Lowe’s Companies, Inc. (NYSE:LOW) Virtual fireside chat June 21, 2022 11:00 AM ET
Company Participants
Marvin Ellison – Chairman and CEO
Brandon Sink – EVP, CFO
Kate Pearlman – VP, IR
Conference Call Participants
Brian Nagel – Oppenheimer
Brian Nagel
Oppenheimer consumer conference. So my name is Brian Nagel. And I work as a Senior Equity Research Analyst at Oppenheimer, covering consumer growth and e-commerce. So I’m very pleased to have with me on this webinar event, the senior leadership team or several members of the senior leadership team of Lowe’s; CEO, Marvin Ellison; CFO, Brandon Sink; and Head of Investor Relations, Kate Pearlman. So thank you all for joining us.
Marvin Ellison
Thank you, Brian.
Kate Pearlman
Thank you so much.
Question-and-Answer Session
Q – Brian Nagel
So I think we’re going to structure this meeting as a fireside chat between me and in the Lowe’s senior team. And again, we’ll get started right now. So well, look, I think one of the biggest questions I’m getting now from our clients, just as they’re considering Lowe’s, as they’re considering retail home improvement is just to understand better the macro environment. Very, very fluid backdrop at this point, a lot of factors, rising rates, some indications of maybe a slower housing activity on the heels of those rates. Obviously, the pandemic has been subsiding now, some sort of say disruptions is what may have been tailwinds to the pandemic are beginning to fade then you called out weather, okay? So there’s number of factors lately. So I guess my first question is just how are you looking at this backdrop as it relates to Lowe’s into home improvement sector?
Brandon Sink
Brian, I’ll take that one. First of all, thanks for having us today. You mentioned the backdrop, the macro backup for home improvement remains healthy. We’re confident in our long-term outlook for our business. And as a reminder, for the group, primary drivers of our growth have remained consistent over time. Home price appreciation, age of housing stock and disposable personal income.
As we look at our market today, real residential investment as a percentage of GDP remains supportive. Over half of U.S. homes are aged 40 years or more and household well at an all-time high with record savings and substantial home equity. So with that as the backdrop, we believe we’re well positioned to capitalize and continue to gain 300 to 400 basis points of share across both our Pro and our DIY consumer segments through continued execution of our total home strategy.
Brian Nagel
And Brandon, I know that we’re looking at rather short periods of time here and the environment is changing rapidly. But as long as I’ve studied Lowe’s, we’ve always talked about home price appreciation being one of the key macro drivers of your business. Now by most measures, home price appreciation has remained strong. You look at as most published measures out there, there’s now been at least a few years of a very healthy home price appreciation, which homeowners are now benefiting from. As you’re looking at — are there any indications market by market where maybe home prices have begun to soften? Are you seeing any — that’s the first question. Are you seeing that? But then I guess the second question would be in those markets, has there been any impact upon Lowe’s business?
Brandon Sink
Yes, Brian, we’re certainly seeing some moderation for sure, which, again, we plan, but I’ll anchor back to — when we think about home prices, we’re also considering the limitation in supply, right? I think documented 1.5 million to 2 million houses, I think, in terms of shortage of supply. So when we think about home prices, yes, there is some moderation, but it’s still the anchor point for our business. It still gives consumers confidence, and we are seeing the shift, right?
So we’ve seen some slowing in housing turnover, but the flip side is that gives consumers which are mostly Lowe’s consumers that they’re anchored to a lower mortgage rate. They continue to invest. They continue to spend in their home, and we believe that we’re well positioned for that repair remodel business and that we’re prepared to capitalize on that.
You mentioned geographic differences. At this point, we’re not seeing anything significant from an overall performance through the first quarter. It’s been pretty even. You mentioned the weather well documented there, what we saw in March, April. But beyond that, just in terms of more broad macro, we’ve not seen significant discrepancies in our regional performance.
Brian Nagel
And Marvin, just sticking along this line of question, just start. You’ve been around the home equipment for some time now. I mean given your — historically, how many as investors, how should we think about rising rates over any length of time? Rising rates is either a driver or impediment home improvement business.
