Lowe's Companies, Inc. (NYSE:LOW) Goldman Sachs 31st Annual Global Retailing Conference September 5, 2024 9:35 AM ET

Company Participants

Marvin Ellison - Chief Executive Officer

Conference Call Participants

Katharine McShane - Managing Director, Goldman Sachs

Katharine McShane

Good morning, everyone. It's my pleasure to introduce Marvin Ellison, Chairman, President and Chief Executive Officer of Lowe's. Marvin has been in the role since 2018, and obviously has a lot of leadership and operational experience in the retail and home improvement industry. We're really pleased to have you today. Thanks for joining us.

Marvin Ellison

It's a pleasure to be here.

Question-and-Answer Session

Operator

Q - Katharine McShane

We are probably going to spend most of our time asking questions on the housing market and macro, which should surprise you. So I wondered if we could -- we could start there. It's obviously still an environment, where housing turnover is still somewhat muted for a lack of a better word. And we wondered if you could maybe walk through what you're seeing in the environment when your expectation is when things can unlock and how we should go from here?

Marvin Ellison

Great. Well, I think the best way to describe the market is still cautious. Consumers overall still remain cautious based on inflationary concerns and elevated interest rates. For us, we looked at the back half of 2023, and we projected rather accurately that 2024 would look a lot like the back half of 2023 relative to consumer demand and that's really what we're seeing.

If you think about our world for a second, over 70% of our revenue is driven from the DIY customer. And so what's happening with this cautious view of the consumer based on elevated interest rates and inflation is that this DIY discretionary big ticket has felt a lot of pressure, and that's disproportionately impacted our business.

For us, we're spending a lot of time ensuring that we are investing in the business and making the right strategic initiatives and putting them in place, so when this market turns, we're going to be in a really good position for that. But as we look at it right now, the consumer remains cautious. There is pent-up demand, but that demand has yet to materialize based on interest rates and inflation.

Katharine McShane

And so one thing that we've been thinking about is there's -- the housing market is one piece of it. And then there's just the health of the consumer. And so we wondered if you could maybe drill down on the health of the consumer a little bit because -- it's been 13 quarters of the negative transaction growth. Like you said, that probably indicates there's some pent-up demand. But what are you seeing with regards to just the consumer? And if you think it's maybe gotten a little bit of harder for that consumer to…?

Marvin Ellison

Yes. So I think the best way to answer that question is to look at the historic demand drivers of our business. And so what historically has driven demand for Lowe's would be home price appreciation, disposable personal income and the age of housing stock. So let's just focus on those three.

When we look at those three demand drivers they all point in a positive direction. And so for us, the health of the consumer is really positive. The challenge is in the near term, the elevated interest rate and the fear of the instability of inflation is driving the consumer just to be on the sidelines.

The great thing about home improvement projects, especially those large big-ticket, kitchen remodel, whole house flooring jobs, replacing your routes, et cetera, those projects where they get canceled, they get delayed. So for us, on one hand, we feel great about the health of the consumer. But on the other hand, we understand that the consumer remains on the sidelines, very cautious because of the near-term pressures they're feeling.

So as we think about that, we have two objectives. One objective is to run the business effectively in the short run while we deal with the near term macro challenges, and we've done that really well. If you look at how well we manage operating expenses, our return on invested capital and just overall profitability. And so we really focus on running the business well with a lot of macro pressure in housing.

But we feel incredibly optimistic about the medium to long-term prospects for home improvement specifically for Lowe's because when this marketplace inflects, and we are not aim to give you the date of the We feel like those demand drivers that I spoke of are going to really pay off for us. And so we're really working hard to position ourselves to be in a market share gaining opportunity when the inflection happens in the macro. And so on one hand, the near term remains challenging because of the cautious nature of the consumer. But the demand drivers and the health of the consumer is actually relatively good.

Katharine McShane

And do you have an estimate as to where you think mortgage rates have to go in order to see more activity in housing?

Marvin Ellison

We don't. It's -- as you know, this is probably one of the most unique environments that we've ever seen because I don't know that there's been a period of time where we we've seen interest rates, especially mortgage rates, being at the levels they were for an extended period of time of historic low. So we don't have the specific mortgage rate number, interest rate number, nor do we know when that rate starts to drop, the timing it will take for that overall activity to flow down on to create demand and home improvement.

But what we do know is that we got great balance sheet. We have a very consistent capital allocation process, and we are making a lot of investments to be prepared when that happens. We will be in a great position as a business, and we'll be in a great market share gaining position whenever rates decline to the point where consumers get off the sidelines.

