Lowe's Companies, Inc.
Q4 2015 Earnings Call Transcript

Published: 24 Feb 2016

[Operator:]

Good morning, everyone, and welcome to Lowe's Companies' Fourth Quarter 2015 Earnings Conference Call. This call is being recorded. Also, supplemental reference slides are available on Lowe's Investor Relations website within the investor packet. While management will not be speaking directly to the slide, these slides are matched to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non-GAAP financial measures. The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr. Robert Niblock, Chairman, President, and Chief Executive Officer; Mr. Mike Jones, Chief Customer Officer; and Mr. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

[Robert A. Niblock:]

Good morning and thanks for your interest in Lowe's. We delivered another solid quarter with comparable sales growth of 5.2%, which exceeded our expectations. Our efforts to drive traffic, which Mike will share in more detail, have resonated with customers, resulting in a 3.6% increase in comp transactions, along with 1.6% increase in average ticket. Our U.S. home improvement business achieved 5.5% comps for the quarter, with all 14 regions generating positive comps. And our strong performance in Canada continues with double-digit comps in local currency for the third year in a row. During the quarter, we generated positive comps in all 13 product categories. We capitalized on increased demand for exterior products as a result of warmer weather with strength in lumber and building materials, outdoor power equipment, lawn and garden, and millwork, while at the same time driving strong mid-single digit comps in interior project categories such as paint and fashion fixtures. And as a result of our strong brand and service advantages, we continue to drive strong comps in appliances. Lastly, our Pro business performed above the company average as we continue to build deeper relationships with the Pro by enhancing our product and service offerings to meet their unique needs. For the quarter, we drove 79 basis points of adjusted operating margin expansion and adjusted earnings per share of $0.59, a 28% increase over last year's fourth quarter. For the year, we delivered comparable sales growth of 4.8% and adjusted earnings per share of $3.29, a 21% increase over 2014. Delivering our commitment to return excess cash to shareholders, in the quarter, we repurchased $562 million of stock under our share repurchase program and paid $257 million in dividends. For the year, we repurchased $3.8 billion of stock and paid $957 million in dividends. As we head into 2016, the outlook for the home improvement industry remains positive. Continued support from steady job gains and improved incomes as well as favorable trends in housing should keep home improvement growth buoyant. Further, despite recent volatility in the financial markets, the fundamentals for continued growth in consumer spending remain intact, consumers who continue to benefit from improved household financial conditions and lower gas prices on top of broader job and income gains. These trends aligned with the results of our most recent consumer sentiment survey where favorable perceptions around personal finances remains stable even though respondent's assessment of the national economy declined slightly. For the home improvement industry specifically, we continue to see favorable trends as a desire to invest in the home continues to grow. Roughly half of homeowners believe the value of their home has increased, which is double the number feeling that way in 2009 and many believe this trend will continue as we saw a significant increase in future home value expectations. And while most homeowners indicated their spending levels are saying the same, they're more likely to allocate funds to home improvement compared to other areas. In 2016, we will continue to leverage the favorable backdrop for home improvement delivering great service to customers, while also anticipating how Lowe's will meet their needs in the future. We take a prudent approach to managing our portfolio of businesses, making decisions that shape how we serve and connect with customers. Giving careful consideration to how we position Lowe's favorably for sustainable growth, we invest to obtain compelling returns over the long run. As we carry out our capital allocation priorities, which remain unchanged from what we shared previously, our first priority is to invest in the business, we then seek to return excess cash to shareholders in the form of dividends and share repurchases. We demonstrated our disciplined approach to capital allocation with the recent changes in our international business. First, after a comprehensive strategic analysis, we decided to exit the Australian home improvement market by withdrawing from our joint venture with Woolworths. We made the decision to focus our resources on areas of the business where we see greater potential return on investment. Second, seeking to reinforce our portfolio of businesses in North America, we've committed to accelerating our growth in Canada by announcing our agreement to acquire RONA. The time is right to strengthen the company's Canadian operations, to take advantage of the significant long-term potential we see. We expect to build on the recent progress our team in Canada has made and the positive results RONA has achieved over the past several years as a result of their restructuring efforts. With this transaction, we see opportunities to further increase revenue and operating profitability in Canada, including enhancing customer relevance by utilizing our strengths as a leading omni-channel home improvement company and drawing on our customer experience design capabilities; expanding customer reach and serving a new portion of the market by applying our expertise in certain product categories including our best-in-class appliance offering; driving increased profitability in Canada by leveraging shared supplier relationships and enhance scale, as well as Lowe's private label capabilities in addition to eliminating RONA's public company cost. At the same time we're reinforcing our international businesses, our U.S. home improvement business, with the dedicated focus from Mike and Rick's team, is diligently working to drive profitable share gains within the U.S. market. In 2016, their efforts will continue to focus on improving our product and service offering for the Pro customer and differentiating ourselves through better customer experiences that make us the project authority. Across the enterprise, we strive to be a customer-centric omni-channel company. So we'll continue to enhance our omni-channel capabilities. Evolving from a multichannel offering to an omni-channel experience where all of our channels work in concert with one another, we will support customers at every step of their home improvement journey and build greater affinity for the Lowe's brand. This strategic framework along with our efforts to improve our productivity and profitability give us confidence in our business outlook for 2016. Bob will share those details in a few minutes. This is an exciting time for Lowe's, and I would like to thank our employees for their incredible contribution they make every day. It's their hard work and commitment to delivering outstanding customer service that makes this company great, and I look forward to what their efforts produce in 2016. Thanks again for your interest. And with that, let me turn the call over to Mike.

