Good morning, everyone, and welcome to Loews Company's 4th Quarter 2018 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 slides, these slides are meant 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.
Marvin Ellison, President and Chief Executive Officer Mr. Bill Boltz, Executive Vice President, Merchandising Mr. Joe McFarland, Executive Vice President, Stores and Mr. Dave Denton, Chief Financial Officer. I will now turn the program over to Mr.
Ellison for opening remarks. Please go ahead, sir.
Thank you, Regina. Good morning, everyone. Overall, we are pleased with the progress we're making in our business and most of the intense work over the past 6 months to transform our company has been in preparation for an improved spring season and fiscal 2019. Therefore, we are encouraged by the customers' response to our assortment and service changes in Q4 and with the results we're seeing in early spring categories. This progress was evident in the improvement we saw in the paint category in the Q4.
As a reminder, for the past 10 consecutive quarters, paint has delivered comps below the company average. Our intense focus on retail fundamentals in this area while leveraging our exclusive partnership with Sherman Williams allowed us to exceed our expectations in paint during the Q4 and transition its business to comp above the company average. While paint is only one category, it is the first area of the business where we implemented our retail fundamentals framework of improved staffing and end stocks, while remediating issues from previous resets. We believe this renewed focus on retail fundamentals across multiple categories will pay dividends throughout our entire business in 2019. Now allow me to take a few moments to update you on our quarterly results and provide you with thoughts on fiscal 2019.
For the 4th quarter, we delivered comparable sales growth of 1.7% and our U. S. Comps improved by 2.4%, delivering a positive 5.8% comp in January. We're also very pleased with the comp progression, which we believe further reinforces that our retail fundamental focus was in place and doing well in the quarter. In the U.
S, we delivered comps in 11 of 14 geographic regions and our Tampa Houston markets faced tough comparison from Hurricane Irma and Harvey. The U. S. We delivered comps, positive comps in 8 of 11 product categories and great offers in tools and hardware delivered comps above the average supported by strong customer response in Craftsman products, which gained market share across every category. In addition to paint, we also achieved above average comp performance in lawn and garden, appliances and lumber and building materials.
We delivered online comp growth of 11% for the quarter. And while traffic to our website was strong, we were unable to fully capitalize on the traffic due to system challenges, such as the outages we experienced on Black Friday weekend. These challenges are a reminder of the upside opportunity we have in our online business. However, coming out of the holiday season, it was obvious that we needed to redirect our online strategy and our focus. Therefore, in January, we made a leadership chain hiring Michael Mann as our new President of our Online Business.
Mike is someone with an extensive knowledge and expertise in the home improvement omni channel space, and we're confident that Mike will work with our new Chief Information Officer, Samathia, to lead an aggressive transformation of loews.com in 2019. In Canada, we posted negative comp sales for the quarter as a weaker Canadian housing market combined with ongoing integration of RONA exerted pressure on the business. We also recorded a $952,000,000 non cash pre tax goodwill impairment charge associated with our Canadian operations. We anticipate weakness in the Canadian housing market, which is exerting pressure on our outlook for that business over the near term. However, we remain confident in our market position in Canada and over the long term potential of this business.
We reported a diluted loss per share of $1.03 for the quarter, but our adjusted diluted earnings per share were $0.80 an increase of 8.1% for the same period a year ago. Now as we transition in 2019, we remain true to our mission of delivering the right home improvement product with the best service and value across every channel and community that we serve. And we'll achieve this mission by winning in 4 key areas: driving merchandising excellence, transforming our supply chain, delivering operational efficiency and intensifying customer engagement. Note that our strategic focus hasn't changed, but we've modified the title of our second focus area since our Analyst and Investor Conference, From Omnichannel to Supply Chain Transformation. This better describes the initiatives beneath it, including fulfillment and delivery optimization.
In fact, all four key areas deliver a better omnichannel experience for our customers. Now allow me to take a few moments to discuss 2019 in more detail. The U. S. Home improvement industry should continue to benefit from several factors, including income growth, lower federal tax rates, gains on household formation and continued home price appreciation.
This growth is further supported by an aging housing stock. As home prices are increasing, consumers are staying in their homes longer and because of their improved financial position, they are investing in their homes. All of these factors drive investments in home improvement projects. To capitalize on this supportive macro environment, we will continue to improve our execution and focus on retail fundamentals. And to be transparent, we are an executive team with high expectations and we visit stores on a weekly basis.
We're still seeing pockets of inconsistent execution. However, through the inconsistency, we're beginning to see improvements in key areas. So let me take a moment to share with you 5 areas where we were pleased to see signs of progress in our business. First, we're delivering better customer service. Customer satisfaction scores have improved for both DIY and Pro customers.
2nd, our merchandise service teams or MSC pilots showed positive results. 3rd, we're seeing improvement in performance versus expectations in key categories. In addition to the improvement we saw in paint, we're also leveraging our improved reset process to better position us for the spring selling season. 4th, we continue to see strong customer sponsored Craftsman, with market share gains in each crafting category since introducing the brand. We're also very excited about the product launch of Craft and Outdoor Power Equipment this spring.