Marvin Ellison
Well, Brian, historically, rising rates have not negatively impacted home improvement if the other macro indicators, some of which Brandon talked about remain strong. As long as we’re seeing home price appreciation, as long as we’re seeing strong balance sheets for each household, as long as we’re seeing employment data remaining strong, rising rates alone will not have a negative impact on home improvement. Obviously, rising rates will impact home turnover because those existing homeowners are going to pause and maybe try to wait it out before departing from a low fixed mortgage rate that they currently have in their existing home to go out in an environment where interest rates are higher.
But when those customers decide to stay in those existing homes because of higher rates then they’re going to make modifications in that existing home that really benefits our business. They’re going to decide rather than getting a new home maybe I put in that new kitchen. Maybe I modernize my bathroom. Maybe I finished that basement. And so those are the kinds of projects that play in our favor. But historically, rising rates alone do not have a negative impact on the home improvement sector.
Brian Nagel
That’s very helpful. And then with regard to the weather, again, we talked a lot about this when Lowe’s reported its fiscal Q1 results or late start to spring. So I guess the question I have now is, has the weather turned to be, I guess, more normal — I mean, more seasonal that could be conducive to those seasonal type sales at Lowe’s?
Marvin Ellison
We stated on our Q1 earnings call that the delayed spring impacted our comps by $350 million or roughly 150 basis points. But once spring began to break and the seasonal category and the performance became pretty much in line with the improving weather. So while we’re seeing sales recover in the regions impacted by delayed spring, it’s important for me to say that we need a full six months to really understand how the season plays out. I mean, even as we sit here now in the second quarter, we have some significant sales weeks in front of us.
So having the whole six months to play out will give us a really good picture of weather, the carryover from first quarter to second quarter and just the spring season in general.
Brian Nagel
And then again, maybe shifting a bit away from just some of the current kind of the fluidity, if you will, of the backdrop. But another topic we’ve discussed a lot is, look, Lowe’s capitalized very successfully upon pandemic tailwinds. I mean we talked a lot about the improvements that you’ve made, Marvin, to allow the business to do that. But Lowe’s was very much, again, performed very, very well through the pandemic. As you look at the business now, with these pandemic disruptions and then your case probably tailwinds to a certain extent abating, what gives you the greatest confidence that the business has successfully rebased stronger now as we’re pulling away from the COVID-19 crisis?
Marvin Ellison
Brian, good question. So when we started this year, it was our expectation that 2022 was going to be a year where we created a new sales baseline as we absorb, as you said, two years a really robust demand. But as we discussed and Brandon has already mentioned, there are numerous tailwinds that we expect to support the home improvement demand for years. Again, I’ll repeat some of them, things like on price appreciation, aging housing stock, disposable personal income, the extension of remote work, millennial household formation trends and baby boomers decided to age in place.
I mean, when you take all of those factors, even if you think about pandemic demand, we think these factors still are going to be supportive for home improvement demand over a period of time. And I think we all would agree that even as we’re in this post-COVID world, the customers are going to just look at their homes differently because you just can’t rely on your home as a residence, but it’s a place of remote work and remote learning.
And so what we’re trying to do and Brandon talked about our total home strategy is that we’re very confident that, that total home strategy is going to further allow us to grow market share gains in this post-COVID environment as we grow across the do-it-yourself customer, the Pro customer and Lowes.com.
And we’re also going to be leaning into our brands, expanding our private brands offering and making sure that we’re continuing to localize our assortment to tailor it to that unique customer in those locations. And so all of those factors gives us the ability to say this is a rebaseline for our business, but we think those factors allow us to grow that.
Brian Nagel
That’s great. Marvin, it’s a perfect segue to kind of the next into start talking more specific about the initiatives of Lowe’s. But let’s talk about the Pro business. There’s been a big push on Lowe’s. We’ve been, again, showing some signs of significant success there in catering more effectively to your Pro customers. So I guess this — how do you — where is the Lowe’s Pro effort at this point? And maybe to discuss some of the key initiatives there that you’ve undertaken to improve the business? And how should we think about it driving from here?
Brandon Sink
Yes, Brian, I’ll take that one. Really excited about the momentum here. Our Pro customer is as healthy as they’ve ever been busier than ever. When we look at the Pro, we view the health of the Pro business across several dimensions, their backlog, confidence in their job prospects as well as their access to materials, labor and credit. And those indicators, again, as we look across the board, all very strong.