Now, the reality is that a large percent of the American homeowners are sitting on 30-year fixed rate at 4% or lower. And so we don't know what rate activity needs to happen to get that customer off the sideline. But what we do know that we're going to be ready to take advantage of that when that timing occurs.

Katharine McShane

And if mortgage rates don't go back all the way to 4% or under, there is such a long time period before the pandemic where interest rates were so low and mortgage rates were so low. Do you think you can get back to a regular algo if the mortgage rates don't go back quite as low as 3%, 4%?

Marvin Ellison

It's a great question. And I don't know that I can give you a precise answer other than to say, I do believe there will be a new normal when it comes to mortgage rates. And I think it will be a new normal when it comes to expectations of consumers and homeowners or prospective homeowners to get off the sidelines to really engage.

There are a couple of other factors in addition to those demand drivers I talked about that we look at. We look at things like the millennial household formation trends, which are significantly higher than any of us would have predicted a decade ago. We look at the fact that there are significantly more people that will be permanently working from home than we ever imagined even five years ago.

And also, as baby boomers age, they have more of a propensity to stay in their existing home and modify it to fit their changing mobility. And so all of those things also will benefit us because it drives wear and tear in the home, and it drives the need for home modifications, meaning structural changes within the home, so although I can't answer your question precisely. What I can say is all of those factors that I just laid out, including those demand drivers, just give us a lot of confidence in the medium to long term.

For us, this is looking at a dual screen. On the first screen is the near term remains challenging because of a cautious consumer based on interest rates and inflation. So we have to run the business really well, but we also have to have a very aggressive investment thesis, so that we can prepare our business model for the in collection.

And the second side of the screen is be prepared for the inflection. We can't time it. We can't call to date. But what we do know is that we have the ability with our Total Home strategy to prepare ourselves to be in a great position when the market starts to create demand that we can be in a position to take outsized share and really, we're doing those things in parallel.

Katharine McShane

If I can maybe just ask a question about the Pro and then we can get into some of the company initiatives that you've put in place. It does seem like your small to midsized Pro customer, which is your core customer sounds pretty resilient. Just based on the survey data you walked through on the quarterly call, why do you think that is? Why do you think their backlogs are holding in despite what we just kind of walked through with the consumer?

Marvin Ellison

Well, let me first answer that question by going back in time a bit. So when I joined Lowe's in 2018, we didn't really have a defined strategy to serve these customers. And so the first thing that we did is what I call, we created a foundation to serve that customer. And the foundation are very basic things, things like making sure that we had adequate staffing in our 1,700-plus stores.

Things like making sure that we had loading assistance when a customer showed up and they bought a product that they didn't have to load it themselves, making sure that we had adequate levels of inventory on hand. Those things are very basic, but if you don't have those basic things, nothing else works. And so then after we achieved that foundation, we started to go one level up and then step was, let's put in a loyalty program, which we launched a couple of years ago and to gain some level of repeat business and stickiness.

And then the next level was let's put a world-class CRM system in so we can identify the customer. And then we have to bring in the brands because the previous management team didn't really understand the pro customer. And so they removed a lot of the national brands, and they replaced them with private brands.

The problem with that was pros are incredibly brand loyal. And when those brands left and in some cases, one across the street to our competitors sold that to customers. And so our merchant team worked incredibly hard for the last 5-plus years to bring those brands back. And so brands like client tools, which kind of gives you credibility with that electrician and at HVAC Pro.

And so after we're able to do those things, then it was all about can we get fulfillment? Can we now get product to the customer to the job site efficiently. And so all of these foundational initiatives and then we layered on top of those started to give the Pros confidence that you were in business to serve them.

And now to answer your question. We delivered mid-single-digit positive comps with the small to medium Pro, which was a surprise to some, but not to us, because if you think about the fact that the U.S. today has the oldest housing stock on record over 41 years old on average, there's a lot of wear and tear and a lot of maintenance required these houses require roof replacements and roof repairs. These houses require replacements of water heaters, major appliances and other things that just happened in our older homes. And who is creating the actual project in able to get that -- those things done or the small to medium Pro.

And so the age of the housing stock is driving repair demand that is creating resiliency within that customer. But also I think strategically, we came to the realization that, that customer was not being served well in the marketplace. There's a lot of initiatives out there to serve the larger, more industrial pro, but there were not a lot of companies out there saying, "Let's take care of this general contractor."

And so we were very, very specific and very purposeful to focus on that small and medium sized Pro because we felt like, a, at Pro not being served well in the marketplace; and b, we felt we had the capabilities based on our 1,700-plus stores and all the things I'll walk through to give these customers something that they maybe we're not receiving in the marketplace, and we feel really good about the strategy, and we feel good about the ongoing process.