[Michael A. Jones:]

Thanks, Rob, and good morning, everyone. As Robert shared with you, we delivered another solid quarter with positive comps across all regions and product categories. We executed well in the fourth quarter, growing both average ticket and transaction. We drove traffic through our Black Friday event, which drove sales increases of 8% overall and 26% online with compelling offers and special buys in tools, holiday décor, appliance and other traffic drivers creating strong values for customers while remaining true to our strategic focus and core strength in home improvement. We drove increases in traffic for the quarter through competitive offers, enhanced online selling capabilities and improved marketing speed and flexibility from our digital capabilities where we tested new concepts like Deal of the Day. We also re-balanced year-end promotions to take advantage of the extended outdoor selling season. Looking at product category performance, we recorded above-average comps in lumber and building materials, appliances, lawn and garden, and paint. We saw particular strength in outdoor project categories led by lumber and building materials, lawn and garden, and to a lesser extent, outdoor power equipment and millwork as customers took advantage of mild weather to complete exterior projects such as roofs, fence and decks. In outdoor power equipment, we drove double-digit comps in off-season products such as pressure washers, walk-behind and riding mowers. And in lawn and garden, we saw double-digit comps in soil, mulch and lawn care. Our new landscape lighting expansion drove strong performance as well, bringing outdoor lighting projects to light by providing inspiration and making selection and installation easy for customers while offering new product technologies like LED. We also achieved strong comps in appliances for yet another quarter, leveraging our investment in customer experience both in-store and online. In-store, our 17 appliance suites showcasing coordinate appliances allows customers to visualize how their appliance purchase will look in their existing or remodeled kitchen, not just as a single replacement purchase, but as a full set of new appliances, and allows us to showcase innovations such as black stainless steel, a new appliance finish, and new product collections like the Frigidaire Professional Collection, a Lowe's home channel exclusive. Online we have enhanced our customer experience and presentation on Lowes.com, including improved product search, integrated and upgraded product videos, enhanced product presentation, like 360-degree views, and simplified product groupings to make it easy for customers to make their selection. Our continued focus on the omni-channel customer experience together with leading brands, breadth of assortment, competitive price, knowledgeable sales specialists as well as delivery and haul-away service combined to drive our sustained share gains in appliances. In fact, J.D. Power and Associates ranked Lowe's the number one appliance retailer for 2015. Paint benefited from increased project activity as well as growing awareness of our three-brand offering. With the launch of HGTV HOME by Sherwin-Williams at the beginning of the second quarter, we are now providing customers with a full suite of top brands they trust for their next paint project. Olympic provides quality at a great value and easy application, Valspar specializes in color authority with their Love Your Color Guarantee, and HGTV HOME by Sherwin-Williams provides strong brand recognition, designer-coordinated colors and quality that customers trust. We are also proud to announce the expansion of HGTV HOME by Sherwin-Williams with the introduction of Infinity, our premium one-coat paint and primer with exceptional hiding power and coverage available in our stores in March. As customers engage in both indoor and outdoor projects, we've leveraged our omni-channel capabilities to help them achieve great results, not only in our stores and online, but also through our project specialists who meet the customers in their homes. This capability represents another important element of our omni-channel strategy. We have project specialists who focus on the exterior of the home available across all U.S. stores and we're expanding our interior project specialist program, reaching all stores by the end of 2016. We're very pleased with our in-home sales program performance, with above-average comp again this quarter. With our ability to coordinate style, provide design expertise and find the right contractors for the job, we are rapidly becoming the project authority in home improvement. And our customer experience design capabilities continue to pay dividends. Leveraging our largest store format and space initially created for the outdoor living experience, we again showcased our holiday décor experience, an inspirational holiday showroom where customers can see everything from poinsettias and artificial trees to indoor and outdoor decorations and gifts. Developed in collaboration between our merchants, stores and dedicated customer experience design team, the holiday décor experience inspired customers to decorate, raise their awareness of the breadth of our holiday décor and gift offerings and provide project solutions relevant to the holiday micro-seasons. The customer response was very positive, driving strong sales and attachment for the products included in the set. We're now transitioning this space back to our outdoor living experience in preparation for the critical spring selling season. Toward the end of the quarter as Winter Storm Jonas approached, we were able to serve customers' needs as they worked to prepare for and clean up from the storm. Our supply chain demonstrated agility and flexibility as we worked to move inventories, such as snow throwers, generators, ice melt and heaters to the areas in the path of the storm. We're proud of the way our supply chain teams and associates responded to the needs of our customers during Winter Storm Jonas. We also continued to expand our Pro business, driving comps above the company average by continuing to advance our product and service offering to meet their unique needs. Throughout the year, we strengthened our portfolio of Pro-focused brands with the addition of Goldblatt masonry tools, GAF roofing, Owens Corning insulation, Lennox HVAC, and Masonite entry and interior doors in addition to leveraging our long-standing partnerships with Hitachi, Stanley Bostitch, Bosch, Bon, (16

