Good morning and welcome to Lowe's 2018 Analyst and Investor Conference. It's a pleasure to have you with us today as we introduce new members of our executive leadership team and share our strategic priorities. Today's program includes a series of presentations followed by a short break and then our financial update as well as an extended Q and A session with all presenters. Before we get started, please note that throughout these presentations, you will hear comments about our expectations and beliefs which constitute forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although we believe we have a reasonable basis for making each of them, we can give no assurance that those forward looking statements will prove to be correct.
They are subject to a variety of risks and uncertainties that are highlighted on this slide and are further described in the company's annual report on Form 10 ks and in its other periodic filings with the Securities and Exchange Commission. Also in today's presentations, we will be using several non GAAP financial measures when discussing our performance and financial condition. You can find information on these non GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures posted on our Investor Relations website. You will also find an explanation as to why Loews management believes these non GAAP financial measures are useful. Thank you again for your attendance and now it is my pleasure to introduce our President and Chief Executive Officer Marvin Ellison.
Good morning. Hey, thank you Tiffany. I am honored to be here today as your President and CEO of Lowe's and as you can imagine I've had a very busy and fulfilling 5 months here and I want to begin today to give you a few of my observations. First, Lowe's is a terrific company with an outstanding brand and a powerful balance sheet. In this really challenging retail landscape Lowe's is fortunate to operate in a sector with strong demand.
We also have great people over 310,000 associates in our stores, distribution centers, call centers and store support centers who are resilient and committed to serving the customers and our communities and without question our associates are our greatest asset as a company. These early observations along with a very engaged and supportive Board of Directors give me confidence that we have a great foundation to build on. As many of you know I competed against Lowe's for 12 years and during that time I gained a lot of respect for the company and the culture and I remember how fierce a competitor the company used to be, so when I took over CEO in July I began a comprehensive reassessment of the business to understand a couple of things. First, I want to see why it seemed that we had lost our competitive edge. Second, I want to understand why we were underperforming the market, but more importantly, I wanted to understand what it would take to once again make Lowe's a best in class retailer, a retail that provides outstanding experiences for customers a great place for associates to work and one that delivers better more consistent returns for shareholders.
Therefore the past 5 months we've had a complete reassessment of the business, established a new leadership team and work with that team to develop action plans to regain a competitive edge that will return us to best in class performance plans that we'll share with you today. So, let me take a step back and let's look at the opportunity here at Lowe's. We continue to see a strong macroeconomic environment for home improvement and although interest rates have ticked up and housing turnover has been pressured consumers are still investing in their homes and as you can imagine we model hundreds of thousands of macroeconomic data points to understand the key drivers of our business but through that work we found that real residential investment, home prices and income growth have the strongest correlation with our business, and while we love helping customers with big discretionary projects, 2 thirds of our business is based on repair and maintenance work. And given that the average U. S.
Home is approximately 40 years old, we see a great deal of potential for our categories that serve customers' ongoing repair and maintenance needs. Our company is well positioned in a large and growing nearly $900,000,000,000 home improvement sector, which is very fragmented outside of the top 2 players. And although I understand why the top 2 players garner so much attention, the truth is our success isn't mutually exclusive. You know, given the large home improvement marketplace and the fragmented nature of the space, we don't see this as a zero sum game. In other words, this is not a win lose proposition.
And although we have a major competitor in this space, combined we have less than 20% market share, so we have room to grow in both pro and do it yourself. And although the DIY customer will remain a very important customer to us, in order for Lowe's to achieve the revenue and sales productivity that we desire, growing our pro business is going to be a major priority. Also despite the favorable macro environment, we have not performed to our potential as a company. Therefore, we believe that we have a significant opportunity to grow market share by addressing our poor execution. And by doing this, we'll create our own financial tailwind.
We look at the opportunity for growth in the DIY and pro areas and we feel great about the future here at Lowe's. So now let me take a few moments and discuss what drove Lowe's to underperform the market and give you a quick update on the current state of the business. So as some of you may remember when Lowe's led the industry in terms of supply chain capabilities, pro and store experience. So what happened? We'll simply say that the company shifted its focus and lost its way.
We undertook initiatives that did not add value to our core retail business. We exited value to our core retail business. We exited National Brands in pursuit of better margins which dramatically hurt our pro business. In addition, we lost expertise in store operations and in merchandising. And we failed to keep up with advancements in e commerce, IT and supply chain.
So, as I mentioned earlier, we rolled up our sleeves and over the past several months, we've conducted really detailed business reviews with all of our functional leaders. I've spent time with suppliers and some of my most valuable time has been spent engaging with our customers and our associates across our 14 U. S. Regions, Canada and our maintenance supply headquarters businesses. In the time I've spent with our associates, their talent, their resilience and dedication to serving the customer really stood out to me.
But what also became evident was despite their best efforts to serve customers, we have put our associates at a competitive disadvantage with outdated and cumbersome systems. And as many of you witnessed 2 weeks ago, our challenging IT infrastructure was evident on Black Friday when we experienced system outages. This system failure presented to the outside world what our associates deal with on a daily basis. It was an embarrassing moment for the company, but one that presented our current state to the world. However, these challenges reflect where we have been but not where we are going and we'll fix these issues.
In addition to the omni channel systems we have work to do to improve our associate and our customer facing systems and as an example let me walk you through how we currently manage large complex installed projects. So while I was visiting a store recently I posed a question to a group of associates. I said okay I'm a customer I'm buying flooring, cabinets, countertops, a suite of appliances, so that kind of equals a kitchen remodel, right? So I said to the team, how do we manage this kitchen project for the customer? So you want to know what the sources showed me as our project management system?
A dry erase board in the back of the store. So after I got past the shock, I had a follow-up question. I said, well, the customer doesn't have a dry erase board, so how do they keep track of the project? Their answer, well, Marvin, we give them a binder. So dry erase boards and binders as a project management system, Hard to believe that a retailer our size with our balance sheet is working with these systems in 2018, but this is the position we put our associates in.
So the question I ask myself is how much would our sales and customer engagement improve with modern systems? The answer to that question creates a lot of energy and motivation for me and the new leadership team. So now that we've identified the opportunities, what are we doing about it? So today, we're going to tell you more about how we're getting back to the basics and sharpening our focus on driving sales. We have plans in place to capture all of the opportunities the leadership team and I have identified over the past 5 months.
We have 2 great advantages to solve these issues and quickly modernize the business. Number 1, we've assembled a leadership team with subject matter expertise and deep experience, and this is the lineup of the leaders that you'll hear from today. Number 2, we have a great balance sheet and the financial world we thought to reallocate capital to invest in our core retail business. So let me spend a moment discussing the importance of experience in 3 key leadership roles. So at the beginning of this year, our senior leaders for merchandising and store operations had a limited amount of home improvement experience and expertise.
Today, our Executive Vice President of Merchandising, Bill Boats, and our Executive Vice President of Stores, Joe McFarland, have a combined 55 years of home improvement experience. Also at the beginning of this year, our Chief Supply Chain Officer had no previous supply chain experience when he was placed in the role. Today, our Executive Vice President, Supply Chain, Don Friesen, has over 30 years of supply chain experience. I'm a big believer that experience matters, specifically in key roles in retail. Now let me quickly remind you of the progress we've made thus far.
So let's begin with your organizational structure. We've aligned our leadership team to improve our focus, our execution and our decision making. As I just mentioned, we recruited seasoned executives with extensive retail and technical experience who will establish the necessary building blocks to create a world class omnichannel environment. This new leadership team has what I call been there done it skill set. In other words, they face similar challenges before in their careers and have a track record of success.
We've also aligned our portfolio to focus on our core home improvement business. And as you remember, part of the focus was we closed Orchard Supply Hardware Operations. We decided to exit the
Mexico market as well
as Alacrity Renovation Services in the Iris Smart Home business. We also streamlined our real estate portfolio, which resulted in closing underperforming stores in the U. S. And in Canada. In addition, I tasked the team to aggressively rationalize our store inventory to remove clutter and reduce lower performing inventory.
We completed that effort in the Q3, and now we're investing in top selling SKUs and job lot quantities for our pro customer. These decisions were not easy, but we believe they were the right decisions for Lowe's, and we're working hard to create a true expense reduction culture. No longer will we throw payroll at a problem. Instead, we will rigorously scope it out. We'll identify the root cause.
We'll implement technology to improve processing systems. And to ensure we drive improved return on invested capital, we have implemented a more rigorous process for capital improvement. It is important for you to know that we are running Lowe's differently and doing so in a way that sharpens our focus on what I call retail fundamentals. And while you hear us discuss certain initiatives today that may be reminiscent the things you've heard Lowe's mention in the past, the expertise, the operational discipline, the focus of this leadership team will allow us to successfully execute on these strategies and capitalize on the opportunity that's in front of us. So, let me now transition into how we will take advantage of this opportunity we have in front of us.
So to do this, we're going to stay true to our new mission statement, delivering the right home improvement products with the best service and value across every channel and community we serve. This mission is not fancy or overly ambitious, but it defines what we will stand for each and every day as a company. We'll achieve this mission by winning in 4 key areas: merchandising excellence, omnichannel, operational efficiency, and customer engagement. So, let's start with merchandising excellence. This simply means having the right products in the right place at the right time so that our customers can shop any way they choose.
To deliver merchandising excellence, we're working to improve productivity, drive localization, and streamline our reset process to improve our execution. Bill Boltz will outline our merchandising excellence initiatives in more detail shortly. Our next strategic focus area is omnichannel. Our aim is for Lowe's to be a great omnichannel retailer, serving customers the way they want to be served. We'll deliver a great omnichannel experience by enhancing the overall customer experience, advancing our fulfillment and delivery capabilities and delivering operational excellence.
Today, approximately 60%, six-zero, of all online orders are picked up in a store. This underscores the importance of omnichannel experience for home improvement. Omnichannel is where we think our transformation is going to play out. You'll hear more about our omnichannel initiative from Don Friesen and our new CEO, Samantani Gavale, later today. Now moving on to our 3rd strategic focus area, operational efficiency.
To deliver operational efficiency, we'll focus on simplifying store operations. Not only will simplification improve the customer experience, it will unlock operating profit for the entire enterprise. And as we mentioned many times before, everything in retail begins with being in stock. Therefore, we are working hard to improve in stock execution to better capitalize on the traffic we're driving to our stores and our website. And as a company, we will become more operationally efficient.
Our 4th and final focus area will be intensifying customer engagement. At the core of this objective is winning the pro. We have a tremendous opportunity to grow this portion of our business. This is a customer that is very important because the typical Pro spends 5 times as much as the average DIY customer. And although the Pro is an important customer, it's a customer with very basic expectations.
And my experience has taught me that in order to win market share with the Pro customer, you need to do 5 things well. First, you have to offer competitive prices, including strong value proposition for volume purchases. The Pro customer is extremely brand loyal, so you must also stock products with brands that resonate with them. Next, it's important to deliver a consistent level of service because for pros, time is money. Then you must demonstrate to the pro that you value their business by providing a differentiated experience.
And finally, it's important to build a relationship with the pro to make it easier for them to run their business and to demonstrate that you have a genuinely understanding of their need. So later today, Joe McFarlane will provide specific details on how we will improve the pro business and drive operational efficiencies. In addition, Jennifer Weber will outline how we will drive improved associate engagement across the company and you'll hear from our Chief Marketing Officer, Jocelyn Wong, who will share with you how we're establishing a stronger connection with our customer while focusing on marketing productivity. So what you're viewing on this slide is not content for a series of fancy wall posters or a list of slogans. What you see here is our operational plan.
Every initiative has a designated captain supported by a cross functional team, and my direct reports and I meet weekly to review progress reports and scorecards for these cross functional teams. As the old goal saying goes, we'll inspect what we expect on these key initiatives, and as I mentioned earlier, we're simply running Lowe's differently. So, what do we believe these initiatives will be worth to the business? We believe over the next several years, we can deliver an operating margin of 12% and return on invested capital of 35%. Dave then will provide specifics on both the short and long term value we plan to generate from the initiatives we will outline today.
And as I think about the timeline of our transformation here at Lowe's, I view it in phases. The first phase of our transformation will be all about focusing on retail fundamentals that will allow us to capitalize on the immediate opportunities and improve results. The next phase of the next 18 to 36 months will be about driving sustainable growth and the last phase is focus on taking market share. The initiatives we'll discuss today, with the exception of supply chain, will roll out over the next 12 to 18 months, resetting the bar for 2019. But let me be clear, we're not waiting 18 months to deliver financial improvement.
It is our expectation that we will experience continuous improvement as we work our way through each phase of this transformation plan. The leadership team and I are very excited today to outline these initiatives for you. But before I conclude, I'd like to discuss our business in Canada. The RONA integration continues, including the execution of our e commerce strategy and the rollout of appliances and the optimization of shared supplier partnerships and procurement efforts continue. And similar to the U.
S, we're implementing plans in Canada to improve execution, expense discipline, and operational profitability. And although comps have experienced some pressure recently stemming from a weaker Canadian housing market, we continue to take share and believe the business is poised for long term growth. So in closing, some of you may be disappointed that we're not going to spend time today updating you on our strategies to leverage virtual reality in the home by outlining the importance that artificial intelligence will play in our decision making. Don't be concerned. These are very important elements of our current and our future strategy.
However, I felt today should be more focused on providing you with a transparent view on the current state of lows while giving you a clear line of sight on our immediate plans to improve our retail fundamentals as part of our 3 phase blueprint. As we say where I'm from in Tennessee, we decided to bake the cake before we start to serve you frosting. This is a new day, and this is a new Lowe's. I expect that we will renew our focus on retail fundamentals that we'll outline today, will capture market share opportunity and generate significant cash flow over the next several years. And as we focus on our core retail business and optimize capital allocation, I believe we'll make Lowe's an investment that will yield meaningful long term returns for all of our stakeholders.
I want to thank you again for being here today. And now I'm pleased to turn it over to our Executive Vice President of Merchandising, Bill Boats.
Thanks, Marvin. Good morning, everyone. It's a pleasure to be here as part of the Lowe's team. A year ago, I was on the other side of the business working with the team as a vendor and I thought that Lowe's had done a pretty good job of recognizing and understanding the expectations of an omni channel retailer. The challenge was that Lowe's did not have the right systems, processes or focus to execute on that vision.
And since joining Lowe's 4 months ago, I have been able to get an inside look at the state of merchandising and have made several key observations. Let me begin with category management. Today we do not have a category management strategy to govern our resource allocation And as a result, we're not aligned to a customer need or our product placement decisions have been more national rather than market specific, leading to lower sales productivity. For example, we've used valuable end cap space as showrooms rather than placing product that drives customer interest and traffic. You can see here that we've used 3 end caps in our stores, sometimes as many as 4, for smart home devices in the same aisle.