And I mentioned earlier, household wealth and the fact that it’s at an all-time high, we’re seeing our homeowners, our customers continue to be confident in making the investments in their homes. And oftentimes, they’re hiring a Pro for that major repair remodel. This is pent-up demand as we see it for the Pro in a major positive, both in the short term as we look at 2022 and beyond. We have a unique opportunity, we believe, to continue to outperform the market for Pro by 2x. Some things that we’ve done over the last couple of years, we’ve overhauled the Pro offering with greatly improved service levels.
We’ve added meaningful national brands and invested in job lot quantities. And then as we look ahead, some other initiatives that we’re really excited about, the launch of our MVP Pro’s rewards program and Pro CRM. Both initiatives to better reward our Pro customers and anticipate their project needs. So really happy with the progress and the momentum that we’re seeing there, Brian.
Brian Nagel
Brandon, where is the Pro penetration now? Where it hasn’t been? And I know you’ve made the point, Marvin, not to discuss targets, but how should we think about the continued growth in that penetration of the Pro business for Lowe’s?
Marvin Ellison
So Brian, I’ll take it. So our current Pro penetration is approximately 25%. That’s an improvement from 19% about three years ago. So we’re definitely headed in the right direction, but what we try to do is to spend time thinking about what are the investments we’re going to make. So we’re focused on the investments we’ve already made, and these investments include things like staffing, technology, job lot quantity, inventory.
We think that these foundational things will allow us to grow sales with limited incremental investments, and this will also allow us to lever operating margins as we drive better sales productivity over time because we think as we grow Pro sales because our investments are going to be limited to drive those sales at a proportional basis, is going to flow to the bottom line a lot more effectively.
We’re also excited about things like the new CRM platform that Brandon talked about, adding members to our new Pro rewards program and also this rewards program is a buy more, save more. So it does things like offers cash back, points and incentives, exclusive offers on business management tools, all types of things that our Pros are telling us it matters to them. But also there’s a wraparound program on paint rewards that we think is going to be really, really effective, and this all links to our already existing strong Pro credit offering.
And so we’ve been leaning into Pro Credit for decades, one of the things that Lowe’s has really done well. And we think that not only is our offer a competitor, we think that it’s best-in-class. And when our early data shows is that the Pro customers engaged in our MVP loyalty program and our credit program spend 300% more than Pro customers not engaged in these programs. So that tells me that we’re definitely headed in the right direction. And we’re also piloting what we call a Pro fulfillment center here in the Charlotte area.
So we’re excited about that. So this gives us the ability to stock the key Pro-related SKUs in deeper inventory quantities, and we’re expanding our ability to deliver next day large orders flat bear. And so we’re taking a multipronged approach to pro fulfillment because we already do next-day delivery of many products from our stores. We have a market delivery model we’ve talked a lot about that we’re leveraging for Pros, and we have our lowest Pro supply branches.
And now this new Pro fulfillment center combines all these functionalities under one roof. So we’re excited about what we’re seeing in the short run, and we have a long-term plan to take these facilities and build out a network and we think that’s going to be one of the key areas that’s going to allow us to take the foundation of what we’ve done in Pro and take that penetration to the next level.
Brian Nagel
So Marvin, is it primarily been — with all that you’ve done, is it primarily a matter of time you’re just connecting with more and more pros and then driving that penetration? Or as you think about the initiatives, are there really key unlocks from here to drive that penetration higher?
Marvin Ellison
I think it’s time and effective execution. Look, we lost the confidence of the Pro customer over the past 10 years. I’ve had Pro customers telling me in town halls and in feedback sessions that it was a 10-year gap before they step foot into a low store game because they were so disappointed over time with how we never showed up for them on a consistent basis. So this is about, number one, improving how we run the business, but also gaining credibility with the suppliers and gaining credibility with the customers.
So the short answer is, this is all about execution. We think that we have the right portfolio of brands now because we walked away from a lot of key brands. We now have those brands, and we think the initiatives that Brandon and I have talked about this morning will give us the ability to grow this penetration in a sustainable way over time, we simply have to execute and listen to our customers.