[Robert F. Hull:]

Thanks, Mike, and good morning, everyone. Sales for the fourth quarter were $13.2 billion, a 5.6% increase over last year's fourth quarter. Total transactions increased by 4%, and total average ticket increased 1.5% to $67.15. Comp sales were 5.2% for the quarter. As you heard from Mike, solid execution drove balanced performance in the quarter. Comp transactions increased 3.6%, and comp average ticket increased 1.6%. Looking at monthly trends, comps were 2.8% in November, 7.3% in December, and 5.3% in January. For the year, total sales were $59.1 billion, an increase of 5.1% driven by comp sales of 4.8% and new stores. For 2015, comp average ticket increased 2.5%, and comp transactions increased 2.2%. Gross margin for the fourth quarter was 34.66% of sales, which is flat to last year. In the quarter, product cost deflation and value improvement aided gross margin but were offset by pressure from the mix of products sold and promotions. For the year, gross margin of 34.82% sales represented an increase of 3 basis points over 2014. In January, we made the decision to exit our joint venture in Australia. There was a process in the joint venture agreement for purposes of determining the value of our portion of the joint venture. We are working our way through that process and expect it to be completed in the next month or so. We recorded a $530 million non-cash impairment charge in the fourth quarter. The charge includes the cumulative impact of the strengthening U.S. dollar over the life of the investment. The valuation is based on our best estimate of our one-third interest in the joint venture. This valuation is subject to potential adjustment as additional information becomes available as we complete the process. For the quarter, the impairment charge impacted SG&A leverage and EBIT by 401 basis points and earnings per share by $0.58. For the year, the SG&A EBIT impact was 90 basis points while the earnings per share reduction was $0.56. Finally, as a majority investor, we have been recognizing our share of the losses which were reflected in SG&A. In 2015, we recorded $11 million and $48 million for Q4 and the year, respectively. As a result of our decision to exercise our put option, we are no longer required to make capital contributions or absorb future operating losses. My comments from this point will be focused on our operating performance and will exclude the impact of the joint venture impairment. Adjusted SG&A was 24.55% of sales, which leveraged 69 basis points. The leverage came from a number of areas. Mike mentioned two, store payroll and marketing, which leveraged 25 basis points and 20 basis points, respectively. Utilities expense leveraged 12 basis points, primarily the result of warmer weather. Employee insurance leveraged 12 basis points in the quarter due to a reduction in both the number and severity of claims. Also, given the sales growth, we were able to leverage fixed costs. For the year, adjusted SG&A was 23% of sales and leveraged 62 basis points versus 2014. Depreciation expense was $369 million for the quarter, which is 2.79% of sales and leveraged 10 basis points. Adjusted earnings before interest and taxes for the quarter were 7.32% to sales, which represented a 79-basis point increase. For the year, adjusted EBIT of 9.31% represented an increase of 78 basis points over 2014. Interest expense at $144 million for the quarter deleveraged 3 basis points as a percentage of sales. Regarding the reported tax rate, the impairment gives rise to a capital loss versus an operating loss and therefore is not immediately deductible. To the extent the company has future capital gains, we'll be able to offset this loss. Adjusted net earnings for the quarter were $541 million, which increased 20.2% versus last year. Adjusted earnings per share of $0.59 for the quarter were up 28.3% to last year. For 2015, adjusted earnings per share of $3.29 were up 21.4% versus 2014. Transitioning to the balance sheet, cash and cash equivalents at the end of the quarter were $405 million. Inventory at $9.5 billion was up $547 million, or 6.1% over last year. Roughly $200 million, or 2.2% of the growth was driven by the timing of Chinese New Year, with the rest of the increase to support sales growth. Inventory turnover was 3.92, an increase of 7 basis points over last year. Moving on to liabilities, accounts payable at $5.6 billion was up $509 million, or 10% over last year. The increase relates to both higher inventory levels and a two-day improvement in days payable outstanding. At the end of the fourth quarter, risk adjusted debt-to-EBITDA was 2.14. Return on invested capital increased 18 basis points to 14.1%. We estimate that the impairment charge negatively impacted ROIC by 238 basis points. 2015 was the third consecutive year that ROIC improved by more than 200 basis points. Now, looking at the statement of cash flows, cash flow from operations was $4.8 billion. Capital expenditures were $1.2 billion, resulting in free cash flow of $3.6 billion. During the quarter, we repurchased 7.6 billion shares, or $562 million, through the open market. For the year, we repurchased almost 54 million shares, which included $3.8 billion from the company's share repurchase program as well as shares withheld from employees to satisfy statutory tax withholding liabilities for a total of $3.9 billion. Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook. But first, I want to highlight that fiscal 2016 will include an extra week in the fourth quarter for a total of 14 weeks and 53 weeks for the year. Lowe's fiscal year ended on the Friday nearest the end of January. This means we have a 53-week year roughly every five years. Our last 53-week year was 2011. For 2016, we estimate that the 53rd week will aide total sales by approximately 1.5% and earnings per share by $0.05 to $0.06. Secondly, while we have reached an agreement to acquire RONA, we have shareholder and regulatory approvals ahead of us. As a result, our outlook excludes the impact of the Rona transaction. Now, let's get into the outlook. As Robert noted, the forecast for the home improvement industry remains positive. While we're optimistic about that forecast, we've taken a prudent approach to our 2016 outlook. For 2016, we expect total sales increase of approximately 6%, driven by a comp sales increase of 4%, the impact of the 53rd week and the opening of approximately 45 stores, which includes 20 Orchard locations and 12 stores in Canada, largely the result of the Target's lease acquisition. For ease of modeling, the EBIT and EPS growth rates exclude the impact of the impairment charge. We are anticipating an EBIT increase of 80 basis points to 90 basis points from a combination of gross margin, SG&A and depreciation. As you've heard from others, there is wage pressure in the marketplace. Our outlook for 2016 assumes roughly 7 basis points or $0.03 per share of pressure associated with above-average wage inflation. For 2016, we expect 25 basis points to 30 basis points of EBIT expansion per point above (30

