勞氏公司 (LOW) 2016 Q1 法說會逐字稿

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 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 and 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. Rick 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 of 5.1% and a 2.2% increase in average ticket.

I'd like to thank our employees for their continued efforts in serving customers which enabled our strong transaction growth.

The teams project expertise and commitment to customer service allowed us to capitalize on the strong home improvement 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 posted comps above the Company average.

Our 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 through our 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.

We will continue to deepen those relationships.

From a geographic perspective, our US home improvement business achieved 7.5% comps for the quarter with all 14 regions delivering positive comps and we continued our strong performance in international markets, including double-digit comps in Canada in local currency.

For the quarter we generated 170 basis points of operating margin expansion.

Included in the quarter's results is a $160 million unrealized gain on a foreign currency hedge entered into in advance of our pending RONA acquisition, including this benefit, we delivered earnings per share of $0.98, a 40% increase over last year's first quarter.

Delivering on 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 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.

With expect to build 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 the year, the outlook for the home-improvement industry remains positive.

Persistent gains in the job market as well as disposable income growth is expected to outpace growth in the economy, should contribute to solid growth in consumer spending and housing remains a bright spot, with home sales and construction activity posting healthy gains to start the year while home prices continue their study upward trend.

As a result, the home-improvement industry should continue to benefit from the solid consumer housing backdrop even as a benefit of favorable weather at the start of the year normalizes.

And as we survey the, consumer we're seeing similar trends.

Our most recent consumer sentiment survey revealed that favorable views around personal finances and home-improvement spending are holding steady.

Rising home prices are motivating homeowners to invest in their homes and many believe that this trend will continue, as the survey revealed a significant increase in future home value expectations.

Likewise, we continue to see home-improvement spending outpace overall spending, as well as positive home-improvement project intentions.

We will continue to focus on improving our product and service offering for the Pro customer and differentiate ourselves through better omni-channel customer experiences that make us the project authority, in order to leverage the favorable home-improvement backdrop.

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

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

Thanks Robert and good morning everyone.

We executed well in the first quarter, growing both average ticket and transactions.

In addition to our successful spring Black Friday events, we drove 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 comps 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 in home-improvement, coupled with our compelling product offering and strength in the 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 benefited from this dynamic, as outdoor projects drove strong performance in windows and doors.

And as customers look to improve and enjoy their outdoor living space, the outdoor living experience we introduced in 2014 continued to pay dividends delivering high single-digit comps in patio and outdoor fashions for yet another year.

We also continue to see robust attachment of accessories, as the showroom created style help customers envision and create their outdoor space.

Our targeted offers and advanced design to capitalize on early spring drove demand high single-digit comps in lawn and garden category, with particular strength in garden hardlines, live goods, soil and mulch.

Our landscape experience was also a success, helping customers visualize their outdoor living, lighting projects and making a selection and installation easy while offering innovative technologies like LED.

This project strength extended to inside the home, as well as we also saw strong performance in interior project categories.

Within fashion fixtures we leveraged our customer experience design capabilities to optimize our recent lighting resets, showcasing an expanded collection of lighting styles, finishes and brands, available both in-store and online including the introduction of Kichler, both home channel exclusives.

Along with Progress Lighting, we now offer the top three leading lighting brands in the industry providing our customers with an exceptional array of options and styles.

We combined our extended product offering with a simplified presentation designs with the needs of the customer in mind, grouping lighting fixtures by style and collection to provide a cohesive decorating solution and simplify selection.

Customers have responded well, driving double-digit comps in interior decor lighting and chandeliers and we are now extending this approach to ceiling fans to leverage our relationship with Hunter fans as well as our private label brand and sourcing capabilities.

We saw mid single-digit comps in appliances, flooring and kitchens, further demonstrating the consumer's continued willingness to engage in interior projects.

Paint performed above the Company average driven by strength in both interior and exterior projects.

