Lowe's Companies, Inc.
Q1 2020 Earnings Call Transcript

Published: 20 May 2020

[Operator:]

Good day everyone and welcome Lowe’s Companies first quarter 2020 earnings conference call. My name is Michelle and I will be your operator for today’s call. As a reminder, this conference is being recorded.I will now turn the call over to Kate Pearlman, Vice President of Investor Relations. Thank you, you may begin.

[Kate Pearlman:]

Thank you, and good morning everyone. Here with me today are Marvin Ellison, our President and Chief Executive Officer; Bill Boltz, our Executive Vice President - Merchandising; Joe McFarland, our Executive Vice President - Stores; and Dave Denton, our Executive Vice President and Chief Financial Officer.I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on Lowe’s investor relations website.During this call, we will be making comments that are forward-looking, including our expectations for fiscal 2020. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings.Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning’s press release and on our investor relations website.With that, I’ll turn the call over to Marvin.

[Marvin Ellison:]

Good morning everyone. This is an unprecedented time as we all navigate the ongoing global economic, social and health impacts of COVID-19. I’d like to start out by extending my best wishes for the health and safety to you and to your families.Like most retailers, we began the first quarter focused on meeting our internal financial plan while executing our Q1 retail strategy. However, due to the global health crisis caused by COVID-19, everything changed in late February. We immediately pivoted by establishing a cross-functional COVID-19 task force, opening a company-wide command center and reprioritizing our Q1 objectives.As a company, our focus shifted from running a business to achieve our financial plan to functioning as an essential retailer operating in a pandemic with three key priorities

[Joe McFarland:]

Thanks Marvin, and good morning everyone. I’d like to begin by echoing Marvin’s appreciation for the tremendous work that our associates have done during this crisis across our stores and distribution network. As always, our highest priority is the health and safety of our associates and customers. I’ll now take a moment to review the operational changes that we implemented this quarter in response to COVID-19.We began with an immediate assessment of how to best facilitate social distancing in our operations and then quickly acted to implement the following

[Bill Boltz:]