And we weren't tracking any productivity targets in this space in terms of sell through or profitability. We were focusing on an emerging trend, however, it was done without the understanding of how it connected with the customer and their expectations. We'd also fallen out of step with the Pro. There'd been a lack of focus on the depth of inventory, the right pricing, and the products that they expect. In fact, we lost some critical brands years ago because there was a focus on margin rate rather than the understanding and responding to the comprehensive needs of that important customer.
We also found that our online assortment was lacking with a significant SKU deficit versus the competition, again creating lost sales and a lack of localized assortments has also led to lost sales and a lower productivity in many of our markets. For example, this end cap in Bullhead City, Arizona is a national end cap of Dyson fans. Now if you're familiar with this market, the average income, household income in this market is roughly $31,000 a year. So while Dyson is a great product and a great brand, an average price point north of $300 for a fan might not have been our best choice for an end cap in this store. And then finally, our reset execution has been poor.
It's lacked process, structure and discipline, leading to slow, ineffective reset activity, out of stocks, lost sales and a huge distraction for our store associates. So having seen all this, we recognize that we have a significant opportunity to improve performance by just executing at a higher level. And to do that, we're focused on the retail fundamentals. And that means being focused on the right things, the basics blocking and tackling and really a need to keep it simple and so within merchandising it all starts with sales. Now that sounds obvious but we have to create a sales driving culture and to do that we have to improve our productivity by establishing and implementing a category management process.
We know that we haven't maximized our sales per square foot because we haven't consistently tracked it and as we visited stores and we've talked to our merchants and our store associates about the sales productivity of those specific end caps or other critical areas of the store, we were surprised at the limited sales information that they had at the store level. This lack of information has prevented us from having a significant focus on driving sales productivity. So we need a cohesive strategy to determine what we focus on, where we invest, and how we're going to sort our products in the store and online, and we know that up until now, we haven't allocated our resources to the areas of greatest opportunity. We also know that we have to do a better job at meeting the needs of the customer at the market level, and to do that our merchants have been meeting with suppliers to make sure that we are focused on the right brands and the right products to deliver these localized and relevant product assortments that are driven by the needs of the customer and we must improve our speed to market. We know that we have a lot of room for improvement to do things better, to do it more efficiently and with a greater sense of urgency and we know that retail is a race and so as a merchant team, we know that we have to move faster and we have to execute with a greater precision to capture on these market opportunities.
As a former vendor to Lowe's, I understood firsthand how difficult it was to get decisions made and to launch a new product. So improving our reset and our in store execution process is a huge part of improving our speed to market. And going forward, we are committed to having and delivering on merchandising excellence and that's really just as Marvin said, having the right products in the right place at the right time, so that our customers can shop with us any way that they choose and we are establishing a rigorous category management process to drive better sales productivity, both in our stores and online. Using a customer centric analytics based approach, we will define the role of each category at Lowe's and identify the inherent category opportunities in the headroom order to make intentional and resource allocation and focus on those areas of greatest opportunity for the business. The category definitions that we have landed on are choice, traffic driving, destination, core and convenience.
Now choice categories are those in which you offer multiple options, you can include both national brands as well as private label product. Traffic driving categories capture the customer interest with great offers and value and they are designed to be highly competitive and disruptive. Our destination categories are the ones that cause customers to drive past other retailers to come see you and for these categories we will focus on brands, assortment, breadth, depth and quality. We will work to leverage these categories so that we can attract and retain new customers. Our core categories are the must have, those home improvement items that are typically project focused.
In these categories, there will be minimal promotions and less transition. And then lastly, the convenience categories are the impulse or mission trip items, what we call basket completers and these categories have less price sensitivity, so that we will focus on attachment to drive sales and margin. So this strategic approach will allow us to meet customers' needs, invest for maximum return in each category and improve our sales per square foot while also improving margin. We expect to see initial benefits from this initiative beginning in the second half of twenty nineteen. We will leverage this category management process to make informed decisions about where and how to expand our online assortments as well to offer customers more options for their home improvement needs and to shore up an identified competitive weakness.
We've also created a more functional operating model by aligning our online merchants with our core merchandising teams, allowing us to make cohesive assortment decisions across all of our channels. Merchandising excellence also requires us to build the right assortments in the right quantities for the right stores that will meet the needs of our customer. So we're focusing on localization at the market and at the store level and leveraging improved relevant and localized product assortments to drive customer engagement. For example, we've had situations where we've had deck staying in markets where houses don't have decks and going forward we'll change the situation with targeted assortments that reflect the needs of the customers in each of these markets to drive sales productivity. This is critical for the pro customer as local building codes require these customized assortments at both the market and the store level.
So to assist with this effort, we're investing right now in a field merchandising team, placing local merchant expertise in each of our regions to give us this enhanced competitive view of the local markets and these teams will focus on maximizing the use of our end caps, our flex space all at the local level to drive this increased relevance and improve the sales per square foot and thus driving inventory productivity. We're currently building out our field merchandising teams right now to roll out in the first half of twenty nineteen. So as we build our assortments at both the national and local levels for both in store and online, we're going to develop and provide our merchants with assortment tools that help them make fact based decision making and these tools will leverage Lowe's transaction data as well as customer and competitive data to help design the right product mix by location and channel. We have seen the power of assortment optimization in driving sales as well as delivering inventory turns. And as an example in our past lives, Joe and I partnered to expand the assortment of cleaning products in urban markets in place of outdoor power equipment.
This allowed us to have better use of space and kept lawnmowers and tractors out city stores and thus drove an increase in sales per square foot. So in 2019 we will leverage also our exciting brand opportunities with Craftsman and Sherwin Williams. We are very excited about the continued rollout of Craftsman given the strong response that we have seen in the category thus far. We have rolled out Craftsman in roughly 2 20 stores so far in 2018 and we will continue that rollout throughout the first half of twenty nineteen. We'll be capitalizing on the growing trend in battery powered outdoor power equipment and we'll be introducing new Craftsman cordless outdoor power products in both a 20 60 volt battery platform.
We will also introduce new gas powered products that will help round out the assortment. These new 20 volt cordless items in Garden are compatible with all of our tool, in our tool department. While the introduction of the new 60 volt platform brings the power and performance of gas in a battery powered product and creates a new Craftsman loyalist. We're very excited to be the exclusive destination in the home center channel for this iconic brand offering some of the best tools, tool storage and outdoor power equipment in the industry. We're also going to leverage our expanded strategic partnership with Sherwin Williams.
It's one of the most recognized brands in the paint industry. It's highly respected for quality products by both homeowner and pro. With this partnership, Lowe's is the only national home center to offer top selling stain brands, Minwax, Cabot, Thompson's Water Seal. The teams delivered a simplified line to structure that makes it easier for customers to select the right product for their painting needs and we have an exclusive line of HGTV Home by Sherwin Williams as well as Valspar interior and exterior paints and we can't forget about the accessories because we now have the top paintbrush brand in the industry with Purdy. So we're excited to bring DIY and Pro customers more of the top brands that they trust for their next paint or stain project.
We will continue to leverage this partnership with increased marketing support as well as an improved inventory position so that we can meet the needs of the business. In order for us to drive merchandising excellence, we must also improve our speed to market to more readily capitalize on market opportunities by improving on our reset process. As we've mentioned before our reset execution process has been rough. In fact our recent window blind reset had an 8 week plan and this reset actually took us 27 weeks to complete and throughout that long process the customer was seeing empty shelves, they were growing frustrated and we missed opportunities to make the sale. So we dug in to understand the drivers of this poor reset execution and I want to share with you 5 critical observations that we have identified.
First, the reset approval process lacked financial rigor. It prevented us from properly prioritizing the most important resets. 2nd, we used a one size fits all approach without recognizing that lower volume stores that had much less payroll flexibility would struggle to find the resources necessary to execute a timely reset. And third, our supply chain played no active role in consolidating that reset product to create a seamless and efficient delivery process to our stores. 4th, there was no consistent exit strategy to clearance or remove product being reset by a specific date and then last, we weren't organizationally aligned to facilitate smooth reset execution, meaning our planning team and our execution teams were housed in separate organizations, which led to misalignment.
So now by having a clear understanding of the issues and the challenges, we are now focused on implementing our new reset execution process. Specifically, we are doing the following. We are investing in the execution teams in our stores. We have already begun building out and piloting our merchandising service team or what we call MST. This is funded by the vendors.
It's an industry standard. We have got an average of 8 full time associates per store. These team members will be responsible for our day to day maintenance of the bay presentations in our stores, along with our end cap execution, they will also be responsible for executing off shelf, improving our in stock maintenance and helping our store associates with daily pack down. These teams are critical to improving on our execution at store level and we need to take these time consuming tasks off the shoulders of our Red Vest associates so that we can free them up to take care of our customer. We have also centralized the accountability for reset execution within our merchandising team, which is now able to manage the end to end process.
Going forward, our supply chain team will work to ensure that we have resets packaged upstream in a way that is easy for the teams to execute and this will reduce reset disruption at the store and allow for us to complete these resets faster. We will also coordinate training and heighten the communication prior to executing a reset to ensure that our store teams understand the strategic rationale behind each reset. We will also establish clearly defined guardrails for product transition activity that's going to allow us to have a path to efficiently liquidate all the non go forward products prior to the reset starting. And as we work to improve reset return on investment through the category management process, we are instituting more financial rigor around the need and the overall reset activity. Each reset will be evaluated by a business case with a hurdle rate criteria and we will also be enhancing our reporting tools so that we can better measure the reset performance.
We believe that this new reset process under one organization along with the introduction of our MST team and our field merchant teams will help us improve our speed to market, allowing us to roll out new products quicker and to drive market share gains while also allowing less disruption at the store and delivering an improved return on investment. So this is a new day and a new Lowe's and hopefully you can see that we have an exceptional opportunity ahead of us to make profitable share gains by having the right products in the right place at the right time so that our customers can shop with us any way that they choose and by focusing on the retail basics, by putting the needs of the customer first, driving sales and margin productivity through a rigorous category management process, driving localization by matching our merchandising assortments to the right markets and improving our speed to market and our reset capabilities, we believe that we're building the foundation for us to provide home improvement solutions that will drive sales and grow market share. I want to thank you for your time this morning and now it's my pleasure to please welcome my partner, Executive Vice President of Stores, Mr.
Joe Buckarlow.
Well, thank you, Bill, and good morning, everyone. Today, I'm excited to share with you our path to delivering an excellent customer experience and making Lowe's a more operationally efficient company. To begin that journey, we took a hard look at the current state of our stores. We saw that customers were very excited to come to Lowe's and therefore our traffic growth was quite strong. However, frequent out of stocks led to poor conversion, lower transaction growth and a frustrated disappointed customer.
We have terrific associates who know this business well and give their all each and every day to find solutions for our customers. But we also saw that we made it difficult for those associates to do their job. Lack of process, procedures and clear direction made their work inefficient. Complex outdated point of sale systems required too much time and training to navigate, leaving our dedicated associates scrambling and long lines of customers waiting. Ineffective staffing models place too many hours in associate and tasking activities and not enough in selling activities and a lack of focus on the pro customer left us without key pro brands, without a proper pro service model and without a competitive value proposition.
And though we expected our stores to function as part of an omnichannel ecosystem, we didn't provide the tools to do it. Order management systems were archaic, split between multiple platforms that didn't speak to each other and didn't properly connect back through our supply chain, so they didn't have an accurate view of available inventory. This made for inefficient use of associate time and a propensity for order cancellations. We also didn't have a single view of the customer. Instead, we had multiple views across multiple systems, leaving us unable to really know the customer in a way that we could effectively anticipate their needs and offer solutions.
Meanwhile, as we face challenges in the business such as poor conversion, we threw payroll at the problem rather than undergoing a full root cause analysis and developing effective solutions leading to further inefficiency in the P and L. However, after our extensive review, one thing was readily apparent, the sheer size of the opportunity ahead of us. As you will hear consistently today, we believe every challenge is addressable and fixable. And the good news is, I have significant experience solving problems just like these. We have built a team of strong operational leaders to help us in driving operational excellence and efficiency.
In doing so, we have a tremendous opportunity to capitalize on strong customer affinity for this brand and better serve the strong traffic that we drive to our stores. Today, I'll take you through how we will become more operationally efficient by simplifying store operations and improving our in stock execution. Next, I'll share how we'll work to deliver share gains by improving our product, service and value offering to win the pro customer. Last, I'll discuss how we can improve our services business to drive profitability and better serve the do it for me customer. The first steps to delivering retail fundamentals in our stores is simplifying store operations.
We'll provide clarity for associates while putting the right processes and systems in place to provide the best experience for our customers. One of our main challenges at the store level is the sheer number of things we are asking the stores to execute. So we started by streamlining communications and messaging to the stores. We've moved to a simplified weekly playbook that focuses the teams on top priorities, key metrics and critical deliverables. And we've implemented a filtering and bedding process to ensure that we're sending only the most important communication to the stores and keeping them focused on just the right things.
To combat the problem of information overload and inconsistency, we shut off 95% of the reports going to the stores. This is to get our people out of the office, printing stacks of reports and onto the sales floor spending more time with customers. We then replaced those reams of hard copy reports with a streamlined dashboard to provide better visibility to store performance versus the expectations. What you are seeing on this slide are the actual reports and e mails sent to a store manager in one of our stores in a 1 month period. This is not a prop.
We actually collected these documents to better understand the flow of information to an average store manager. I think you would agree that this is virtually impossible to effectively manage and prioritize. However, this was a view of our actual state approximately 6 weeks ago. Another key focus as we simplify store operations is aligning and allocating payroll correctly. Having associates in the right place at the right time is one of the most important things that we can do to serve our customers.
And other than cost of goods sold, payroll is the largest expense for the company. Our current labor scheduling system needs to improve. The current system is antiquated, ineffective and does not properly predict labor trends. It generates schedules 13 weeks in advance and does not schedule labor hours to align with customer demand patterns by department. This has resulted in significant ineffectiveness as well as wasted time for managers overriding and editing the schedules.
In fact, our stores spend over 1,000,000 hours each year writing schedules when a labor scheduling system should be carrying that load. We're now implementing automated selling informed by customer data to better predict customer demand by time of day, day of week and by department. We are also aligning our labor hours with peak traffic to ensure that we're using our labor hours efficiently and reducing payroll expense while delivering great customer service. In addition to allocating our payroll more effectively, we'll be reducing tasking hours to enable our associates to spend more time with customers. Only 40% of our payroll hours in the store today are spent with the customer and that absolutely must change.