Our paint lineup, which showcases Valspar, Sherwin Williams and PPG Olympic, provides customers with a full suite of top brands they trust for their paint projects.

Tools and hardware also benefited 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 with exclusives like Hitachi and Bostitch, the number one and number two brands in pneumatics, and the extension of brands like Bon, along with our extensive private-label line of Kobalt Tools.

Whether working on indoor or outdoor projects, our omni-channel capabilities help customers achieve great results.

Customers can engage with our associates in-store for expert advice, our content on www.lowes.com for inspiration, our contact center for ongoing support, or our project specialists who work with them in their homes.

On www.lowes.com we have upgraded our online shopping experience with enhanced product content 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 customers' digital experience.

As a result we continue to see positive customer response and very strong growth in our online channel.

Our exterior and interior project specialists who meet with the 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 specialists 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 us apart as a project authority in home improvement, at a 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 of Pro-focused brands with the addition of GAF roofing, Owens Corning insulation, Lennox HVAC and Masonite entry and interior doors.

We continue to collect feedback from Pro customers, our outside sales team and store employees, while working closely with our field-based merchandising managers to identify local market opportunities and brands to further optimize our offering for the Pro.

We've 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 of our www.lowesforpros.com site that we relaunched last year, making it easy for Pros to manage multiple properties and quickly purchase items nationwide.

Thus far we have been pleased with the program rollout, given the positive customer response and 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 help them order and replenish 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 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 capturing market opportunity with large Pro customers.

We are also reaching out to the Pros with targeted marketing and special events such as credit events, bonus days and spring Pro appreciation 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 building relationships with new customers.

Our work to strengthen our portfolio brands as well as expand our omni-channel offering through our growing Pro services team and our relaunch of www.lowesforpros.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 aligned with the needs of the Pro, jobsite delivery and our value proposition including a 5% off every day loyalty program for Pros using Lowe's proprietary credit, as well as reduced delivery rates.

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

For the quarter, gross margin contracted as strong performance and lower margin categories such as lumber and building materials led to a negative mix impact.

And while we planned promotions to capitalize on strong spring demand, the participation rate in those offers exceeded our expectations which, together with markdowns associated with reset activity, lead to a negative rate impact.

Our stores once again effectively managed payroll hours on very strong comps sales growth, driving payroll expense leverage.

They drove 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 top-line growth and are focused on improving productivity and profitability.

We look forward to sharing further progress with you through over the course of the year.

Thank you for your 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 transaction count increased 5.5%, and average ticket increased 2.2% to $68.08.

Comp sales increased 7.3%, driven by a comp trends transaction increase of 5.1% and 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 capitalized on favorable weather to drive of above planned comps.

April sales were consistent with their 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.

The decrease in gross margin as a percent of sales was due to rate pressure, as well as the mix of product sold.

The rate pressure related to targeted promotions and markdowns associated with recent activity.

SG&A was 22.3% of sales, which leveraged188 basis points.

In anticipation of the RONA acquisition we entered into a foreign 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 leveraged 13 basis points as we continued 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 leveraged between 5 and 10 basis points in Q1.

Depreciation for the quarter was $357 million which is 2.34% of sales and leveraged 25 basis points compared to last year's first quarter, as a result of higher sales and assets becoming fully appreciated.

Earnings before interest and taxes increased 170 basis points to 10.42% of sales.

The unrealized gain on the FX hedge accounts for 105 basis points of the increase versus last year.

Interest expense at $156 million for the quarter deleveraged 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 3, 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.

The effective tax rate for the quarter was 38.2%.

Earnings per share of $0.98 for the quarter represents a 40% increase over last year's $0.70, the $0.98 includes $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 on the balance sheet, starting with assets.

Cash and cash equivalents at the end of the quarter were $4.6 billion, the higher cash balance is a result of the April bond deal.

Our inventory -- first quarter inventory balance of $11.1 billion increased $441 billion 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 liabilities 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 days payable outstanding.