Thanks Joe, and good morning everyone. As Marvin mentioned, we posted U.S. home improvement comparable sales growth of 12.3% in the first quarter, driven by outperformance in essential DIY and pro categories. Fourteen of 15 merchandising departments generated positive comps with weakness limited to installation heavy product in kitchens and bath. We saw very strong COVID-related demand for essential cleaning products along with other home necessities such as refrigerators, freezers, and DIY home repair products. As customers isolated in their homes this quarter, they engaged in a variety of projects which drove double-digit comps in core spring-related categories, paint and other critical repair and maintenance categories.During the quarter, we posted double-digit comps in lumber, which benefited for strong unit demand from both pro and DIY customers, but continues to be driven by our improved investments in job lot quantities. Core pro categories also performed well with double-digit comps in rough plumbing, hardware, and tools. Within rough plumbing, we delivered double-digit growth in pipe and fittings as our expansion of job lot quantities in this area continues to pay off along with growth in other essential categories like air filtration, pumps, and water filtration.Our hardware business benefited from the strength in fasteners and our general hardware categories, supported by the addition of pro brands like FastenMaster, GRK, and Power Pro ONE as these product categories are the critical project completers for both the pro and the DIY customer. In tools, we continue to see a strong customer response to our Craftsman program, but we also saw strength from the launch of our new Cobalt XTR 24-volt power tool platform as both the heavy DIY and pro customer are quickly recognizing the quality and performance of this great product.Within our key pro tool brands such as DeWalt, the number one power tool brand in the industry, we continued to see nice growth across all segments and we were pleased with the results we are seeing through the addition of our exclusive DeWalt 12-volt compact line of power tools.Lastly, we continue to showcase new and innovative tool products from Bosch, Lufkin, Spider, and Metabo HPT, along with Cobalt to build in the strength of our tools business. These brands combined with our investment in job lot quantities and our improved pro service model are driving new customer trial and increasing our share of wallet with our existing pro customers.As Marvin and Joe indicated, the progress we made on our strategic initiatives in 2019 positioned us to execute well this quarter. For example, having our merchants in place for the entire year allowed us to fully plan for the spring season and respond to the rapidly changing operating requirements we are currently facing. I am also proud of our vendor partnerships and our recent brand introductions, both of which have allowed us to better meet the customer demand.I’d like to take a moment to mention just a few of the suppliers who made an extraordinary effort to keep our stores well stocked this quarter despite their own challenging operating environments. Within our building products categories, some of our suppliers that deserve a special shout-out are Charlotte Pipe, ECMD, Sharkbite, and Idaho Forest Group. In home décor, 3M, Monopy and Samsung were true standouts, and our hard lines business Kilman [ph], Bonnie, Old Castle and MTD Products went above and beyond in their responsiveness. Finally, I’d be remiss if I didn’t give a big thank you to the efforts put forth by Zep Cleaning Products, Safety Zone, and Medline as these three suppliers went above and beyond to provide us with hand sanitizer and gloves for our frontline associates.Turning back to our associates, our field merchandising teams played a critical role in helping our stores adjust to the changing environment, along with being on the ground to respond to 10 tornadoes and two earthquakes that impacted parts of the U.S. during the quarter. Our merchandising service team, or MST also went above and beyond as they were ready to do whatever was needed during the quarter to help our stores respond to significant increases in demand. This quarter our MSTs were key in our ability to quickly reconfigure our stores to support social distancing. The support of these teams in invaluable because they are the boots on the ground focused on taking the time-consuming tasks off the shoulders of our red vest associates.Looking ahead, we continue to make investments to drive future growth, and in the second quarter we are excited about our rollout of Simpson Strong Tie framing hardware and fasteners. These trusted pro products will be available in stores nationwide with an expanded assortment on lowes.com, helping pros to fulfill all their hardware needs in one place, saving them time and money.As spring has now arrived across the country, we will continue to leverage our position as the number one destination for outdoor power equipment in the U.S. with our leading brands such as John Deere, Honda, Husqvarna, Aaron’s, and Craftsman to provide customers with an outstanding selection of products to help them complete their outdoor projects. At the same time, we’re proud to offer our customers the top two brands in grilling, Weber and Charbroil.As we’ve discussed previously, we’ve remained focused on completing our Google Cloud migration in the second quarter to ensure that we build a strong infrastructure for lowes.com, and the teams are working quickly to add capabilities to lowes.com over the next three quarters that will further enhance the customer experience and to continue to grow sales on this digital platform.In closing, we remain committed to the work ahead to serve our customers and our communities as they navigate the public health challenge of COVID-19, while building capabilities to serve them even better in the future.Thank you, and I’ll now turn the call over to Dave.

[David Denton:]

