Q4 2024 Earnings Summary
- Lowe's resilient Pro business and strategic investments position the company for outperformance, as the Pro segment remains robust and is expected to drive significant growth when the market recovers.
- The company's market-leading supply chain infrastructure provides a competitive advantage, enabling next-day and two-day delivery of major appliances in virtually every ZIP code, a capability that is difficult to replicate.
- Strong focus on productivity and profitability through Perpetual Productivity Improvement (PPI) initiatives, which are expected to offset cost pressures and maintain flat gross margins in 2024.
- Lowe's expects DIY demand to remain under pressure throughout 2024 due to macroeconomic factors like inflation, higher interest rates, and low housing turnover, indicating continued pressure on sales growth.
- There is uncertainty around the timing of improvement in macroeconomic conditions, and even when conditions improve, there could be a lag before increased consumer spending on home improvement materializes, which could delay recovery in Lowe's business.
- Operating margins are sensitive to sales declines; for every 1% decline in comparable sales below guidance, operating margins are expected to contract by approximately 15 basis points, highlighting potential profitability risks if sales underperform.
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Margin Sensitivity
Q: How sensitive are margins to changes in comp sales?
A: Brandon explained they've established a flow-through rule: for every 1% increase in comp sales above their guidance, they expect about 10 basis points of margin expansion, and for every 1% decrease below guidance, about 15 basis points of margin contraction. -
Operating Margin Guidance
Q: Can you bridge the operating margin from 13.3% in '23 to 12.6%-12.7% in '24?
A: Brandon highlighted two main factors impacting the operating margin: cycling of legal settlements and deleverage on lower sales, each contributing about half of the 65 basis points step back at the midpoint. Incentive compensation does not create a headwind in bridging '23 to '24. -
Comp Sales Outlook
Q: What's driving the comp improvement in the second half of '24?
A: Brandon stated that the comp improvement is due to cycling easier comparisons from the DIY weakness that intensified in Q3 of '23, not from an improving macro environment. They expect macro pressures to persist throughout '24. -
Expense Management Impact
Q: Will expense management affect future sales or require more SG&A investment?
A: Marvin reassured that service levels remain high, evidenced by 200 basis points improvements in customer service for both Pro and DIY. Expense reductions come from productivity initiatives, not cutting payroll, allowing investment in customer-facing activities without hindering service. -
Cost Optimization & Ticket
Q: Where do cost optimizations stand, and how will they affect ticket vs. traffic in '24?
A: Brandon noted they're pleased with expense management and have a robust roadmap of PPI initiatives. In '24, PPI is expected to offset over $400 million of wage, inflationary, and strategic investment pressures. They expect average ticket to hold up, with a pullback in transactions; Pro growth positively impacts average ticket, while DIY big-ticket pressure and appliance ASP declines are drags. -
Pro vs. DIY Mix
Q: Can you discuss the Pro vs. DIY mix today?
A: Marvin confirmed the mix remains at 25% Pro and 75% DIY. They feel good about the resilience of Pro customers, who are small to medium-sized business owners confident in their backlogs. DIY weakness is viewed as a macro issue, not an execution issue. -
Demand Environment
Q: Is the demand environment improving sooner than expected?
A: Marvin and Brandon indicated their base case assumes no change in macro conditions compared to recent quarters. While hopeful for improvement, they expect DIY pressure to persist throughout '24. Any comp improvement is due to easier comparisons, not optimistic macro views. -
Weather Impact
Q: Was weather a net headwind in Q4?
A: Brandon explained that extreme winter weather in January impacted sales by about 200 basis points, especially affecting the Pro business. Additionally, cycling two years of hurricane recovery had about a 150 basis points comp impact in Q4, all anticipated in their guidance. -
Appliance Performance
Q: How are you performing in appliances relative to the market?
A: Bill stated they saw share growth in appliances for the year. Units grew across all major categories, but average selling prices faced pressure. Consumers shifted from multi-unit to single-unit purchases and are polarized between value products and high-end innovations. -
Big Ticket Pressure
Q: Can you elaborate on big-ticket pressure in DIY and how it compares to pre-pandemic mix?
A: Marvin noted that consumers are healthy but spending more on experiences rather than big-ticket home items. They are working through pandemic-related purchases, and the company is meeting customers with varied product offerings at different price points. -
Store Strategy
Q: Would you consider being a net opener of stores in the future?
A: Marvin said their focus is on space productivity in existing stores rather than opening new ones. They see better returns investing in current infrastructure but will open stores in strategic locations where appropriate. Pleased with rural market performance, they plan to expand these offerings to more locations.