At the end of the first quarter, lease adjusted debt to 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 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 a non-cash 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 statement of cash flows, operating cash flow was $3.2 billion, capital expenditures were $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 on 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 have $2.4 billion remaining on our share repurchase authorization.

The remaining $53 million of share repurchases shown on the statement of cash flows related to shares withheld from employees to satisfy statutory tax withholding liabilities.

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

First as a reminder, FY16 will include an extra week in the fourth quarter for a total of 14 weeks and 53 weeks for the year.

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

Second, while we had received shareholder approval and authorization from regulatory agencies we have not closed on the RONA acquisition, as a result our outlook excludes the impact of this 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 in our plans and hope to sustainable a momentum, but we are in the middle of a spring season and believe it's prudent to maintain 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 Orchard locations and 12 stores in Canada.

For ease of modeling the EBIT 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 and 90 basis points.

The 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 incremental $0.11 from our prior guide coming from FX hedge gains.

We are forecasting cash flows from operations to be approximately $5.4 billion, our capital plan for 2016 is approximately $1.5 billion, this resulted in estimated free cash flow of $3.9 billion for 2016.

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

The share repurchase assumption is not expected to be affected the RONA acquisition.

Regina, we are now ready for questions.

(Operator Instructions)

Scot Ciccarelli with RBC Capital Markets.

Good morning guys.

I hate to kind of lead with a short-term factor like weather, but Bob, 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 a monthly cadence on kind of a on a weather adjusted basis month by month?

Scott, so we estimate that weather impacted Q1 performance by roughly 150 basis points, as I mentioned in my comments.

That impact was more pronounced the first part of the 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 a 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 those factors?

Scot, the three factors that we mentioned, the mix of products sold, the recent activity target promotions, each had roughly 15 basis points impact.

So roughly even.

All right thanks a lot guys.

I'll pass the torch.

Simeon Gutman with Morgan Stanley.

Thanks.

So first, I guess a 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 got started earlier versus outdoor seasonal products that sold through?

As I mentioned in my comments, Simeon, we think about spring is more of a first half event, we don't spend a lot of time trying to dissect what might have sloshed between quarters.

So certainly the mild winter weather enabled exterior projects.

We saw that show up in some of the categories that Rick mentioned that outperformed, but the ultimate impact will be determined at the completion of second quarter when we review our spring results.

Got it.

Okay and then thinking through gross margin, are you able to share with us the difference in product margin in some of those categories, seasonal lumber and building materials?

And should we see the gross margin bounce back to that to some extent in the second quarter, reflecting the product mix?

So what I would say is the lion's share of the mix impact related to lumber and building materials.

So if the demand for those categories 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 addition, the other two items the targeted promotions and the reset activity are largely Q1 events and we don't expect a lot of residual impact beyond Q1 for those items.

Okay great, thank you.

Greg Melich with Evercore ISI.

Hi, thanks.

Two questions.

One is about the guidance in the fact that it was a good strong start to the year and if we keep that 4% comp guidance, my math it implies that the rest of the year we are going to be running like 3% or 3.5%.

Is that what you are seeing now, especially given if I remember correctly May is actually an easier comp than April was a year ago?

And then I have a follow-up.

Yes, Greg, this is Robert.

I will start and I will turn it over to Bob.

I think just as we've done in the past few years, generally coming out of the first quarter we've not changed our guidance for the year.

So we're following a cadence very similar to what we've done in the past, we think it's too early in the year to be changing our guidance.

I think it's just very consistent with what you've seen in the past few years, whether we started off with a robust first quarter or first quarter that was let's say weather challenged as we had a couple of years ago.

But Bob if you'd like to.

So Greg a couple of things I will reiterate from my comments, first we focused on April, April was on plan.

Second, we hope to sustain a momentum that we are seeing.

So we're excited about our plans and remain top in our ability to execute, there's nothing that would suggest that we are not able to execute the guidance we put forward.