Brian Nagel
And just for the sake of the audience here, I think the brand additions you’ve made, I think, are really key here. Maybe talk a bit about that? And what brands have you brought in to really cater better to that Pro and maybe if you articulate some of the success you’re seeing with that?
Marvin Ellison
Well, look, I’ll talk about brands in general. But the merchant team have done a really nice job of leveraging a balanced brand strategy, where we offer national brands to our pros, and we’re — and we also have national key DIY brands in appliances, grills, outdoor power equipment. But we also are focused on offering differentiation through private brands, especially in the core categories where the DIY customer is more brand agnostic.
So let’s talk about the national brands for a second, specifically to the Pro customer. So we brought by brands that we had lost under the prior leadership team. These brands are critical for Pro. And some of those brands are Bosch, the expansion of DEWALT, which is still the number one pro power tool brand, Eden, SharkBite, Spyder and Simpson Stron-Tie, just to name a few.
And while we’re still going after a few additional brands, I mean, we are really confident that the brands I just listed, those brands are sufficient for us to win with today. And we’re also pleased when you think about the exclusive brands we’ve gone out to get like EGO and scale. So we’re the home improvement retail channels for those brands, and these are the number one brands in battery outdoor power equipment, and we deliver record sales for EGO and skill. So it’s been a win-win for Lowe’s and for down. And we’re also continuing to expand our private brands, as I mentioned, as a way to create differentiation for our DIY customer.
So an example of that, last year, we acquired the STAINMASTER brand. And as you know, STAINMASTER is the most trusted carpet brand. And this year, we’ve completed a major style refreshes STAINMASTER, and now we’re extending that STAINMASTER brand into tile, vinyl and laminate. And so we’re also excited that we recently launched a new modern brand we call ORIGIN 21, which complements our already popular Alan Rock brand, which is more traditional and timeless.
So we feel like we have an opportunity to expand our private brand penetration north of 20%. Today is, give or take, 15%. So it’s a balance approach. Pros lean more toward national brands because they want for familiarity, and they want consistency. DIY is a lot more agnostic specifically in decor, and we can create that level of differentiation. So I’m really pleased with the merchants focus on both, and we’re going to continue to build on where we are.
Brian Nagel
In terms of Pro, and again, we talked a lot about Pro. Your primary competitor is also very focused on Pro, higher penetration than Lowe’s has today. I know you’re very familiar with that business. But how should we — what are the market share opportunity? So as Lowe’s continues to grow in the Pro business at a rate that’s far in excess of the overall industry growth, where is the market share coming from?
Marvin Ellison
Well, we think it’s — we think this is a really fragmented market share environment. I think today, we estimate that the addressable market share in the Pro space is, give or take, $450 billion. So there’s a lot of market share out there. So as we look at what we’ve done so far, we think the gains have come primarily from smaller regional competitor. But obviously, it’s difficult to note precisely.
But again, that $450 billion market opportunity is really fragmented, and that gives me confidence that we have the opportunity to really gain share. So throughout the pandemic, we’ve made significant improvements across our service offering, all the things that Brandon I’ve talked about. And now the goal is how do you capitalize on those investments, given that convenience is one of the key things that Pros are looking for because as I’ve mentioned many times before, for Pro customer, time is money.
And so we’re going to expect, and we are expecting things like our new MVP Pro program to be meaningful, that new CRM program to give us that one-to-one communication, and we think that’s going to be great to incentivize the Pro to shop at Lowe’s and put us in their consideration set.
Brian Nagel
Are Lowe’s articulated the guidance for the current year 2022, you talked about Pro being a strength. I guess, is maybe more for a brand. I mean, you talk about Pro customer — the Pro business like that’s what we’ve seen to date. Now to the extent that the backdrop does soften somewhat, okay, how would you think about sort of the interplay between the DIY business and the professional business?
Marvin Ellison
Well, look, I think that, as you said, I mean, when we set our guidance for 2022, we had an expectation that the business was going to be led by stronger Pro growth. I mean, we’ve had historic growth, and it’s been extremely robust the last 2-plus years. A lot of that has been driven by pandemic demand, but also government stimulus has really drove what we would call incentive buying that we know was unsustainable. But when we think about kind of how we move forward and how we continue to execute, we just think that there is an incredible opportunity for us to just drive the business by leaning into both Pro and DIY on a more consistent basis.