[Operator:]

Our first question will come from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

[Simeon Ari Gutman:]

Thanks. Good morning. Bob, just a quick follow-up on the progression of the flowthrough for the year. I guess we were under the impression there were some indirect costs that had come out in the middle part of the last year and that would still roll through the model in the first part of 2016. And so why I guess isn't that the case? And then can you just put a little more color around why bonus in GM? I don't know if those were mentioned in any part of the year, but what are the factors that are going to help you with flow-through in those areas?

[Robert F. Hull:]

So, Simeon, there is a variety of factors that contribute to flow-through being a little bit heavier from the second half of the year. Gross margin really based on the mix of products primarily. We had a greater mix impact in the fourth quarter in the second half of the year than we did and the year as a whole. That's a primary difference driving a little bit heavier gross margin expansion in the second half than the first half. For bonus, we came into the year expecting to leverage bonus roughly 10 basis points. It ended up being flat as a percent of sales for 2015 relative to 2014. A lot of that difference came in the fourth quarter on the strength of our sales performance. Our bonus programs are predicated on sales and earnings performance. And based on the strength of the sales results for the fourth quarter, we increased bonus accruals. As a result, we'll have the opportunity to leverage against that build in Q4 2015. Another smaller item, store environments, so just the timing of projects weighted more in the first half versus second half as we think about 2016 versus 2015. And then the impact of the 53rd week. We have roughly $900 million of additional sales in the fourth quarter that's going to drive roughly 15 basis points of higher EBIT in the second half of the year as a result of that. So those are the major factors giving rise to the difference in flow-through second half versus first half.

[Simeon Ari Gutman:]

And to clarify, are there incremental indirect costs that could come during the year? And then I'll just ask my follow-up in case we get cut off. Just the volatility or the variability in the months in the quarter. November was weak. I think that you mentioned Black Friday was good I think. But November was a little weak. December was great against tough compares. Did anything explain that, anything strategically? Does it sync up with promotions, et cetera?

[Robert F. Hull:]

As it relates to the second question, really tough weather first half of November, primarily in the Southeast. So if you think about our footprint, our Southeast orientation, that had an impact on the first half of November. After that we saw much improved performance in the second half of November. And as Mike indicated, we had very good Black Friday performance. As it relates to other indirect costs, we continue to work on our indirect spend and would expect to see the leverage throughout 2016 from those efforts.