Okay.

So if April was on plan, presumably May is on plan?

As we talk about, we guide annually.

We feel good about the opportunity to deliver our results, we're not going to get into the short-term nuances of this quarter versus that quarter, but we are confident in 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 unrelated to reset, are there other categories that you're going to be resetting doing this with that we should expect in the second and third quarter, just for the rest of the year?

Or was that something more specific to the first quarter as we think about the rest of the year and how it plays out?

Greg it's more specific to the first quarter and normalizes throughout the balance of the year.

Got it.

Thanks I'll let someone else have a chance.

Thanks Greg.

Christopher Horvers with JPMorgan.

Thanks, good morning.

Following up on the margins, was gross margin in line with your plan?

And then the other side of it is, the SG&A came in much better even if you back out the foreign currency hedge gains.

That was very strong, so was that also in your plan?

And as you think about putting up a 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 were also I think embedding more of like a 5% comp.

So I guess those extra 2 points didn't drive as much flow-through as one would've thought.

So the gross margin came in a little bit below our plan for a couple reasons.

First, as Rick talked about, we had a greater take-rate in the targeted promotions.

So we had an estimate of the impact, the customers' activity was stronger than we anticipated which is certainly a good thing and kudos to the team for identifying the items that resonate with customers.

Second, we expected the impact from the reset to be a little bit more balanced, Q1 and Q2.

We had good sell-through on the recent activity, therefore that impact was more pronounced in the first quarter.

As I mentioned, that kind of clears the debt in Q2 going forward.

And lastly, the mix pressure was a little higher than anticipated based on the strong demand of lumber and building materials.

As it relates to the flow-through, so the lower than anticipated flow-through is almost entirely attributable to the decline in gross margin versus plan, again based on the factors I just described.

Understood.

Understood, so the SG&A came in where you thought it 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 at relates to our partner and they made a change that impacted us last year regarding the loan-loss reserve.

The trailing impact of that hit Q1, that was modest pressure in Q1, that's largely done so that's a pressure in Q1 that we won't see in Q2 going forward, but not otherwise, Chris, nothing out of the norm.

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, Costco being a little bit light.

So is there anything, as you peel back demand whether it's regionally, in California is ticket versus traffic deceleration in the quarter, is there anything that you are seeing that would suggest a deteriorating consumer backdrop?

Chris this is Robert.

As I outlined in my comments, as we've seen the consumers we look to our consumer sentiment survey with what their intentions are around spending, with what their intentions are around investing in the home, as we are seeing continue improvement in the job market, we're seeing continuing improvement in wages, we are seeing continue improvement in home values.

It's 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 in comp transactions during the quarter.

And nothing that we've seen in our sentiment surveys has led us to believe that the consumer when we asked him how you feel six months out with regard to their purchases, nothing shows any change in their intentions as we survey them today.

So that I think is why, as Bob took you through, strong first quarter, we are aware of what others are saying out there with regard to the consumer, but when we take our strong first quarter performance and what we are hearing from the consumer when we survey them gives us confidence in reiterating our guidance for the year that Bob has taken you through.

Thanks guys.

Michael Lasser with UBS.

Thanks a lot for taking my question.

This is the second quarter in a row where you are a little bit more promotional [and seem 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 in those, it's a three-part question I apologize.

Is the promotional activity more pronounced in-store or online?

Thank you.

I can take that.

First let me talk about where we focused our promotions and a little bit about how we went about it first quarter.

We're more focused on lawn and garden seasonal living, tools and hardware, major appliances and interior projects because we thought that those would be the types of products and projects consumers' mindset would be geared towards.

We leveraged our sales and operation planning process and what's important about this process it is allows us to have a better sense on the micro seasons that applied to the consumers' mindsets, and 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 it's one 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 where the consumer is making purchases and ensure that we don't disappoint them by not having product.

But I wouldn't say that the intensity and depth of promotion was greater, what I would say is that our execution around promotions continues to get better.