And 5th, we're seeing positive results in our Pro business driven in part from our investment in job lot quantities. Although things are far from perfect and we still have work to do to transform the company, these five areas of progress give us confidence in our business outlook for 2019. They also demonstrate that we are focused on the right initiatives to achieve our long term targets. Before I close, I'd like to thank our over 300,000 Solsys for embracing change and for their renewed competitive spirit and for their commitment to our most important initiative, serving the customer. With that, let me turn the call over to Bill.
Thanks Marvin and good morning everyone. We see a great opportunity ahead of us to capture more share in the home improvement market. With a strong retailer brand, great products, a compelling new marketing campaign and impactful new partnerships, all of which will drive customers to our stores and our website. We are very excited about our new partnership as the official home improvement retail sponsor of the National Football League. This exclusive multi year sponsorship grants Lowe's the ability to market on a national and local level throughout the year, which will allow us to deepen our relationships with both the pro and our DIY customers.
We are also working to deliver an outstanding customer experience in our stores and on our website. Today, Joe McFarlane and I will provide you with an update on our progress. As Marvin indicated, we are in the early stages of change. And while there are still pockets of inconsistency in our system, transformative action is underway and we are beginning to see signs of improvement. For example, we are seeing positive signs from our merchandising service team or MST pilot.
These teams are funded by our vendors and they add an average of 8 full time employees per store. These teams are responsible for the day to day maintenance of the day presentations in our stores, responsible for setting and maintaining end caps and helping execute off shelf displays. The MST teams are critical to improving our execution at store level as they take these consuming tasks off the shoulders of our Redfast associates so that they can be freed up to serve customers. Early results of our MST pilot show reduction in out of stocks, improved sales productivity and an increase in base service per hour. We expect to complete the staffing of our MST teams and roll the program out nationwide in the Q1 of 2019.
As we have discussed before, the Pro customer will be a key focus for us in 2019. This is why, as Marvin mentioned, we took steps in the Q4 to improve our inventory position for the Pro by investing in Job Lot Quantics, an area that has historically been underfunded. We must ensure that we have inventory depth at the store level to meet the Pro customer needs and enable the presentation impact on our top selling items. In the Q4, we piloted job lot quantities for select SKUs in select test markets and we saw an increase in both pro comps and pro sales penetration. Following this successful pilot, are now expanding our investment in job lot quantities and we are rolling out nationwide in the Q1.
We are also leveraging our improved reset process to better position us for the spring selling season. We are transitioning into the season more efficiently and and we are setting our stores earlier. All of this to ensure that we have sufficient seasonal inventory on hand and that we are positioned to capture the spring demand when the season breaks. We are pleased with early results in the South and Deep South where we are seeing strong comps in our seasonal and lawn and garden categories. Another area of excitement for spring is the continued rollout of Craftsman.
Our data shows us that approximately 60% of Craftsman customers were not previously a Lowe's customer. So from tools to outdoor power equipment, from the garage to the garden, Craftsman is a traffic driving loyalty building opportunity for us and we are very proud to be the exclusive destination in the home center channel for this iconic brand. We have gained market share in each Craftsman category since introducing the brand and we are excited to add Craftsman outdoor power equipment as part of our spring offering. Throughout the spring, we will also continue to roll out of mechanics tools, hand tools, power tools and tool storage across the chain. In addition, for the first time this spring, Lowe's will have the top 3 brands in writing equipment with John Deere, Husqvarna and Craftsman.
In addition to our assortment and outdoor power equipment, we expect to drive sales this spring with compelling events like Spring Black Friday, exciting product offering such as the extension of our Monrovia plant program, a home center exclusive in lawn and garden and expanded offerings from Weber and Charbro, the top 2 brands in outdoor grilling. In fact, earlier this month at our store managers meeting, the merchants led every store manager in the company through a product walk displaying for them all of the new and innovative products that they could expect to see for the upcoming season. This event was well received and has built an increased excitement for spring season. In the Q1, we will also drive merchandising productivity through the rollout of our field merchandising teams. These teams will focus on meeting the needs of the customers at market level, delivering localized and relevant product assortments, helping to drive customer engagement and improving sales per square foot and inventory productivity in our stores.
We will also dramatically increase our online assortment in 2019 as we work to shift slower moving SKUs out of our stores and onto our website to improve inventory turn. We are excited about the opportunities that are ahead of us and we're working very hard
to position Lowe's for the future
and to capitalize on the strong demand in a healthy sector. Thank you. And I'll now turn the call over
to Joe. Thanks, Bill, and good morning, everyone. I'd like to discuss the steps we are taking to improve customer service in stock and better optimize our labor spend. The first step to improve customer service was to streamline communication and pass at the store level. Therefore, in the Q4, we moved to a simplified weekly playbook that focuses the teams on top priorities, key metrics and critical deliverables.
Since then, we've seen a significant increase in on time task completion in the stores as our associates are now more focused on activities that drive sales and
improve customer service. In addition, we instituted a
regular pack down process within our stores to ensure that we're consistently filling our shelves with the product we already have. Since that launch, we've seen in stocks improve by 15%. To assist with our supply chain replenishment algorithms and keeping pace with sales demand, we gave our store managers limited autonomy to reorder appropriate quantities of low risk, high velocity SKUs to improve in stocks on key items. To improve our focus on customer service, we eliminated sales floor tasking activities during the busiest hours of the day, so our associates can focus solely on selling and providing excellent service. As a result, we've seen an increase in sales productivity and customer satisfaction scores.