[Simeon Ari Gutman:]

Okay. Thanks.

[Robert F. Hull:]

Thank you.

[Operator:]

Your next question will come from the line of Michael Lasser with UBS. Please go ahead.

[Michael Louis Lasser:]

Good morning. Thanks a lot for taking my question. It's about the promotional activity that you undertook during the quarter. Is that something that you had planned on doing, or was it more in response to what you saw in the marketplace and then responded in kind?

[Michael A. Jones:]

Hi. Good morning, Michael. This is Mike Jones. I'd say this, most of it was planned. We do make adjustments as we see the competitive activity in the marketplace and we will at times move out of one form of promotion to another. One of the things that you saw us do was move from credit as a primary form of promotion at certain points in the quarter into other forms of promotion. But the total activity level is exactly where we planned it to be. The execution towards that activity level, we do make adjustments within the quarter.

[Michael Louis Lasser:]

So just to try and interpret what you're saying, Mike, you had planned to do some promotions in the fourth quarter. You were going to move away from offering extended terms of free financing towards more pricing and discounting. That's how it happened. And is that a right interpretation of how it unfolded?

[Michael A. Jones:]

I'd say it a little different. We planned to do promotions within the quarter. We promoted to the level that we planned to promote to. And one of the adjustments that we made in the quarter was less financing and more towards discounts is what we did in the quarter. So total level is exactly where we expected it to be with some adjustments within the quarter on how we got there.

[Michael Louis Lasser:]

Are there signs that the sector is becoming more promotional, maybe some struggle just with their survival they're doing things to be more relevant and so you're having to respond? Or is it just that this is the direction the world's heading?

[Michael A. Jones:]

I don't think so. I think where those are having challenges, the challenges are probably something other than just straight price. I think there are folks having challenges around their format and I'm not sure they're going to promote their way out of those kind of challenges. And so I would describe the market as very rational. When we go after what we target for share gains, we do it in a way that's rational. I think the majority of us do exactly that. So I don't see it becoming more promotional. I don't think I see anyone doing anything that's going to suggest that the market goes in a bad space as a result of people trying to survive. I just haven't seen that.

[Robert A. Niblock:]

Michael, this is Robert. Also keep in mind it's not just the promotional cadence that we execute in the quarter versus our plan. It also comes into playing the success of those promotions. So, for example, we didn't plan on appliances to be high-single digit comps for the quarter. There was opportunity there obviously, as we've talked about in the past, that particularly the fourth quarter that's a category of merchandise that is from a competitive standpoint is something that gets promoted through the holidays. And that had great receptivity, great success with the appliance offering, the suites that Mike talked about being in the stores. So part of it is not only staying on the program, but the success of what we saw which drove some of that mix impact as well.

[Michael Louis Lasser:]

Understood. Thank you so much.

[Robert F. Hull:]

Just to clarify, so the product promotions impact gross margin, so we called out the negative impact to gross margin based on the product promotions. The reduction in financing promotions hit SG&A. So roughly speaking, the EBIT impact of promotions in Q4 was about as planned. The complexion, as Mike described, between gross margin and SG&A was a bit different.

[Operator:]

Your next question will come from the line of Chris Horvers with JPMorgan.

[Christopher Michael Horvers:]

Thanks. Good morning. A couple of follow-up questions. So in January, was there any benefit from the weather in January? I'm assuming the warm weather Home Depot talked about yesterday that being mainly a December phenomenon. Was there a benefit from the big storm in January? Trying to get an understanding of what's a real good indication of the underlying run rate of demand in the business that was like a 5.3% and your guiding to 4% for the year?

[Robert A. Niblock:]

I'll start, Chris, and I'll let Bob talk specifically about how things fell in January. Just kind of as we said in our comments, if you think about the quarter, El Niño year or what, but certainly, overall warmer weather for the majority of the quarter. That extended the season for the outdoor product categories, which is what we went through here kind of lawn and garden, lumber and building material, those that we saw a really strong – outdoor power equipment that we saw really strong performance for. But then we had stuff like Hurricane Jonas hit, I'm sorry, Superstorm Jonas hit. We were in really great shape with the products that customers needed at that point in time. So any time that you're selling snow throwers and ice melt, those things, you're not selling a lot of other stuff, but when the customer needs that product, being in supply of those products, which our merchants did a great job with having secured the access to the product, as Mike took you through our supply chain, did a great job of getting that product in the market where the customer needed it, whether it was impacting for the customer to have that product. So all in all, that was great execution in the quarter and taking advantage of the opportunity that was there. Bob you want to talk specifically to weather impact of January?

