LOW
#Thanks, Rick, and good morning, everyone
Sales for the second quarter increased 6.8% to $19.5 billion, supported by total customer transaction growth of 3.1% and average total ticket growth of 3.5% to $71.40. RONA sales were approximately $1 billion or 3% of sales growth
As a result of the calendar shift from the 53rd week in fiscal 2016, this year’s second quarter included one less week of spring and one more week of summer than last year
While this had no impact on comp sales, it did decrease second quarter total sales growth by approximately $285 million or 1.7%
Comp sales were 4.5% for the quarter, driven by an average ticket increase of 3.6%, and improved transaction growth of 0.9%
RONA was included in the comp calculation for the first time in the month of July
Looking at the monthly comp trends, comps grew 0.6% in May, 5.3% in June and 7.9% in July
As Robert and Rick indicated, we were pleased with our improved top line performance versus Q1 and the acceleration of our comp growth through the quarter as we built momentum with successful holiday events and enhanced messaging, driving traffic improvement in both June and July
During the quarter, we continued to capitalize on market opportunity, as we opened four new stores in the U.S
which drove 80 basis points of growth
Gross margin for the second quarter was 34.21% to sales, a decrease of 23 basis points from the second quarter of last year
The decline was primarily the result of promotional activity and excessive benefits from value improvement and 10 basis points of inflation
SG&A for the quarter was 20.16% of sales which leveraged 101 basis points
In last year’s second quarter, we recorded an $84 million loss on the settlement of a foreign currency hedge entered into in advance of the RONA acquisition
This provided 46 basis points of leverage this year
An additional 49 basis points of leverage is driven by $96 million gain from the sale of our interest in Australian joint venture
Also, we drove 20 basis points of favorable leverage, primarily as a result of our new store leadership model
Somewhat offsetting these items was 10 basis points of deleverage in advertising, as a result of our efforts to amplify the consumer messaging
Depreciation and amortization for the quarter was $357 million, which leveraged 20 basis points
Operating income increased 98 basis points to 12.2% of sales
The comparison to the prior year loss in the foreign currency hedge possibly impacted operating income by 46 basis points and the gain from the sale of our interest in Australian joint venture also positively impacted operating income by 49 basis points
Interest expense for the quarter was $159 million, which leveraged 10 basis points
Effective tax rate for the quarter was 36.2% compared to 38.1% in the second quarter of fiscal 2016. The year-over-year change in our effective tax rate is primarily the result of the gains in the sale of our interest in the Australian joint venture
The gain represents the proceeds in excess of book value but did not result in tax expense in the quarter due to a reduction of previously established deferred tax valuation allowances
Earnings per share on a GAAP basis was 1.68% for the quarter
The gain from the sale of our interest in Australian joint venture increased EPS by approximately $0.11 for the quarter
Adjusted earnings per share was a $1.57, a 14.6% increase over last year’s adjusted earnings per share of $1.37. Turning to the balance sheet
Cash and cash equivalents at the end of the quarter was $1.7 billion
Inventory at $11.4 billion decreased $803 million or 7.6% versus the second quarter of last year, was primarily driven by appliances to support sales growth as well as timing associated with seasonal builds
Inventory turnover was four times, an increase of 11 basis points from the second quarter of last year
Asset turnover decreased 8 basis points to 1.86. Accounts payable of $8.6 billion represented a $953 million increase or 12.4% over the second quarter of last year due to the timing of purchases and terms improvement
At the end of the second quarter, lease adjusted debt to EBITDAR was 2.21 times
Return on invested capital was 17%
The net impact of the gain from the sale of our interest in Australian joint venture and prior year charges negatively impacted ROIC by 153 basis points
Now looking at the statement of cash flows
We generated strong operating and free cash flow in the quarter of $5.1 billion and $4.6 billion, respectively
As we allocate capital, we are focused on investments that align with our strategic priorities to expand our home improvement reach, develop capabilities to anticipate and support customer needs, and generate profitable growth and substantial returns
Our recent acquisition of Maintenance Supply Headquarters demonstrates how we’ve made strategic investments to further grow our pro business by expanding our ability to serve the multifamily housing industry
The transaction is expected to be slightly accretive to earnings this year
After strategic investments, we look to return excess cash to shareholders
In the quarter, we paid $299 million in dividends and in May we entered into a $500 million accelerated share repurchase agreement, which settled in the quarter for approximately 6.4 million shares
We also repurchased approximately 9.4 million shares for $750 million through the open market
In total, we repurchased $1.2 billion of stock in the quarter; we have approximately $2.6 billion remaining under share repurchase authorization