And for us, we look at this in a very simplistic way. We always, again, for the last five years, struggled with the specific customer. And so the question we ask ourselves is a very simple one. If we can maintain a growth with this Pro customer, and then the DIY customer comes back when the macro improves, that really bodes well for Lowe's as an overall business. Because now we're dealing with all this DIY pressure because, again, the majority of our business is driven by that customer, but we really believe strongly that the DIY pressure we are feeling in the marketplace is driven by the macro.

So when the macro in FLEX, we have every intention on maintaining growth with the Pro, as we've said consistently. And if we can do that and concurrently get the DIY business back across the macro starts to FLEX, we feel like that's a good investment thesis for our company.

Katharine McShane

And with all the work that you've done around the Pro since you've gotten to Lowe's in 2018, the small and medium-sized Pro, I feel like has been your bread and butter where you focused. Now that you feel like you're at a place where you've invested in behind the business, can you look to increase that TAM go to a larger Pro? Or is it still going to be concentrated on the small, midsize?

Marvin Ellison

No, it's a very fair question. And what I will say is that we will always be opportunistic to identify investment opportunities that will grow our business. But we've been very, very focused. What I've said to the team consistently is you have to earn your right to migrate to a larger customer. And what we were not going to do was take a totally broken strategy and say, "We're going to just immediately leap ahead and try to serve a larger, more complex customer."

I look at it illustrated like in building blocks. Again, you start with this foundation. And the foundation to me is the small to medium customer. And once you've created the efficiencies for that customer then you can start -- you can build to the next layer in the next layer.

And so the short answer is we absolutely will look at broader market opportunities with the Pro, but we will first make sure that we have a good service offering and we have a really good market share presence what the current customer will focused on, and we think that there remains a lot of opportunity to grow the small to medium Pro customer.

Katharine McShane

If we could maybe talk a little bit about the supply chain because you've made a lot of investments also in the supply chain to improve productivity and drive profitability. Could you maybe talk to us about what inning you are in, in terms of just assessing the overall supply chain and what needs to be done? And what some of the takeaways have been just with regarding to what you've been able to accomplish so far?

Marvin Ellison

Yes. So I would say, let's start at what Lowe's used to be and what we inherited 6 years ago. Lowe's created the traditional hub-and-spoke supply chain, a supply chain with regional distribution centers that were really stocking DCs for domestic product. In other words, we ship it to the DC. We put it in the racking and we hold it and they replenish stores based on demand. That is a very, very traditional supply chain, and that traditional structure does not benefit inventory turns and it does not serve a customer in an omni-channel environment.

And so in other words, everything that we've built at Lowe's was designed for one purpose, to replenish the stores, but there was no vision around sending product to consumers' homes or sending product to job sites for professional customers. And so we had to take a step back and say, "Okay, everything that every facility that we have in our supply chain has to be multifaceted, has have the ability to replenish stores, has to have the ability to ship directly to the customer's home and also to a job site for Pro, if needed."

And so that transformation started roughly five years ago. In addition to that, we were the largest appliance retailer, but we were doing it, I call it the hard way. We were housing inventory in the back of our stores in the stock room, a housing inventory and storage containers behind our stores. And literally, if you purchase an appliance from our store in Queens, and you are living on Long Island, traditionally, the only way that the store received credit for that sale is that item would ship from Queens along Island, even though there was a long Island store that will potion house, because of the nature of how our supply chain was built, very primitive and very store centric.

And so we built out our market delivery network, specifically for appliances that we think is best in class, and it has enabled us to have the ability to deliver appliances next day in almost every zip code in the country, and that's something that is unmatched in the country.

And now we're looking at this market delivery model, and we're saying now that we've kind of conquered the appliance delivery network, what's next? And so now we're looking at other big and bulky items, and we're saying, "Can we now inject those big bulky items into this market delivery platform?" And so we'll be speaking a lot more about that at our December Analyst and Investor Conference because we think there's a world of possibilities on how we leverage this market delivery.

Relative to our regional distribution centers, as I said earlier, we're now in a position that we're shipping product directly to job site and homes, if needed. But more importantly, we've turned destocking DCs into cross dots, so that the inventory doesn't just go from the trailer to the shelves, it flows directly through and it continues to move, and that has been a net benefit to our inventory turnover and that's something we'll continue to get better at.