So we are doing a much better job of getting the right promotions in front of the customer at the right time, leveraging our digital capabilities as well as some of the process that we put in place.

Are you learning anything about price elasticities?

It seemed like last quarter it was more focused on appliances, maybe this quarter was more on seasonal and tools?

And so maybe the construct of the home-improvement industry which conventional wisdom says that there's not -- the elasticity isn't as great here as in other categories.

May not be true and you can push that a little harder to drive more traffic.

Is that the way you're thinking about it?

So Michael we've got tools that allow us to understand the effect of promotions and price elasticity of items.

That's the magic is to have the right level of promotions that resonate with customers, not too much because too much promotion creates some leakage in the system and less than ideal flow-through.

So we do have some tools in place that allow us to evaluate the effectiveness of the promotion that draw customers in, try to get a sense of the close rate as well as the elasticity of the items.

So we are continuing to turn knobs and pull levers to maximize the effectiveness there.

And Bob, you mentioned that in promotions will 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 it will be more effective and less dilutive?

And then I'm done.

Thank you.

So as Mike, said one of the key areas that was a focus in Q1 was lawn and garden.

And some of the higher take-rate and higher effective promotions were around that category.

Those are not things that we expect to repeat in the second quarter or beyond for that matter, regarding lawn and garden which allows us to be comfortable with that, the impact was largely contained in the first quarter.

Okay.

Good luck with the spring.

Thank you.

Thanks Michael.

Matthew Fassler with Goldman Sachs.

Thanks a lot and good morning.

A couple of quick ones here.

I know you gave the monthly cadence as reported, did the Easter calendar shift impact the monthly cadence at all?

It did Matt, as we think about Easter impact it -- with the change, Easter would have impacted, March, would've been 9.7%, April would've been 3.4%.

Got it that's very helpful.

Second question, can you talk about what you saw directionally for online growth this quarter and any changes in how the customer DIY and/or Pro is using www.lowes.com?

Yes Matt.

Lowes.com and e-commerce grew 23.5% for the quarter.

And we saw strong growth in traffic as well as conversion to the site.

So we feel good about the investments that we made over the past year in really beginning to drive increased shopability of the site.

I think the key aspects there is, when we go back and we talk about the things we've done to the site to really make it more customer friendly.

Like I said in my comments, the enhanced video content that we're adding to the site, the improved product descriptions as well as increased content there is also resonating well with the customer.

So those aspects I think continue to help us drive the incremental growth from the dot-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 and the feedback we're getting from consumers, as well as our AEPs in the field about the usability of the site.

The functions 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 work.

We have not seen a shift in the mix of business regarding the in-store pickup.

We still see that as roughly 60% of all e-commerce transactions that are picked up.

That's even heavier as it relates to Lowe's for Pros delivery.

Still continues to grow as a component of that and parcel is about 30% of our dot-com sales.

Thanks so much for that thorough answer, I appreciate it.

Seth Sigman with Credit Suisse.

Thanks, good morning.

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 those as bigger opportunities as we move through the year?

So Seth those items continue to be in play.

We did see some modest benefit from both those items in the quarter, but they were offset by the three negative factors that were 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 outperforming in the past to below the Company average.

And I think that's just optics to some extent as I think you said the category was still up mid single digits.

But is there anything else read into that as we try to understand both where we are in the cycle and also perhaps how the competitive landscape may be changing in that category, specifically?

Thanks.

No, we don't think there's anything else read into it.

If you look at our appliance business it's outperformed the last five quarters, it's cycling over a 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-day delivery, haul away, in-house facilitation, repairs and maintenance.

We're really proud of the fact that we control the last three feet of the appliance experience, we don't outsource that.

JD Powers just recognized us as the Best in Appliance Retail Satisfaction.

The investment that we made in floor space gives us one of the largest floor space in the industry.