In the Q1, we'll improve associate engagement by rolling out the smart model, a new customer service model which will guide the way we hire, train, evaluate and coach associates. This program models what a great experience actually looks like and drives behaviors that deliver the kind of experience that customers want. The Smart program is a comprehensive toolkit, including the training program and mobile devices, which are designed to provide our associates with the tools they need to deliver outstanding customer service. In the Q1, we will train all associates in the company on smart customer service and will complement this training by rolling out smart mobile devices to our stores. No longer will associates be required to leave the sales floor to log into a terminal to determine the price, rate of sales, on hand quantities or order status of an item.
The new smart device will provide associates with real time data at their fingertips by time of day, day of week and department, allowing us to align our labor hours of peak traffic, providing better department coverage and customer service, while also ensuring that we're using our labor hours efficiently and reducing payroll expense. This new system will replace a current staffing system that doesn't effectively capture and predict sales and customer traffic patterns. To further improve the customer experience in the Q1, we are replacing a a series of non customer facing positions with over 600 assistant store managers and over 5,000 department supervisors. These customer facing department supervisor roles will focus on providing better departmental coverage and expertise as well as coaching our associates in delivering excellent service. 1 of these supervisors will be dedicated to the Pro department.
To improve the Pro customer experience, we're also reallocating resources to add dedicated loaders so that the Pro customer can consistently rely on us to help them load
the bulky product they need. These new resources in Pro will allow us to take full
advantage of the job lot quantity investment that Marvin and Bill mentioned earlier and build on the momentum created in January when Pro comps were high single digit. Though we're in the beginning stages of change, we are excited about the early results we are seeing and committed to the work ahead to fully capitalize on the healthy demand in our sector. Thank you. And I will now turn the call over to
Dave. Thanks, Joe, and good morning, everyone. Let me begin this morning with a few housekeeping notes and review of the major charges that we incurred during the quarter. First, as a reminder, in the Q1 of fiscal 2018, we adopted the new revenue recognition accounting standard. The primary impact was the reclassification of the profit sharing income associated with our proprietary credit program from SG and A to sales.
The adoption of this program had no meaningful impact on operating income and no impact on comparable sales. Secondly, this quarter we changed our accounting policy for shipping and handling costs. Costs related to the delivery of products from the company to the customers are now included in cost of sales versus SG and A and D and A. This reclassification resulted in a decrease in gross margin of $289,000,000 in the 4th quarter and prior periods have been restated. Again, this accounting policy change had no impact on operating income.
3rd, as described in the press release and consistent with our plan to reposition Lowe's for long term success, we incurred $625,000,000 of pretax charges related to our strategic reassessment. And finally, during Q4, we recorded a $952,000,000 noncash pretax goodwill impairment charge associated with our Canadian operation. Given the softening outlook for the Canadian housing markets, we determined that the book value of this business exceeded its fair value. This write down essentially eliminates all goodwill associated with our Canadian operations. I'll now turn to review of our operating performance, starting with our capital allocation program.
In fiscal 2018, we generated over $5,000,000,000 in free cash flow and through a combination of both dividends and share repurchases, we returned nearly 90% of this cash to our shareholders. In the Q4 alone, we paid $387,000,000 in dividends and our dividend payout ratio currently stands at 35%. In November of this year, we entered into a $270,000,000 accelerated share repurchase agreement, retiring approximately 2,900,000 shares. We also repurchased approximately 2,800,000 shares for $2.59 through the open market. So in total, we repurchased $529,000,000 of our stock at an average price of $92.25 We have approximately $14,000,000,000 remaining on our share repurchase authorization.
And importantly, we continue to invest in our core business with capital expenditures of approximately $328,000,000 in the 4th quarter and nearly $1,200,000,000 for the year. Now looking at the income statement, we generated a diluted loss per share of $1.03 compared to diluted earnings per share of $0.67 in the Q4 of LY. On a comparable basis, excluding the $1,600,000,000 in pretax charges we recognized in the Q4, adjusted diluted earnings per share was $0.80 an 8.1% increase over last year's adjusted diluted earnings per share. Despite slightly softer sales in the quarter due to the weaker Canadian macroeconomic environment, the $0.80 of adjusted diluted earnings per share was in line with our expectations as we effectively managed expenses and drove store payroll leverage. Sales for the 4th quarter increased 1% to $15,600,000,000 supported by total average ticket growth of 4.6% to $76.96 partially offset by 3.6% decline in total transactions.
Comp sales were 1.7%, driven by an average ticket increase of 2.3%, partially offset by a transaction decline of 0.6%. Our U. S. Home improvement comp was 2.4% for Q4. While comp transactions declined for the quarter, we drove sequential improvements throughout the quarter with comp transactions down 2.1% in November, down 0.8% in December and positive 1.6% in January.
During the quarter, the net effect of cycling in the hurricane season was an approximate 80 basis point drag on comp sales. Headwinds from Hurricanes Harvey and Irma were partially offset by demand from Florence and Michael. Now looking at monthly trends, total comps were 0.3% in November, 0.8% in December and 4.8% in January. Additionally, monthly comps for our U. S.