We have a goal of increasing our customer facing hours to 60% of payroll by the end of 2020. As a first step, we've already eliminated Salesforce tasking activities during the busiest hours of the day, so that our associates can focus solely on providing excellent customer service. This process eliminates competing demands and provides a clear, concise and consistent approach to deliver a repeatable and reliable experience across all of our stores. And in 2019, we'll leverage the MST teams that Bill discussed to reduce tasking responsibilities for our selling associates. We'll also improve tasking efficiency in the front end of our store, on the sales floor and in the back end of the store by establishing clear processes and procedures and leveraging technology such as the mobile devices.
For example, in the front end of the store, we're improving our point of sale systems. We're replacing a cumbersome outdated green screen with a graphical modernized intuitive selling interface to make it easier for our associates to navigate and faster for us to train new hires and seasonal associates. We're also providing more checkout options for the customer. For example, we're adding self checkout in all stores over the next 2 years and on our new handheld devices, we will enable mobile checkout capabilities to drive greater front end efficiency. On the sales floor, we're leveraging mobile devices to reduce tasking hours and increase productivity.
For example, printing price labels on a store walk requires an associate to walk all the way from the aisle they're working in to 1 of 2 terminals in the store that actually print labels. Going forward, we'll roll out handheld printers to allow associates to print price labels right in the aisle and save valuable time. We'll also leverage mobile devices to drive efficiency in other tasking activities. And Don will discuss how we'll realize efficiencies from our supply chain transformation by moving big, bulky product such as appliances to bulk distribution centers. As we use our payroll more effectively by reducing tasking hours and driving labor efficiency through standardized processes and procedures will drive payroll leverage.
We'll use a portion of these payroll savings to add 3 hourly department managers to each store beginning in January. These customer facing roles will focus on improving the customer experience by providing better department coverage as well as coaching our associates in delivering excellent customer service. As Marvin discussed, many of our associate facing systems are in need of modernization. Therefore, we're upgrading our order management system, replacing multiple legacy systems with 1 best in class system to manage orders and services. And we're connecting this system through to our supply chain, giving our associates a more accurate view of inventory and improved visibility throughout the system to provide customers with more reliable information.
We'll also make this improved inventory view available to our associates' mobile devices to continue to shift from desktop to mobile, reducing the need for associates to run to desktop terminals to gather information and leaving customers standing in the aisles. Now let me take a moment to discuss the root cause of our out of stock problem. Historically, Lowe's has managed to an inventory dollar amount rather than an inventory turnover goal. So we haven't adequately invested in high velocity SKUs and job lot quantities necessary to maintain a proper in stock position. As Bill described, ineffective resets have also led to out of stocks in key categories.
And as Don will describe, flow challenges across the network have resulted in either excess inventory or insufficient inventory. Within the stores, I've seen a lack of engineered processes for tasks such as flowing product from receiving to the sales floor that has adversely impacted our in stock position. Finally, our store managers had no autonomy to reorder product, leaving them unable to address out of stocks in key items. So to improve our in stock position, 1st, we developed a comprehensive in stock process, including standardized procedures for effectively moving product from receiving to the sales floor and we rolled this out to all U. S.
Stores in the month of November. We also instituted a regular pack down process to ensure that we're consistently filling our shelves with the product that we already have. Next, we'll improve the flow of inventory from the RDCs to the stores to ensure that we have consistent in stock levels throughout the entire week. Then we'll give our stores better visibility to the schedule of incoming shipments from the RDCs as well as the contents of what's actually on that incoming truck. This will allow our store managers to better plan for receiving those trucks and allocating appropriate labor without having to pull associates off the sales floor just as we've done in the past.
Finally, we'll give our store managers limited autonomy to reorder appropriate quantities of low risk, high velocity and SKUs to improve in stocks on our key items. And as we monitor out of stocks, we'll leverage associates mobile devices to evolve inventory replenishment from a slow paper based process to an efficient automated process. All of these work streams combine to improve our in stock levels, allowing us to improve our traffic conversion, then increasing sales, while also improving on labor productivity. We expect that we will see measurable improvement in our in stocks as we head into 2019. Finally, let's talk about how we win with the Pro customer.
First, we took a hard look at the gaps in our Pro offering. We found that we had inadequate associate coverage at the Pro desk and no dedicated loaders to help pros load their trucks. Time is money for all of our customers, but none more so than the Pro. If a Pro customer has to take 1 person off the job site and send them to Lowe's to get more supplies that results in lost productivity for their business. Now if that Pro has to take 3 people off the job site for the trip to Lowe's because the pro can't rely on us to have loaders to help load the bulky product they need, that is even more lost productivity.
We had no direct leadership of the pro teams in the store to focus the teams on critical pro activities. We weren't properly assorted for the pro and we've had insufficient job lock quantities, leaving us unable to meet their needs. This led to a poor pro customer experience and a lack of Pro loyalty and a loss of Pro market share. Well, now it's time for all of that to change. The Pro customer is too important within the home improvement and represents too large of an opportunity to just leave on the table.
As Marvin noted, the Pro makes up over 50% of the home improvement product available and at Lowe's only 20% to 25% of our sales actually come from the Pro customer. Therefore, Pro is one of our largest opportunities to take market share and we are laser focused on capturing that opportunity. As Marvin said, Pro is a very important customer but they have very basic expectations. Winning with Pro comes down to 5 things. 1st, offering competitive prices, including a strong value proposition for volume purchases.
At an individual SKU level, we are competitively priced. The Pros find our volume pricing confusing and also unreliable. So we're rolling out a simplified transparent pricing program for large volume orders such that the pro customer can better understand our value proposition and count on it. We're also improving our contractor packs as another way to convey a value message to pros that are purchasing in large quantities. 2nd, stocking pro relevant brands given that the pro is incredibly brand loyal, we'll also improve our offering with key brand introductions to bring the pro customer back to Lowe's.
We've already seen the power of destination pro brands and attracting customers with the introduction of Sharkbite, A. O. Smith, Marshalltown, Hitachi and Bosch and we're not done. We have the opportunity to partner with other key national brands for the pro and given that those vendors are not in exclusive arrangements, we are confident that they share in our excitement about the opportunity for the Lowe's Pro business. 3rd, delivering consistent service levels.
To ensure we have the proper store level focus on the Pro, we're placing dedicated Pro department supervisors in each one of our stores. We'll also establish labor standards for the Pro desk to make sure that we simply have appropriate staffing levels, and we'll have dedicated associates to help the pros load their trucks. We'll also have knowledgeable and consistent staffing in key pro departments such as rough plumbing and electrical, lumber and building materials, millwork and paint. 4th, providing a differentiated experience, we'll differentiate with a robust product offering and great service but also by leveraging our maintenance supply headquarters business to provide additional products and services for the Pro. We've launched a streamlined product catalog for the MRO customer and are planning for additional branch expansions.
Going forward, we'll work to integrate our outside pro sales forces and better leverage the MSH catalog in offering product to our stores. Finally, developing strong relationships with pro customers, strong relationships will be fostered with our dedicated Pro teams that provide a familiar and friendly face for those repeat Pro customers. Those relationships also come by demonstrating that you understand the needs of the Pro customer. Given that sufficient inventory is one of those needs, we're investing in job lot quantities for the Pro. This is to ensure that we have inventory depth at the store level to meet the Pro customer demands and also to enable presentation impact on those top selling items.
This represents the current inventory levels in the lumber and building materials departments of a typical store and now this represents how the department looks after we invest in job lot quantities. For a pro customer visual presentation matters, if they are shopping on Monday and see limited inventory they will not return later in the week for fears that you will be out of stock. So we are now investing in job lot quantities and we will have our sufficient inventory in place for the Pro in early 2019. We also have an opportunity to improve our services business by simplifying our selling model, improving our project management systems, expanding our national installer network, narrowing the scope of the projects that we undertake and improving the overall customer experience. As Marvin mentioned, our current project management process is archaic, So we're working with Samantani, who you will hear from shortly to modernize this part of the business.
This will allow us to serve the growing do it for me demand more effectively and efficiently. This is a new day and a new Lowe's and the opportunity ahead of us is very clear. We can capitalize on a great home improvement sector and a tremendous brand by focusing on retail fundamentals to win in today's retail environment. We expect that our focus on improving in stocks, delivering better customer service and winning the pro customer will drive greater sales productivity over the next few years. While our focus on simplifying store operations, implementing technology and improving payroll productivity will improve our operating efficiency.
Thank you for your time today. And with that, I'd like to hand it over to Executive Vice President of Human Resources, Jennifer Weber.
Thank you, Joe, and good morning, everyone. As both Marvin and Joe noted, we have some of the very best associates in the home improvement business. They are loyal stewards of our brand and are dedicated to serving customers. That being said, we must better leverage their talents and enthusiasm to maximize customer engagement. This is a critical piece of the puzzle as we look to drive sales across the business.
So over the past few months, I've been working with our functional leaders to identify the areas where we can help our associates drive better customer engagement. And I'm very excited today to talk to you about 2 very specific but unique aspects of our action plan. It all starts with making sure our associates are focused each and every day on providing excellent customer service. We are rolling out a new smart 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 model focuses on seeking out the customer in order to start a conversation, meeting the customer's needs, adding relevant products, services and expert advice, reviewing how the needs of the customer were met and thanking the customer. SMART is more than just a training program. This is a fundamental shift in our culture, moving from one that focused our stores on tasking to one that is laser focused on delivering great customer service. The SMART program is a comprehensive toolkit, including a training program and mobile device, which are designed to provide our associates with everything they need to deliver outstanding customer service. Training in the smart model for all of our associates in the U.
S. Will take place in the Q1 of 2019. And the new smart mobile devices that we're rolling out to our stores will empower our associates with the data and tools they need to serve customers. These expectations laid out by the smart model will also be embedded in our hiring and associate development programs. We believe that great customer service is driven by having a strong and healthy selling culture.
And the smart model is the underpinning of that culture. In addition to this company wide training effort that gets our people focused on delivering great customer service, we're also taking steps to help our associates develop critical trade skills that will better serve our customers and evolve into the kind of skilled tradespeople that could eventually be part of our contractor network or loyal pro customers. Before I dive into the specifics of what we're doing, I want to take a moment to talk about the trends we've been seeing in the labor market for some time now. Over the last several decades, there's been a perception in our nation's culture that a career in the skilled trades is isolating, difficult, dirty and underpaid. The majority of kids in middle and high school view it as a failure if they end up in the trades as their profession.
So plumbers, electricians, carpenters, 1 in 5 people globally say they don't like their job and have no career path. Many believe that their craft or trade skills cannot provide prosperity in a modern technology driven society. It simply does not have to be this way. And it's driving a chronic shortage of qualified trade professionals despite increasing demand for their services. With nearly 3,000,000 skilled trades jobs expected to open by 2028, we are determined to change this.
In February of this year, we announced the start of a new workforce development initiative called Track to the Trades. In partnership with Guild Education, an adult education company, Track to the Trades provides our associates with innovative career alternatives and financial support to pursue a skilled trade. As a part of this program, Loews is offering paid tuition for trade skill certifications, academic coaching and support as well as placement opportunities for full time pre apprenticeships in our nationwide contractor network or continued growth with Lowe's. By investing in our people, we're developing them into a team of trusted advisors that can provide support for our customers today, while building a pipeline of skilled trade workers for the next generation that will better position us to meet the customer demands over the long term. Let's take a look at a video highlighting the importance of changing the narrative around this critical profession.
They said our capes didn't show to enough class to be heroes. They said we were the butt of the joke because we didn't attend their eyes. But they forgot to mention, debt is not the prerequisite to living the dream. You don't have to lean on a desk when you have the drive to design your own lead. By design, these hands summon creativity.
Technology and trade, 2 converging paths, mother earth and mother board, shaping the terrain for the next generation. We are the rightful journeymen, the way makers. When the banks crash and the stocks fall, we set the bearings straight, scrape our knees on sunbeams, hold families together within the framework of our mind, turn businesses into our business with the vision that keeps the lights on. We build a better world out of thin air. This is the what if for the future masters of trading.
The electricians and bricklayers, solar power technicians, energy auditors, tiny homebuilders for the ones who don't care about the color of a collar. Craftsmanship is a calling. What if the vaysayers were so worried about making it in society, they forgot to value the hands that make the society? What if you could live the life you've always dreamed right from where you are? Your career choice isn't a matter of right or wrong.
It's a
matter of knowing what you can do. There's work to be done.
A pilot program for approximately 48 associates in 4 key markets: Denver, Charlotte, Pittsburgh and Richmond. The pilot program was a huge success with 200 candidates enrolled in the early months. We completed the rollout of this program to qualified part time and full time associates in every store, distribution center and call center across U. S. As of October, and enrollment in the program continues to expand.
These associates are completing coursework at their own pace so that they can become a master electrician, a plumber, a carpenter, an HVAC installer or appliance repair specialist. We are very excited to make this investment to develop our associates and advance engagement with both our DIY and pro customers. As we focus on becoming a more customer centric company, it's absolutely critical that we continue to broaden our relationship with our customers. We are shifting the culture at the store level to focus on customer service over tasking, teaching our people the skills they need to deliver great customer service and offering training in the skilled trades to help our associates better serve our customers. By investing the skills and capabilities of our people and leveraging their talent and enthusiasm to maximize customer engagement, we are turning them into that team of trusted advisors in our aisle today, while filling the pipeline of skilled workers for the next generation.
I'm excited with all of the work we have underway and believe that investing in our most valuable asset, our associates, will help us win in today's environment. Thank you for your time this morning, and I'll now turn it over to Senior Vice President and Chief Marketing Officer, Jocelyn Wong.
Thank you, Jennifer, and good morning, everyone. I'm excited to share with you all the different ways we're working to evolve marketing and establish a stronger connection with our customers while focusing on productivity. Over the last 18 months, we have shown good progress with our ability to drive traffic, something we've done by leveraging our strong brand while building capabilities to quickly modernize our approach to digital marketing. Yet, there is still plenty of room for continued improvement. We have an opportunity to refine the messaging of our mass media to expand our reach and relevance and appeal to a wider audience.
We're also working closer with store operations and merchandising to ensure that our in stock and product availability aligns with the products and services that we're promoting. Now, we also need to build the right data infrastructure so that we can better leverage our own customer data and reach customers along their journeys in meaningful ways. We're moving away from our past history of deploying incremental marketing spend that is largely reliant on mass media and into an era of leveraging better targeting and personalization to engage customers at the right place with the right message at exactly the right moment to drive incremental traffic with a plan to spend significantly less advertising dollars over the next few years. So let's begin with the customer. For more than a decade now, we have been the Home Improvement destination for what we call the light DIY customer.
Now this is a more casual DIY customer who likes to do smaller home improvement projects themselves, but isn't completely confident in their DIY skill set. We've become their go to destination because we provide them with an experience that makes them feel comfortable, knowledgeable, and ultimately confident enough to move forward with their project. We know them and we serve them well. Let's take a look at one of our spots from last spring, which targeted this customer.