Thank you Bill, and good morning everyone. I’ll begin this morning by reviewing the liquidity actions that we took during the quarter and provide an update on our capital allocation priorities.Given the uncertain economic outlook, we decided to bolster our liquidity to plan for any unforeseen disruptions. In Q1, we raised $4 billion in senior notes and increased the capacity of our revolving credit facility by $770 million. After repaying $500 million of senior notes due in April of 2020, we now have $6 billion of cash and cash equivalents on the balance sheet as well as $3 billion in undrawn capacity on a revolving credit facility which can be made available for any unanticipated needs in liquidity. We believe that we have more than adequate liquidity to manage through any of the potential scenarios that we could be facing.During the quarter, we also decided to halt our share repurchase program. Furthermore, we do not anticipate doing any more share repurchases this year beyond what we executed in the quarter. In Q1, we repurchased 9.6 million shares for $947 million at an average price of $98.45 per share. We remain committed to returning capital to shareholders through our dividend program and, as always, we look for ways to drive shareholder value over the long term.Also, consistent with our capital allocation framework, we are continuing to prioritize investments in the business for future growth. In the quarter, capital expenditures totaled $328 million and we are still planning for a total of $1.6 billion in capital expenditures through this year. In certain cases, we have reprioritized some capital projects to focus on the near term need to improve our omnichannel capability, but our expectations for the total spend in 2020 remain unchanged.I’ll now turn to a review of our operating performance, beginning with the income statement. In Q1, we generated GAAP diluted earnings per share of $1.76 per share compared to $1.31 in the first quarter of last year, an increase of 35%. In the quarter, there was a very modest impact on operating income related to the previously announced Canadian restructuring. My comments from this point forward will include certain non-GAAP comparisons where applicable.In Q1, we delivered adjusted diluted earnings per share of $1.77, an increase of 45% compared to the prior year. These results exceeded expectations largely due to stronger than expected sales and gross margin rate, particularly in the latter half of the quarter. Sales for the first quarter were $19.7 billion, an increase of 11.2% on a comparable basis versus the prior year period, with total average ticket growth of 9.7% while transactions grew by 1.2%.U.S. comp sales were up 12.3% in the quarter and we were encouraged to see strength in our performance across both DIY and pro customers and across all geographies. Our U.S. monthly comps increased as we moved through the quarter with 5.1% in February, 8.9% in March, and 20.4% in April. February’s national performance was largely in line with our expectations, but beginning in March we saw sales impacted by COVID-related prep activities and customers working on long delayed projects as they sheltered in place. Also, lowes.com sales ticked up meaningfully in March as more customers increasingly utilized online shopping options. Sales continued to accelerate into April with a large step-up mid month. lowes.com sales also increased significantly with comps of over 150% in the month, while our installed sales declined approximately 50% as many customers were unwilling to allow installation work in their homes.The strong broad-based trends that we saw in April have continued into May, with strength across both DIY and pro and across nearly all merchandising categories and all geographies. For May month to date, U.S. comp sales have been trending at or above April results with strong double-digit comps across all geographic regions.Gross margin was 33.1% of sales in the first quarter, an increase of 164 basis points compared to Q1 of last year. Gross margin rate improved 110 basis points, driven both by the actions that we took last year to lower product cost and improve our pricing and promotional performance, as well as a 40 basis point benefit from lower promotional activities throughout the quarter. As Marvin mentioned, the company pulled back on promotional marketing in an effort to limit non-essential traffic given the stay-at-home orders across the nation. Gross margin also benefited from approximately 55 basis points related to favorable product mix.SG&A for Q1 was 21.3% of sales, an improvement of 45 basis points over the prior year. This included $320 million of COVID-related expenses incurred during the quarter with $275 million in financial assistance to our frontline associates, approximately $35 million related to cleaning and other pandemic-related operating expenses, and approximately $10 million in charitable contributions. While the $320 million of COVID-related expenses resulted in SG&A deleverage of 160 basis points, the impact was more than offset by payroll leverage of 105 basis points driven by higher sales and improved store efficiencies, advertising leverage of 40 basis points, and employee insurance leverage of 25 basis points.Adjusted operating income margin increased 208 basis points to 10.16% of sales. Note that COVID-related expenses are not excluded from our adjusted results.The effective tax rate was 25.1% compared to 16.6% last year. The prior year quarter benefited from a change in approach related to the exit of our Mexico operations. The adjusted effective tax rate was 25%, above the prior year rate of 22.9%.At $14.3 billion, inventory is slightly lower than the prior year levels.Now before I close, let me address our 2020 business outlook. Despite our solid performance this quarter and strong sales momentum continuing into May, we are withdrawing our prior guidance for the full year 2020 sales, operating income, and earnings per share. In this unprecedented operating environment, we like other companies have limited visibility into future business trends, which result in an unusually wide range of potential outcomes for our 2020 financial performance. However, going forward we would like to provide additional transparency regarding our performance, so it is my expectation that we will be giving more frequent periodic updates on our results throughout the second quarter.In closing, we remain confident about the future of our business and our ability to continue to drive sustainable long-term shareholder value. Finally, I’d like to extend my appreciation to the associates at Lowe’s across the world who have risen to meet the challenges of this global health crisis.Operator, we are now ready for questions.

[Operator:]

[Operator instructions]Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

[Simeon Gutman:]

Thanks, good morning everyone. My first question is on sustainability of comps. I know it’s an impossible question to really answer and you’re not going to provide much guidance, but from a planning perspective, there’s a surge right now, your inventory position looks pretty reasonable, so what are your expectations, if you could share how you’re thinking about the surge and then leveling off, and then what should be a recession theoretically now and into the back half of the year?