[Robert F. Hull:]

So as Robert said, with extreme weather, you're selling the of impacted (41

[Christopher Michael Horvers:]

And then, so as a follow up to that, the 5.3% in January, maybe thinking about that, and then reflecting on the comp progression throughout the year and how you're thinking about the first quarter, first half or second half?

[Robert F. Hull:]

So as we think about 2016, we see the four quarters in a relatively tight band. There is some movement up or down, but it's not substantial for the year. So as we think about the 4%, should be fairly consistent across the four quarters.

[Christopher Michael Horvers:]

Understood. And then one follow up, which is on the EBIT line, so we had modeled I think almost 20 basis points of bonus leverage in the fourth quarter. And it sounds like that was flat. Was that basically the delta versus your model in terms of driving the leverage and as you think about getting into the 25 basis point to 30 basis points next year, it seems like sales upside resulted in less margin flow through as you saw in the fourth quarter. So I guess trying to reconcile those two things.

[Robert F. Hull:]

So the flow through was impacted in a quarter and for the year by two factors, and we've talked about both. Bonus is one, and the mix impact on gross margin is the second. If you – rough math would suggest, Chris, that those items combine for a 5-basis point flow-through impact kind of year which would get us into the 25-basis point to 30-basis point range. We are comfortable with the guided range for 2016 that would also be in that 25-basis point to 30-basis point range.

[Christopher Michael Horvers:]

Understood. Thank you.

[Operator:]

Your next question comes from the line of Peter Benedict with Baird. Please go ahead.

[Peter S. Benedict:]

Yeah, hey, guys. Just a question kind of on the spring upcoming. I mean, how does the warmer winter kind of set you up for the spring? Have you guys made any adjustments in terms of the timings of your sets? How you're approaching the spring business?

[Michael A. Jones:]

Good morning, Peter. This is Mike Jones.

[Peter S. Benedict:]

Hey, Mike.

[Michael A. Jones:]

Yes, from an inventory perspective, I talked earlier to having brought in inventory a little sooner to be sure that we're prepared for the spring. But we're also looking at category performance so that we can take advantage of what we think is going to be some upside. With the way we've made some adjustments to how we're doing our resets in terms of outdoor patio and some of those categories, so yeah, we're ready for the spring. We think it could be a good spring for us, and we want to be there to take advantage of it. And you saw us do that on the other side of the fall as well, taking – carrying some of the fall lines longer into the year to take advantage of what looked like a longer fall season.

[Ricky D. Damron:]

Yeah, Peter, this is Rick. I'd also add to that just from a inventory perspective, Bob talked about the impact of Chinese New Year and the timing of that and the impact that had on the inventory layers for the quarter. So the majority of that product is spring related. So we have that in our systems. It's in our DCs and being loaded into the stores. So we feel good both from a stacking perspective as we plan the quarter as well as the flow of inventory that we won't have or won't see any significant gaps if the weather continues to hold as-is or accelerate into an early spring.

[Peter S. Benedict:]

Okay. That's helpful. Thanks. And then just on the big ticket comps, they were solid, 6.6%, those transactions above $500, but they did slow a little bit or decelerate from the third quarter. Just curious given what's going on in the stock market, some of these energy markets, just curious if you're seeing anything kind of when you peel back the onion any kind of wealth effect impacts on some higher-ticket project demand? Again, it doesn't look like it's impacting the overall business, but anything in particular you can point out there, either regionally or what have you? Thank you.

[Robert F. Hull:]

We're not, Peter. Our business continues to be driven by income and housing. So really solid progress on the number of jobs added throughout 2015 as well as late in the year starting to see some real wage appreciation. As it relates to housing, continued solid turnover through 2015 as well as additional price appreciation. So all those factors continue to drive demand for home improvement, and we see similar factors going into 2016.

[Peter S. Benedict:]

Okay. Great. Thank you.

[Robert A. Niblock:]

Thank you.

[Operator:]

Your next question comes from the line of Greg Melich with Evercore ISI. Please go ahead.

[Gregory Melich:]

Thanks. A couple of questions. I want to start with deflation, what you've seen in lumber and copper in the quarter, and what's the outlook do you think is for this year?

[Robert F. Hull:]

So those two items, lumber and copper, they really impacted Q4 by 35 basis points. We expect roughly similar impact in Q1, but the effect dissipates as we progress through 2016.

[Gregory Melich:]

Okay. Great. And then second, I just wanted to make sure I got the CapEx cash flow buyback tied together correctly. It looks like you'll be generating $3.5 billion of free cash flow but buying back $3.5 billion of stock, and that's excluding the acquisition or anything you might get from the Australian joint venture. So if we get the deal in Canada done early, should we expect that $3.5 billion to be less, or does that $3.5 billion sort of factoring that expense is kind of out there and I guess why CapEx ticked up this year to $1.5 billion?