At Lowe's, we have the right paint for every family. With our collection of stain resistant and durable paints, we've got you coming. All projects have a starting point.
Start with Lowe's.
Now, while our Moments campaign did well for us, we know we can't achieve our growth ambitions without expanding beyond this customer segment. Our mass media creative must appeal to a wider audience in order to work harder for us in driving more traffic per dollar spent. Therefore, we're working hard to refine our messaging to focus on what it takes to win in the hearts and minds of the heavy DIY customer and prioritize segments of the Pro. Now heavy DIYers are hands on makers. They are DIYers through and through, and therefore they have both the confidence and the desire to engage in more advanced home improvement projects.
The heavy DIYer is a frequent in store purchaser that relies heavily on online channels for inspiration and research. But they want to see and touch the products they're buying and talk to our associates about the projects they're working on, especially when they need help troubleshooting a project that they've already started. Heavy DIYers spend more on products, nearly 2 times the average and they shop in store 1.5 times more than the average customer. So we're responding by evolving our marketing campaign with a new tagline, don't just do it, do it right for less, start with Lowe's. Now we believe this new campaign will help us move up the home improvement customer skill set continuum.
And our research also shows that the light DIYer also responds well to this campaign. This is important because it allows us to maintain our strength with the light DIY while we broaden our message. In other words, we believe that by 2021, we can reduce our marketing spend and concurrently speak to a larger base of customers. So let's take a look at 2 of our upcoming spring 2019 ads that feature our partnerships with Sherwin Williams and Craftsman.
Lowe's knows you're the type who does it right, who's painted there and stained that, who seamlessly moves from step 1 to step done. So we do it right with top tier performance from brands like Valspar with exceptional paint durability, whether you're inside or out, and all weather stain for a beautiful finish. Along with pro trusted Purdy brushes and rollers, we do it all at the right price so you can get big savings and big results. Do it right for less. Start with Lowe's.
But you won't because Lowe's is a new home of craftsman mechanic sets, power tools and more. All backed by a warranty you can count so you can get what you need and get back. Good stuff. Do it right for less. Start with Lowe's.
All right. So you'll see that our new campaign is less whimsical than our past work and more authentic to what it feels like to do home improvement projects. It highlights real associates and provides a clear value message and call to action. This new creative should help us expand our core customer base to include the heavy DIY customer and create halo with the Pro, a critical customer to us as well. Now Joe spoke about our focus on better serving the needs of the Pro.
And as his team works to improve our value proposition for the Pro, in marketing, we're working to make sure that the Pro is considering Lowe's in the 1st place. So as we think about what it takes to even be relevant with the Pro, it forced us to not only reevaluate our message to this customer, but also how we deliver that message. We know that the Pro doesn't engage with media in the same way as the DIY customer. So we're focused on delivering messages to the Pro in the channels that fit them best. This comes to life in digital, social media and addressable TV, where we can use data to identify and target the Pro, and with radio, which reaches Pro customers, both on the road and on the job site.
Now we've increased our marketing investment with the Pro considerably and the good news is, is we've seen exceptionally strong ROI here. Now, while I just shared some of our traditional marketing elements, I do want to spend a moment talking about the advancements we've made in reaching customers throughout their shopping journey. Because as you know, customers don't consume media in a linear way. So let me give you an example through the lens of a heavy DIY customer. This customer is streaming an episode of his favorite sitcom on his smart TV when he learns that Lowe's now carries Craftsman products through an online video ad.
We targeted him with online video because we have data that tells us he has a propensity to buy tools. He knows he needs a new mechanics toolkit for his latest project, but he's not yet sure which brand to buy. So he does a quick search on Google and clicks on a Lowe's search ad. Now we served him that ad because we know he's close to a Lowe's store and because we know that he's most likely to purchase at Lowe's. Let's say he is not ready to make a purchase just yet, so he puts his search on hold for the time being.
But being an avid sports fan, he later checks scores on ESPN, where we retarget him with a display ad reminding him of the Craftsman products that he was considering. After noticing the ad, he goes to lowes.com, where he spends some time researching the toolkit he's interested in. This prompts him to actually go to the store, interact with the product and make a purchase. Now all along his journey, we're able to measure the impact of the digital advertising on his eventual purchase, which leverages location data. And because we understand his journey was successful, we can scale and target others like him with relevant effective advertising.
Now, this is an example of how we'll use data to be relevant at the right time, which leads us to a path of personalization and ultimately a better customer experience. Now we're also continuing to invest in our military appreciation program. During the World Series and over Veterans Day weekend, we ran a television spot which featured our Veteran associates, thanking all veterans for their service while building awareness of our 10% off discount for active duty and retired military. Not only did we launch a new media campaign in support of military the stores also took steps like designating veterans parking, military themed patches and vests for our associates to represent how much we value our customers and associates who served our country. Now through our military discount, we will provide over $1,000,000,000 in savings for active duty and retired military this year.
As we drive awareness of this program, we also expect to increase participation, which will drive greater loyalty among our current customers and drive new customers to Lowe's. And with new customers registering for our military appreciation program, we'll be able to build out our customer database with additional information and leverage this data to develop an even better understanding of this important customer segment and how best to serve them. This allows us to further personalize and communicate in a way that drives better engagement. So let's take a moment to look at this creative.
Our military roots run deep. Lowe started when 2 GIs returned from World War II. And after serving their country, serving their community came naturally. More than 75 years later, in 2018, Lowe's would proudly contribute nearly $1,000,000,000 to military families all over the United States with our everyday military discount. From our thousands of Red Best veterans and the entire Lowe's family, we thank you for serving.
Now, you've heard others speak today about our efforts to enhance the customer experience. That experience often begins with the reach of our marketing efforts and our work to deliver personalized targeted messages that build a strong affinity for Lowe's and drives activation. In addition, our objective to win with the Pro is supported by our evolving data driven approach to reaching Pro customers with messaging that is specifically relevant to them. Finally, you heard Bill speak earlier about localization and optimizing assortment to fit Localization plays an important role in marketing as well, and it's going to be a key strategic pillar for us next year. You will see us lean into local markets to a greater degree, working with our operations partners to add meaningful local marketing layers to complement our national marketing.
This is a new day and a new Lowe's with a new approach to engaging customers at the right place with the right message at exactly the right moment. We will work to drive traffic by focusing on our core customers, while we broaden our messaging to drive greater impact. We will provide relevance through personalized targeted marketing and tailored local marketing efforts. And we believe our targeted data driven approach will allow us to achieve our objectives while reducing our overall marketing spend. Thank you for your time this morning.
And now please welcome our Executive Vice President, Supply Chain, Don Frison.
Okay. Thank you, Jocelyn, and good morning, everyone. It's my great pleasure to be part of the Lowe's team and to give you an update today on the efforts to transform our supply chain. Now let me start by sharing that logistics is in my blood. In fact, I started my career in logistics over 30 years ago as a part time car washer at United Parcel Service while I was a sophomore at the University of Tennessee.
Since then, I progressed through a variety of supply chain roles, spending 19 years at Walmart, leading the world's largest truck fleet and supporting more than 30 distribution centers that supplied merchandise to 1600 stores, supercenters and neighborhood markets in the Eastern U. S. I also had the opportunity to spend 2 years in Johannesburg, South Africa, building out a supply chain strategy for a 360 store chain called Massmart. And most recently, I served as the Chief Operating Officer for Sam's Club, where I was responsible for club operations, including supply chain, for more than 6 50 locations throughout the U. S.
And Puerto Rico. I've worked throughout my career to build world class supply chains and now I have the absolute privilege of applying that experience to transform the supply chain here at Lowe's. So as Marvin discussed, our unified goal is to be a great omni channel retailer, serving customers the way they'd like to be served across all channels and at all stages of their shopping and fulfillment experience. For us to meet the omni channel expectations, we must leverage our supply chain over the next few years to optimize fulfillment and delivery to improve customer service. Make no mistake, stores will continue to play a very significant role in allowing customers to shop and take things with them in the store, allowing them the convenience to shop online and pick up in store.
In fact, our research clearly points to an important role for the store in the omni channel home improvement sector. Marvin also mentioned that over 60% of our online orders are currently picked up in store. However, customers are increasingly seeking a set of more robust fulfillment and delivery capabilities to meet their unique needs. So as a result, we've seen growth in orders with fulfillment via delivery, pick up in store, parcel shipments and they've all outpaced the growth of what we call the in store take with channel. So we had to take a very critical look at our supply chain and determine where we were properly positioned and how we will serve that demand.
And quite frankly and simply stated, we found that low supply chain technology and infrastructure have not kept pace with the evolving customer expectations. Now our supply chain was built utilizing a hub and spoke model to service a network of stores rather than an omni channel system. We found that this single channel hub and spoke supply chain infrastructure is also at the brink of capacity. Over the years, we expanded our network of regional distribution centers and flatbed distribution centers to support new store openings and sales growth. However, we've not opened a new RDC, RFDC since 2013, which is 2 to 3 years beyond our average historical pace.
Now along with constraints, our outdated supply chain has burdened our stores with complexity, impacting our ability to service our customers in a manner that they really deserve and compromising our ability to drive productivity. So for example, today, big, bulky products such as appliances are stocked in every store. However, most customers don't take that product with them after purchasing it. In fact, approximately 80% of appliances are delivered. This model creates inefficiencies in working capital as we are managing appliance inventory at the store level rather than managing it at market level.
It also drives inefficiencies as it takes a lot of payroll to move big, bulky product around the back room of the store as well as staging it for delivery, not to mention the increase in damages that you see. And lastly, this model creates logistics efficiencies or inefficiencies rather as we manage deliveries at the individual store level versus the market level. We also found that we have limited visibility to inventory as it moves across our ecosystem and poor flow management. Specifically, we have limited visibility to product when it's coming from our vendors. Therefore, stores don't know what trucks are arriving at their docks or when they're arriving at their docks.
Also, there's a lack of visibility to special order product and the lead times associated with those that affect our competitiveness in the market. The flow challenges across the network result in either SS inventory or not enough inventory that lead to lost sales. And underpinning all of these challenges is the lack of data connectivity throughout the entire ecosystem. We have slow and equated systems that are complex that utilize different platforms that don't connect with each other. So in an omni channel system, supply chain actually infiltrates every aspect of the business.
The good news is that all of these challenges are addressable. And as we solve and evolve our supply chain, we have a tremendous opportunity to increase our competitiveness, improve our operating margin and more importantly, take share. We'll do this by standing up capabilities to support the evolving customer expectations and better connecting customers' needs with the products and the services that we offer as a company. We have a clear line of sight as to how we will transform our supply chain to enhance the omnichannel customer experience. We'll support top line growth and we'll drive better cost efficiencies.
And we'll do that through optimizing a network of assets in our distribution systems as well as the flow of product between those assets. So the first pillar of our supply chain strategy is improving flow management and inventory visibility to improve our in stock position. We'll do this by supplying our stores with smaller, more frequent shipments to ensure that we have consistent in stock levels throughout the entire week. We'll be able to manage our inventory more efficiently at the store level because they'll receive the amount of product that they need rather than receiving excess inventory than having to place it in top stop. We'll also be able to provide our stores with more predictable deliveries that then allow our store managers to better plan their labor resources.
And while more frequent shipments to stores can drive higher transportation costs, we believe we'll see sufficient benefit from the improved in stock as well as the efficiencies from reducing slow moving inventory to offset the increased cost. Now to illustrate these challenges, consider this example of a customer buying a special order refrigerator. Without improved visibility to vendor inventory, we are unable to provide that customer with an accurate delivery date of the product. We don't know when the product will arrive and therefore we don't know how to schedule the home delivery with any type of accuracy. So to provide a delivery date to the customer, we provide a conservative estimate to account for that uncertainty And if the estimated delivery date is 3 weeks out, we could possibly lose that sale.
And even if the customer continues with the purchase, we will likely have to call them to change the committed delivery date because the product ultimately arrives at a different time frame than our original estimate. We are now standing up systems and processes that such by the end of 2019, we will have better visibility to product coming into the network as well as visibility to product location as it moves through the network. Now in addition to improving flow management and inventory visibility, the 2nd pillar of our supply chain strategy is evolving our infrastructure to optimize fulfillment and delivery. We have to ensure that we have the right inventory in the right place at the right time and most importantly in the right quantities, with the required network and capacity to meet our customers' needs. We are standing up a tailored network of bulk distribution centers, regional distribution centers, cross dock delivery terminals, flatbed distribution and direct fulfillment centers.
Each of these nodes has a very specific and critical role in providing a consistent end to end fulfillment experience across all channels to all customers. Now to drive efficiencies and provide a consistent experience for customers buying big and bulky products, we are building out a market level delivery model. This will consist of a network of the bulk distribution centers with movement to cross dot network. We will then pull the majority of our appliance inventory out of our stores, we'll pull them out of the regional distribution centers and place it in that network of bulk distribution centers. We expect to have 20 bulk distribution centers in place by 2021.
These facilities will provide daily service of appliances and other big and bulky items, so think about things like riding lawnmowers, grills, patio furniture and storage sheds. They would then move to a network of cross dock delivery terminals for last mile delivery to the customer. And replenishment of a limited amount of appliances and other large products to stores so that we can service that take with appetite that some of our customers have. We expect to add approximately 90 cross dock terminals over the next 3 years. Now this network of bulk distribution centers and cross dock facilities will then remove the burden of deliveries from stores, covering approximately 95% of our current in home deliveries.
This delivery model will also produce labor efficiencies as we'll use fewer payroll hours to move bulky product around. It will also provide working capital efficiencies as we're able to manage inventory a lot more efficiently than we do today because we'll be doing it at market level. And logistics efficiencies from planning deliveries at the market level as well. Finally, this helps eliminate the multiple touch points in the supply chain and when you reduce those touches, you start to reduce damages. Now as we evolve our supply chain, we're also evaluating capabilities to better service the pro.
We'll do direct to job site delivery, leveraging our flatbed distribution centers and delivery from our stores. Now let me take you through a very quick example of how that will illustrate how these changes will impact our customers and our associates. So today, if a customer in a Charlotte store buys a refrigerator for a home in Hilton Head Island, the selling store in Charlotte has a choice. They can either arrange for the refrigerator to be delivered from our Hilton Head store, which in the current environment is very complicated from a systems perspective, or they can have a box truck travel over 500 miles round trip from Charlotte to Hilton Head to make the delivery. The store will choose the 500 mile round trip delivery almost every time simply to get credit for the sale.