Home improvement business were 0.9% in November, 1.4% in December and 5.8% in January. Now my comments from this point forward will be on a comparable non GAAP basis. Adjusted gross margins for the 4th quarter was 31.5 percent of sales, a decrease of 56 basis points from Q4 of last year. The adoption of the new revenue recognition standard provided 110 basis point benefit to gross margin. We experienced 55 basis points of pressure from substitute items that were offered over Black Friday weekend due to inventory shortages on advertised SKUs as well as an accelerated clearance activity for holiday inventory in order to better position us for the spring selling season.
We are raising the bar on serving our customers. Therefore, these two actions were necessary to mitigate inefficient planning leading into the holiday season. We also experienced 45 basis points of pressure from supply chain costs as we added new facilities to the network that are still ramping up to full capacity, coupled with ongoing increases in transportation costs and increases in customer deliveries. Tariffs exerted 25 basis points of pressure on gross margin and other product cost increases exerted 15 basis points of additional pressure. We are working diligently to mitigate the pressure from tariffs through a portfolio approach.
We are acting with caution and deep analytical rigor given the unprecedented size and scale of potential changes to allow us to measure the unit impact before proceeding. And finally, product mix shift had a 25 basis point negative impact on gross margins for the quarter. Adjusted SG and A for Q4 was 23% of sales, which delivered 77 basis points. Adoption again of the new revenue recognition standard resulted in 108 basis points of SG and A deleverage. This was partially offset by leverage from operational expense management.
Adjusted operating income decreased 106 basis points to 6.4 percent of sales. The adjusted effective tax rate was 24.3% compared to 39.1 percent of versus LY. This significant improvement is largely the result of tax reform. At $12,600,000,000 inventory increased $1,200,000,000 or 10.3 percent versus the Q4 of LY. This was largely driven by earlier spring buys, the anticipation of additional Craftsman resets and our investments in job lot quantities.
These are important strategic investments to drive sales performance in the coming months. Looking ahead, I'd like to discuss our 2019 business outlook, which remains essentially unchanged from what we shared at our December Analyst and Investor Conference. I'm providing the outlook today on an adjusted basis versus 2018. However, we have also provided a schedule on our Investor Relations website that takes this one step further and rebaselines 2018 by quarter, removing all operational impacts associated with our strategic reassessment. Also, as disclosed in our press release, for fiscal 2019, we will adopt the new lease accounting standard using a prospective transition approach.
We estimate adoption of this standard will result in an increase in the lease related assets of between $3,200,000,000 $3,600,000,000 and an increase in lease related liabilities of $3,500,000,000 to $3,900,000,000 The difference between the increases in total assets and liabilities will be recorded as an adjustment to beginning retained earnings in fiscal 2019. The standard will have no impact on our debt covenant compliance under our current agreements. In 2019, we expect a total sales increase of approximately 2% for the year, driven by a comp sales increase of approximately 3%. We expect adjusted operating margin increase of 85 basis points to 95 basis points. The primary driver of operating margin expansion beyond sales growth is expected to come from SG and A leverage.
Store labor productivity as well as reductions in advertising costs from more effective and targeted marketing programs will be the major contributors. The effective tax rate is expected to be approximately 24%, and we expect adjusted diluted earnings per share of $6 to $6.10 a share. We are forecasting cash flows from operations of approximately $6,500,000,000 and capital expenditures of approximately $1,600,000,000 This is expected to result in free cash flow of approximately $4,900,000,000 for 2019. And our guidance assumes approximately $6,000,000,000 to $7,500,000,000 in share repurchases for the year. We remain extremely excited about the future of our business and are focused on taking the necessary actions to drive returns and long term shareholder value.
So with that, operator, we are now ready for questions.
We are now ready for questions. Our first question comes from the line of Christopher Horvers with JPMorgan.
Thanks. Good morning, guys.
Can you talk about
the improvement in January? Obviously, you called that out in press release and on the call. It's a small month. So I was curious, have you seen in particular categories? Is it driven by particular regions?
How did it look in DIY and pro? And was there any of the clearance activity that you saw pressure gross margin provided a benefit to the January comp?
Chris, this is Marvin. Overall, we saw improvement in both pro and DIY, and really the sequential comp improvement was driven by quite a few factors. First, we saw transaction growth in ProN DIY and I think David's comments on the progression of transactions throughout the quarter reflected that. We also saw significant comp improvement in the pro business. We think that is based on the investments in job lot quantity, the supervision and staffing improvements, basic things like loading and just a broader service operation that we put in place.
We also feel very good about the early set to spring. I think Bill mentioned it in his comments and so did I, where we actually had stores this time last year that in the seasonal area, they were still managing through clearance holiday product. And so to simplify that, we're able to get what would be relevant spring product in some of these warmer weather markets paid a big dividend. In addition to that, we talked about the Craftman response the customer was also important. I'll let Bill add any additional color, but the good news for us is it was widespread, it was not either DIY or Pro, it was both.
It was transaction driven, it was driven across multiple categories and the pro business improvement also drove the kind of correlated improvement in building materials and tools and categories like that. Bill, anything else to add?
A few hit on most of it. I think the comments that were made in your early response around paint was another one where we saw the improvement there, both for DIY and for the Pro, in addition to the Deep South and South, as I said in my prepared remarks, where just by setting these stores earlier and ready for spring earlier, we saw a payback come from that. So we're encouraged by the early signs
of that.
