勞氏公司 (LOW) 2017 Q1 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies' First Quarter 2017 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 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. Mike McDermott, Chief Customer Officer; and Mr. Marshall Croom, Chief Financial Officer.

Joining during the Q&A session will be Mr. Rick Damron, Chief Operating Officer; and Mr. Richard Maltsbarger, Chief Development Officer and President, International.

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.

This quarter, we delivered comparable sales growth of 1.9%, driven by a 3.5% increase in average ticket, partially offset by a 1.5% decline in transactions stemming from weaker outdoor performance.

We posted positive comps in 8 of 11 product categories, with one -- while one category was flat.

A solid macro backdrop, combined with our project expertise, drove above-average performance in indoor project categories across the appliances, kitchens and flooring categories.

We also continue to advance our sales to Pros customers, driving outperformance in rough plumbing and electrical, lumber building materials and tools and hardware.

We drove 27% comp growth on Lowes.com and above-average comps in in-home sales, demonstrating the continued strength of our omnichannel foundation.

Our ability to connect to customers in our stores, online, through our contact centers or in their homes ensures that we provide solutions to customers across the most relevant moments of their project journey.

We're pleased with the progress we've made to enhance our product and service offering for the Pro customer, delivering another quarter of comps well above the company average.

And we continue to expand our capabilities to better serve this growing customer group.

Last week, we announced that we've entered into a definitive agreement to acquire Maintenance Supply Headquarters, a leading distributor of maintenance, repair and operations, or MRO, products to the multifamily housing industry in the Southeast, South Central and West.

This is an important step in our strategy to deepen and broaden our relationship with Pro customers and better serve their needs.

When combined with our November 2016 acquisition of Central Wholesalers, a prominent MRO distributor in the Mid-Atlantic and Northeast, this acquisition will substantially expand our ability to serve the multifamily housing industry as both the primary and secondary supplier while also increasing our presence in major metro markets and strengthening our foundation for future growth.

This combined multifamily MRO business is expected to generate more than $400 million in annual sales with 16 distribution centers and over 200 additional outside sales representatives.

From a geographic standpoint, our U.S. business achieved 2% comps for the quarter with positive comps in 12 of 14 regions.

And internationally, we delivered double-digit comps in Mexico, while comps in Canada were flat in local currency.

Canadian comps were pressured by unusually high snowfall in addition to 4 years of high single to double-digit comps.

Last week marked an important milestone, the 1 year anniversary of our acquisition of RONA.

This acquisition has fortified our presence in Canada with a market-proven asset.

We remain excited about the compelling opportunity to bring together Lowe's global scale and resources with RONA's local expertise, and we're well positioned to capitalize on the market's strong, long-term fundamentals.

We're pleased with early wins in key areas such as introducing our best-in-class appliance offering in RONA-branded stores, serving a new portion of the market and positioning us to capture additional market share; building on our e-commerce capabilities, which are already delivering strong growth above initial expectations; converting as many as 6 RONA big-box stores to Lowe's-branded stores in fiscal 2017; and driving improved profitability by leveraging our shared supplier relationships.

Due to great work of our Lowe's Canada team, we have begun unlocking the value of the acquisition and remain confident that we will deliver the revenue and call synergies we expected.

For the quarter, we delivered earnings per share of $0.70.

These results included a $464 million pretax loss associated with the early extinguishment of debt from our recent tender offer.

Adjusted earnings per share were $1.03, an 18% increase over last year's adjusted earnings per share.

Delivering our commitment to return excess cash to shareholders, in the quarter, we repurchased $1.2 billion of stock under our share repurchase program and paid $304 million in dividends.

Turning to the economic landscape for the balance of the year.

The home improvement industry should continue to see solid gains.

Job and income growth should drive solid gains in both disposable income and consumer spending.

And revolving credit usage remains favorable, supplementing the spending power generated by stronger incomes and supporting bigger ticket purchases.

Housing is expected to remain a bright spot.

Increasing household formation is encouraging and is expected to continue amidst steady job gains.

Home price appreciation should persist as mortgage rates has -- have eased from their postelection increase, which will support home affordability.

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

Our most recent Consumer Sentiment Survey revealed that homeowners have an increasingly favorable view of the national economy and their personal financial situation.

Rising home prices are continuing to encourage homeowners to engage in more discretionary projects in addition to ongoing maintenance and repair spending, and we believe that this trend will continue as well over half of homeowners we surveyed believe their home values will continue to increase.

Also, nearly half of homeowners we surveyed indicated that they intend to engage in a home improvement project in the next 6 months, and home improvement spending is expected to continue to outpace overall spending.