Brian Nagel
So the point you made, I think we just chatted in the past. I mean if — to the extent the environment debt turned more difficult, could you see more consumers opting for that DIY app? And how are Lowe’s be positioned, again, if that dynamic would start to play out wide?
Marvin Ellison
For sure. I mean we plan, as I said, for the DIY to pull back this year, but we’re well positioned with 75% of our customer base in the DIY space from a penetration standpoint and 25% in Pro. If we see a pullback from the Pro to more DIY, we’re well positioned for that. And we’re equally positioned to continue to grow our Pro sales. Historically, when there is any type of a macro headwind, customers tend to take on more projects themselves as a way to save money.
That’s the beauty of the do-it-yourself model and the beauty of the home improvement sector.
So we are well positioned. If Pro continues to be strong, we’re going to continue to grow that penetration. If there’s a pullback and there’s more of a shift to DIY, we’re obviously positioned there as well. And as you can imagine, we’re paying really close attention to the tendencies and the habits and the shopping behaviors of both of these customers. So we are in a position to serve them both.
Brian Nagel
And just one final question on Pros and I guess it really goes to like maybe a check on the real-time health of the business. You talked a lot about just as you’re connecting with your professional customers, they talk about these for their own businesses, these historically strong backlogs. Is that — do you still hear that now even as potentially the environment turned a little bit more challenging, are there — the backlogs of the Pro still very healthy?
Marvin Ellison
It is. I mean, in this around entire country. I’ve been in this business, as you mentioned earlier, for a long time, and I have never remembered an environment where the Pro customer is more confident about what we call their book of business. And we spend a lot of time doing official and unofficial surveys with Pro customers to understand what are you seeing? What’s your demand? What are some of the services, products, projects that you’re working on? What are some of the things you need that we don’t carry? I mean that’s the typical interaction and agnostic to geography. We’re hearing nothing but strength and confidence in Pros to what they are seeing from a pipeline of business and projects that they have on their schedule. So it remains really robust.
Brian Nagel
Got it. I do want to shift now a bit to just the supply chain and maybe frame it just initially this way. So there’s been a lot of talk within the broader consumer space over the last several quarters now about disruptions within supply chains, particularly global supply chains. So the question I have is from that standpoint, kind of what is Lowe’s seen? But then maybe more importantly, you’ve also worked to improve a lot of your own supply chain discipline significantly. So on that front, what has been done to improve the Lowe’s supply chain capabilities and how has that allowed you to deal very well with what has been historical challenges in the movement of products around the globe?
Brandon Sink
Brian, I’ll speak to the — a little bit of landscape in the backdrop first. So as we look across the global supply chain today, pressures continue to persist, but I would say largely in line with our expectations that we outlined for the year. We started highlighting that on the — as early as the third quarter call last year.
We’re seeing some ports around the globe continue to recover, but certainly not yet back to the 2019 levels when container ships were flowing without disruption. And then more recently, the ongoing Russia-Ukraine conflict, zero-COVID policy in China have added to the uncertainty around when we’re going to see recovery more globally.
The other thing I’ll mention, we’re closely watching disruptions, especially further inflation-related impacts on our consumers is we look to manage prices and that impacts how they shop and how they view our product lines. And then lastly, we’re tracking the developments in particular with the West Coast port authorities and the unions there and the negotiations as they look to hopefully reach an agreement here over the next several weeks. And I’ll just mention the teams are doing a great job contingency planning around that, looking at rerouting ships to the golf or to the East Coast when and if necessary there.
And then I’ll get into second part of your question was more around what we’re doing on our side to kind of control that. We began, again, as early as last fall to actively leverage the scale that we had, our relationships with our transportation partners and our shipping carriers to secure capacity, mitigate the impacts of the price increases that we were seeing. And as I’ve indicated, the supply chain costs specifically import cost increases, those were visible to us as early as last fall, and we began to actively work with the merchants, with the finance teams to set those prices accordingly.