Looking ahead, I’d like to address several of the items detailed in Lowe’s business outlook
First, as we’ve discussed, we were pleased with the acceleration of our comp growth in the quarter, the result of our amplified marketing messages, compelling offers and integrated omni-channel experience; the incremental investments we’ve made in these areas are paying off and we’ll continue those investments into the second half of 2017. Second, as Robert and Rick shared, we’ve also made the decision to reinvest in incremental customer-facing hours in the second half
We believe this will allow us to more fully capitalize on our strong traffic trends and ensure we’re delivering an excellent customer experience
Finally, we’re seeing incremental pressure from our private label credit card program due to increase in program costs driven by higher losses, as well as casualty claims due to increased workers’ compensation costs
We still expect the total sales increase of approximately 5%, driven by a number of factors
First, we’re forecasting comp sales increase of approximately 3.5%; second, the RONA acquisition drives about 2% growth; also, we plan to open 25 stores, which represent approximately 1% sales growth
Keep in mind, total sales growth will be reduced by roughly 1.5% related to the comparison of 52 weeks in 2017 versus 53 weeks in 2016. However, on a GAAP basis, we are anticipating an operating margin increase of 80 to 100 basis points as a result of the investments and incremental expense pressures that are just described
Remember, a full year of RONA results versus roughly seven months last year will pressure operating margin by an estimated 15 to 20 basis points for 2017. Effective tax rate is expected to be 36.9% this year
For the year, on a GAAP basis, we are now expecting earnings per share of $4.20 to $4.30. Please refer to Page 13 and our supplemental reference slide for summary of adjustments, as you compare 2017 to 2016. We are forecasting cash flows from operations to be approximately $5.9 billion, capital expenditures of approximately $1.4 billion
This results in estimated free cash flow of approximately $4.5 billion for 2017. Our guidance does assume approximately $3.5 billion in share repurchases for 2017. Regina, we’re now ready for questions
Question-and-Answer Session
<UNK>, this is Marshall
We are maintaining our targets that we previously communicated back in December
Obviously, this year, won’t hit those targets
But, productivity is still alive and well and is actually helping us offset the incremental investments we are making this year
We know we’ve got more runway to go as we move forward
So, the investments we are making from staffing, again we’re leaning into it to take advantage of the increased traffic, leaning into optimized promotions and knowing that we’ve got opportunities to utilize price optimization tools, continuing value improvement efforts and continuing to evaluate promotional effectiveness
That’s a longer term
We’ve got other productivity majors for optimizing labor, leveraging fixed costs, reducing indirect spend, lower depreciation and enhancing profitability in Canada
Yes
As we updated in our guidance, we’re expecting about 10 more basis points of incremental gross margin pressure, driven by some of the actions that we’re taking, leaning into the amplified marketing that we’re doing that’s helping drive the traffic
So, that’s putting pressure on gross margin line for the year
So, it actually improved about 20 basis points of drag to about 30 basis points, to get above that from the year standpoint
While we leveraged retail operating hours, we did have the incremental advertising spend and a couple of other items I alluded to, some of the pressure we’ve seen in the back half with casualty claims, workers’ claims and costs there
We saw little bit of that in the second quarter
And also, it’s been competitive in marketplace from client standpoint, put pressure on delivering fleet
But, the bigger drivers are back half or leaning into the marketing message, reinvest in that and to try to capture more of the sales that we’re seeing coming through to offset some of those back half pressures
So, we came in with a plan, I think roughly 35 stores
We since have gone through and scrubbed and evaluated certain locations, and some of them we decided not to open at this time or will defer until later point in time
Matt, this is Marshall
At this point in time, we’re comfortable with reconfirming the guidance, as we lean into the back half of some of these incremental investments
Again, we have better line of sight to not only productivity efforts that we are driving this year, but in 2018 and 2019 above and beyond that and also looking at what we’re leveraging from 2017 into 2018 and 2019 from the capability builds, how we are leveraging pro, continuing to take a look at our office staffing complement, trying to match labor to track traffic that we’re seeing and fixed costs, indirect spend as mentioned earlier
So, again, at this time, we’re comfortable with these longer term targets and productivity at this point in time
If we have better line of sight to revise, we’ll provide that in upcoming call
Basically for the year, we spoke to 15 to 20 basis points impact on operating margin advantage for Canada
It’s roughly about 20 basis points for the quarter
And then, share repurchase, again, we’ll target $3.5 billion this year, in 2017.