As we reflect on the quarter, we're very pleased with the continued growth of our Pro customer sales and excited about the opportunity we have to further expand that business and gain additional market share.

For the DIY customer, we recognize the near-term opportunity we have to drive more traffic with improved messaging and an optimized promotion strategy.

Mike will share more with you on that in a moment.

Longer term, we continue to focus on actions and invest in capabilities that will add the most value for customers and shareholders.

We're focused on omnichannel project experiences and expanding the reach of home improvement, ultimately serving more customers more effectively.

We're developing capabilities to anticipate and support customers' evolving needs.

We're also focused on improving operating discipline and execution and are committed to making productivity a core strength for Lowe's.

Before I close, I'd like to thank our employees for their dedication and ongoing commitment to anticipating and serving customers' needs.

Our employees are truly the foundation of our business.

Thanks again for your interest.

And with that, let me turn the call over to Mike.

Thanks, Robert, and good morning, everyone.

In the first quarter, we achieved positive comps in 12 of 14 regions and posted positive comps in 8 of 11 product categories, while one category was flat.

We delivered a comp of 1.9% on top of 7.3% last year despite softer performance in outdoor categories, which gave rise to a modest decline in transactions.

As you know, Lowe's has built a very strong seasonal business over the years, with approximately 35% of Q1 and 40% of Q2 sales historically driven by outdoor categories.

Given the tough comparison to Q1 last year, we designed a spring strategy intended to balance indoor and outdoor projects.

However, as the quarter unfolded, we found we weighted our messaging too heavily towards indoor categories.

We made the appropriate adjustments to our messaging mid-quarter and saw a corresponding improvement in April.

As we look to capitalize on strong demand for indoor projects and customers' continued desire to invest in their homes with our project inspiration and expertise and targeted promotions, we drove above-average comps in interior categories such as appliances, kitchens and flooring.

Once again, we achieved strong comps in appliances, leveraging our investments in customer experience, both in-store and online.

In-store, our appliance suites allow customers to visualize how their appliance purchase will look in their refreshed or remodeled kitchen.

Online, we've enhanced the customer experience and presentation to make it easy for customers to select their products.

Our omnichannel customer experience, together with leading brands, breadth of assortment, competitive pricing, knowledgeable sales specialists as well as delivery and haul away service, continues to drive our performance in appliances.

Kitchens also benefited from our omnichannel customer experience.

In order to provide a holistic project solution to a simple kitchen refresh or a full remodel, we display our kitchen solutions, including cabinets and countertops, immediately adjacent to our appliance offering so customers can both envision and design their dream kitchens.

Following the trend from last quarter, we again drove above-average comps in kitchens through a combination of project inspiration and expertise, our investment in project specialists and targeted events.

We also drove above-average comps in flooring, leveraging our strong assortment as well as targeted promotions to capture indoor projects.

We continue to advance our Pro customer sales, driving comps well above the company average, by further optimizing our product and service offering to better serve the Pro.

We achieved strong comps in lumber and building materials, driven by strong Pro demand, continued recovery efforts from Hurricane Matthew and Louisiana flooding and inflation.

Pro activity also drove solid comps in rough plumbing and electrical and tools and hardware.

We captured Pro sales by improving our brand assortment with exclusives like Hitachi and Bostitch, the #1 and #2 brands in pneumatics; and the extension of brands like Vaughan, Owens Corning and GAF.

We continue to be excited about the effectiveness of destination brands in attracting Pro customers.

This strength is evidenced with the addition of Marshalltown, a trusted Pro brand and a leading supplier of masonry tools, which drove double-digit comps in the category.

In addition to our outstanding portfolio of brands, we're also deepening and broadening our relationship with the Pro customer with our strong value proposition as well as advancing our capabilities to connect with Pro seamlessly across channels through LowesForPros.com and our growing ProServices team.

The addition of Central Wholesalers, along with our pending acquisition of Maintenance Supply Headquarters, further expands our capabilities to serve multifamily property management customers throughout the country with enhanced product and service offering while strengthening our platform for future growth with this important customer.

We continue to drive Pro awareness with targeted marketing, including expanded digital capabilities as well as Pro exclusive offers to grow our share of wallet with existing Pros while also generating new business.

We've also enhanced our buy in bulk program with new signage in-store, messaging on LowesForPros.com and marketing campaigns designed to drive awareness of the great values we provide for the Pro.