[Robert F. Hull:]

So regarding CapEx, the higher number of store openings is the biggest driver for CapEx. There was some timing of projects. A couple stores slipped from 2015 to 2016 as well as some other projects which moved about $100 million from 2015 to 2016. Adjusting for that, we basically compare $1.4 billion in 2016 to $1.3 billion in 2015. Bear in mind that the 2015 number includes roughly $200 million associated with the purchase of the target DC and leases. Specific to the buyback and cash flow generation, you are correct that it excludes both the RONA transaction and any funds received from the joint venture. However, even if the transaction goes through in the middle of the year, we do not expect that the $3.5 million share repurchase would be reduced.

[Gregory Melich:]

Okay. Great. And then online growth, I think, Mike, you mentioned up 26%, but that was around Black Friday. Do you have a number for the whole quarter?

[Ricky D. Damron:]

Yeah, Greg, this is Rick. For the quarter, the online business was up 26% in total. So that was the quarter number.

[Gregory Melich:]

Okay. Got it. And what percent of sales now?

[Ricky D. Damron:]

3% of total sales.

[Gregory Melich:]

Thanks. Good luck, guys.

[Robert A. Niblock:]

Thanks, Greg.

[Operator:]

Your next question comes from the line of Seth Sigman with Credit Suisse. Please go ahead. Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker) Thanks. Good morning, guys. First a question on the long-term guidance, the 11% EBIT margin goal. I know you said you would update us at some point, but just as we look at the numbers, it seems to imply a similar margin improvement in 2017 as 2016, but of course 2016 has that extra week, so on a 52/52 week basis, it implies an acceleration. How should we be thinking about that at this point?

[Robert F. Hull:]

So still on target for the 11% in 2017. Our guidance would suggest roughly the same level of EBIT improvement in 2017 versus 2016, so you're correct on that. Regarding the 53rd week, while it is an extra week, it's essentially one of our lowest, if not the lowest volume sales week of the year, so it's not a terribly productive sales week. It has some impact on the second half of the year as I mentioned, but the EBIT impact is only about 3 basis points for the year. So there will be an impact in 2015 going into – excuse me, 2016 going into 2017. Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker) Okay. Got it. And then a question on the Pro side of the business. You mentioned that was performing above the company average. That seems to be a change versus the last couple of quarters, at least. Can you elaborate on that trend? Do you think that's an industry trend or something specific that's resonating? And then I guess on the other side of that, does it imply any major change in the trend for the DIY side of the business?

[Robert A. Niblock:]

This is Robert. I'll start and then I'll let the other guys jump in. Yes, I think part of what we signaled was giving the favorable weather that we had during the quarter that I think that also helped drive some strength in the Pro business when you think about the ability for a lot of the project categories that we talked about for them to continue to work and implement, and on top of that, a lot of the other initiatives that we've put in place such as LowesForPros.com, the incremental resources that we've put in place after that is resonating with the consumer. So I think part of it is kind of an industry macro that the weather is setup and allowed up for incremental opportunity and those product categories which drove some of that business. Then on top of that, some of the specific stuff that – and resources we've put behind our Pro initiative in becoming more relevant with that Pro customer.

[Ricky D. Damron:]

Yeah, this is Rick. And I would agree with Robert, weather had an impact on the Pro when we look at the categories and performance particularly, through the month of December. But I think it also continues to resonate about the way the Pro continues to respond to our initiatives, both from a brand perspective as the merchants continue to work with the operations team to make sure that we have the relevant brands that the Pros are responding to. And then also with our continued focus on making sure that both from a service standpoint and a value standpoint that we remain relevant to the marketplace in what we're doing there. So they continue to the respond well to the brands. The outside sales organization that Mike highlighted earlier of 160 people, adding another 35 into that organization. Continues to perform extremely well and resonate with the customer, particularly on our large MRO accounts and our national accounts as we continue to see those grow. And our core programs, of our 5 Ways to Save for the Pro customer continues to resonate really well. So we think we'll continue to build upon the solid foundation that we've put in place over the last couple years. Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker) Okay. Thank you.

[Operator:]

Your next question comes from the line of Eric Bosshard with Cleveland Research. Please go ahead.

[Eric Bosshard:]

Good morning.

[Robert A. Niblock:]

Good morning, Eric.

[Eric Bosshard:]

Good morning. Curious if you could talk a little bit about your thoughts on market share with both the DIY customer and Pro customer, how you would evaluate the performance in 2015 and how you think about how that performance might compare in 2016?