And equally as important, we've leveraged our gig network to really create what we think is one of the best brick-and-mortar omni-channel delivery models in retail where you can get same day -- in some cases, the same hour deliveries to your home, ship from 1,750-plus stores that we have, but it is still ongoing. And so if I would say what -- I would say we're probably -- we're probably in the mid-innings, early to mid-innings, because the evolution around supply chain and retail is never going to finish. It's going to continue to evolve.

We're going to continue to learn. We're going to continue to benchmark. But we think that we've made tremendous progress on a very primitive, very traditional hub-and-spoke model to a more modern omni-channel model in addition to the ability to leverage our flatbed distribution centers, which were only designed to ship big bulky product directly to the stores, and we're converting that model to also deliver to the job site, so again, just creating agility, making these facilities multifaceted and thinking in terms of omni-channel versus traditional retail.

Katharine McShane

If we could just change gears to your PPI initiatives, which I know has been also a very important focus for the company. And I might be front-running the December meeting a little bit by asking this, but I thought I'd try. On the second quarter call, you said you're currently piloting the next round of innovations on the PPI road map. And so if you can, is there anything you can talk to us about some of the things we can expect from the second phase?

Marvin Ellison

What I will say is that we are incredibly pleased with the discipline that we put in place in the company. And as I said on the second quarter earnings call, initially when we started thinking about perpetual productivity improvement initiatives, it was housed in store operations, in our stores, in our payroll model, in our payroll allocation and how we drive efficiency in our stores.

And we had so much success there, we expanded it to all different functions, supply chain, merchandising, HR, information technology, online, et cetera. And so now what I will tell you is one of the larger initiatives that we're working on that we'll share is what we're calling our front-end transformation. Taking the same approach, we were very traditional. We had -- the majority of our stores didn't even have self-checkout. And as we started to look at self Checkout, we wanted to be sure we created an environment that was uniquely different than the rest of the retail world.

And what was happening in retail is that every retailer was purchasing the same type of self-checkout unit even though our business models are dramatically different. In other words, in the stores where we had self-checkout, we had purchased those units that were designed for grocery. And I don't know about you as a big difference between grocery and home improvement when it comes to the size of product, the weight of it and ability to scan it, et cetera, et cetera.

And so we took a step back and said, okay, we're going to do self checkout. If we're going to transform the front end of our store, we need to think about this from an omnichannel perspective, not from a traditional retail. And so from this front-end transformation, we've done a couple of things. We've been able to create point-of-sale units that can be converted to selfcheckout to staff with a cashier. We've been able to free up space for merchandising, so we can be consistent in planogram on the front, and we've been able to create space for omnichannel and boltless fulfillment that didn't exist.

And so this has created an incredible amount of productivity, labor productivity, space productivity and expense productivity. And so we're in the process of continuing to retrofit all of our stores in the chain with this front-end transformation, and that's going to be a major unlike in all the areas that I just outlined. We have other initiatives. Again, we'll talk about in December that we're excited about.

But what's interesting is Brandon Sync, the CFO and I have a list of these perpetual productivity improvement initiatives by function over a multiyear period. And all of these initiatives have been tested, and we have basic expense takeout and productivity target associated with it. So we can look multiyear in understanding the rollout schedule to know when these initiatives will be live and we have a good idea on the estimated productivity improvement that we will see based on the implementation of it, and we're excited about what the future is.

Katharine McShane

Okay. One area of business that more specifically is on the hardened broadline side of retail is retail media networks. And you mentioned on your Q2 call, your marketing team is rebranding your retail media network program to a simple platform where you help your brand partners meet a wide range of marketing objectives. Could you maybe talk a little bit about the goal of the rebrand and what it entails? And just as the program continues to grow, what is the expectation for revenue and for margins?

Marvin Ellison

Sure. We wanted to simplify not only the name, but also simplify and articulately better to our supplier partners, the return and the benefits they receive from participating in this retail media network. This is obviously not new in retail. There are other large retailers who've done this really well.

For us, it's really more about how do we leverage the scope and reach of Lowe's as a brand to consumers to give our supplier partners a greater opportunity to speak to more consumers. How do we leverage the data that we have in the marketplace to give them more market share opportunities to grow in a way that they can elevate their brand.

And what I will tell you is the retail -- the supplier partners who participated with us, they are extremely pleased, and we use the data and the return that they've gained for their investment in our media network as a benchmark and as a presentation to other brands to say, this is what we were able to do for Brand X. How we're able to grow their business, the number of views, the marketplace presence.