Our focus on further strengthening our portfolio of brands, continuing to build upon our omnichannel offering through our growing ProServices team and LowesForPros.com, are all part of a broader commitment to build our strong foundation to anticipate and serve the needs of the Pro customer.

We also continue to focus on our strategic priorities, leveraging our omnichannel capabilities to help customers achieve great project results.

Customers can engage with our associates in-store for expert advice, on Lowes.com for content and inspiration, with our contact center for ongoing support or with our project specialists to bring their solutions to life.

As customers engage in both indoor and outdoor projects, we leveraged our omnichannel capabilities to help them throughout their project journey, driving 27% comp growth on Lowes.com and above-average comps for in-home sales.

Our interior and exterior project specialists represent another important element of our omnichannel strategy as they serve the do-it-for-me customer, who needs a bit more help navigating their project, meeting them in their homes to design, plan, pull together products across multiple categories and manage their project through to completion.

We're also advancing our omnichannel experience, making it even easier for customers to engage with our in-home project specialists.

On Lowes.com, we've added online scheduling capabilities to our in-home selling model, and we've seen a very strong response to these enhancements with increased leads and appointment requests.

For the quarter, gross margin contracted 64 basis points.

We had 35 basis points of impact from product mix and RONA.

The remainder of the decline was primarily the result of promotional activity; inflation, predominantly in lumber; and pricing investments in key product categories.

Looking ahead, we're working to refine our promotional strategy by improving the balance between big-ticket and smaller-ticket projects, eliminating less-effective promotions and reducing the overall margin impact to the business.

We continue to make progress in driving productivity throughout the enterprise while investing in the areas that matter most to customers.

This quarter, we drove 40 basis points of payroll leverage as we realized the benefits of our new store staffing model.

We took decisive action to design and implement a new structure that provides better leadership and accountability, allowing us to grow sales with more efficient staffing.

We're also working to drive productivity in our supply chain by introducing new international carriers into our system and realigning our network to balance our volumes against 3 new shipping alliances in Southeast Asia.

As these improvements are implemented, they're expected to benefit gross margin in the back half of the year.

As we look forward to the remainder of 2017, we're proud to welcome 2 new additions to our expanding portfolio of brands that appeal specifically to Pro customers: SharkBite, the industry leader in plumbing fittings; and A. O. Smith, the leading brand of residential water heaters.

And for DIY customers, we're leveraging our MyLowe's platform to drive additional brand loyalty.

We're proud to announce that we've simplified our military discount program by allowing active duty and veterans to register through MyLowe's.

We're also offering free parcel shipping exclusively for MyLowe's members.

And as we move to Q2, we look forward to our compelling Memorial Day, Father's Day and July 4th events as well as our outdoor entertaining event featuring unique omnichannel experiences such as online tools to build the ideal backyard retreat.

We are well positioned to capitalize on a favorable macroeconomic backdrop for home improvement as we continue to execute on our strategic priorities and make progress on our initiatives to drive top line growth while improving operating discipline, productivity and profitability.

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

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

Thanks, Mike, and good morning, everyone.

Sales for the first quarter were $16.9 billion, an increase of 10.7%.

Total customer transactions increased 6.4%, and total average ticket increased 4% to $70.79.

Our transaction growth was aided by the addition of RONA.

RONA sales were approximately $630 million or 4.2% of sales growth.

As a reminder, RONA is not included on our comp calculations until the second quarter of this year.

As a result of the calendar shift from the 53rd week of fiscal 2016, this year's first quarter included 1 less week of winter and 1 more week of spring than last year.

While this had no impact on comp sales, it did benefit first quarter total sales by approximately $500 million, contributing 3.6% to sales growth.

Comp sales were 1.9%, driven by an average ticket increase of 3.5%, partially offset by a transaction decline of 1.5%.

Looking at monthly trends.

Comps were positive 3.8% in February, negative 1.2% in March and a positive 4.0% in April.

Lastly, new stores drove 100 basis points of comp growth -- or total growth, excuse me.

Gross margin for the first quarter was 34.4% of sales and, as Mike mentioned, decreased 64 basis points from the first quarter of last year.

We had a combined 35 basis points of impact from product mix and RONA combined.

The remainder of the decline was primarily the result of promotional activity to match the intensity of the marketplace; inflation, primarily driven by lumber; and pricing investments in key product categories.

SG&A for the quarter was 22.99% of sales, which deleveraged 73 basis points.

The deleverage was driven by the comparison to an unrealized gain in last year's first quarter when we recorded $160 million associated with the foreign currency hedge we entered into in advance of the RONA acquisition.