Unfortunately, this isn't a hypothetical example. It's a true story. In the future, we'll solve this problem by giving the Charlotte store visibility to where the refrigerator is available in the bulk network and arrange to have it delivered from the closest delivery location to Hilton Head. It allows for faster delivery, less costly fulfillment for us. We'll also change our operating procedures to ensure that the Charlotte store gets credit for the sale.
That will help the teams really focus on fulfilling sales in the most efficient way possible. The 3rd pillar of our supply chain strategy focuses on improving the speed, reliability and efficiency of our parcel shipping network. Given that demand for parcel shipment has really increased significantly, we expect that trend to continue to accelerate. We opened our 1st direct fulfillment center in Tennessee in the Q3 of this year. That direct fulfillment center will fulfill approximately 75% of the U.
S. In 2 day ground demand. It will relieve RDC capacity by handling break pack for the entire network. So in addition, we're evaluating our 2nd direct fulfillment center to be located in the western U. S, which will recover the remaining 25 percent of parcel demand with 2 day ground shipping.
For the same day and next day shipping, we'll actually have the option of then leveraging our stores, which have the advantage of close proximity to the customer, as well as sufficient capacity where they no longer have to stock appliances and other big and bulky items in the back room. So to illustrate the potential for our omnichannel evolution, consider that today 90% of an average store's back room is filled with appliances. In the future, the majority of these appliances and other bulky items will be stored in the bulk distribution network and fulfilled through the cross dock terminals, freeing up significant space in our backrooms. We currently have 84 parcel shipping stores, and the additional backroom capacity in our stores will now give us the potential to have over 1700 parcel delivery locations throughout the U. S.
If needed. We can then leverage artificial intelligence to determine the optimal assortment for these parcel locations based on historical buying patterns on lowes.com. We believe that this is a competitive advantage over other home improvement retailers who lack the requisite store capacity to stand up store level parcel shipping capabilities. This is a new day and this is a new Lowe's. We're excited about the opportunity ahead of us and we have plans in place to capture that opportunity.
All said, we expect to make a capital investment of $1,700,000,000 in our supply chain over the next 5 years to improve the omni channel customer experience. We will optimize fulfillment and delivery through a tailored distribution network. This will allow us to support top line growth while also driving operating efficiencies. And we believe we have the plans, the skills, the experience and the capital to capture that opportunity. So thank you for your time this morning and now please help me welcome Executive Vice President and Chief Information Officer, Samantani Gabelais.
Thanks, Don, and good morning, everyone. It's a pleasure to be here with you all today. Prior to joining Lowe's just over 4 weeks ago, I spent over 25 years working in global technology organizations such as American Airlines, Sabre and Travelocity. Most recently, I served as Senior Vice President, Digital and Marketing Technology at Target, overseeing the company's global e commerce, enterprise marketing and loyalty technology strategy and operations. As Marvin indicated earlier, there is a common thread across the presentations today, a focus on the retail fundamentals.
But there is another commonality in what you have heard today, the need for significant improvement in technology solutions across our business. In fact, if you look at the 10 areas of focus in our strategic framework, 6 of them have system improvements as a critical dependency. Having joined Lowe's only 4 weeks ago, you might say I have signed up for a lot. However, given my experience leading large scale transformation efforts, I strongly believe in our plan to deliver the technology improvements needed to address the challenges and capitalize on the opportunity outlined by the team today. Like my peers, my first order of business upon arriving at Lowe's was to conduct a deep dive assessment of the current state of my functional area.
What I found is that Lowe's technology is well behind leading retailers in terms of strategy, architecture, process maturity and capabilities. Our store and supply chain systems were developed in the 90s, while our merchandising pricing and digital systems are rooted in early 2000s. Only our back office system really measures up to current standards, and that's obviously not ideal for a customer facing organization. Leading retailers have modernized their technology platforms and advanced their digital capabilities through investment in software engineers and targeted acquisitions. However, at Lowe's, we have historically underinvested in talent and technology, opting instead to use off the shelf software packages and then heavily customizing them, resulting in poor integration, difficult upgrades and slow responses to business needs.
Taking a step back and looking at how we got here, our technology goals were focused on managing cost and headcount rather than building capabilities that serve customers in a modern omnichannel world. Misaligned goals and inconsistent execution further contributed to a growing gap in our capabilities. For example, in 2,009, we launched a services platform initiative, which was designed to provide connectivity between our omnichannel assets and close many of the capability gaps described by the team today. Services platform was scoped as a 4 year program, but it was shut down after 7 years. And in the end, it delivered less than half the original business value intended.
Inconsistent leadership evidenced by the rotation of 5 CIOs in last 8 years drew an inconsistent strategy and low accountability, which in turn delivered poor results. We have capability gaps in stores, supply chain, merchandising and digital systems, and we must remedy them in order to win in today's complex retail environment. We have set forth plans to begin the modernization process as we head into 2019 and then position ourselves to make investments beyond 2019 to stay current in a rapidly evolving space. Going forward, we'll focus on 3 main areas. 1st, creating a best in class architecture to support our omnichannel ambition 2nd, establishing an operating model that accelerates our development 3rd, building a best in class team of highly skilled and motivated technology professionals.
1st, we'll create a truly omnichannel architecture. When I say that, I don't mean a single app or just a slick website, but a ground up single view of customer orders irrespective of whether they were placed online, in the store, through the call center or on the job site. It is about creating a single view of our customers, product, prices and inventory. Whether our inventory resides in our bulk distribution center, our stores or our direct fulfillment center, this information will be readily available to all our associates and customers through a flexible architecture deployed closest to the end user for optimal performance. This type of architecture will dramatically improve our speed, scale and flexibility.
It will allow us to deploy updates more frequently as we'll be able to quickly change only the parts we need without affecting or changing the whole structure. We'll be able to reuse components, which are literally like Lego blocks to rapidly construct new capabilities for our associates and customers to embark on a journey of continuous innovation. In addition, as part of our new technology strategy, we are moving to cloud enabled technologies, which will improve application availability and scalability while lowering the total cost of ownership. Today, less than 5% of our enterprise application portfolio is running in the cloud. With this critical foundational architecture in place, we'll be able to offer new functionality for our associates and customers and deliver the best in class retail experience.
In addition to improving our omni channel architecture to drive better results, we have started our journey to fundamentally change our technology operating model. We are standing up product teams, pairing engineers with product managers and business experts to co innovate and deliver functionality faster. Gone are the days of multi year mega projects. Instead, throughout 2019, we'll be bringing new functionality to our store associates and customers on a continuous basis. To deliver on this omnichannel architecture and all the functionality it enables, we intend to hire over 2,000 software engineers over next few years.
And we'll put these engineers at the center of everything we do in technology. We'll ensure that the work environment, level of empowerment and compelling product work will create one of the best places to hire and retain top talent. We have historically relied on off the shelf software packages, which we then customized, which was inefficient and created isolated platforms with isolated data and it required us to staff separate teams, each with different skill set. We have now shifted our focus to a digital transformation strategy that relies on building customized solutions and leveraging open source technologies, which are far more nimble and cost effective. By 2021, I plan to shift the build component of our application portfolio to over 80%, leveraging our team of software engineers, which will improve our agility, reduce maintenance expense and enhance our performance and monitoring capabilities.
As we stand up our new capabilities, we'll put our associates and customers at the center of everything we do. We are improving our architecture, operating model and the team to create exceptional experiences for customers. When we talk about these experiences, they'll be ranging from an outstanding website experience to delivering the most useful apps for our store associates, to creating tools to manage a complete installation project, to inspiring ARVR experience. In a sense, we will empower our store associates and customers across our website, stores, call centers and job sites. I would be remiss if I did not address the improvements we are making to deliver improved customer experience on lowes.com.
We recently reduced checkout steps on the site from 6 to 3, allowing for a faster checkout and better experience. We also optimized our site for natural search, which yielded better results for our customers. Going forward, we are working to improve our site stability and speed by improving our website architecture and building a technology platform that will allow us to scale and launch new features quickly. This new platform will enable all technology teams to build capabilities using open source software and improve speed to market and reliability. Looking ahead, we still have a great deal of opportunity to deliver an improved experience online with more relevant site search result, customized content and accurate view of inventory and expanded assortment to increase our online conversion.
All the technology improvements I've described will clearly take significant investment to achieve. And we do plan to invest between $500,000,000 $515,000,000 in capital per year through 2021. This investment will be coupled with clear priorities, focus and superior technical expertise and greater accountability. We believe that these investments aligned to our strategic priorities backed by exceptional execution will significantly improve the return on technology initiatives. In fact, we are seeing some early wins that our investments and our operating model is paying off.
In closing, as Marvin mentioned, we have sufficient capital to invest and functional leaders with clear vision of where we must take the company. In 2019, we'll focus on stabilization and modernization. Then in 2020, we'll deliver rapid functionality improvements and capability rollout. In 2021 and beyond, we will continue to make ongoing strategic investments in our business. Throughout my career, I have led creation of extremely complex, highly distributed systems as well as large scale transformation efforts.
As I have watched the technology landscape evolve, the current advances in cloud deployment, open source technologies, artificial intelligence and machine learning have made this an opportune time to execute a large scale technology transformation. My experience, combined with current technology climate and the support and deep expertise of this leadership team gives me confidence in our ability to achieve these goals and leverage technology to take advantage of the opportunity ahead of us. I'm truly excited for what lies ahead in our multiyear technology plan and excited to be part of this retail transformation. Thank you for your time today.
We will now take a 15 minute break. Refreshments are available in the lobby. Ladies and gentlemen, the conference is about to resume. Please take your seats. Please welcome Chief Financial Officer, Dave Denton.
Funny. Good morning, everyone. Welcome back from the break. I'm very excited to be part of the Lowe's team as we focus on improving the core fundamentals of our business, which we believe will allow us to drive significant shareholder value over time. Now, while my first official day was in late November, I spent a significant amount of time over the past several months immersing myself in this business.
I've actively participated in the strategic planning process, the development of the 19 financial targets and plans and the creation of our long term financial outlook and targets. As we set the stage for the future of the company, we are focused on 3 key areas to drive significant shareholder returns, and this will be our roadmap for unlocking value as we go forward. 1st is our drive towards operational excellence throughout the enterprise. 2nd is our ability to generate significant levels of cash flow. And finally is instilling a more effective approach to capital allocation.
Maximizing shareholder value will be a major focus of the company, and I believe that all three areas will contribute to our success. So with that, here's a look at my agenda for today. First, I'll review 2018 and help you better understand our core performance, excluding all the noise associated with our strategic reassessment. My objective will be for you to have the right financial baseline by which to evaluate our performance over the next several years. Then I'll lay out our roadmap from a financial standpoint for the next planning horizon, including our guidance for 2019 as well as our long term financial targets.
And then finally, I'll review our priorities for capital allocation. As you well know, 2018 has been a rebalancing year for Lowe's of sorts. We've narrowed our focus and have been eliminating underperforming and non core assets all in an effort to create a platform for growth and enhanced long term returns. The good news is that we are very well positioned in both a large and growing home improvement sector. And as Marvin shared earlier, this nearly $900,000,000,000 market is very fragmented outside the top 2 players, which means there is a tremendous opportunity for share gains.
We have a strong consumer brand. We have a broad customer base, and we have a very diverse set of product offerings, not to mention a very healthy balance sheet that we're going to put to work to create value for shareholders over time. Having said all that, you heard this morning about the challenges facing our business today, much of which are totally within our control. We've discussed the need to improve our execution and better serve the Pro customer. Our technology infrastructure is in need of improvement while our supply chain needs to evolve to meet the needs of an omnichannel environment, and this year's strategic reassessment allows us to have greater investment focus on our core retail operations.
On our last earnings call, we shared our updated expectations for 2018, and we're reiterating that guidance here today. Total sales are expected to increase approximately 4%, driven by comp sales increase of approximately 2.5%. We expect an operating margin decline of between 2402.55 basis points, which includes about 135 to 150 basis points associated with our reassessment of the business. We expect diluted earnings per share of between $4.08 $4.24 a share and adjusted diluted earnings per share of between $5.08 $5.15 per share. And we will generate a very healthy $5,500,000,000 of free cash flow.
And we said we have substantially completed our strategic reassessment of the business and have now honed our focus on making significant progress on our initiatives in 2019. So given all the moving parts in 2018, I'll spend just a minute rebaselining our financial performance so that you can better manage our progress going forward. Now this slide starts with the midpoint of our 2018 GAAP guidance and eliminates charges associated with the strategic reassessment, including between $460,000,000 $580,000,000 of additional charges that we expect to occur in the Q4. And the amounts, the nature and the timing of any additional charges associated with the attended exit of our Mexico retail operations will depend on the plan that we execute in that space and therefore not reflected in our guidance. Likewise, we are currently undergoing our annual goodwill impairment test.
While it's too early to determine the outcome of any potential non cash impairments resulting from this effort, they are not contemplated in our guidance today. From this adjusted view, we then re baseline so that you have the right jumping off point from 2018. First, we have closed all Orchard Supply hardware stores, which removes roughly $560,000,000 in sales from our base and eliminates about $60,000,000 in losses associated with that business. The exit of our meat Mexico retail operation as well as certain non core activities in the U. S, which include both the Alacrity renovation services and the Iris smart home business, will remove about $210,000,000 in sales and eliminate approximately $40,000,000 in losses.
And these actions are represented in the business unit optimization column on this slide. We also announced the closure of 20 underperforming stores in the U. S. And another 27 in Canada, so we've added back the liquidation impact of those closures. And then finally, we've completed an aggressive rationalization of inventory, removing both low performing and slow moving items.
So we've added back the impact of that event in both the U. S. And in Canada. The net effect of all rebaseline is a rebaseline of an operating margin of 9.3 percent and EPS of $5.51 per share for 2018. So here's a quick road map outlining how to think about the next few years from a qualitative perspective.
Again, 2018 is a rebalancing year where we're eliminating underperforming and non core assets and again allowing the organization to focus on retail fundamentals. In 'nineteen, we will shift our attention to realizing many quick wins across our business, but also aggressively implementing the initiatives that we outlined earlier today. And given the practical timing lag between the implementation of the business fixes and the realization of the financial benefits, we anticipate that 2019 will only deliver modest financial progress. However, looking forward, we expect that beyond 2019, the business will begin to more appropriately reap the financial benefits of these important operational changes. But clearly, transformation of the supply chain and establishing a robust omnichannel platform will require investments beyond 2019.
So with that as a backdrop, let's review the company's 2019 financial guidance. We expect total sales growth of approximately 2%, driven by comp sales growth of approximately 3%. We expect our initiatives to enable us to begin to close the gap to market growth. Drivers of our 2019 sales plan include the steps that we're taking to achieve merchandising excellence, including category management, enhanced local assortments, better reset execution, and the continued launch of the Craftsman brand at Lowe's. Additionally, our operational efficiency efforts will lead to more productive labor utilization and better in stock levels, which we expect will allow us to better convert traffic into transactions.
