if we get the deal in Canada done early, should we expect that $3.5 billion to be less?

Or does that $3.5 billion factor in that that expense is out there?

And I guess why CapEx ticked up this year to $1.5 billion.

Regarding CapEx, the higher number of store openings is the biggest driver for CapEx.

There was some timing of projects; a couple stores slipped from 2015 to 2016 as well as some other projects, which moved about $100 million from 2015 to 2016.

Adjusting for that, we basically compare to $1.4 billion in 2016 to $1.3 billion in 2015.

Bear in mind that the 2015 number includes roughly $200 million associated with the purchase of the Target DC and leases.

Specific to the buyback and cash flow generation, you are correct that it excludes both the RONA transaction and any funds received from the joint venture.

However, even if the transaction goes through in the middle of the year we do not expect that the $3.5 billion share repurchase would be reduced.

Okay, great.

Then online growth I think, Mike, you mentioned up 26% but that was around Black Friday.

Do you have a number for the whole quarter?

Yes, Greg; this is Rick.

For the quarter, the online business was up 26% in total.

So that was the quarter number.

Okay, got it.

And what percent of sales now?

3% of total sales.

Thanks.

Good luck, guys.

Seth Sigman, Credit Suisse.

Thanks; good morning, guys.

First, a question on the long-term guidance, the 11% EBIT margin goal.

I know you said you would update us at some point.

But just as we look at the numbers, it seems to imply a similar margin improvement in 2017 as 2016; but of course 2016 has that extra week.

So on a 52-52 week basis, it implies an acceleration.

How should we be thinking about that at this point?

Still on target for the 11% in 2017.

Our guidance would suggest roughly the same level of EBIT improvement in 2017 versus 2016, so you're correct on that.

Regarding the 53rd week, while it is an extra week it's essentially one of our lowest, if not the lowest, volume sales week of the year, so it's not a terribly productive sales week.

It has some impact on the second half of the year, as I mentioned; but the EBIT impact is only about 3 basis points for the year.

So it will impact in 2015 going into -- excuse me, 2016 going into 2017.

Okay, got it.

Then a question on the Pro side of the business.

You mentioned that was performing about the Company average.

That seems to be a change versus the last couple quarters at least.

Can you elaborate on that trend?

Do you think that's an industry trend or something specific that's resonating?

And then I guess on the other side of that, does it imply any major change in the trend for the DIY side of the business?

This is Robert; I'll start and then I'll let the other guys jump in.

Yes, I think part of what we signaled was, given the favorable weather that we had during the quarter, that I think that also helped drive some strength in the Pro business.

Because you think about the ability for a lot of the project categories that we talked about, for them to continue to work and implement.

On top of that, a lot of the other initiatives that we've put in place such as lowesforpros.com, the incremental resources that we've put in place out there that is resonating with the consumer.

So I think part of it is an industry macro that the weather set up and allowed for incremental opportunity in those product categories which drove some of that business; and then on top of that some of the specific stuff that -- and resources we put behind our Pro initiative and becoming more relevant with that Pro customer.

Yes, this is Rick, and I'll agree with Robert.

Weather had an impact on the Pro when we look at the categories and performance, particularly through the months of December.

But I think it also continues to resonate and highlight the way the Pro continues to respond to our initiatives both from a brand perspective, as the merchants continue to work the operations team to make sure that we have the relevant brands that the Pros are responding to, and then also with our continued focus on making sure that both from a service standpoint and a value standpoint that we remain relevant to the marketplace in what we're doing there.

So they continue to respond to both the brands, the outside sales organization that Mike highlighted earlier of 160 people, adding another 35 into that organization.

Continues to perform extremely well and resonate with the customer, particularly on our large MRO accounts and our national accounts as we continue to see those grow.

And our core programs of our 5 Ways to Save for the Pro customer continues to resonate really well.

So we think we'll continue to build upon the solid foundation that we put in place over the last couple years.

Okay, thank you.

Eric Bosshard, Cleveland Research.

Good morning.

I'm curious if you could talk a little bit about your thoughts on market share with both the DIY customer and Pro customer, how you'd evaluate the performance in 2015, and how you think about how that performance might compare in 2016.

I'll start, Eric.

Obviously, we think that as we look at the market share data that you can get out there that our performance in 2015 exceeded the growth in the markets.

We feel good about our performance.

It exceeded our own plan and expectations.

I think the team did a good job of capitalizing on opportunities that presented itself in the market.

For example, the appliances and how we -- the amount of business we did in appliances consistently throughout the year.

As we look forward to what the market looks like in 2016, the initiatives we have in place, I still believe that we feel good that -- some of the changes that have taken place in the marketplace, that we feel good that we'll continue to, with our initiatives, gain share in 2016 as well.

Eric, specific to the numbers for the calendar fourth quarter, NAICS 444 was up 4.6%; our comparable growth is up 5.1%.

We know that's not a precise measure of the industry, but directionally we feel like we're growing a little bit ahead of share.