This year-over-year comparison drove 105 basis points of expense deleverage.

And in the first quarter of this year, we experienced 40 basis points of payroll leverage in the stores, so we realized benefits of our new store staffing model.

We also experienced 37 basis points of leverage in incentive compensation due to lower payment levels relative to last year.

Somewhat offsetting these items was deleverage from our private-label credit portfolio due to an increase in program costs, driven by higher losses, as well as risk insurance, which was driven by a favorable actuarial adjustment last year that didn't repeat this year.

Depreciation and amortization for the quarter was $365 million, which was 2.1% of sales and leveraged 20 basis points.

Operating income decreased 117 basis points to 9.25% of sales.

The RONA impacts associated with the mix of business and integration costs negatively impacted operating income by approximately 65 basis points in the quarter.

Additionally, the comparison to the prior year unrealized gain of the foreign currency hedge negatively impacted operating income by 105 basis points.

This quarter, we completed a cash tender offer for $1.6 billion of our higher coupon bonds.

And as a result, we recognized a $464 million loss on the early extinguishment of debt.

To fund the tender offer and finance current year maturities, we issued $3 billion of unsecured bonds in April.

The issuance consisted of 10- and 30-year notes with a weighted average interest rate of 3.58%.

For the quarter, interest expense was $161 million.

Effective tax rate for the quarter was 35.5% compared to 38.2% in the first quarter of fiscal 2016.

The year-over-year change in our effective tax rate was primarily driven by the implementation of a new accounting standard for excess tax benefits associated with share-based compensation.

Earnings per share was $0.70 for the first quarter, including a benefit of approximately $0.06 from the calendar week shift.

The loss associated with the early extinguishment of debt reduced EPS by approximately $0.33 for the quarter.

Adjusted earnings per share was $1.03, an 18% increase over last year's adjusted earnings per share of $0.87.

Now to a few items on the balance sheet, starting with assets.

Cash and cash equivalents at the end of the quarter was $1.96 billion.

The lower cash balance this year is a result of a larger April 2016 bond issuance in anticipation of the RONA acquisition.

Inventory was at nearly $12.3 billion at the end of the quarter and increased $1.2 billion or 10.8% versus the first quarter of last year, with roughly 60% of the increase related to the addition of RONA.

Inventory turnover was 3.95, an increase of 12 basis points over the first quarter of last year.

Asset turnover increased 5 basis points to 1.83.

Moving on to the liability section of the balance sheet.

Accounts payable of $9.9 billion, representing a $1.1 billion or 12.3% increase over the first quarter of last year, primarily due to the timing of purchases year-over-year, terms improvement as well as the addition of RONA.

At the end of the first quarter, leased adjusted debt to EBITDAR was 12.27x (sic) [2.27x].

Return on invested capital was 15.6%.

The prior year charges offset by the net gain on the foreign currency hedge related to the RONA acquisition negatively impacted return on invested capital by 225 basis points.

Now looking at the statement of cash flows.

Operating cash flow was $3.3 billion; and capital expenditures were $202 million, resulting in free cash flow of nearly $3.1 billion, which was up 2.7% to last year.

In March, we entered into a $500 million accelerated share repurchase agreement, which settled in the quarter for approximately 6.1 million shares.

We also repurchased approximately 9.2 million shares for $750 million through the open market.

As Robert mentioned, in total, we repurchased $1.2 billion of stock in the quarter.

We have approximately $3.8 billion remaining on our share repurchase authorization.

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

We expect to recover our first quarter sales miss over the next 2 quarters by increasing our media weight with a focus on value, improving our promotional effectiveness and rebalancing our indoor-outdoor strategy.

And as a result, we are reaffirming our operating outlook for the year.

We expect a total sales increase of approximately 5%, and this sales increase is driven by a number of factors: First, we are forecasting comp sales increase of approximately 3.5%.

Second, the RONA acquisition drives about 2% sales growth.

Also, we plan to open 35 stores, which adds roughly 1%.

To offset that, total sales growth will be reduced roughly by 1.5% to the comparison of 52 weeks in 2017 versus 53 weeks in 2016.

And on a GAAP basis, we are anticipating an operating margin increase of approximately 120 basis points.

Regarding operating margin, a full year of RONA results versus roughly 7 months last year will pressure operating margin by an estimated 15 to 20 basis points for 2017.

Effective tax rate is expected to be 37.8% for 2017.

For the year, on a GAAP basis, we expect earnings per share of approximately $4.30.

Please refer to Page 13 in our supplemental reference slides for a summary of adjustments as you compare 2017 to 2016.