And the reason why we think that's important is that if you consider our floor space and appliances, coupled with our floor space and cabinets, it positions us well to take advantage of the cycle as it continues to play through.

The best thing I say is that, in kitchens in particular, if you look at the high ticket items in kitchens things like cabinets and countertops, we saw strength there.

So that suggests to us that the cycle is still well intact.

Okay makes sense thanks very much.

Mike Baker with Deutsche Bank.

Thanks.

One follow-up question to an earlier one.

How much did the greater uptake on the promotional activity impact the comps?

Certainly it had some impact Michael, as lawn and garden is one of the best performing categories.

So it was certainly a driver of the quarter, but as the team described there's many actions impacting the Pro, impacting the paint category, impacting a variety of things that help drive the totality of the performance in the quarter.

Okay I think the four product categories I think as Mike Jones mentioned as where you focused promotions, two were above, two were 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 every comp point above 1% you're going to look for between 27 and 30 basis points of improvement, you're obviously below that here.

So is the reason that you didn't change that, is it what you said earlier about not changing the comp outlook, just too early in the year?

Or are there specific reasons to believe the flow-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 will say Michael we think there's potential upside on the sales line.

Again, we feel good about momentum we saw in Q1, we'd 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's some upside on the top line.

We talked about some gross margin pressure in the first quarter that will continue, so we certainly take that into account.

However, we do feel even better than we did 90 days ago about our ability to continue to drive expense productivity and leverage, which gives us confidence in the outlook.

To the extent sales are better and some of that's driven by lumber building materials categories and the flow-through might be closer to 25 basis points.

But again, it's too early to start changing pieces of the outlook.

Okay.

Thanks, understood.

Thank you Mike.

Eric Bosshard with Cleveland Research Company

Two things.

First of all from a bigger picture perspective, just wondered Bob if you could comment on how we should be thinking about gross margin?

Understand the moving parts of the first quarter, but as we think about this year or the next couple of years strategically how are you thinking about balancing promotions and sales relative to gross margin, and what path does that suggest for gross margin?

So two things.

One, it ties back to a previous answer and then second would be long-term gross margin performance.

As I mentioned earlier, we do have tools that allow us evaluate the effectiveness of promotions.

As we think about promotions, some are specifically to drive sales, some are specific to grow the basket.

And some are just general awareness around the brand and the categories we carry, so we continue to turn knobs and pull levers to maximize the effectiveness there.

Taking a step back, Eric, as we think about gross margin, we do expect some modest gross margin improvement annually.

As we think about gross margin, it's probably not going to be 2017 until actually eclipse the gross margin rate we had in 2010.

So we felt like we are forging new ground and looking for gross margin peaks that have never occurred before.

So roughly over that eight year period it's called flattish gross margin over a long period of time.

And then secondly, I understand the influence of weather and your desire to 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 in looking through that?

Can you isolate it to weather, is there anything else different that's going on that explains the magnitude of the step down?

Two things regarding weather, so I mentioned 150 basis point impact in the quarter, if you exclude the weather we would still meet our sales plan.

So the underlying demand for our category is strong, the macro fundamentals that drive our business, housing and incomes continue to be constructive.

Beyond that, no other nuances impacted the monthly cadence.

Okay and within I guess your commentary with April being on plan would suggest that's where you expected to be despite whatever happened with weather, is that the proper way to read that?

That is correct.

Okay thank you.

Thank you.

Seth Basham with Wedbush Securities.

Thanks a lot and good morning.

My first question just around Pro, and specifically Lowe's for Pros.

You have 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 I stated earlier, we've been very pleased with the receptivity from the consumer and the Pro customer regarding Lowe's for Pros.

We continue to see strong growth quarter over quarter as the customers become aware of the site.

If you want to look at Q1, we saw a significant growth in new registered Pros on the site as well as conversion in growth as a percent of total dot-com 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 as 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 Pros, for example, were not capable of using their in-house credit.

They can now.