And so for us, we're very excited about it because we are specifically home improvement. And so if you're interested in getting your brand in front of consumers or homeowners, consumers who have good personal disposable income, equity in their home than we are a great opportunity to do that. And so the rebrand for us is really more about simplicity. And it's all about making sure that we can leverage our digital platform, our media platform and allow partners to come in and kind of ride our to be able to reach and have access to the same audience that we are very pleased and fortunate to have access to.

Katharine McShane

Okay. Thank you for that. We're asking five questions for -- to each company who's attended the fireside chat sessions at the conference. And so -- just kind of looking for quick answers to these questions in a survey kind of forum. So first, we've talked about the consumer. But just if we were to compare what you expect for the second half of '24 versus what you've already seen in the first half, do you expect things to be the same, better or worse?

Marvin Ellison

We expect the second half to be consistent with our guidance and updated guidance we gave in our second quarter call, we still believe that the consumer is going to remain cautious, specifically the DIY consumer on big-ticket discretionary. They're going to remain cautious based on elevated interest rates and inflation concerns, but we believe that we'll be able to operate well from a profitability and from an expense management standpoint, in spite of the headwind that we may feel because of the DIY discretionary pullback.

Katharine McShane

And then that goes into our next question just on the topic of cost pressures, and this is more about '25 than maybe the second half. But we've seen some tailwinds, mid-freights and maybe some dissipating costs. But for '25, how is Lowe's thinking about the cost of materials, labor, maybe even tariffs when it comes to impacting your cost basis?

Marvin Ellison

We don't see any material difference in 2025 versus what we're experiencing now. Obviously, with the threat of additional tariffs, we're watching that very closely. The good news for us is that we are in a much better position as a company with better systems, dedicated teams to focus on cost, on tariffs and how those costs impact retail. And so even if there are additional tariffs in 2025, we feel like we're in a much better operational and systems position to manage that, but we don't see any material difference between '25 and '24 from a cost of expense perspective.

Katharine McShane

Okay. Third question is just about consumer behavior, again, back to the consumer. We've heard from a lot of retailers that consumers are looking for value. Is that something that you've seen at Lowe's? And do you think it's more of a testament to the macro that we're in? Or more of a secular trend with how consumers shop?

Marvin Ellison

Look, we think the consumer demand relative to promotions, relative to value, we think is very consistent with pre-pandemic demand and the how your consumer approach the business. So for us, we understand that this whole big-ticket DIY discretionary pressure is going to persist as long as we have elevated interest rates and inflation concerns, having said that, we also believe that our Pro comer is going to continue to be relatively engaged based on the fact that the houses or aging repair work will be required.

And as you mentioned earlier, roughly 75% of our Pros in our survey basically had to us that they feel like that there will be demand for their business in the second half of the year. So we don't see any material difference in our consumer relative to what they expected us from a pricing promotional standpoint. And luckily for us, we operate in a pretty rational retail industry when it comes to promotion and it comes to being overly aggressive on price.

Katharine McShane

Our fourth question is just more or less points of distribution in the U.S. next year? Will we see more or less from Lowe's?

Marvin Ellison

I think for us, our number one focus is how do we gain more productivity from our existing stores. We're in a unique position where we have over 1,700 and, call it, 1,750 stores, and we have lots of productivity opportunities to get more out of stores. And so there is a huge initiative on gaining more space productivity, and that's something that is our first priority, getting more from the space that we have. In addition to that, we're going to be opportunistic on new store openings.

As we see what we describe as real estate voids, places where there's available real estate, and we don't have the store density we want or as we see population shift, and we saw a lot of that as we all well know, during the pandemic. We're very conscious of those opportunities, and we're going to be opportunistic, and we will build stores where we think we can hit our hurdle rate, and we can serve our customers.

But again, our outsized opportunity is getting more productivity from the existing space we have, and we have a long list of initiatives like rural, like pet, like apparel, like being more localized with urban in some of these locations. So we're putting a lot of work in these areas, and we think that we'll get a really good return. But again, we'll be opportunistic on new stores.

Katharine McShane

And then the last question, we touched upon it a little bit the promotionality. The home improvement is pretty rational. It's not highly promotional. But -- just if you were to compare the second half of this year versus last year, how would you view the overall promotional encounter?

Marvin Ellison

We don't anticipate any material difference in the second half of the year from last year, and that includes the holiday season. We have a very good plan. We have a great trim-a-tree offering that we think the customers are going to respond well to. We feel really good about our partnerships with our supply base. We feel great about our relationship with the NFL. That's been a great initiative to help us to gain more of a presence with our millennial customers. But from a promotional standpoint, we think we'll be very consistent with last year.

Katharine McShane

Thank you for joining us today. Appreciate the time.