Also to ensure we had the right in-stock levels in our key spring categories for this year, in particular for Spring proactively landed product early, we talked about that back in May. And we continue to leverage the investments that we’ve made in our coastal holding facility to hold that product upstream, allocate it timely across the country when we see the demand break, it helps us avoid stranding product at a local store level or if we see a selling season compress there.
And then the last thing I’ll mention that’s been a little more recent is just the fuel cost that we’re managing the volatility there like every major retailer, higher costs than we expected, not in our original outlook back in February, given the timing of when the Russia-Ukraine crisis broke and energy prices starting to rise.
But I’ll mention where we can. We’re working to offset that. We’re reducing overall usage, including trailer fill rates for shipments from DCs to stores and also leaning into intermodal in areas where we have nontime-sensitive shipments. But I’ll just reinforce to fuel overall as a relatively smaller part of our cost of goods sold.
So while volatile, we’re still confident that we can manage that throughout 2022 and still deliver on our gross margin commitments, which are slightly up for the full year.
Brian Nagel
So Brandon, is Lowe’s in stock? I mean, is it in stock? Are you not losing sales as a result of out of stock tied to the supply chain issues?
Brandon Sink
Yes. Brian, I would say we feel better about our in-stock levels now than we have since any point in the pandemic. We talked a lot in May around where we were from an overall inventory standpoint. Dollars up 10%. Inflation impacted that 13%. So actually planned down from a unit standpoint. So in a lot of areas, just given the environment and how we forecasted and where we predicted it, we had planned inventory levels to be down and we’re managing against that.
Now there are a few areas that I’ll highlight where we were actually, we’ve continued to invest, and we’ve been chasing healthier in-stocks. We continue to invest in Pro job lock quantities, Marvin highlighted that. And as we continue to fuel that business, also paint and appliances. There are a couple of areas where we had historically lower in-stock levels here over the last couple of years, where, as we stand now, we feel really good about the positions we’re in.
So overall balance. We feel like we have the right quantities in the right categories to drive the business over the back three quarters but also in the areas where we forecasted demand to be lighter that we feel like we’re managing that effectively and we’re replenishing the inventory in line with the demand that we’re seeing there.
Marvin Ellison
And Brian, the only thing I’ll add to that is I’m incredibly proud of this team and our planning and our collaboration between merchandising, supply chain, finance and technology. I mean, you know as well as I do that retailers in this current environment are really struggling with inventory. And the fact that the management team did such a detailed job of focusing on forecasting revenue by category based on not what had happened in the last two years, but what we really perceive the pullback would be by specific categories.
And because of that, to Brandon’s point, I mean, we literally have less units than we did last year and our in-stock position is better. I mean, we have the best in-stock position that we’ve had since the beginning of the pandemic. Now there are places we can get better, but we’re in a significantly better position than we’ve been in for the last couple of years, and we’re doing it while managing inventory in a very, very difficult environment to forecasting. So a lot of credit to the team here for doing some really detailed work in leveraging technology and cross-functional communication.
Brian Nagel
Sticking with this supply chain. So Brandon, the comment you made would suggest to me that there may be some aspects of supply chain improvement, but challenges very much were made. The question I have is from a competitive standpoint, a perception that through the pandemic, given how well Lowe’s has managed supply chain and the direction that may have opened up another market share opportunity as other competitors were not able to stay in stock. So the question I have is as others are starting maybe now to get better in stock, is that at all a headwind for Lowe’s? And then what — again, is this dynamic likely continues to play out? How should we think about price promotions within the space? And we recognize that home improvement has been a very benign price promotional environment historically.
Marvin Ellison
Well, Brian, I’ll take the first part of that. So I would say, as we discussed, this is a big marketplace. And so when you think about the entire home improvement available market, I mean it’s roughly $900 billion. So it’s obviously very fragmented. You take us and our largest chief competitor, and we’re going to make up less than $400 billion of that $900 billion addressable market.
So there’s a lot out there. Having said that, without a question, we think the efficiency of our supply chain and the execution and the inventory management of this team gave us the ability to take some share away from smaller regional players. They just didn’t have the capital. They didn’t have the carrier relationships. We’ve never got involved in the spot market. We came to bringing in product from overseas.