[Marvin Ellison:]

This is Marvin. I’ll take the first part of that and I’ll let Dave take the second piece. You’re right - this is a very unique and unprecedented environment that we’re in, but what we can tell you is that we had very strong sales in April and, as Dave mentioned in his prepared comments, that momentum has continued into May. That includes triple-digit comps and lowes.com, that also transitioned from April into May.We don’t anticipate we’re going to see negative comps, but we do anticipate that we’re going to see sales start to moderate at some point in the latter part of this quarter and in the back half of the year. What’s interesting about this environment is that this is not a housing recession. If you go back to 2008 - 2009, you’re in a housing recession and so the home improvement business was directly impacted. This is obviously different, and we’re seeing still sustained strength from our homeowners because they’re sheltering in place and they’re finding those projects around the house.Having said that, like every other company out there, we have very limited visibility to what’s going to happen in the out months and out quarters, but we do feel as though even in this unprecedented environment, we have a really good execution plan and we think the results in Q1 reflected this.I’ll let Dave add any additional--

[David Denton:]

Simeon, I’d just add a couple points. One, real time we’re tactically responding and managing to the increased demand for consumers for these essential products that they’re seeing in our stores, so one, real time we’re working on that. Secondly, importantly we’re still running our long term playbook. We’re making investments to date to drive long-term shareholder value in the out years, so we have not deviated from that playbook. Three, we have developed a variety of plans that can allow us to flex both from a merchandising perspective to lean into your non-discretionary type items over the back half if required, and secondly being able with all the tools we’ve put in place operationally to be able to flex our labor and operating expense profile to manage in a slightly softer demand environment.

[Simeon Gutman:]

Okay, and then my follow up, is there--I doubt with plus-20 type of comps, it sounds like that’s what you’re running, anything in DIY yellow flag, and it sounds like the pro is also pacing the DIY customer at the moment. Can you talk about anything you’re hearing as far as the type of jobs and if their pipeline or backlog is starting to refill up?

[Marvin Ellison:]

Well, I think what’s interesting is the strength remains in DIY, but for us the pro customer remains healthy, and that customer has transitioned primarily to outside projects. Also, as a reminder, our pro customer is the smaller, what we call the pick-up truck pro. That pro was less impacted in this forced downturn than the larger, more industrial pro, so even though pro was not as robust as DIY, our pro growth was still really strong in the quarter and that strength continues. Their pipeline is more delayed and not cancelled, and now you’re starting to see those jobs pick up.Another interesting data point, in the states that are beginning to reopen, we are seeing our stores outperform the total company comp in those locations, which to us is a data point but it’s a glimmer of hope that we’re able to sustain our performance even when there is a broader competitive landscape out there.But again, Simeon, there is a lot we don’t know, there is a lot of uncertainty, but as Dave said, we have a lot of levers that we can pull from an expense management perspective, and Bill Boltz and Joe McFarland have really detailed playbooks from the 2008 - 2009 period when we had to transition in our old life to a more repair and maintenance type of strategy. We know how to do that, so if that is a requirement, we have a very experienced team of merchants and operators that can make that pivot.

[Simeon Gutman:]

Thanks, good luck.

[Operator:]

Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

[Michael Lasser:]

Good morning. Thanks a lot for taking my question. Marvin, I know you’re not expecting negative comps, but should we look at that 850 basis points of COVID-related sales of simply pulling forward demand from future periods, and if that’s the case, why wouldn’t comps go negative?

[Marvin Ellison:]

Michael, we don’t see it as pull forward because these were projects that were on the customer’s to-do list that they simply didn’t have time to get to. I mean, as a reminder, we are in the essential retail business, and two-thirds of what we sell is non-discretionary. What we saw a lot was customers coming in and fixing things that they had just delayed, so we don’t see it as a pull forward at all.Look, we’re blessed to be open. We’re very thankful that we’re open, but this is without question the most challenging environment any of us have ever worked in, and when we look at what the customers are buying, we look at the sustainability of it, we don’t see what occurred in Q1, we don’t see what occurred in April as a pull forward. We just see it as a unique demand shift based on the competitive landscape and based on customers sheltering in place.