Our Pro Focus should also generate incremental sales for 2019. We are making investments in both inventory, brands and services to better meet the needs of this important customer segment. And finally, we expect that improvements to lowes.com will yield better top line results. So in addition to solid sales growth, we expect 235 to 250 basis points of improvement in operating margins. This represents approximately 30 basis points of improvement versus the rebaseline of to roughly 9.6% in 2019.
We expect the primary drivers of operating margin expansion beyond sales growth to come from SG and A leverage. Store labor productivity as well as reductions in advertising costs from more effective and targeted marketing programs, they will be the major contributors. Strong sales and growing margins are expected to generate approximately $6,500,000,000 in cash from operations in 2019. We are planning for capital expenditures of roughly 1.6 $1,000,000,000 in 2019, which is elevated compared to our historical run rate of about $1,200,000,000 over the past several years. And now that we have substantially completed the strategic reassessment, we have identified the critical areas where focused capital investments are required to both drive near- and long term performance.
And the good news is that the amount of incremental capital required to fund this effort is not significant. In 2019, approximately 60% of our capex will be dedicated to maintaining and reinvigorating our current asset base and improving our technology solutions, while 25% will be focused on strategic efforts that will drive improved performance both in the long term and as well as in the near term. New store growth in international investments will be very modest, requiring only about 15% of planned capital spend. And we expect that the next 12 to 18 months will be the peak capital investment period, and the company's level of investment would be modestly below the peak longer term. Now before I highlight our longer term targets, I want to point out the cadence of some of our key initiatives.
And as this chart indicates, most of the initiatives have go live dates sometime in 2019. The supply chain and digital investments will be the exception, requiring a multi year journey. While benefits from many of these efforts begin to accrue in 2019, we expect that the impact from these initiatives to increase significantly over time. And this is a chart that we will use going forward to track our progress. With an increased and intense focus on retail fundamentals, we have a significant opportunity to drive performance and returns over the next several years.
Based on the actions currently underway and our planned initiatives, here's a quick snapshot of our longer term financial targets. Over a reasonable planning horizon, we are targeting sales per square foot of $3.70 Now this level of sales growth equates to a nearly 15% increase on a per store basis. We are targeting an operating margin of 12%, 2.70 basis point improvement from our rebaseline levels in 2018. This improvement will be largely achieved through a combination of both sales leverage and better SG and A performance. This level of performance would slightly outpace our peak level achieved some years ago.
And finally, with accelerating sales growth, improved operating margin and better capital deployment, it is our goal to enhance ROIC by 1600 basis points to 35%. And based on the plans we currently have in place and the corrective actions underway, we believe we have very clear line of sight to achieve this level of financial performance. Improving ROIC is critical as we look to enhance shareholder value over time. So with that, I'm going to switch gears for just a minute, and I'm going to focus my comments on our balance sheet as well as the capital structure of the company. Our objectives are geared towards funding our business operations, supporting future investments, and optimizing our capital structure.
We are very committed to maintaining a strong balance sheet and a solid investment grade rating because a healthy balance sheet is a key element to providing flexibility for the company to invest in high return efforts, which in turn will allow us to maximize shareholder value in the long term. But we feel we can maintain that flexibility at a slightly higher leverage level. We will now target an adjusted debt to EBITDA ratio of 2.75x versus our previous target of 2.25x. We believe that increasing our leverage ratio will allow us to optimize our capital structure and our cost of capital and drive incremental returns for our shareholders. Our debt maturities are well laddered with no 1 year requiring a significant outlay of funds, which provides us incredible flexibility as we issue additional bonds and increase our leverage.
Now looking forward over the next 3 years, we believe strongly that the company is positioned to generate significant levels of cash. Assuming a reasonable financial plan, the company could generate operating cash over this period of approximately $21,000,000,000 Now, if you were to assume that slightly more than 20% of this cash would be invested back into the business in high return efforts, over $16,000,000,000 in free cash would be generated. Now, additional cash of about $9,000,000,000 could be made available as we reach our new leverage level of 2.75x. This will result in approximately $25,000,000,000 available to enhance shareholder returns. Given the strong cash generation of the company and the improved outlook for the company, Today, our Board of Directors have authorized $10,000,000,000 in additional share repurchases to be completed over time.
This brings our total share repurchases from an authorization standpoint to $14,500,000,000 During 2019, we expect to complete between $6,000,000,000 $7,500,000,000 of share repurchases, significantly above the roughly $3,500,000,000 on average over the past several years. While we expect the incremental repurchase to have a modest effect on 2019 EPS accretion, we expect it to generate significant value to shareholders longer term. As a result, we expect to deliver adjusted earnings per share in $0.19 of $6 to $6.10 per share or approximately 10% over the 2018 rebaseline levels. So here's a handy summary of our capital allocation priorities. Our first priority, as always, will make the necessary operational investments to drive healthy growth and returns within our core retail business.
Acquisitions will not be a priority in the near term, but we will always evaluate opportunistic situations that add needed capabilities. We plan to maintain our current dividend payout ratio of 35% while managing again our capital structure to 2.7 times adjusted debt to EBITDAR. We are committed to making disciplined risk adjusted decisions when deploying our cash. We will invest in projects that help us grow our grow and stabilize our business with healthy long term returns. We will either fund these types of projects or we will return the capital to our shareholders if that creates the best
value. This is
a new day and this is a new lows. We believe we have set reasonable financial targets for the company. We have a renewed focus and energy on driving long term shareholder value, and we look forward to providing updates on our progress in the coming quarters. So with that, again, thank you so much for your interest in Lowe's. I'm now going to ask my colleagues to join me on stage.
I'm going to take some questions from the audience.
Okay. Let's get started.
Great. Hi. Good afternoon. Greg Malek with MoffettNathanson. So I guess I wanted to start with the real shift here where we can see the 2,000 engineers really impacting much of the company.
I'd just love to hear a little bit more about why do that 80% internal, will all those people be here in Mooresville or will they be spread across the different business units? How are you actually executing on that? And why do it all internally in house when there's probably a lot of other places you could get that expertise?
So let me follow-up on leverage.
I'll take the first part. I'll let Samanthe get into the specifics. But as we did a search for our new Chief Information Officer, we really wanted someone that could help us think about the future. And if you think about large companies making large scale transformations, you don't make those buying package software. So I wanted someone and we wanted someone that had a skill set and a track record of specific design in this new age of cloud technology and open source arenas of technology.
And so she has that. And so I'll let her speak specifically to the vision around doing it in house versus going outside.
That's a good question. And I think the my experience, what it tells me is, if your underlying business process is non differentiated and if it is well known and well documented and if it is not changing much, those are great places to buy packet software. So for example, if you want to run your company's payroll, that's a great place to buy a packet software because every company out there is running payroll kind of similar to each other. However, if you want to run your own inventory or you want to take orders, these are the places where you are actually bringing differentiation. This is your secret sauce.
Generally, packages develop software, which is lowest common denominator across all their clients and they are not able to accommodate for secret sauces. So this is something we want to internally do. And 2,000 engineers is our estimate given our omnichannel ambition like you heard all across. This is our estimate of what we'll need. Any great engineering organization today, I think has always to be in a talent mode of hiring, retaining top talent.
I personally spend a lot of time making sure that I have a really good network, robust network, and I'm continuously looking for people. So I think it squarely falls in our ambition of omni channel. Developing our secret sauce internally with our own engineers and that is the estimate that we'll accommodate that.
And so let me give you kind of where we are today. We have quite a bit packaged software that we customize. And so we're paying licenses fee for product that we can't even get serviced on because it's so customized. And so we have the worst of both situations and we have to work our way out of that. And relative to where these individuals will be located, that is still under discussion.
We have we're fortunate to have office locations not only here, but on the West Coast, different parts of Carolina and around the country. And so Samanthony is working with Jennifer and I, and we're thinking through what would be the best location for us to recruit and to retain these individuals. So that's best to come.
Dave, welcome. It's great to have you.
Nice to meet
you.
Thanks for the very clear path and plans and goals. I guess I'd love to get a little more idea of the sensitivity just to top line and macro and why really take leverage up to 2.75 times now when it looks like the organization has a lot of change going on. And there are some macro headwinds in terms of housing turnover and whatnot. So, I guess, what sort of world environment would you see that 2.75 target where it might make sense to go back to 2.25? Percent, how flexible would you be around that?
Well, listen, we're never going to put the company in harm's way. We do think there's an opportunity to take advantage of the balance sheet between kind of where the company is today and levering up to 275. We'll unlock a lot of cash. You heard, I think, very strongly about the business and the opportunities we have in the business. Despite what happens from a macro perspective, there's a lot of opportunities to drive performance in the business, even if we had a softening of the macro.
Having said that, we will be cautious. We will work and we'll manage ourselves through certainly 2019 beyond, but I do think it's appropriate to get our leverage back up there. And we're going to use the capital to reward shareholders as we go along in this journey to improve Lowe's over time from a financial returns perspective.
Thank you. Simeon Gutman from Morgan Stanley. Marvin, you somehow lost 5 or 10 points of Pro Share in 5 months. I don't know where it went, but if you can talk about the old base that we were using, why did that definition come down? And then if you can talk to us about what do you think your share of wallet is with the probe customer?
We think your competitor is somewhere in the mid teens, so you put both of you together. It's still pretty small piece of the market. Sure. Where is all that other business? It would tell us that it doesn't have to come from them.
And is there any big buckets or low hanging fruit there?
Yes. So Simeon, I'll take the first part of it and I'll let Joe McFarland provide some additional context. The pro penetration has always been an estimate. And as we dug into our version of that estimate, we felt that it was estimated too high based on the view that Joe, myself and Bill, with our experience in this space, have typically viewed pro penetration. And so from that, we felt that the number is closer to 20% to 25%, again, based on a renewed view of the ESPIN, and we feel more comfortable with that as a representation of our penetration.
Now, setting that aside, as we mentioned on a couple of different occasions today, this is a $900,000,000,000 home improvement marketplace and 50 percent of that is pro. And so we know there is a lot of share out there, that us and our largest competitor does not have a significant amount of. So we do know that the fragmentation of the home improvement marketplace, including Pro, is a very available marketplace for us to go to try and drive the business. And so I'll let Joe talk about MSH, which we think is a huge opportunity for us to unlock part of that, but also just the fundamental things we do in the store and what we will do over the next couple of months and into 2019 that we think will allow us to start to grow that business.
So I think it's important to understand that from a pro capture standpoint, the way that we have in the past looked at that is really primarily through our private label pro credit card. And then we've matched up known transactions like transactions to the pro. And as you think about even being in our store, you think about the Pro end of the building, it is painfully obvious that we don't have that Pro customer in the store. And so through our own internal really kind of deep dive and resetting the expectations of Pro, We believe that 20% to 25% is pretty accurate. When you think about the footprint we have and we often get asked a lot of times, do we have a disadvantage in our footprint from a Pro standpoint?
Even in our most rural locations, there are mom and pop lumber yards, there are lighting showrooms, there are flooring showrooms. And so all of this opportunity is out there and between the 2 of us having such a small portion of that Pro business, it's not a them or us, it's the sheer size of the opportunity that's out there. In addition, as Marvin mentioned and I mentioned in my presentation, we have a great opportunity with MSH to continue to expand, to open up new branches. MSH really has a very focused catalog for the single family MRO customer. And we believe that there is a lot of synergies between our outside sales force and the MSH outside sales force in working together.
We have launched our very first kind of joint partnership in understanding how we leverage MSH inside of a Lowe's store and how we leverage Lowe's store with the MSH customers as well. So very early days, but I think we are pleased with the reception we are receiving from the customers and we think there is a lot of synergies there. So the opportunity ahead of us as we have supervisors, as we increase the depth in job lot quantities, as we improve the service model with the loaders, the MSH as we sharpen kind of our larger volume quotes out there from a Pro standpoint, we believe there is tremendous opportunity to unlock that pro business inside of Lowe's.
And my follow-up is for David. Can you share any color on what each point of comp is worth the EPS? And my premise is that it's worth more to you going from a 2 to a 3 than 0 to a 2.
Yes, certainly as you go up with the fixed cost nature or semi variable cost nature of the business like this, clearly taking those next points up would be more impactful to us financially. I'm probably not able at this point in time to give you a clear delineation of that. I do think given 2019 is a bit of an initiative implementation year, I think once we get that the business, I'd say, more stable and we think about the out years, there's probably a better metric at that point in time to come back to you with that.
Thanks. Eric Posner, Cleveland Research.
The slides I had didn't have Xs for the
years for the 12% margin. So perhaps you can clarify that. I guess, 2 questions. 1, if you could help us understand the thought process.
Yes.
I know it's a new lows, but traditionally we're used to 3 year plans. And so is that implied as 3 years? And then secondly, there's a lot of spending going on and it seems like the incremental margin in the next $25 a foot sales per foot is quite high. So could you just talk a little bit about connect those two dots please?
I'll take the second part. Relative to the 3 year plan in the axis, this is a really new team. I think that's worth noting. And this is also a company that candidly does not have a great track record of hitting financial forecasts. So we wanted to be appropriately conservative in determining our long term view of the business because 2019 is a rebalancing year.
And so we're definitely focused on a 3 year plan and beyond that relative to supply chain and IT and digital. And so the Xs represent our near term view, and you can define near term in any way you want, but it's our near term view. And we'll leave it at that, and we think we'll have a much better line of sight as we execute through 2019. As we think about the sales productivity, I'll let Bill discuss some of the things that he's putting in place relative to kind of how we today have such a lack of focus on driving sales productivity, whether it's in caps, off shelf space and pro. And the big unlock for us in driving sales productivity is the pro business.
Anytime you have a customer that's worth 5 times more than traditional DIY, that's a customer you need to attract because they unlock so much productivity value in the store. But Bill can talk about the value of MST in driving productivity, the field merchandising team and some of the things this team is working on right now to just be more productive with our space in the store.
Thanks, Marvin. Yes. So as I said in my prepared remarks, we're making changes to the end caps and using a whole different philosophy in regards to changing them from what have been showrooms to now trying to sell product off of that. In addition, as we roll out MST, we'll have the ability to now look at in bay performance, and so we'll look at bay productivity. So as part of the category management process and going through and identifying and applying a role and an intent to every category inside the store, we'll be able to get a more clearer look at the productivity inside of each one of our bays.
That then allows us to make good decisions as it relates to how we then implement off shelf, what we put on our end caps and then how we grow our assortments online, so that we can supplement what we are doing inside of our store and build out those assortments online at a faster rate. And then we can invest as we've as Joe covered in his presentation, so that we can invest in job lot quantities in those high moving SKUs for the pro customer, and that's where we're headed.