We are forecasting cash flows from operations to be approximately $5.9 billion and capital expenditures of approximately $1.4 billion.

This results in estimated free cash flow of approximately $4.5 billion for 2017.

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

Regina, we're now ready for questions.

(Operator Instructions) Our first question will come from the line of Michael Lasser with UBS.

Is your decision to make price investments in response to something that you're seeing in the marketplace?

Or is it more proactive in an effort to regain some of the share that seems like you might be losing today?

Michael, throughout the quarter -- this is Mike McDermott.

Throughout the quarter, we saw an opportunity to improve our DIY value perception.

We feel good about our competitiveness, our assortments, our brand portfolio and the innovation we're bringing to market.

We've had to adjust our marketing to more frequently include lower price point values that are already in place throughout our product offering to drive increased traffic.

So it seems like you're maybe making some changes in response to the markets.

Are you seeing pressure from more of your big-box competitors?

Or is it coming from the online channel?

I think we're seeing significant opportunity in both DIY and Pro as home improvement continues to do very well.

As it relates to the competitors, there are many -- as you know, many competitors in the marketplace, and we've got to face them all.

Okay.

And my follow-up question is on the outlook for the year.

So the first quarter fell short of where you thought it was going to be.

You're going to be a little bit more price-competitive.

So to still achieve your prior expectations, is it that sales will come in better than what you previously thought?

Or you're going to find other ways to offset some of the cost pressure -- some of the margin pressure you might feel from the price investments?

It's really the latter.

We're looking at geography shift with the gross margin pressure we experienced in the first quarter.

We're going to experience pressure for the year in total, and we're anticipating roughly 20 basis points.

But we do expect to be able to offset that on the SG&A line as we're going to get some visibility and traction through our productivity efforts.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

Maybe a question for Mike on the marketing.

I think over the summer or maybe postmortem from looking at last year, you talked about a little too much marketing geared towards the millennial.

And then this quarter, we heard maybe you were more indoor-oriented.

And maybe this quarter was just a tactical change in how the seasons and sales were playing out.

How do you feel about the marketing plan the rest of the year?

And I'm sure you want to avoid these type of missteps, if you'd characterize them that.

And how do you do that?

Yes.

I'll tell you, we continue, Simeon, to optimize our media and improve our flexibility and responsiveness to the market opportunity and the weather, ultimately driving improved productivity as we spend on the spend and as we continue to drive traffic.

We tried to toggle in and out of weather opportunities throughout the quarter and found that we suboptimized.

Our objective, obviously, is to better connect with our customers through more personalized messaging tailored to their specific needs, and we continue to build capabilities to do that.

We'll also continue to look for the most effective and efficient ways to drive traffic and build our brand across all of our assets.

So that continues to be something that we fine-tune over time.

Okay.

And my follow-up is on RONA.

Can you talk about when -- I think you said after Q2 that it comes into the comp base.

Is there -- what kind of comp lift should we assume and then the timing and magnitude of synergies as they flow through?

Simeon, this is Marshall.

I'll address the RONA question.

Basically, it will come in towards the tail end of the second quarter, then we'll be able to roll that into our comp numbers for the company.

So -- and once we do that, we've already baked that into our guidance for the year.

And this is also Richard.

To play off of what Marshall said there, as well as the comp guidance, all of the synergies that we have for the year have also been baked into the guidance that was provided for the year.

Your next question comes from the line of Dan Binder with Jefferies.

This is Dolph on for Dan.

Around the outperformance of the Pro category, are you able to quantify how much pass-through Pro grew?

Or how many bps above the average Pro category Pro sales grew?

This is Robert.

I will say, overall, the -- as Mike alluded to in his comments, we have been investing heavily in the Pro recently, certainly, with the addition of things like Marshalltown, SharkBite more recently and A. O. Smith as well as the other initiatives we've had over the past few years, the launch of LowesForPros.com (inaudible).

So I will just say that we saw significant growth in the Pro customer more than 2x our overall comp.

And then we take -- and as I said in my comments and highlighted the acquisition of Maintenance Supply Headquarters, the definitive agreement, and we'll get that acquisition closed.

Combining that with Central, I think it's just going to give us opportunity to continue to perpetuate the great momentum that we had with the Pro customer.

So really pleased with what the team delivered in the first quarter and also really excited about the opportunity that lies ahead as we continue to deepen our relationship, particularly as -- with the opportunity we see in the MRO business.

Okay.

And if I could just ask one last question.

I think you mentioned some deleverage on some credit cost.