[Michael Lasser:]

Understood. I have a quick two-parter for Dave. First part is if we strip out the benefit in gross margin we saw from favorable mix and from advertising, less promotions, it looks like you still haven’t recouped everything that you lost in the first quarter of last year. At what point will you be able to recoup everything that you lost in gross margin, or is it just going to be structurally lower?And then your commentary around share repurchases indicated that you’re not going to be for this year. What happens if there’s a V-shape recovery or the business continues to perform very well? Under what conditions would you resume share repurchases?Thank you very much.

[David Denton:]

Yes Michael, listen - it’s our expectation that we would recover by the end of the year our gross margin to the baseline rate that we’ve talked about, that was our prior guidance. We’re largely working on that day-in and day-out. I’d say there’s a combined team between merchandising and finance focused against that effort, and I’m actually really pleased with the progress we made and we continue to push forward. I feel like we’re in really good stead there and we’re making the right investments to improve our performance.Secondly from a share repurchase perspective, listen - we’ll wait and see. I think the good news is at the moment, our cash flow is very robust and very strong. We’ve shored up our balance sheet from a liquidity perspective. Let’s just watch and see, just given the dynamic nature of this market, and see where we stand. We’ll watch it carefully as we go through the balance of this year.

[Michael Lasser:]

Thank you very much, and good luck.

[Marvin Ellison:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Seth Sigman with Credit Suisse. Please proceed with your question.

[Seth Sigman:]

Hey guys, good morning. Thanks for taking the question. I wanted to focus a little bit on SG&A. Obviously very good leverage in the quarter. You discussed some incremental costs obviously, but you had some offsets. I’m just wondering if you can elaborate on some of those positive offsets in the quarter, how sustainable are those as you look into the second quarter?Then just regarding the $320 million of incremental costs, how should we be thinking about that bucket as well? Thanks.

[Marvin Ellison:]

Seth, I’ll take the first part of this and then I’ll hand it over to Joe McFarland. I think that the key to our ability to have the leverage performance was the new scheduling and labor management system. Timing is everything and our associates have been incredibly heroic during this time, but the ability to make sure we could look at the demands of the business by location, by department of the store to schedule effectively was a large part.I’ll let Joe McFarland talk about what we were able to benefit from the labor scheduling system in addition to some other expense-related initiatives that they drove in operations.

[Joe McFarland:]

Yes, thanks. This is Joe. As we’ve been working our 60/40, and again that is to shift our labor productivity from tasking to selling, we are well on our way in our 60/40 transition. If you think about things that Marvin mentioned - the customer-centre schedule, we were able to really dial in our associate staffing based on departments that were lifting, reallocate labor in the areas of the store that were suffering, and also the smartphones, the ability for the associates to be able to sustain 150% comps in dot-com in the month of April and 80% for the quarter would not have been doable had we not done things like our Pick app and the smartphone applications that really allowed the associates to set up curbside delivery.Seth, there were a number of things throughout the quarter - the operational initiatives that we continued to stay focused on, our centralized receiving, so a lot of things allowed us to gain that leverage.

[David Denton:]

Yes Seth, and I’ll just add a shout-out to all the ops teams to really be very focused and really drive a lot of efficiencies this quarter. However, there will be additional costs that we will incur as the new operating model goes forward. We incurred cleaning, incremental costs for cleaning, we put in social distancing ambassadors in our stores to manage the queues and flow through from a traffic perspective, so some of those costs, which we incurred about $35 million in the first quarter, are probably ongoing for the balance of this year.

[Seth Sigman:]

What about the $275 million, how much of that is ongoing past the first quarter?

[Marvin Ellison:]

Seth, our goal is to take care of our associates. We’re really proud that in Q1 we invested roughly $340 million in our associates and our customers and communities. We’re going to continue to make sure that we take care of our associates as this pandemic continues to drive a unique environment in our stores. Like anything else, it’s difficult for us to project when that’s going to be, but as an example, we paid out $80 million in special payments in the month of March, $2 wage increase for our associates in the month of April, another $80 million-plus in special payments for the month of May. Joe talked about the Winning Together payment that we’re going to make over and above the target for the month of June, and so we’ve looked at the needs of our associate and we’ll make the appropriate decision based on what we think is in their best interest.