I mean we had long-standing long-term existing carrier contracts. And so we never got into the elevated pricing of the spot market, and that allowed us to manage our costs a lot more effectively, et cetera. But to your point, as things normalize, do we think we’re going to run the headwind? Look, that’s all about our ability to execute. We think the initiatives that we’ve implemented, we think our total home strategy irrespective of other retailers being better in stock or working through some of our supply chain challenges, we still think that we have the ability to compete.
We think it will grow our Pro business 2x, 3x the marketplace and that’s just because of the investments we’ve made. And we think as the DIY segment performs that we’re going to be really competitive based on all the investments that we’ve made.
So yes, will there be more aggressive competition? Sure. Now having said that, we have no expectation that we’re going to get into increased promotions. We worked really hard the last three years to get off of the halo pricing philosophy that Lowe’s was known for. We felt like that, that was an ineffective way to go to market in the home improvement space. And so we have now transitioned to an everyday competitive price philosophy across all of our businesses, including appliances. And we’re going to stay committed to that.
And the good news for home improvement is that historically, this is a really rational environment when it comes to pricing and promotions. So we have no intention on doing anything that’s going to elevate our promotional cadence or get into any kind of dramatic pricing changes because we think that’s not the healthy way to run our business.
Brian Nagel
Got it. And then with regard to inflation, we’re talking about supply chain, that’s clearly been a contributor to inflation, but there’s been others as loss commodity prices such as commodity prices. Lowe’s, again, managed it very, very well strategically, adjusting pricing where they need to be. So I guess the question I have is as you watch your consumers now, has there been any additional indications of consumers starting to back or push back some of the inflationary price increases? Have you seen any signals of underlying demand destruction as prices have remained — have to continue to climb and remain persistently high?
Brandon Sink
Yes. Brian, I’ll take that one. We’ve continued to manage the portfolio here over the last couple of years with cost increases from our suppliers, ensuring that those are justified, ensuring that we have the right tracking, the right clawback provisions, a path to recovery as those commodities and underlying dynamics change.
We’re managing the full portfolio in terms of how and where we believe we can pass on price increases. And then we have — we talked about the pricing capabilities that we have, a great monitoring mechanism to really see and understand what’s happening with volume, where we’re taking price, how customers are responding, elasticity, et cetera.
So we feel like we have the right analytics, the right mechanisms to understand that. To your broader question, at this point, we’ve not seen any underlying or concerning degradation there. I’ll point to — we talked in May about the strength of our big-ticket business, right? Combined Pro DIY, we saw tickets over $500, still performing comps in the mid-single digits there. So pleased with the performance.
Not really seeing any material movements. Most of the impact was in the lower transactional areas that we believe was still very much what we were cycling be a stimulus there. You mentioned also trade down in some semi-durable categories, I’ll mention areas like paint brushes and tools, we have seen some shift.
And when we look out at the good, better, best, continuum some shifts there from better to good. But the trade down for the most part that we’ve seen is quality and it’s not necessarily price. So again, still in the midst of understanding inflation and impact, but that’s what we’re seeing in the business currently.
Marvin Ellison
And Brian, the only thing I’ll add is, if we look at the business real time and we still are in the middle of the quarter, I mean lumber prices have declined a little bit more than what we had anticipated, and I think Brandon even more than we anticipated from our earnings call. So that’s something that we’re looking at. I think the number is roughly, what?
Brandon Sink
$200 million.
Marvin Ellison
$200 million, yes, that we’ve seen a decline in pricing. And so that is obviously going to have some impact to the top line because of that, but we’re managing through it. And the good news is that we have now a set of tools in place that give us the visibility to this. I remember not so long ago that we would have experienced this type of price reduction over this shorter period of time, it would have been very difficult for us to even have visibility to much less manage. But again, this is going to have some impact to our numbers. But again, we work to manage through it like all the other retailers out there.
Brian Nagel
Go ahead, Brandon.
Brandon Sink
Go ahead, Brian
Brian Nagel
I was going to ask you on lumber. So as you’ve seen prices moderate, is there an incremental unit demand as that happens?