And Chris, the only caveat I'll provide is we're not declaring victory. We have a lot of work to do. There's still areas of the business that I mentioned that we are still seeing pockets of inconsistency. But we believe that the whole retail fundamentals focus that we all talked about is paying dividends the longer we are able to embed it in our merchandising philosophy, in our operational processes. And that's why we believe we sequentially improved throughout the entire Q4 period.
And then as a follow-up, Dave, as you look forward, can you talk a little bit about the cadence around the quarters or the halves, anything on the comp and the margin structure? And as you look forward, do you think the inventory is clean such that and the stores are closed, so do you think that the gross margin pressures from clearance are behind us and the accounting charges as well?
Yes. So maybe keep that a couple of questions in there. First from a comp perspective, as I think about 2019, is it shaping up? I would think about that as somewhat balanced first half and second half, maybe with a slight bias a bit to the back half of the year. The first half, I think we're very nicely positioned for seasonal, and I think the season will drive our performance a bit in the first half as we implement our initiatives.
The second half driven more specifically related to our initiatives beginning to take hold and beginning to see some progress financially from those programs. And so I think that's the way to think about as the year shapes up. I do think largely our inventory liquidation work is behind us. As a retailer, we are always in this business. We always look at nonproductive we are always in this business.
We always look at nonproductive inventory, so we will continue to focus on that, but we don't see major program from that perspective going forward.
Thank you.
Your next question comes from the line of Simeon Gutman with Morgan Stanley.
Thanks. Good morning. My first question is on 2019 guidance. I think it was mentioned that the guidance is essentially unchanged.
Can you just help us bridge, I
think at the Investor Day, it was 30 basis points of pro form a adjusted margin improvement. Can you bridge that versus the guide and maybe the base that you're guiding off of today? Is that effectively unchanged?
Yes. So think about this in 2 ways. 1, when we gave guidance at our Analyst and Investor Conference, we baselined it off of we baseline assuming the midpoint of our Q4 guidance range. Now that Q4 is done, we kind of came in closer to high end of that guidance range. So that's really the major change.
Secondly, when I provided our guidance during my prepared remarks, I referenced back to our adjusted 2018 numbers, not our re baseline numbers. So if you step back and you do the compare to re baseline numbers versus our adjusted, that will bridge that gap. So essentially, our 2019 outlook has not changed as we sit here today.
Okay. And my follow-up is on the Q4 gross margin. You mentioned the drivers. Can you remind us or can you share with us how much of it was unexpected versus your plan? And then if you look at the entire margin expansion guidance for 2019, that 30 basis points or so or the adjusted one that you're talking about, If you end up doing better than that, besides sales, which I would think is the more obvious lever, is there an opportunity to beat on margin?
And I'm just trying to gauge the sensitivity within each of these lines, whether it's gross margin or SG and A and determine if there is a high degree of any or not?
Yes. So I guess I'll take the first piece as what was, I'll say, somewhat unexpected in gross margin as we cycled into Q4. I don't think we fully anticipated the impact of both the substitute items on Black Friday and the requirements to do that, although it's the right thing to do from a customer perspective. And then secondly, we made during the quarter a proactive change to our plan to liquidate seasonal more aggressively and earlier to get ourselves better positioned from a spring perspective we cycled into 2019. So those were probably not completely expected, but we actively manage that from our standpoint.
And Simeon, this is Marvin. So the broader comment that I will make is we put a very new merchant team in place and Bill Bose didn't really get in the seat until basically mid August. And so as you know, planning for spring is well underway prior to that timeframe. So it was a real accelerated process to understand where we were entering spring, set dates and the like. And to David's point, there is a traditional process that I'm accustomed to and Joe and Bill accustomed to heading into the holiday period with big ad eyes, that is to go through the ad to make sure that you have a degree of in stock.
And what we found out is that we didn't. And that was a traditional problem that we've had here at Lowe's. And so rather than to disappoint customers, again, we decided to take the aggressive approach that we're going to substitute it knowing that it would have margin impact, but as David stated, it's the right thing for the customer. In addition to that, as I mentioned, it was not uncommon going into week 3, 45 for Lowe's to be still managing through holiday markdowns in lieu of driving spring categories. And so obviously, we decided to take advantage of our merchandise service teams and to reset these areas, and we're pleased with what we're seeing in areas where the sun is actually coming out, and those things exerted pressure.
Bill and his team have good plans in place. We have a lot of new leaders running big businesses and we think the guidance that Dave outlined for margin is something that we'll be able to deliver upon.
Thanks. Your
next question will come from the line of Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. Can you give us a sense for how your promotional posture is going to be in 2019? It seems like this clearance activity is taking a little bit longer than what you expected. And is not only that going to extend into the upcoming year, but will you also be more aggressive to reengage customers with your store?
Michael, we don't see any material changes to our promotional cadence in 2019 versus prior years. We think we have a great brand. We are excited about products that we are bringing to market and we think that that's going to allow us to get the traffic and then do a much better job of converting that traffic.
Okay. And I want to follow-up on the outlook for 2019, because you did embed income tax rate that's 100 basis points below what you had previously expected. So what prompted that change and how did that flow through the rest of the model?
Yes. Clearly, we are constantly looking at our income tax status, and I think this is just we'll just continue to tweak that as we look at our expectations for 2019. So nothing dramatic there.