[Seth Sigman:]

Okay, thank you for that. Just a follow-up here on that May quarter-to-date trend. Are you seeing the composition of growth change at all between DIY and pro, and are you seeing a pick-up in some of those weaker installation heavy categories like kitchen and bath? Any signs that those are starting to improve more as the restrictions are easing here? Thank you.

[Marvin Ellison:]

I’ll take the first part and let Joe talk about the install piece.The short answer is yes. DIY remains very, very strong. Pro is improving, and remember what I said - because our pro is that smaller pick-up truck pro, that pro tends to be less impacted by macroeconomic factors, so that pro was healthy but they’re getting even more healthy as the weeks and days progress throughout the year, and as I mentioned in states that are reopening, we see strength in our business but we also see strength in these urban store locations. Remember I mentioned in the first quarter, our remote stores dramatically outperformed urban stores by almost 650 basis points. We’re starting to see those urban markets start to improve as well, and so as Dave mentioned, there’s a broad geographic positive double-digit performance that we’re seeing.Joe can talk a little bit about the install piece.

[Joe McFarland:]

From the install piece, Marvin mentioned that our install heavy related categories for the quarter were significantly down, as referenced in our negative comps for kitchen and bath. As we have progressed through the quarter and looked week by week, we have a really robust dashboard that we look at that includes things like future leads, and so in the exterior installation projects we’re really seeing that business come back very, very quickly, so we’re very pleased there.We are making progress on the interior projects, but that will be slow and that will be tempered as our consumers feel more and more comfortable allowing our pros in their home and our installers in their home.

[Seth Sigman:]

Okay, thanks guys. Best of luck.

[Operator:]

Thank you. Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.

[Greg Melich:]

Hi, thanks. I had a follow-up for Dave and then on strategy, Marvin, I had one on that. Dave, the 340 that you did--sorry, 320 on COVID, is any of that accrual of something that basically might get paid out later this year, like extra vacation, or was that basically costs in the quarter? Then Marvin, a follow-up.

[David Denton:]

It’s largely cost in the quarter. There’s always some accruals based on when things actually get paid, but largely this was expenses that are incurred in Q1.

[Greg Melich:]

Perfect, and you would--it sounds like you’re comfortable that the leverage ratio falls from 2.7 down to 2. If results are strong, you want just to be more conservative on the balance sheet?

[David Denton:]

That’s correct. If you look at our leverage ratio as we sit today, we’re probably a little bit over 2.8 at this point in time, but if you net the cash that we have on our balance sheet, we’re well below that. I think just given the unprecedented environment we’re operating in, we’re just going to be conservative here for a while until we see how this plays out for the balance of the year.

[Greg Melich:]

Makes total sense. Marvin, you’re talking about the digital surge and also how it’s happening by geography and by even customer. Could you give us some more about the changes and improvements you’re making in the multi-channel experience and any metrics around the customers that are using it, that might be new or now behaving differently or more frequently since they used lowes.com?

[Marvin Ellison:]

What I can tell you, Greg, is that we’re just pleased that the work we’ve put into stabilizing and modernizing lowes.com is starting to pay dividends. As we mentioned in the last couple of calls back last year, the entire dot-com site was on a decade-old platform, so we’re in the process of transitioning that to Google Cloud. We’ll be complete this quarter. That allowed us to take on the demand, and what we’re seeing is that customers simply want to shop the way that they choose to. In the past, we couldn’t accommodate that. Joe mentioned in his prepared comments, when we started to get requests from customers for curbside, we put that up and going in three days. I mean, this time last year it would have been impossible to do that because we didn’t have the infrastructure.Bill Boltz and the merchant team has also done a really nice job of adding additional SKUs, and I’ll let Bill talk about some of the work the merchants have done that has allowed us to drive the dot-com business and some of the future work that we have in place to drive dot-com for the balance of the year.