Can you give us an idea of where credit -- Lowe's card penetration is now?

And does the deleverage of this quarter have you rethinking any terms or standards for that card?

I'll just say that our credit card penetration for the private-label brand is roughly 28%.

So we've seen that steadily grow over time.

So when you look at the overall portfolio, just keep in mind that we are coming off of historically low delinquency rates and loss rates.

So we're beginning to see a little bit of inflection there and believe that our portfolio is performing relatively well versus others in the marketplace but something we will keep an eye on.

You have to be sensitive to how you adjust those terms for your customers because we do see those as sales driver and a tool that they will want.

And the use of revolving credit, we see, is a strength to the consumer as they spend in 2017.

Your next question comes from the line of Eric Bosshard with Cleveland Research.

You all talked about in 4Q a big focus on productivity in the business.

I'm curious, as you look at 1Q and as you look out through the balance of the year, what ranks kind of first on the emphasis in that area looking at this quarter with gross margin and SG&A in sales?

I'm just curious what's at the top of the list when you think about productivity as you define it.

What's the metric that you're most focused on achieving or improving?

As we talked about on the fourth quarter call and at our Analyst Day in December, we are increasing our operating discipline and our focus on productivity across the business to driving core strength and a core mindset.

The big thing we want to make sure that we get across is this laser focus on productivity doesn't deflect or detract from our efforts to continue to drive our customer-centric omnichannel strategic initiatives.

In fact, we see them as complementary.

We believe this will continue to allow us to invest and grow in those key areas as the consumer continues to shift.

In the quarter, we really focused on 2 key areas.

First, that was the rollout and the change of our store stacking models, which was in place to help us drive improved leadership across the store, improved training and oversight to drive a better customer experience across the store.

And we also changed our management complement here at the CSC to drive a leaner organization to become more nimble and drive more speed on decision-making.

So we're very pleased with how both those initiatives are going and how the organization has responded to those actions.

As we think broader about productivity, we're really focused on a few key areas as we continue to move forward, some that are strict productivity initiatives, others, which we believe will have consumer experience impact as well.

First, expanding our production offices will continue to be a focus as we look to expand that into our southern division during the second half of the year, which really improves the communication of (inaudible) business, drives it into our contact centers from a store model, improving our communication and efficiency and connectivity to the customer during that complex install process.

We're also optimizing our freight load from the distribution centers, Mike spoke about that earlier, as we look to optimize lanes and flow as well as how we flow the product to the customer as this is the single biggest utilization of nonselling labor in the stores.

So the teams are continuing to focus on how to get more effective and more efficient there.

Third, we continue to tap alternate delivery options.

We have centralized delivery tests ongoing in 4 markets currently, both small, medium and large, to understand how do we optimize our delivery networks more effectively, more efficiently.

And then we'll continue to leverage our indirect sourcing opportunity across the enterprise to get stronger.

So the core aspects of productivity, we think, will continue to drive the organization and help us deliver against our targets for the second half of the year.

And we're pleased with the outcomes that's been implemented today.

I guess just one follow-up.

When you talk about the outcomes -- and great job in leveraging payroll and leveraging SG&A.

Is that the scoreboard you're focused on?

How are you balancing that relative to growing sales and sales productivity and market share?

How are you thinking about balancing those 2?

Yes.

Eric, the big things that we look at when we're looking at it from a store standpoint is a holistic measures of success from efficiency of process through our customer service metrics.

So we're measuring our close rate performances, we're measuring our customer satisfaction scores, I would say, are the 2 dominant drivers of our overall measurement of success.

And they will continue to measure it against the anticipated benefits that we have around that.

So we're pleased with what we saw across both those attributes in the quarter.

As a matter of fact, we saw increases in our overall customer satisfaction scores compared to Q1 2016.

So really proud of the way the teams and fields have rallied around this and responded and continue to work to meet the needs of our customers in and out every day.

And Eric, this is Marshall.

I'll just pile on just real briefly.

The -- you were looking for ways to drive sales productivity.

So anything, the process and capabilities that we need to deliver to drive better sales productivity as long as keeping an eye on our expenses, eliminating waste in order to more effective ways and to utilize our spend.

So I hope that helps.

And if I could just inject one clarification.

Just received a note that the lease adjusted debt-to-EBITDAR is 2.27x.

I think I said 12.27x.

The rating agencies are on the line.

Don't want to get them too excited.

But it's 2.27x, and we anticipate getting to 2.21 by the end of the year.

Your next question comes from the line of Seth Sigman with Crédit Suisse.

