Lowe's Companies Inc (LOW)

Guidance Cut and Market Outlook
Q: What's behind the guidance cut?
A: Management adjusted guidance due to caution over the macro environment and DIY customer sentiment, especially around big-ticket discretionary spending. Elevated interest rates and inflation have DIY customers on the sidelines. They can't predict when the inflection will happen but felt it prudent to adjust guidance. -

Margin Outlook and Impacts
Q: Why is margin conversion weaker in H2?
A: The updated full-year operating margin outlook is consistent with their rule of thumb: 14 basis points of contraction for every point of comp decline. Second-half differences are due to timing of merchandise PPI initiatives and lapping over prior-year incentive compensation. Gross margins are expected to be roughly flat for the full year. -

Pro vs. DIY Performance
Q: Is Lowe's taking share in Pro and losing in DIY?
A: Pro business is growing, and they believe they're taking share. In DIY, sales are concentrated in big-ticket discretionary purchases, which were soft. They don't believe they're losing share in DIY; it's more due to macro dynamics affecting big-ticket projects. They feel confident in their assortment, pricing, and marketing. - -

Impact of Interest Rates on Demand
Q: At what rate level will demand improve?
A: It's difficult to know at what interest rate consumers will fully engage or how long demand will lag rate cuts. They see pent-up demand but note that consumer sentiment remains weak. They're hopeful that lower rates will relieve pressure and drive existing home sales activity, but many homeowners have mortgages at 4% or less, so even with decreases, reluctance may remain. -

Inventory Management
Q: How are you managing inventory amid cautious demand?
A: Inventory declined 3.3% year-over-year, outpacing the sales decline. They focus on Pro depth and brands, maintain strong in-stock levels, and manage seasonal inventory based on trends. They've converted distribution centers to be more flow-through, improving turns and overall inventory position. -

PPI Initiatives and Expense Management
Q: How much room is left in PPI initiatives?
A: They are proud of progress but only in the middle innings of the productivity journey, with much runway ahead. PPI initiatives are offsetting over $500 million in associate wages, inflationary pressures, and strategic investments. The roadmap covers all aspects of the company, and they continue to maintain discipline and drive efficiencies. -

Gross Margin Expectations
Q: Is gross margin expected to decrease in Q3?
A: Gross margin is expected to be up in both Q3 and Q4. For the year, they expect it to be roughly flat. PPI initiatives will continue to benefit, accelerating in Q3 and Q4, turning into 2025. Transportation costs continue to be favorable. -

Risk of Promotions Impacting Industry
Q: Do you see pricing and promotions as a risk?
A: Promotional activity remains stable. Seasonal offers are standard, and appliance promotions are back to normal. The ticket increase is due to strength in Pro business, not pricing. The pricing environment remains largely stable, and the industry continues to be disciplined and rational. -

Long-Term Margin Outlook
Q: Is 14.5% operating margin still achievable long term?
A: The framework still holds, though recent years have been worse than original expectations. They're not calling the turn but believe there's pent-up demand. When they return to mid-single-digit comp growth, they believe they can outpace that with initiatives. -

Rural Store Performance
Q: Any changes in rural store performance?
A: Rural markets are performing to expectations. They're piloting unique initiatives, including workwear, pet products, and ATV-related offerings. They feel good about serving all customers with same-day and next-day fulfillment. Rural is a significant part of their growth strategy. -

Potential Downside Risks Before Rate Relief
Q: Where could the business get weaker before rate relief?
A: Consumer sentiment, existing home sales, and housing affordability remain concerns. Consumers prefer services over goods, especially in home improvement. Improvement in macro trends should drive a sustained increase in DIY traffic, particularly in big-ticket categories. -

Clarification on Q3 Trends
Q: How are comps expected to trend in Q3?
A: Comps are expected to be relatively evenly split between Q3 and Q4. Unfavorable weather in Q2 pressured sales. Current trends are very much in line with guidance for Q3. They tend not to be precise with monthly trends but feel confident current trends reflect guidance. - -

Earnings Algorithm and Deleveraging
Q: If comps stay negative in '25, will deleverage accelerate?
A: The operating margin framework still holds. They expect their rule of thumb to hold: 14 basis points of contraction for every point of comp decline. It's not a natural output but reflects work done across the portfolio. -

Incentive Compensation Impacts
Q: Did changes in incentive comp impact results?
A: Incentive compensation is largely consistent. The only notable item was the $140 million in discretionary bonuses paid in Q4 last year. Nothing that would significantly change or need to be factored in. -