[Bill Boltz:]

Yes, this is Bill. Just a lot of work from the online team as well as the core merchants to get relevant SKUs online, relevant categories of product in addition to being able to support the operations work that goes on inside the store. But along that, as I mentioned in my opening comments, the capabilities that the team is continuing to work on to enhance delivery operations, to schedule deliveries, to be able to ship from many of our locations, all of that work continuing to go and be put in place through the balance of the year, so just lots of improvement that will continue to go on lowes.com.

[Marvin Ellison:]

Greg, the other point I’d make, I would say roughly 90% of our dot-com sales are fulfilled or picked up at a store, and for us that’s significant because anytime the customer can pick it up at the store, that helps us to defer the cost of operating a platform.The good news is lowes.com will only get better for the balance of the year, and as I mentioned, we’re triple-digit growth in April, we’re triple-digit growth month to date, and we can sustain that and we’re having improved functionally for the customer each and every week, and that’s something that we’re excited about for the future.

[Greg Melich:]

Great job, guys. Good luck.

[Marvin Ellison:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research. Please proceed with your question.

[Eric Bosshard:]

Two things. First of all, in terms of online, the pick-up in-store, fulfilled at store, I know you said that fulfilled from the store, but how much of this is getting delivered in the mail and how much of it is getting picked up at the store? Can you just give us what that number was in the quarter?

[Joe McFarland:]

Eric, it’s Joe. Just over 60% of our orders are picked up in store, and then the incremental is fulfilled primarily through store.

[Eric Bosshard:]

Okay, and then secondly, in terms of the promotion and merchandising strategy for 2Q, I guess a question for Bill, the strategy around promotions and events for Memorial Day and Fourth of July, how are you planning on that? Then curious, as you look back to how you managed spring Black Friday, the reduced effort to drive traffic, did you end up seeing, or how material was the negative impact on sales from that, and then bridge that to how you think about Memorial Day and July 4 as well.

[Marvin Ellison:]

Eric, this is Marvin. I’ll take the spring Black Friday and I’ll let Bill talk about Memorial Day and Q2.When we look at spring Black Friday, we received minimal incremental sales benefit from the event. Due to the distribution process of print media, we were unsuccessful in pulling the tap on distribution, but when we look at all other forms of media, all other traffic driving mechanisms for the event were pulled, so from that the sales were minimal. Let me make sure just for the broader audience I define how we look at print media.Print is the least effective marketing medium that we have, and total sales contribution generation by print for Lowe’s is 0.7%, so I know there was a lot of discussion that spring Black Friday was a benefit to us in the quarter but, as I said, it was incrementally minimal at best. In addition to that, as you know, we closed for Easter, and we were forecasting Easter to be a plus-$200 million day. When Dave Denton, Joe McFarland, and Bill Boltz and I sat down and made that decision to close, we had no idea at that time how we would make the sales up, but we felt like it was in the best interests of our associates and their families to give them a day off, and we would just take the financial hit, for lack of a better term, for that decision. But we felt it was simply culturally the right thing to do. So when you take being closed for Easter and you take pulling in all other traffic driving mechanisms for spring Black Friday, both events turned into a negative environment from a sales perspective for us.That kind of summarizes Easter and spring Black Friday, and looking in the rear view mirror, I’ll let Bill talk about Q2.

[Bill Boltz:]

Yes Eric, in regards to the pricing strategy, as we’ve shared with you before, our intention has always been to change the pricing strategy at Lowe’s and get to be more of an everyday competitive price program. That work really started a year ago, it continues into 2020, so we look at Memorial Day, Memorial Day is going to be very consistent to how we operated in Q1, and as we get into the back half of Q2 with July 4 and Father’s Day, again trying to implement the pieces and the plays, that the pricing strategy--you know, more of a normal cadence from being relevant for dad and being relevant for the holiday and July 4. That’s how we’re going to approach the quarter.

[Marvin Ellison:]

Eric, the last point I’ll make, and I think Dave will close with a comment, is at the end of the day we want to be a value-oriented retailer, but we don’t want to be promotional. I think that’s the point that Bill has said from his very first day here. You may not see us using traffic driving media to get incremental footsteps in the store in this unique environment that we’re operating in, but when the customers come in, we want them to see value on the shelves because if there is a time that you ever needed value for customers, this is one of those times. But we will be very cognizant and conscious of not driving traffic in an environment where that may put people at risk, and that’s something that we’re going to balance really well.