I just want to follow up on the sales performance in the quarter being a little bit lighter than you expected.

Can you just clarify, do you think that was driven by some seasonal factors?

Or was there more of a share loss component here, and that's why you're making some of the promotional changes?

Seth, I'll -- this is Rob Niblock.

I'll start.

As we look at the quarter, and as we indicated, there were certainly some weather challenges that impacted our seasonal performance.

As you know, seasonal is a big category for us.

We had strong comps that were going up against last year from a seasonal standpoint.

So as Mike indicated, part of what was done with the heavy reliance on seasonal was to try and pursue some opportunity that we saw in indoor categories.

As we toggled between those 2, we recognized that we probably had some opportunity to continue to improve our messaging around seasonal categories, value driving and traffic driving items.

So Mike and his team started making those necessary adjustments.

But when you look at -- for the -- when we look at the quarter, with -- as we look at it on balance, even with weather challenges, we were only slightly below our plan for the quarter.

So all in all, considering weather, we ended up with a good performance against our plan.

And as we said, we're making adjustments to continue to capitalize on the opportunity that we see in the market.

Got it.

And then the regions and the categories that did underperform in the quarter, did you see signs of improvement late in the quarter in April?

And if you could just give us a general sense of how you're feeling about May because it does seem like there's some confidence that the business is going to reaccelerate.

We did see the most significant pressure in our lawn and garden and seasonal and outdoor living businesses.

From a lawn and garden perspective, we saw some inconsistent performance throughout the quarter really aligned with that weather that Robert just talked about, leading to a slightly negative comp.

We weren't able to offset the underperformance in live goods with some of the positive performance in other areas in that division.

But certainly, as weather has improved, we have seen improvement there as well as in our seasonal and outdoor living categories, particularly in patio.

So as time moves on and weather stabilizes, we are seeing improvement in those categories.

From a geographical standpoint, we had negative comp performance in 2 regions, our Boston or our most Northeast region, primarily driven to the changes in weather from last year.

We saw the biggest impact there.

And then in our St.

Louis region, which we saw with the significant flooding events that took place during the quarter.

So both those regions, as Mike said, these -- the product categories have performed better.

Those regions have also improved from a performance standpoint as well.

And this is Marshall.

I'll just say that from March to April, we like that trajectory.

So thus far in May, we're pleased with what we're seeing.

Your next question comes from the line of Matt Fassler with Goldman Sachs.

I want to dig a bit deeper into the promotional and pricing actions.

If you could just reiterate, were these focused in seasonal, where you were seeing some of the challenges?

Were they focused in some historically promotional categories like appliances?

And where else might you have undertaken them?

Or were they pretty much directly connected to some of the changes in marketing?

Or should we think about these as 2 separate efforts?

Matt, this is Mike.

I would tell you that some of the select pricing investments that we made were really tied to seasonal products, and we executed those mid-quarter.

And we certainly saw some improvement, as I just mentioned.

The other area of focus has been an investment in special order products, really, across our digital assortment, supporting our omnichannel to engage customers, both Pro and DIY, as they build out their projects and leverage our extended line design through our digital properties.

So they are the areas of most significant focus in regard to those investments.

And just to think for a second about that seasonal business.

You spoke about the weather, which, clearly, was an impediment.

So was this an effort to try to overcome that impact?

Or were you simply saying, "Hey, whatever it takes," whether or not -- or did you feel like there's more of a share issue in that category for you?

It was really designed to -- with the market adjustments we made to try and capitalize on seasonal traffic, recognizing that both in the first in the second quarter, seasonal traffic is a significant driver of the traffic that engages with the portfolio.

So that's why we did it to really complement the marketing adjustment and revert on the traffic.

And to the extent that the full year gross margin outlook seems to be better than what you showed in Q1, presumably a little bit less of a drag from RONA as you cycle the acquisition, but would you expect some of those investments in pricing and promotion to subside?

Yes.

For the remainder of the year, Matt, we expect to partially offset the impact of some of those promotions and pricing investments.

We have cost improvements from our line review process as well as refining that promotional strategy and eliminating the less-effective promotions as the year unfolds as well as fine-tuning our pricing actions based on the results that we're seeing.

As you know, we constantly adjust our approach to optimize gross margin, making sure we deliver value to our customers while balancing the traffic and tick the equation.

So that process is managed daily, and we do think we'll see improvement.

Your next question comes from the line of Dennis McGill with Zelman & Associates.

Just to clarify a couple of those statements earlier.

Can you specify which categories were negative in the quarter?

And then also, any impact from Easter as you had estimated on the monthly comps margin in April?