Pros not receive their 5% value-prop usage on prior www.lowes.com, they can today.

Tax exempt 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 the site more effective, more efficient but to date we've been extremely pleased with what we've seen, both from a registered user 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, indirect cost can you give us an order of magnitude of the benefits you expect from each of those?

Sure, I'll give you some high-level perspective.

For the year we continue to think indirect spend is going to pay dividends for us.

That's in the 15 or so basis point range, bonus is 10.

Like we talked about with the analysis around promotions we continue to do the same thing regarding resets and things of that nature.

We think we will get about 10 basis points of leverage on that spend this year.

Risk insurance is going to be less of a drag, it's about 5 basis points, employee insurance also less of a drag, advertising about 5 basis points.

A couple kind of indirect items, fixed-cost leverage 10 or so basis points and the impact of the 53rd week gives us about 5 basis points, so a lot of good items drive expense leverage for 2016.

That's helpful detail.

Thank you.

Thank you.

Kate McShane with Citi Research.

Thank you.

Thanks for taking my question.

One area that I just wanted to make sure I address today is just about the supply chain.

I know it's something that has been discussed by both you and your biggest competitor in the home-improvement channel as a competitive advantage and a 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 6 to 12 months?

Sure.

The aspect of the supply chain it's been a significant 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 RDC.

So we are able to meet 94% of all 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 in smoothing out orders and order flow to make sure that we are as effective as possible.

We continue to drive labor efficiency in the supply chain through utilization of Lean Six Sigma practices and processes.

And making sure that we are able to get the effective use of [tubing] out the trailers and the trucks to move forward.

Fleet and fuel costs continues to be an advantage and a tailwind currently.

So we continue to see those avenues 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 Fulfillment Center, or DFC, direct-to-customer fulfillment center which we have currently plans underway and being built out for a forecasted opening in the 2018 time (inaudible).

Thank you.

Regina, we have time for one more question.

Peter Benedict with Robert Baird.

Hey guys, thanks for taking one more here.

So a couple questions.

First, I mean the 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.

Any way to quantify that this gap relative to maybe historical trend, is this about as strong a gap as you've seen, just trying to get a flavor for just how strong that momentum is right now?

So the Pro performance, Pete, in first quarter was approaching double digits.

Okay.

Good that's helpful Bob.

Thank you.

And on the online business what are the largest categories that you guys are selling online right now?

And then what are the fastest-growing?

Are there certain categories that are kind of coming on strong, just curious how that looks?

A couple things, I'd say for the most part when you see simple replaced items, they tend to do better online.

Like appliances as an example.

But one of the differences is in our strategy is that we help customers pull together projects and that tends to lend itself more towards omni as the best tool to serve those customers' needs.

But our encouraging of online is moderated by the fact that we tend to be more project oriented, to simple replace thus we talk about being the project authority and not talked to just product.

Yes and I would add to that as we continue to look at overall traffic to the site as I said earlier, we have been extremely pleased with receptivity to the new functionality of the site from the consumer.

And I think that's representative in the results over the last couple of quarters, as well as the investments that we are making to make content more effective for the customers from a aggregation of data perspective as well as product information.

As such we have 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 continue to do well.

The single product categories, particularly in appliances and those categories, and again I think it's important to highlight that the store still plays a 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 dot com from the store, with 30% still being parcel.

So we feel good with where, we are we feel good with the traction we're making and making the site 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.

Certainly a lot stronger in the south I think than the north, how large was that gap and what kind of opportunity do you see in lawn and garden in call it 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 sharp motions in lawn and garden.

The business continues to do extremely well, so if you look at paint as an example where we had really high comps above the Company average, applicators, exterior stains, exterior paint, spray paint, caulk, interior stains all double digit.

We feel good about some of the spring that's ahead of us, we think that's going to drive our lawn and garden business.

We feel even better about some of our big initiatives that are also driving our business.

Terrific.

Thanks so much guys.

Thanks Steve.

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.