[David Denton:]

Yes, and to Marvin’s point, obviously our stores, there’s a lot of value in our stores, the items that we sell, and if you just look in the rear view mirror and you look at the number of items that we promoted this year versus the number of items that we sold on promotion last year, we’re down about 24%.

[Eric Bosshard:]

Okay, that’s helpful. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

[Kate McShane:]

Hi, good morning. Thanks for taking my question. I just wondered with regards to customer acquisition, do you have an idea of how any newly acquired customers broke down between DIY and pro during the first quarter, and have you seen repeat purchasing from these customers?

[Marvin Ellison:]

Kate, this is Marvin. That’s a really good question. What I will tell you is that this was such a unique quarter and we were so focused on, first and foremost, making sure that we were looking into the health and safety of our associates and our customers, that is not a data set that we spent a ton of time looking at. Candidly, as I said in my prepared comments, the moment we started to address the challenges of COVID-19 for our associates and customers, we became less focused on the financial performance of the company and became more focused on trying to provide the essential products that our customers and communities needed.I’m sure we can get that data and we can probably share it. I’m sure the Investor Relations team can get it for you, but we were just so focused on trying to run this business, serve our customers, serve our communities and keep our associates safe, that there are a lot of data sets we didn’t pay a lot of attention to this quarter.

[Kate McShane:]

Okay. Just as a follow-up and unrelated, I realize comps are very strong, but are you still seeing the stronger trends in the better and best categories versus the good categories, and have there been any signs of trade-down by the pro?

[Marvin Ellison:]

No. Average ticket remains strong. We have seen no trade-down. Our customer segment has been surprisingly resilient and, as I stated earlier, customers have rediscovered Lowe’s. We know that for a fact. But again, patterns have been strong, they’ve been very consistent, and we are continuing, as you can imagine, to track it on a day-by-day, hour-by-hour basis so we can make the necessary adjustments.

[Kate McShane:]

Thank you.

[David Denton:]

Michelle, we’re going to take one more question, please.

[Operator:]

Thank you. Our final question comes from the line of Christopher Horvers with JP Morgan. Please proceed with your question.

[Christopher Horvers:]

Thanks, good morning. Two margin questions. First, Dave, on the gross margin up 150 year-over-year, you think about the lower promotions and the mix benefit. How did the underlying expansion play out relative to your plan, and then in an environment hypothetically where the category goes flat or, let’s say, down low single digits in the back half of the year because the recession lingers longer, how do you think about SG&A dollar growth or payroll deleverage in that sort of environment, given the strong flexibility that you’ve shown over the past 18 months? Thank you.

[David Denton:]

Sure, so I’ll take gross margin and I’ll flip to Joe to talk a bit about SG&A. I think obviously from a gross margin perspective, as in my prepared comments, we made really nice progress. I think maybe the best way to look at it is in February, so when we entered the year, we were actively running our playbook, we had worked between finance and merchandising to improve our cost complement, to partner more deeply with vendors to manage our promotional cadence more effectively, and I think we were largely hitting our plan, if not probably a little bit in advance of our plan as we went into February.Obviously we got turbocharged a bit from a gross margin expansion perspective due to COVID in the back half of the quarter, but I feel like the underlying elements that we had put in place of driving really solid performance there, we still have work to do, we’re not done - this is a marathon, not a sprint, but I think we have the right pieces together to play out and improve our margin performance, both in the short term and the long term.Now I’ll flip it to Joe to talk a bit about SG&A.

[Joe McFarland:]

Thanks Chris. From an SG&A standpoint, the team did a really nice job in Q1, obviously as Dave had mentioned. As we look forward, it would be continued strong sales, but we have a rule of thumb based on sales outperformance and payroll leverage, but in addition the hard work that the ops team has done putting new engineered labor standards in, the labor engine that the team built, the mix between ticket and transactions, and we’re very confident in our ability to continue to leverage on SG&A.

[David Denton:]

Great. Thank you very much for calling in today and talking about Lowe’s. Please stay safe and healthy.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.