Yes, I can talk to the categories with negative comp.

They were the lawn and garden category and seasonal and outdoor living categories.

And on the Easter shift, Dennis, it was a negative 0.5% in March versus the 1.2% I stated earlier.

And then it was 3.2% on an adjusted basis for the Easter shift in April versus the 4% that I highlighted earlier.

Okay.

And then can you also clarify, when you talked about the Canadian pressure in the quarter, I think that was on the core business.

But more broadly, can you just talk about what RONA is comping at today just to give us a sense on what that would -- how that it is impacting the comp when it does come in?

Dennis, this is Robert.

As this comps, as you know, that we mentioned -- or as I mentioned in my comments, are for the legacy Lowe's business that we have in Canada.

The RONA business that we acquired, as Marshall said, it won't roll into comps until late in the second quarter.

Yes, I understand it's not in the comp base, but can you give us a sense of what it is comping at today?

Go ahead, Rich.

So this is Richard Maltsbarger.

The current RONA business is comping at the expectations that we had for Q1, with the exception very similar to what we're seeing in the U.S. to the pressures that Robert mentioned in his remarks regarding the unseasonable late spring snowfall that we experienced, especially across Québec.

And those expectations were consistent with the domestic business?

Or plus or minus?

They're consistent with the domestic business.

Your next question comes from the line of Chris Horvers with JPMorgan.

So I wanted to get your thoughts.

I've been asking some companies this.

As you look at the business, do you think compares really matter from a same-store sales perspective as you think about the cadence of the quarters for the year?

In other words, at this point in the cycle, outside of the weather variability that obviously shifts demand, is your comp trend, the comp trend?

Or do you look at the next 2 quarters and think there were specific items that impacted the business last year that would suggest we should think more about comp stacks versus the overall trend in the industry?

Well, certainly, Chris, when we look at comps, as we said, first quarter of this year, we were going up against tougher compares from a year ago.

And that's why I think we had previously indicated on our fourth quarter call that we expected the best comps in our second and third quarter of the year were rolling up against our weakest compares.

If you take the combination of being up against the tougher compares, weather challenges and how they hit in the quarter, you make a good point that you have to kind of look and bring all those factors to bear when you look at the performance.

And as we said, overall, when we look at the business in the first quarter even with the weather, we delivered sales that were just slightly below our plan.

And with the actions that Mike and his team were taking, I think we have good line to being able to recover that top line as well as being able to continue to mitigate some of the margin impact we had for the first quarter when we get past the acquisition -- the anniversary of the RONA acquisition and those things.

Understood.

And then 2 quick follow-ups.

First, on Maintenance Supply Headquarters.

Is that -- have you included that in the outlook?

I know it hasn't closed quite yet, but is that included in the outlook?

And if it's not, can -- or either way, can you give us some understanding on how that might impact gross margin and SG&A when it comes in?

Will we see any impact at all?

Or is it just too small relative to the total?

Yes.

I would say, one, it's still a pending acquisition.

We haven't received final regulatory approval for that.

We did not bake that into our guidance.

And so once we get through the acquisition, then we would roll any impact that we see from that into our guidance the first time we update after the acquisition.

Okay.

But you -- in the -- you mentioned that you do expect it will be accretive this year.

Any indication on what it might be?

Yes.

We do expect it to be slightly accretive this year.

Your final question will come from the line of Greg Melich with Evercore ISI.

I want to follow up on 2 things.

One, housekeeping.

What was inflation in the comp?

I think you mentioned the gross margin, but not the comp.

Yes.

We had about 50 basis point, again, primarily driven by a lumber in the first quarter.

Great.

And then it sounds like -- don't want to put words in your mouth.

The comp trend through the quarter, that 450 bps deceleration from February into March and then coming back in April, that, that change was entirely traffic-driven and the ticket was pretty steady.

Is that a fair assumption?

Yes, it is.

Great.

And then finally, maybe just to help frame it a little bit as we think about flow through the rest of the year.

Credit profits, remind us, that shows up entirely in SG&A?

Or does some of it show up in gross margin?

And could you remind us roughly how much of SG&A is a profit share from the credit card?

Well, I will disclose that it does show up in SG&A, so the whole program, income and cost flow through below the margin line.

But it is in our operating margin.

So the costs are in gross margin, but the profits or the lack thereof...

No, no, no.

Greg, the entire program runs through our SG&A line.

And as always, 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 23.

Have a great day.

Ladies and gentlemen, this concludes today's meeting.

Thank you all for joining, and you may now disconnect.