Okay. Thank you very much.
You're welcome. Thank you.
Your next question comes from the line of Brian Nagel with Oppenheimer.
Hi, good morning. Thank you for taking my question. Nice quarter. Thank you. So the first question I have, Marvin, you discussed a lot of what's happening in the stores and obviously some initial positive results.
How should we think about with all with what you've done in the stores, initiative in the stores, how far into this process are you? And then also, is there a way to look at, particularly with the sales acceleration, comp sales acceleration through fiscal Q4, is there a way with that data to sort of say isolate areas where you have touched versus areas you haven't, so we could see evidence of the progress you make in the stores with
some of the initiatives? No. Brian, it's
a good question. I would say putting a measuring stick to how far we are, we still have a lot of work to do. I mean, if you took a poll in this room with me, Joe and Bill, who spent quite a bit of our life in home improvement, we would tell you that we're going to be a lot better this spring. We're not going to be nearly as good as we would like to be, just because we all really started with Lowe's late in the summer and it just didn't give us the proper time to make the necessary adjustments to the categories we want to impact, the buyers we'd like to make and the supplier relationships that we would like to formulate. Having said that, we're very, very proud of the work of the teams and we're very proud of the change management acceptance that we have seen in the stores, on the merchandising side and supply chain, really across the whole organization, but we have a ways to go to be the great company that we know we can be.
And as we think about the business we've touched, I'm going to let Bill provide a little more specifics, but I highlighted paint. And we highlighted paint because one of the first areas that were obvious from a retail fundamental standpoint that was not working was the paint department. We had poor staffing. We're totally out of stock. We had no accessories.
We had no philosophy on attachment selling. And we were not leveraging this great supplier partner in Sherman Williams to the degree that we felt we could. And so we immediately addressed that and we feel great about the progress that we're making and we felt like that the progress was more of a microcosm of kind of what could be for other categories that we're now touching. But I'll let Bill talk about some of the other categories that we're going to be focused on for the balance of this year to try to get the same level of improvement.
Yes. So I think a couple of things.
First of
all, just to kind of finish the comment around paint. There's a number of things that are happening. Even though we're in the early stages, we've between Joe and myself, we've worked on staffing, right? We made a lot of changes in our paint department last year, but we never addressed the staffing model. So now the staffing model is being addressed.
We've addressed supervision for the paint department. We took an in stock focus. So between Don Friesen's team, the store team and my team, we took a look at what's needed for the Pro and for the DIY. And that includes job lot quantities in products like 5 gallon paint. Training, we put a whole new paint department in front of our customer last year.
We didn't do any training. So now we're going through and training all of our associates. We're leveraging the relationship, as Marvin touched on, Sherwin Williams. These guys know the Pro business better than anybody else. And so as our partner, how do we leverage that relationship in order to make sure that collectively we're addressing that Pro Painter in the way that we need to.
From a marketing perspective, we've got a whole new marketing campaign coming out this spring. We're very excited about that and work that the team's done in addition to pricing and loyalty programs that we're testing to be able to put out there for the propane. And then as I touched on already in the seasonal categories, the work that we were quickly able to do at the latter part of last year between the store team, the supply chain team, the merchant teams to look at spring, to look at load ins, to look at the prep needed in order to be ready for spring when the season breaks was all efforts that we had to quickly get behind in order to make that happen. So again, early stages, but as I said, we're seeing pockets of where it's working. And so that gives us a little bit of encouragement in regards to the stuff that we're focused on is working.
As Marvin said, we've got areas inside the store that are a longer putt for us that we've got to get out further out on and we'll see some of those improvements coming to us in the back half of this year because they're just going to take longer for us to get cleaned up and to get addressed.
That's all fair.
And Brian, one other thing, as you think about the where we're at from this recovery, we've been talking about new department supervisors in place that's just happening in January. I talked about the smart training that rolls out in Q1, the mobile devices rolling out in Q1 or early stages in pro job lot quantities. So we feel good about where we're at today and feel really good about the plans we have moving forward.
That's very helpful. And thank you. And then one just maybe real quick follow-up. You obviously called out January in the 5.8 comp there. Any commentary on how the business has tracked here into February?
Well, I think the simple answer would be minus obvious weather challenges, we're pleased with what we're seeing. I mean, February is always an interesting month in home improvement because it's not a high volume month and weather is very unpredictable. But as we mentioned, we've gone into stores and we've set spring early. And I'll just give you one anecdote. I was in a store recently and the store was performing really well from a comp perspective and then we have a 21 year manager that's in the building.
So I put him aside and wanted to get his assessment of how did he feel about spring versus last year. And we were standing in the area with the new Craftsman outdoor power equipment and with the new grill assortment. And he basically said to me, Marvin, this time last year, we would have been surrounded by clearance holiday. He said, so that's how I feel about the business. We're selling product that's relevant to the customer.
And so that's what we're seeing, Brian. So none of the things we're doing is outrageously strategic. It's retail fundamentals, setting product in the timeframe that customers would like to buy it, having great brands, improving service, having product available. But the key for us for February is just the timing, meaning having the product in the store online when customers are interested in buying it. And so where the sun is shining and we can get the good points of view on category performance, we're feeling good that we're headed in the right direction.