Hi, thanks. It's Mike Baker from Deutsche Bank. And these are maybe specific questions that you wouldn't that you won't answer, but I'll give it a shot. Within that 3.70 sales per foot, what kind of same store sales is embedded in there? How much of that is macro driven?
There's got to be some macro thought process in there. How much of it is it company specific, I. E. End caps like making the end caps go from showrooms to selling product that's worth X amount of 100 of 1,000,000 of dollars. You have any kind of specificity in there, if that's a word?
Yes. Listen, at this point in time, what we do have, I'll say, plans in place that take us out through that period of time. I think at this point in time, we're not willing to kind of go through that in detail. I will rest assured that there's behind all these initiatives, you can imagine the captains that we have that are managing these projects and the initiatives and the project plans beneath them to go drive to performance. So we have pretty clear line of sight to that.
But we're not really at this point in time prepared to disclose that.
So let me give you a couple of anecdotes that give me some confidence. We're in stores every week and I'm in stores every weekends and it's not uncommon for me to be in a store like this weekend that's a +2 percent comp with over a 1,000 out of stocks and out of stocks and home improvement is real easy to capture. You just count holes on the shelf because if it's not available for the customer to purchase it, it doesn't matter if it's in the overhead or stock room, you're out of stock. And so when I look at that, I have 2 emotions. 1 really frustrated that we're providing such a poor level of service to the customer, but also really encouraged that I'm a 2% comp in this store.
I got 1,000 out of stocks. I can go across the street to a competitor and I can count a significantly lower number than that. And so macro has nothing to do with that nor is any of that structural that is 100% within our control. Conversely, I can go to a store in a pro market where I know the pro is strong based on my past experience and I can go to one of my stores and I'm less than 20% penetrated pro. And I'm thinking to myself the opportunity here is enormous if we could figure out this business because this store, this market is a 40 plus percent pro penetrated market.
And so we look at all of these things and not just from a perspective of anecdotes, then Joe and Don are working intently on the in stock piece and Bill is working on the assortment from a pro perspective and Joe is working on the service model. So we're working on all of these things and to David's point, we can't give you a basis point value to each, but because we have so much experience on this team that's kind of been through this journey before, we intuitively know the value is there and we have to execute it. And so and these things are not impacted by the macro in any shape, form or fashion.
Thank you for that answer. One more follow-up while I have the microphone and this is for Jocelyn and Jennifer. I think as I look up there, you 2 are the only people who were there with the previous management team. And Jocelyn, I asked you this at breakfast, but can you maybe describe what you see different in the way Lowe's operates today than maybe 3 years ago?
It's going
to be really hard to say something negative when I'm sitting next to her. But she is definitely free to do that.
She knows she is.
So I'll start and then you can jump in. I think I'll just elaborate on the conversation that we had earlier. I think what's really exciting is the strong focus that you can see. Culturally, I think there's also a renewed sense of urgency. One of the examples that I was giving you this morning, which can really allude to this, is the military spot that you just saw that we played earlier that played in the World Series.
From the time that Marvin, Bill, Joe and I talked about it, to the time we wrote the script, we shot it in a store and we shipped it to air was 10 days. So that is probably a really great illustration of the urgency that we're operating, and the alignment behind all necessary parties to just align on what we need to do and get it done. I think it was, obviously an amazing thing to be able to launch that TV spot. It's a program that we stand behind. But I think that's probably a really good example from the seat that I'm in on the change from a culture standpoint.
We're getting to alignment. We're talking about the tough issues. Once we decide, we go. And so I think as you hear about the opportunities that we have with execution, the areas of focus, sense of urgency, alignment, focus, those are key enablers for us getting the job done. So I will let Jennifer dive in from her point of view.
Sure. Absolutely. Thank you, Jocelyn. I'll just add to that. What I would say is, one of the notable differences that I'm very encouraged by is we're simplifying the business and we're doubling down on retail fundamentals.
And as I travel in the field and I talk to our store associates, they've known what we need to get after in terms of enhancing their ability to more effectively serve our customers. And that's what they're hearing from this leadership team. Very clear articulation of the expectations going forward. What we're doing to get after it. Accountability around execution.
And then a very routine cadence of communications. Marvin does a weekly podcast to our field associates. And I get so many comments on that, on how much they appreciate, that we're refocusing on retail fundamentals, that they feel like there's an open and transparent and authentic communication with the senior leadership team. And then finally, one of the things that I think of about as an HR leader that until a team comes together, you're never quite sure is there's great alignment and chemistry with this team. And so this team is working so well together.
There's great chemistry. There's great confidence and support of each other. And that's something that until you bring the team together, you don't know. But I really credit everyone sitting up here with that because we really place an emphasis on making sure that we're aligned as a team. We're focused on sense of urgency and executing with accountability.
Good morning. Flora Champine from Loop Capital. Dave, when you mentioned the potential to raise $9,000,000,000 in debt, would that be likely front loaded given the rising interest rate environment?
Well, we wouldn't do that. That $9,000,000,000 is really over a 3 year period of time, so we certainly wouldn't do would not do that in 2019. We will obviously take our leverage ratio up to in 2019, so we'll place incremental and additional debt. We haven't really come up exactly what our financing plans would be because the markets are a little choppy right now. I think particularly at this leverage ratio, those type of companies in that in those typical rating categories, there's kind of barbells.
And you see some that have been struggling, like the GEs of the world, as an example. And they've created a little bit of a shock to the credit markets, I think. So I almost think that after the 1st of the year, we'll kind of get a better reassessment of
how the credit markets
work and how they look
and how frothy they might
be to determine how work and how they look and how frothy they might be to determine how we go to market. Got it. And this one's for Marvin, but related to the expectation that interest rates will
rise, and that may impact the demand for your categories. And that may impact the demand for your categories overall. What's embedded as a rate of industry growth inside that 3% comp for next year? Because I don't think that's where your ambitions lie longer term.
Well, I don't know that we have an embedded industry growth as much as we look at the macroeconomic data points that really correlate our business, income growth, home price appreciation and real residential investment. You know, what I've said many times over the years is the home improvement market is in a good position when you purchase a granite countertop for your kitchen and you view it as an investment and not an expense. And the difference is correlated to the value of your home. If your neighbor sells his or her home and they lose money, then everything you buy is it feels like an expense, but if they sell their home and the values up, then everything you buy for your home feels like an investment because you believe that you're going to get it back and that goes to consumer confidence. And so we're in a even interest rates are up and we acknowledge that and you have some affordability indexes kind of ticking in a place where they're higher than they have been, but still relative to kind of historical norms, we're still from an affordability perspective around the country, we're still in a really good position.
Our business and those metrics really support us, and that's part of why we view the ability to grow above, you know, kind of hopeful that we could grow above what we have presented. But we want to be appropriately conservative because we want to gain some credibility as a team that we can deliver on our financial expectations. But the macro is still supported, but more than anything, we believe we can create our own tailwind. I can go on and on and on about the end of day, survive stocks, about how we're not servicing the pro business. That photo that Joe McFarlane showed on the lumber and building material, those are real photos.
That's a real photo of a store that you go in and you see all the steel, all the back wall. If you're a pro customer, there is no chance that you're going to shop us because you're so concerned that later in the week you're going to be out of stock. And so you're going to make this trip to the store. You're going to walk in with 1 or 2 people and there's no product. And so you've just created a serious productivity issue for yourself.
But when we can present product in a job lot quantity in a presentation level that they can say, okay, you guys are in business, you understand what I'm trying to accomplish, then you create some confidence. And then Jocelyn is going to help us invite those pros back in to let them know that there is something different here and we can start to win a greater share of the wallet. So all those things factor into what we believe we can do in the future.
Good afternoon. It's Michael Lasser. Thanks a lot for taking my questions. Marvin, you laid out a comprehensive plan here. But in the past across retail subsectors, we've seen retailers who maybe lag behind and have had comprehensive plans have difficulty catching up for whatever reason.
Why is this time different?
It's a very fair question. I think what's different about it is that we have recruited individuals who've done this before. So there's no one on this presentation stage here that had had some level of transformation in their experience and every single thing that Joe McFarland presented we've executed before. Everything that Bill Boltz presented he's executed before. Everything that Samantha Lee talked about from a large scale transformation she's done it before in different places And Don's experience in supply chain, he's done these things before.
So that gives me confidence that we're not guessing or we are not depending on consultants to tell us what to do, but we really understand it from a practical knowledge standpoint and we have the balance sheet. If you think about Dave's presentation of capital, the reason why we're not seeing a enormous ramp up in spend is because we're just reallocating our spend to our core retail business. We're not investing in Australia. We're not investing in Orchard. We're not investing in Alacrity.
We're not investing in Iris. We're investing in the Lowe's core retail business. And so we have the capital to do it. And having done this before as a leader in different roles, we've made mistakes. We've learned.
And so because of that, we have the institutional knowledge to get it executed. And we have the discipline not to allow distractions to come our way. Now, as I said in my comments, we believe we can drive continuous improvement throughout every phase of this transformation, and that's expected of all of us. But that gives me confidence that we can do this.
And you mentioned continuous improvement. You've talked to linear progress. But how much should we expect to see some disruption along the way either because of legacy issues or because you are instituting a lot of change in a relatively short period of time? I mean, as recently as 3 weeks ago, we saw your website go out on the busiest one of the busiest shopping days of the year. So how much have you factored in and how much should we expect to see some disruption along the way?
Well, I think we're not naive enough to believe that we won't have some disruption, but the disruption won't affect every corner of every aspect of every part of the business, because again, I go back to the out of stocks. I go back to the lack of product presentation in pro, I go back to our service issues, I go back to our lack of investment in leadership training. These things will not create disruptions. These things will make us better in the short term and the long run. So we believe there's a good balance between improving the business in the short run with fundamental retail initiatives that will offset disruption that may occur as we figure out other things.
And also, we test and learn. I mean, in the past, this company has been notorious for just rolling out a large scale change without testing or piloting anything. We were even piloting the job like quantities. We did not just decide to just rush in and shove inventory to the store. I mean, Bill and Joe and Don have been working on specific markets.
We were in a store a couple of weeks ago looking at the presentation. I mean, all of us making sure that we felt good about it, making sure that it represented what we felt was the right presentation. And so we're testing and learning so that we can minimize the disruption. But again, will there be some disruption? Sure.
But will that impact our business as in a large scale negative way? We don't see that as a possibility.
But also just think about the journey we talked about earlier this morning that the operating margin improvement as we cycle into 2019 is pretty modest because we you talked about a lot of quick win opportunities we have, but we're not counting that all that's going to flow directly to the bottom line because there might be some disruption. There are some investments we're making.
Hi, Brian Nagel from Oppenheimer. Thanks for taking my questions. So I have a couple, I guess, largely financial questions probably from Marvin and Dave. But first off, on the 12% operating margin target, I reckon that's a nice bounce from where we are currently, but it's still lower than your primary competitor. And on your slide, you had a benchmark of the 14%.
I don't really know what that pertain to. But the question I have is, is that a top in the or is that more of an interim type goal? And as you look at the model, if you really dug into the model now, are there structural limitations within the business that could keep it going from significantly higher or meaningful higher?
Yes. So I'll deal with the structural and I'll let Dave talk about how we see that as an interim rather top of our expectation. So from a structure standpoint, not so much. As we look at our chief competitor, the one obvious difference is that they have more stores in metro market. So I think the numbers reflected in the top 25 metro markets in the U.
S, they have 80% more stores than we do. That is structural. There's not a lot you can do about that in the short run. However, that's just as we estimate 1 third of the gap. So there's 2 thirds that are 100% within our control.
It's for execution of resets. It's an inefficient in stock process. It's lack of a focus on pro, you know, etcetera, etcetera. These are things we control and things that we believe that we have the expertise and the processes in place to start to chip away at it. And we'll make some investments in some metro markets so that we can have a better presence, but that is more of a long term horizon.
So structurally, yes, but modest. And I'll let Dave talk about where we see the business going beyond what we presented.
Yes. Listen, 12% is not the ceiling on this business. We strongly believe that. What we've tried to do is lay out a reasonable financial plan over a defined period of time, pretty quick period of time, to get to these levels. We do think there's additional opportunities to go above and beyond that, but what we've tried to do is be very planful, understanding all the efforts we have underway and about to implement in 'nineteen and what will that deliver over the next several periods.
And that's what you're seeing on the slide. And now we had to really take a step back to Marvin's presentation earlier today. Once we get kind of through some of the underbrush here, there's an opportunity to now think about our business a little bit differently and how can we improve our performance above and beyond that level.
So let me give you an anecdote. So, you know, Don showed, he gave an analogy on appliance delivery. And as he said, unfortunately, that's a true story. And so let's just think for a second. If you pull all the appliances out of the store where 90%, almost 80% are delivered, but yet we we house them in the store.
And even if we have an appliance distribution center in a market like Dallas, when the customer orders the appliance, it's shipped from the appliance DC to the store. The store still takes the burden of that process. And so, the 2nd largest spend we have from cost of goods sold is payroll. And so the amount of payroll that we are we have tied up in appliance delivered just appliances in our store is enormous, not to mention storage containers, damage, transportation costs, the inefficiencies of all that. So just taking that and creating a market based delivery model, pulling that out of the store and going direct to the consumer is an incredible unlock for us, unlock from a customer service, but also an unlock from a profitability perspective.
And so as we think about the future in Don's 5 year supply chain plan, that's factored in, but we don't even know how much productivity we're going to gain by pulling that out, but we know it's significant. So that's just one of many examples that we're very encouraged with the possibility to generate operating profit and our competitor doesn't have to deal with that and that's a compare and contrast from a cost perspective.
Got it. My follow-up question also on guidance. So for 2019, I found it quite impressive. I'm sure this is well that with all that's going on, you're still assuming sort of saying up here in terms of sales operating margins.
That's right.
Within that guidance, it's maybe more qualitative. From a macro standpoint? Are we assuming much change from what we're seeing currently? And then second, how much of that guidance reflects the beginnings of the benefits of the changes you're making in the company?
Well, clearly, there are some benefits baked into this. I think that the macro you should almost disconnect the performance a little bit of our company to the macro because I think there's so many self inflicted issues that we have that we can solve to, I'll say, weather the storm of a softening macro if it were to occur. I do think you're seeing those initiatives begin to deliver performance in 'nineteen. The cadence of those of that delivery is probably more back half weighted just by the practical nature of the reality that once you put in a fix, the financial benefits take a little bit of while a little while to accrue. So you're seeing that effect on 2019 as we think about our financial plan.
Thanks for taking the question. This is Jason Aas from Bank of America. So I wanted to ask Dave on the 30 basis points in margin improvement. If you could give us a walk through on that in terms of just sounds like you're going to be adding some labor to the stores and I guess at the corporate level. So what really are the offsets to that against you the leverage?