As we think about 2016, we do some work with some partners to try to estimate what the expected growth rate is for our industry.

And that would suggest roughly a 4% growth rate for 2016, which sits right on top of our comp.

With other -- with new stores that suggests an opportunity to take share in 2016.

I guess specifically I'd -- to follow up on the Pro side, the investments you are making there, especially in the outside selling effort.

Curious if you think that allows for a notable improvement in your market share performance with the Pro.

Or is 2015 reflective of what that growth rate or what that market share performance is going to continue to look like?

Eric, this is Mike Jones.

We think there's potential for it to continue.

If you look at some of the brands that we've brought back, in fashion lighting with Kichler, Progress Lighting, and [Korzel], that's a three-brand approach.

This approach is a Home Channel exclusive.

You won't find these brands at any other Home Channel.

And if you look at our strength in fashion lighting through this past quarter, we were up double digits.

Paint, above the Company average.

With Sherwin-Williams, now bringing on Infinity (technical difficulty) and Olympic; again another three-brand approach.

You won't find this particular approach at any other home channel.

And with the addition of Cabot to couple with Olympic as the knockout punch, number one and number two, you won't find that at any other home channel as well.

That's going to let us continue to drive share gains in paint.

If you look at our approach in pneumatics, with Hitachi pneumatics coupled with Stanley Bostitch, that's the number-one and number-two pneumatic brand in the US.

You won't find that at any other home channel.

I can go through our portfolio of brands that we've brought back and an exclusive set we have and (technical difficulty) fantastic job.

We think that positions us to continue to build more relevance with the Pro.

When you couple that with the other initiatives that we have, we think we've got runway.

We've talked before about GAF coming back, Owens Corning insulation coming back.

We've talked about (technical difficulty) exclusive; we talked about Goldblatt coming back.

We've got a portfolio of brands that we brought back to Lowe's that we think position us for share gains, to Robert's point, both with Pro and with DIY.

So we're comfortable about how we're positioned going into 2016.

The team has done a fantastic job of bringing back brands.

We think we continue to build towards being the project authority in home improvement.

We're very comfortable with how we're positioned.

Eric, this is Rick.

The only thing I would add to that, again, is the introduction of lowesforpros.com in the second half of the year, just getting its legs under it.

As we continue to gain traction from that initiative, I think it sets us up well to continue to gain share from the MRO customer, as we continue to get traction with lowesforpros.

Great.

Thank you.

Regina, we've got time for one more question.

Matthew Fassler, Goldman Sachs.

Thanks so much, guys, for squeezing me in.

I have two questions.

The first relates to big-ticket and to some of your category disclosure.

One category you cited as being a bit softer is kitchen, which I know is a traditional big-ticket project oriented category.

My sense is that world had had some momentum for you.

So anything in particular holding you back?

Any macro reading you would take from performance in that category?

This is Mike Jones.

No, we don't think it's anything macro.

Kitchens were largely challenged by some pull forward due to October promotions.

We had some reset activity in kitchen as well.

I already talked about the (technical difficulty) credit promotions that also impacted kitchen.

So we don't think there is anything macro there.

Got it.

Then the second question, as we think about bonuses and incentive compensation, it sounds to some that really, like, what happened was the sales beat by a greater degree than the earnings; and the way the incentives are structured that essentially worked against you and dug the earnings hole just a little bit deeper.

As you think about the incentive structure for the stores and the way you pay out bonuses, is there any thought being given to reworking those in a way that they're more profit or gross profit driven?

I understand that the store-level associates can't necessarily think about the earnings for the enterprise, but in a way that that incentivizes the best kind of business that you can do?

Matt, this is Robert.

I think, yes, you obviously hit one of the items that put a little pressure on the quarter, and that was the sales growth rate versus the earnings growth rate, if you want to call it that.

What I'll tell you is that every year we look at our incentive compensation programs all the way across the organization, and try and set us up for what we think is going to drive the right response across the organization to take care of the customer and drive the business.

This has been an evolution that we been on all the way back from when we were just single channel and everything -- the incentive compensations were heavily focus to what took place in the four walls of that store, to really now today being an omnichannel organization where as store manager is not only compensated on what happens inside their store but also what happens in their market as well.

So it's an evolution we've gone through as we're going from single channel to multichannel to now omnichannel.

But that's part of what Rick and his team do every year, is look at the incentive compensation structure and make sure that it's appropriately aligned.

We're very happy with the behaviors that it's driving; but it is something that -- as we continue to evolve the other parts of our business become bigger parts of the total sales.

It is something to look at to make sure that we're driving the right behavior of keeping the customer in the center and always focused on what's best for the customer.

That's our job and we'll be doing that.

All right.

Thank you so much.

Well, great.

Thanks and as always thanks for your continued interest in Lowe's.

We look forward to speaking with you again when we report our first-quarter results on Wednesday, May 18.

Have a great day.

Ladies and gentlemen, this concludes your conference for today.

Thank you all for joining and you may now disconnect.