Your next question comes from the line of Scot Ciccarelli with RBC.
Scot Ciccarelli. Given the improvement that you saw in the pro sales specifically in January, I guess I'm wondering how are you guys generally thinking about pro trends for 2019 as you add job lot quantities and some of the other changes that you're making? That's number 1. Number 2, related to that, do you have any feel for whether the improvement was more from bringing new customers into the Lowe's ecosystem or is that just a greater share of wallet from existing customers or is it just too early to tell? Thanks.
So Scott, I'll give a hell of an answer to Pro and if Joe believes there's any other specifics, he can jump in. But we think our Pro business improved and our actual Pro comp in the month of January outperformed the total company comp. So Pro really had a strong close to the quarter. But when we look at it fundamentally, it's just some basic things. It is getting the job lot quantities in the stores.
And as both Joy and Bill mentioned, we're not yet complete, but we should have all stores with the job like quantity investments by the end of this quarter. It's doing basic things like adding dedicated loaders to every store. Joe mentioned the fact that we put pro department supervisors in position. For a business this important, we did not even have a supervisor overlooking the area. We've invested in equipment, just basic things like lift trucks and carts that we're not even in the area, in addition to fundamental things like easy accessibility to parking.
So we believe we're simply servicing an existing customer better and we're becoming a second, if not a first option for customers that have literally stopped shopping us because we didn't have adequate inventory levels. We have high expectations for Pro, but we have a lot of work to do. I mean, we're by no means checking the box that we've kind of solved this very important customer's issues, but we think that we have a good plan forward. And so we're going to continue
to execute on that. I don't know, Joe, do you have anything
you want to add? Yes. The only thing I'd add is we brought in a on that. I don't know, Joe,
if you have anything you want to add? Yes.
The only thing I'd add is we brought in a few 2 new leaders for our Pro business that have depth of experience servicing the Pro, both
inside the store as well as outside sales. So we've been focused on both and focused on attracting new customers, but also focused on serving the customers and getting a larger share of wallet. So we're again, as Marvin said, we're early stages in Pro, but we feel very, very good about the that we have.
And Scott, the only thing I'd close with, it's too early to determine if it's new customers, existing customers. We're looking at all that data as you can imagine. But our philosophy is very basic here. We want to improve our overall service and engagement with our DIY customers, but we want to have a more intentional focus on the Pro because we know that a more intentional focus on the Pro will improve transactions, it will improve ticket and it will improve overall productivity from a sales per square foot perspective. And so it's a balanced approach serving both of those very important customer segments.
Appreciate the help. Thanks guys.
Your next question comes from the line of Steve Forbes with Guggenheim Securities.
Good morning. So I wanted to start with the adjusted EBIT margin guidance for 2019, right? You mentioned leverage within the SG and A, but can you give some color around the outlook for gross margin, specifically as it relates to a bunch of the headwinds, right, you called out impacting you in the Q4? How should we think about those impacting you in 'nineteen?
Yes. So, Scott or Steve, this is Dave. I would look at gross margin, think about that as essentially flat for the year for the most part. We're going to get operational leverage really through SG and A as we focused on both store productivity, but importantly, as we focus on advertising effectiveness. And I feel like that much of what we had occurred in Q4 of 'eighteen is kind of behind us and baked into our plan going forward is essentially that flat outlook.
And then just a quick follow-up regarding the capital deployment plans for the year. Any color, right, regarding the anticipated timing of the activity or share repurchase activity? And how much you planned to fund via just the free cash flow profile of the business versus incremental debt as we fine tune the models here?
I can't give you
too much on that. I would we're taking obviously a very cautious approach to this, making sure that we understand both the macro environment and specifically the credit markets as we approach 2019 from a capital plan. I think the best assumption that you should view just from a modeling perspective is to think about share repurchase more or less equal throughout the year. Obviously, that will ebb and flow based on how we actually go to market, but that's probably a good starting point for you.
Thank you.
You're welcome. Thank you.
Your next question comes from the line of Eric Bosshard with Cleveland Research.
Good morning. Good morning.
Two things. First of all, in
terms of online, curious for your outlook in terms of when the results there start to improve. It seems like the execution at the stores is better, but online continues to lag. So I'm curious for the outlook for progress there. And then also if you could explain within that, changing your strategic focus, which may be a nuance, but from omni channel to supply chain. And then secondly, if there's any quantification of the benefit in January, if it was material of clearancing Holiday out earlier?
Thank you.
Okay. So Eric, I'll take the first part of the online questions and I'll let Bill give some color to online and I'll let David jump in on the question regarding clearance. Look, 1st and foremost, we know a modern day retailer has to be an omni channel retailer. And for us, the classic example of our shortcomings was evident on Black Friday weekend where we had our failures from a system and service perspective. And so we made the decision to just go out and recruit someone who had a specific background in this to just kind of supercharge our focus and to have a much more aggressive approach, and that's Micah Menn.
Micah Menn joined us in January, as I mentioned in my prepared comments, and he's going to work with Samantha, our new Chief Information Officer, who actually ran the e commerce business for Target, and they're putting together an aggressive plan that's going to allow us to get very focused on creating a true omnichannel experience for Lowe's. And so the good news for us is that we have 2 leaders in position, 1 with deep home improvement experience from an e commerce perspective and another with broad experience on the e commerce world that's going to allow us to really have a more aggressive focus. And the fact that it's reporting in the merchandising is critical because we want the merchants to have a broad view, not a store view or an online view, but an omni view. So I'll let Bill talk a little bit about kind of his additional thoughts on what the expectations are in that business for 2019 and beyond.