Brandon Sink
Yes. So Brian, to Marvin’s point, we were making assumptions for the full year in the guide back in May. We were seeing aggregate lumber pricing north of $800. We expected that to effectively hold through July 4 and then sort of revert back to the historical norms and the period of time there would be July 4, the Labor Day. But what we actually saw was kind of post Memorial Day, that deceleration has happened much faster.
I think lumber prices have printed down going on seven, eight weeks in a row. So that’s effectively the capture that Marvin is talking about that we didn’t necessarily anticipate will certainly impact Q2 to a degree. You mentioned units. I think good news story is we are seeing a bit of a bump in units. We’re seeing the customer respond both on the Pro and DIY side. So that’s good news, but still not to the degree that it would fully offset. I think it’s somewhere north of 30% is the drop in prices that we’ve seen just from mid-May to where we sit today.
Brian Nagel
Got it. I know our time is going to start to wind down quickly, but I do want to touch on e-commerce. Again, it’s been a big effort on the part of Lowe’s to really enhance the e-commerce capabilities. So the question I have is kind of where is Lowe’s now today with e-commerce and how is that allowing the company to connect even better with customers, both DIY and Pro? And then any additional investments — as we think about the continued e-commerce build-out here, any additional investments needed on part of Lowe’s?
Marvin Ellison
Well, look, I feel great about where we are from an e-commerce standpoint. And look, the simple statement is retailers can no longer dictate the customers how they should shop. Instead, it’s our job to facilitate the customers prefer shopping choice, whether that’s in-store, online, on store, buy online, pick up in store, curbside like us wherever the customer wants to shop, we want to make sure that we’re there for them because the customers are demanding a seamless integrated omnichannel shopping experience in our stores, on Lowes.com and our mobile app.
So it’s important to note that many of the projects that our customers are buying, they research in online even before they come in the store. And we’ve made quite a few investments over the past few years that has allowed us to double our online sales and growing it from 5% online penetration in 2019 to we’re now at 10%. So we’ve made a lot of progress.
And look, there are other things that we’re going to be investing in, but we feel like that we’ve made the right level of investment and we have a capital allocation strategy laid out so that we can continue to make these investments in online without adding incremental capital dollars.
We think that the things that we’re doing with visibility, functionality, search, ease of navigation is really important. And we’re also going to continue to improve the UX perspective on our online so that we can improve engagement and conversion. Specifically, things like visualization tools in pain and blinds, and we’re also looking to expand things like product descriptions and make sure that we’re just giving the customer confidence in their purchase decisions.
Look, we feel great about what we’re doing right now on online, and we have a long list of investments that we’re going to make that we think will continue to put us in a best-in-class position from a primitive perspective. If you could go back two or three years, we were just really scratching the surface of what we could be. We think we’re now in a much, much better position and only going to get better.
Brian Nagel
All right. And one final question I want to ask just with respect to the real estate footprint of Lowe’s. So look, a lot of talk through the pandemic coming out of the pandemic that there has been this shift in the population to maybe more suburban, if not rural areas. We’ll see if this plays out. How to the extent that is happening? How does that play into the real estate footprint of Lowe’s and potentially benefit the company over time?
Brandon Sink
Brian, I’ll start by saying when we look at the overall market, U.S. home improvement market as it relates to stores, relatively mature, store footprint for big box home improvement pretty saturated. But with that being said, we’re always going to look at opportunities, look at strategies, look at migration patterns, markets, where we can be strategic when adding new stores and where we see profitability opportunities. But I would say it’s not going to be a meaningful part of our growth strategy going forward.
When we look at the next three years, I think our most meaningful opportunity is going to be better optimized. The footprint that we have improved the current space productivity. And as we think about sales per store, sales per square foot, delivering on our key growth drivers that we’ve talked a lot about today across the total home strategy. We’ve talked about Pro online, expanding our private brand portfolio and improving our localization strategy.
So that’s really where we see the opportunity, and we look forward to giving you guys a more robust update of the drivers of our business there in the next three years in December at our analyst and investor conference.
Brian Nagel
Well, thank you, Marvin, Brandon, Kate, thank you very much for your time. Congratulations on the continued success at Lowe’s and the repositioning efforts and such. So thank you.
Brandon Sink
Thank you very much, Brian.
Marvin Ellison
Thank you. Welcome.
Kate Pearlman
Good bye.
Be the first to comment