[Robert A. Niblock:]

I'll start, Eric. Obviously, we think that as we look at the market share data that you can get out there that our performance in 2015 exceeded the growth in the market. So we feel good about our performance. It exceeded our own plan and expectations. I think the team did a good job of capitalizing on opportunity that presented itself in the market. A great example is appliances and how the amount of business we did in appliances consistently throughout the year. As we look forward to what the market looks like in 2016, the initiatives we have in place I still believe that we feel good and that some of the changes taking place in the marketplace that we feel good that we'll continue to with our initiatives gain share in 2016 as well.

[Robert F. Hull:]

Eric, specific to the numbers for the calendar fourth quarter. The NAICS 444 was up 4.6, our comparable growth was up 5.1. We know that's not a precise measure of the industry, but directionally we feel like we're growing a little bit ahead of share. As we think about 2016, we do some work with some partners to try to estimate what the expected growth rate is for our industry. And that would suggest roughly a 4% growth rate for 2016, which sits right on top of our comp, with new stores that suggests an opportunity to take share in 2016.

[Eric Bosshard:]

I guess specifically as a follow-up on the Pro side, the investments you're making there especially in the outside selling efforts, I'm curious if you think that allows for a notable improvement in your market share performance with the Pro, or is 2015 reflective of what that growth rate or what that market share performance is going to continue to look like?

[Michael A. Jones:]

Eric, this is Mike Jones. We think there's potential for it to continue. Look at some of the brands that we brought back in fashion lighting, with Kichler, Progress Lighting, and Quoizel. That's a three-brand approach. This approach is a home channel exclusive. You won't find these brands at any other home channel. And if you look at our strength in fashion lighting through this past quarter, we were up double digits. Paint, above the company average, with Sherwin-Williams, now bringing on Infinity (56

[Ricky D. Damron:]

Eric, this is Rick. The only thing I would add to that again is the introduction of LowesForPros.com in the second half of the year just getting its legs under it. As we continue to gain traction from that initiative, I think it sets us up well to continue to gain share from the MRO customer as we continue to get traction with Lowe's For Pros.

[Eric Bosshard:]

Great. Thank you.

[Robert F. Hull:]

Regina, we've got time for one more question.

[Operator:]

Our final question will come from the line of Matthew Fassler with Goldman Sachs. Please go ahead.

[Matthew J. Fassler:]

Thanks so much, guys, for squeezing me in. I have two questions. The first relates to big ticket and to some of your category disclosure. One category you cited as being a bit softer is kitchen, which I know is kind of a traditional big ticket project-oriented category. And my sense is that that world had had some momentum for you. So anything in particular holding you back? And any macro reading you would take from the performance in that category?

[Michael A. Jones:]

This is Mike Jones. No. We don't think there's anything macro. Kitchens were largely challenged by some pull-forward because of October promotions. We had some reset activity in the kitchen as well. I talked about the credit promotions that also impacted the kitchen. So we don't think there's anything macro there.

[Matthew J. Fassler:]

Got it. And then the second question, as we think about bonuses and incentive compensation, it sounds to some degree that what happened was the sales beat by a greater degree than the earnings. And the way the incentives were structured, that essentially worked against you and sort of dug the earnings hole just a little bit deeper. As you think about the incentive structure for the stores and the way you pay out bonuses, is there any thought being given to reworking those in a way that they're more profit or gross profit driven? I understand that the store level associates can't necessarily think about the earnings for the enterprise, but in a way that incentivizes sort of the best kind of business that you can do?

[Robert A. Niblock:]

Matt, this is Robert. I think, yeah, you've obviously hit one of the items that put a little pressure on the quarter, and that was the sales growth rate versus the earnings growth rate, if you want to call it. And what I'll tell you is that every year, we look at our incentive compensation programs all the way across the organization and try and set us up for what we think is going to drive the right response across the organization to take care of the customer and drive the business. And this has been an evolution that we've been on all the way back from when we were just single channel and everything – the incentive compensations were heavily focused to what took place in the four walls of that store to really now today being an omni-channel organization for a store manager who is not only compensated on what happens inside their store but also what happens in their market as well. So it's an evolution we've gone through as we're going from single channel to multi-channel to now omni-channel. But that's part of about what Rick and his team do every year is look at the incentive compensation structure and make sure that it's appropriate and in line. We're very happy with the behaviors that it's driving, but it is something as we continue to evolve the other parts of our business become bigger parts of the total sales. It is something to look at to make sure that we're driving the right behavior of keeping the customer in the center and always focused on what's best for the customer. That's our job, and we'll be doing that, so.

[Matthew J. Fassler:]

All right. Thank you so much.

[Robert A. Niblock:]

Well, great. Thanks, and as always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our first quarter results on Wednesday, May 18. Have a great day.

[Operator:]

Ladies and gentlemen, this concludes your conference for today. Thank you all for joining and you may now disconnect.