Yes. Thanks, Martin. So a couple
of things. First of all,
we're not sitting still on online. So as we've strengthened the leadership team on the merchandising side for online underneath Mike, realigning those folks so that they're tied to the core merchandising team so that we can pull through those strategies. But we're really looking at it focused on 3 separate areas. So from a customer's perspective, making sure that it's easier to shop, easier to navigate, and that we have more products available on lowes.com. And then for our associates, it's building out the muscle of the endless aisle inside of our stores.
So utilizing lowes.com as a tool in their toolbox and getting that rigor as we work through the smart training that Joe was talking about, it's about being able to leverage lowes.com as a solution for customers inside of our stores. And then the 3rd part of it is our vendor partners, right, being able to get the SKU additions online, the product availability, making sure that we're forecasting and ruling out the rigor around those businesses just like we do inside of our store, improving the A plus content and then improving our drop ship ability and fulfillment abilities that we have on those.com. So that's what we're focused on.
We've got a lot of work to do.
We know that we've had some struggles there, but I think we're very confident with the leadership team that we have in place there that we'll see significant progress in our lowes.com business in 2019.
And Eric, before I hand it to David, just one other data point. Even with some of our challenges, today 60% of our online orders are picked up in the store. And so that so our customers are begging us to get this right. And we have some short term and long term plans that we think will make a true difference in this business. And we're pleased with the leaders we have in position, pleased with the oversight and strategic direction that Bill is providing, and we are looking forward to coming back in subsequent earnings calls to update the investor community on kind of the progress we're making.
So I'll let Dave talk to you about clearance.
Yes. Eric, your last comment around the clearance effect in January, clearance did not drive any material influencer. It had very, very immaterial influence on sales in January. So that was not a driver of our performance in the month. Great.
Helpful. Thank you. You're welcome. With that, we'll take one more question.
Our final question will come from the line of Peter Benedict with Baird.
Hi, guys. Pressure is on here, I guess. So I'll start with a question just around the supply chain transformation, Marvin, that you called out, kind of that second strategic focus. Any give us a sense of where you are today, any milestones we should think about in terms of where you want to be 12, 24 months from now with respect to fulfillment and delivery? That's my first question.
Well, Peter, I would say where we are today, we talked about at the Analyst Investor Conference that we just opened our 1st direct fulfillment center and that's a milestone for us because believe it or not, we were shipping parcel online product from our first distribution center out of Woodborough. And it's very manual, not very efficient, effective, and we've transitioned from that to something that's much more state of the art with plans to open a second facility on the West Coast. What we're also focused on this year is transitioning a lot of the deliveries that take place in the store today, primarily appliances and other big bulk items into a bulk distribution cross dock strategy that takes enormous pressure off the stores from a delivery perspective and it centralizes it and it will allow us to aggregate bulk deliveries to the customers' homes more effectively. At 30,000 feet, Lowe's has a very good job of supplying product to the store. But in modern retailing, your supply chain must have the same ability to deliver product to the consumer's home and to the job site.
And so in essence, what we're developing is a network of distribution centers and systems that will allow us to do store, job site and to the customer's home, and that's what we will start to build out this year. And that's really the short and the long term plan.
Okay.
That's helpful. And then my follow-up would be basically related to how you guys are working with your vendors as you execute all the stuff you've been talking about. You talked about having them pay for the MST efforts. Are there any other just give us a sense for how maybe you're working differently with vendors today than maybe Lowe's has in the last few years? And what's been the response as you've been asking these folks for more?
Thank you.
Yes. So I'll take that. So first of all, I think we're 1st of all, we're being way more transparent with our vendor partners, making sure that they understand what we're focused on. And then we've had some history of being inconsistent with them. So for us, it's about being able to deliver on what we're working on together and being very transparent and making sure that the teams are communicating to them frequently and often.
Marvin and I have made ourselves available for those strategic meetings where necessary to help pull those messages through. But we value our vendor partners. They're doing a great job. We've thrown a lot at them just as we've thrown a lot of change in our organization and they've responded very favorably. So we're just like what we talked about with paint, that's a real good example of how that communication and that response has helped pull through that performance improvement in our paint business because we're collectively working together.
And Peter, the only two comments I'll add is number 1, our vendor partners are eager and willing to work with us. They want to win and they want Lowe's to win because we are true partners in each of our entity success. And secondly, it's a ton of value to have Bill Bolt here as someone who was a vendor to Lowe's. So not only does Bill bring very specific and a deep understanding of home improvement product and category knowledge, he also brings a perspective of a former supplier working with Lowe's to help us understand how it feels to be in that position. And so we have work to do, but as Bill noted, we've made ourselves available.
We've had quite a few strategic meetings. We've had some very positive and very impactful discussions, and we think it's going to bear more
fruit
in the long run than it has thus far.
Okay, great. Thanks so much guys. Good luck.
Thank you.
Ladies and gentlemen, this will conclude today's conference. Thank you all for joining and you may now disconnect.