Thanks.
Yes. Well, you want to talk about the store payroll real quick?
Yes. So I'll take the payroll. I'll tell you the amount of productivity improvements that we've identified just from a straight payroll standpoint. I'll give you a couple of examples. If you think about what I showed the green screens on our front end cash registers.
And so we have a fix going in late Q1, early Q2. And when you think about the amount of time it takes, as we hire new cashiers, a lot of them have never seen green screens before. They have no experience with them and you think about the amount of time and if we hire 30,000 cashiers this year and we can take their training down by 8 hours, If by putting the new touchscreen interface on the registers, if I can shave 10 seconds off of every transaction we have. And so these are real productivity improvements. These aren't just straight take payroll out and have kind of a shell game happening.
These are real productivity things that we have line of sight. I've done many of these things before in a previous life. As we think about moving from paper based to the new handheld devices, we're rolling out the new handheld Zebra smartphone that will be in all stores by the end of March of this year. And so a lot of productivity tools going on that going from manual process to digitized process. And so I think from a payroll standpoint, we're able to offset all the investments that we're making and the supervisors we're adding within to the stores through straight productivity gains.
So at the end of the day, there's kind of 3 things driving operating margin for 2019. 1 is a little bit of sales leverage as we think about the comp sales improvement performance. Secondly, we're getting some productivity through the stores through the initiatives that we're implementing. And then finally, we're honing our advertising costs to be more productive in targeting. Those three things are driving our performance in 2019.
We'll also be a lot more focused on SG and A in 2019 than historically. So, beyond the store, but non store based positions also.
Great. Thanks. And then as a follow-up, I wanted to ask about how you're thinking about the store base and just where your expectations are for store growth going forward? And just also related to that just in terms of the strategic planning process if you feel like that's largely been completed now?
Store growth is going to be modest. We still have voids in certain markets that we'll always address. But as I mentioned, we have a much more rigorous capital allocation process that we put in place. So the hurdle rate for new store approvals have become a little bit more stringent, which is the way it should be, but that does not prevent us from having voice that we will address. And relative to the strategic reassessment of the business, with the exception of some smaller, less material things we'll do, the bulk of the major decisions are behind us.
Thanks. Good afternoon. Chris Horvers, JPMorgan. So I'm trying to get a sense of the level of people change that's occurred at the level below the management team in front of us. So can you talk about that level of turnover in terms of the direct reports of the major functions?
Could we say X percent is turned over and Y still the comment then? Is there an iteration on top of that where your direct reports have to go out and do a level of people change in the organization below that?
Well, I'll answer the question more broadly because we don't want to do an HR review here
for.
Good time.
Yeah. What a world to hear. But what I will say is this, I challenge every leader, every new leader to come in to not only assess the business, but assess the team and assess if we have leaders in position that A, does not have the skill set that we believe we can develop or B, we need to operate. And we've made quite a few changes based on that philosophy. Bill has made significant changes in merchandising.
Joe has made significant changes on the store side. Don has made significant changes. Just pause on supply chain for a second. We're over a $70,000,000,000 retailer and our past leader of transportation and delivery had never been in supply chain before. Never.
It was managing this massive fleet in this significant cost center for us and had no experience. And so that's an example of Don coming in and making a decision that we he has contacts in the market to go out and find, you know, deep skill based knowledge to come in to upgrade those types of positions. And so, Montani is new in the role and she's assessing her team. And so, I've given every leader the appropriate autonomy to make the assessment, but also to challenge ourselves as a world class company. We need world class talent.
If we don't have that talent, let's go out and get it. But if we have the talent, let's promote. Bill has made promotions within merchandising of existing leaders. Joe has made promotions and so has done. So it's a combination of both.
It's not just bringing in a wave of external talent because we have no internal talent. We have great talent internally. Let's elevate them, but let's also find talent on the outside. So it's a combination of all those things.
So is there a next level down?
Yes, it cascades. But we have to be smart. I mean, spring is our holiday season. So we're not going to go into the spring season disrupting organizational structures. And so a lot of the changes that we've made, we've made in preparation for having the right leaders in position for the spring season.
And that's what we've been doing for the last couple of months.
And then my follow-up is for David. You mentioned after the 1st year going looking at capital markets. Yes. So is this about $4,000,000,000 of debt? Is that there?
Yes, somewhere in that zip code, yes.
So is your concern it's you can't get it all done at once at the right rate or they
No, it's just a rate issue quite honestly at this point in time, yes.
Thanks very much.
Scott, I had a question.
Hey, guys. Scott Mushkin over at Wolfe Research. Thanks for taking my question. So I think with Michael's question you kind of answered, I think one of the fears I'm hearing from everybody is the organization is going to run too fast. But it seems like you got a handle on that.
The second question that we get is, how are you going to differentiate Lowe's in the marketplace? If you go toe to toe with Home Depot, that seems like a losing strategy. And I know there's a big market share out there. But at the same time, it seems like Lowe's has some unique qualities, unique brand. And I was wondering how much progress you've made understanding why people use Lowe's and how to get bigger with people that might prefer Lowe's?
Well, I think it's a fair question, but I think you answered it in the fact that this is a big market. And rather than being fixated on one competitor, I mean, we're a customer centric company. We have to listen to what our customers are saying to us, the customers who are shopping us and the customers who are not shopping us. And so we're really focused on that, but we understand that if you take our largest competitor and combine them with us, it's less than 20% market share. So as I said, I mean, this is not a win lose, 0 sum assignment.
It's not as though we're competing for a contract like Boeing and Airbus. You got a winner and a loser. That's not how this market is a fragmented market. And so we're looking at it from the standpoint that if we can serve our customers in a way that they want to be served, if we can sell the products and provide the level of service and convenience that they desire, then we can grow and we can grow irrespective to what's happening with our largest competitor. And that's the way we're looking at this.
So differentiation for the sake of differentiation is something that we're not interested in, but differentiation to serve the needs of a customer because that customer has communicated that they desire that need in order to shop with us is something that we're definitely interested in and we make those adjustments. And I think Jocelyn's view of the marketing campaign is a great example of doing deep customer insights work and understanding that our current marketing strategy speaks to one segment of the customer demographic, and yet we can tweak that and we can speak to a broader demographic by spending less money. And so that's kind of the approach that we're taking. That is how do we attract more customers in this fragmented market place and not be so concerned about one competitor.
Hi there, right here. Marvin, you have laid an ambitious plan for Lowe's and you're transforming the company and you've brought in a lot of talent as well and we can see it here. In the past as you mentioned there were many things which were promised but not delivered. I'm curious how are you promoting the culture of accountability?
Yes. Well, I talked about the operating plan on the slide with the mission statement, our 4 objectives and our ten initiatives. The culture of accountability is that on a weekly basis the captain and that cross functional team will come in and present to this group. They will present their scorecard, their progress, their challenges and their wins and collectively there's no problem that they can present that somebody sitting up here shouldn't have the ability to solve and so you drive accountability first by having clarity. Jennifer mentioned the fact that if you could go out in the stores a couple months ago and ask the question, what's the mission for the company?
Nobody could answer it. As a matter of fact, this team could answer because there wasn't one that was clearly articulated. And so it starts with clarity of mission, then it starts with the key objectives to deliver the mission and how do you measure. Because if you can't measure it, then you can't execute it. And so we've gone back to a very basic framework of mission, objectives, initiatives, measurements that define success, one view of success.
The other thing that this company is really good at is having multiple versions of success. I got a report that makes my numbers look better than you think they look. Well, not anymore because we have one scorecard for the company that we're all looking at. So we're looking at the same data and we're defining success the same way. And so as simple as that sounds for a large company is needed.
And also, one of the reasons why this company failed to deliver in the past wasn't because of a lack of intellect, it is because of a lot of priorities that were distracting from the core business. And as I said to the team, we could run the best Orchard Hardware Store or Small Market Hardware Store in the world and it wouldn't impact the valuation of the company. But if we can invest capital in Lowe's core retail business and make a difference in operating margin, make a difference in comp sales, make a difference in return on invested capital, then we're providing the shareholders the value that they deserve. And so refocusing and narrowing our priorities will also help to drive accountability.
Let me give you just an antidote to help you there too. In my presentation, I talked about getting to the root cause of the problem and not just throwing payroll at a problem to try to solve it. And when you think about from an execution standpoint, we've really restricted access to the stores to who sets priorities and created a real gatekeeper and a task management system that everything flows through the store operations team. If it's going to be a priority, that's going to go to a store manager to execute. It goes through one funnel, it's managed by the store operations team.
The store operations team, at one point was disbanded. So when I arrived, we didn't have a core store operations team in the company. So we had no Senior VP of Operations. The labor team reported to 1 SVP. The loss prevention team reported to another SVP.
The Omni team reported to someone else. There was no one pulling everything together for the company. And what that ended up doing is on a weekly basis, I showed you the stack of e mails that one store manager would get, that's a buffet. And we had teams kind of picking and choosing what they were going to do because there was so much to do and so much placed on them. So we took the task management and when I arrived, we were executing somewhere in the low 50s to high 40s percent of all the tasks that would go out And restricting those, making the right priorities, we are at a 98% plus execution rate.
And I am challenging the people that are below the 98% on why we are not at 100%. And so if we are limiting those tasks, we have to be at 100% execution. And we have a weekly format to review that and to call it out. In addition, we shut off over 35,000 email lists. And so this is email all store managers in this district.
I shut down 35,000 email list that existed in the company. And so you think about getting to the root cause of why our execution was where it was. Everybody had a hand in it was kind of a free for all in what stores were asked
to do.
I think there's one other thing and you asked a question around accountability. We're driving a weekly meeting now. And if you think about having merchandise operations, inventory teams supported by marketing and information technology. We talk about the business every Monday in a very frank and transparent way. We're planning together.
We're understanding who's accountable for what. And when we walk out of this room and is held in this room, we're all on the same sheet of music relative to what has to be executed. And that is a big difference from where we were from an accountability perspective.
Joe Feldman, Telsey Advisory Group. I wanted to ask again about the Pro. How easy is it to get the Pro to switch? Because our understanding or at least mine is that you know the pro it's very sticky very routine they like their few places to shop and that's it so how do you go out and grab them even though you're doing all these great initiatives?
Well you know I had the pleasure of running the pro business for our competitor for 6 years and I remember when Lowe's had dominant market share in home improvement in the pro and they switched and they switched because we stopped selling the brands, they switch because we stopped investing in service, they switch because we stopped investing in inventory, they switch because we started to focus on inventory versus plan versus inventory turns, the things that Bill talked about and Joe talked about. And so it is our expectation because we have 1700 locations in the U. S. And so we're very convenient that if we can just take a step back and we can offer consistent service, better inventory presentation, we can call out the pro brands that we have and do a better job of filling out the assortment on the ones we don't have, that we can win this customer back. We don't think it's going to happen overnight, but this customer, from what I have learned, is pretty agnostic to where they shop as long as those things are delivered.
And if we deliver those things consistently, and that's the key word, consistently, we think with Jocelyn's team's help to invite them back in, then we can win that customer back over time and that's our goal.
Yes. The only thing I would add is, we've talked a lot about the strength of our brand overall. This last year and I alluded to it in some of my prepared remarks, our team has been really focused on testing and learning the different levers to get the Pro's attention and really trying to figure out what are the ways, what are the messages to get the Pro back to Lowe's. And we have had really, really good success. And so what that tells me is that as we align with Joe and his team and obviously with the merchants on the brands, the services, all the things that we have talked about, the job lot quantities, we can really partner in a very meaningful way.
So from just sending out the invitation, that's what my team has been doing for the last year is testing what should be on the invitation, what's the best way to send the invitation. And the Pro, that would tell me the Pro is ready. So when we are ready and we bring all those pieces together, I think the opportunity is pretty significant.
Thank you. And then a quick follow-up, maybe for Bill, with merchandising and the category management that you are doing, do you expect to end up focusing on any different categories maybe or deemphasize any categories? I know the big competitors talking about home decor a little bit more. Just anything you can help on that?
Yes, great question. I think that, the role of the category helps us, 1, go through and clearly define the roles of the categories inside of our stores and online today. It also helps you identify those opportunities for future growth, maybe categories that you're not in today that you could be in tomorrow. And if you think about our stores and the different locations that they're in, there's that opportunity that that process provides you. And so as I said earlier, we have the opportunity to look at how do we enhance our online assortments at a faster rate to support some of the customization and configuration that she might be looking for into core categories, for example, and then that could open up space to allow us to get into new categories that are more relevant right now in the home improvement space that would be relevant inside of our stores.
So all of that is part of the category management process.
We have time for one more question.
Pressures on. Peter Benedict at Baird. Marvin, I'll start with you. The accountability stuff is great. Employees and people in general tend to behave the way they're incented to behave.
So just curious if you can touch on the incentive structure that you have in place both for the senior executives but also down to the store level?
It's a very timely question. We have a quarterly hourly bonus program for our store sources that no one knows how it's calculated. It is so complicated that, you know, and Jennifer knows this because I torture her and Joe with this all the time. I go out and I test it in every town hall by saying, okay, who can tell me what our quarterly bonuses call and how it's calculated? And no one has got it right yet.
And it's not because anyone tried to do anything wrong, it's that we made it complicated trying to incentivize the associates more, and we did the opposite because they don't know how to drive it. And so we're taking a step back, and and we're simplifying it going into 'nineteen. So it's going to be crystal clear to the associates on what they have to do to deliver a really great program, a quarterly bonus program for an hourly associate. So it's a great program, and we just don't do a great job. We give our associates a 10% discount every day.
We don't tell anybody that we do that. Our competitor does not do it, and we don't even recruit. We don't use it as a recruiting tool. I didn't know we got a 10% discount until I joined the CEO and someone gave me a discount card. I was like, what is this?
And they said, you didn't know you get a 10% discount. I said, I didn't know and I don't want it.
You were still able to recruit them though. Yes.
So to give you an example that we have, we have great programs and we don't do a good job of communicating. So we're going to fix the quarterly bonus and make it more simple. The other thing we're working on is aligning the financial metrics of the leadership team, which today are not aligned. We have different performance metrics for bonuses based on the function that you're in, and I am not a proponent of that, and so we're going back and Jennifer and I will be meeting with the comp committee and we're presenting, you know, 3 metrics that will be consistent across finance, supply chain, merchandising stores, HR, etcetera, etcetera, just for clarity and also for alignment and it is my expectation that whatever I'm reviewing on, so would the store managers. I want to go all the way from me to the store managers, so we're all in this together and that's what we're working on.
So it's timely because Jennifer and I spent time working on this and we'll be presenting to the comp committee I think in January.
Yes. That's
great. Thanks. And then I guess as my follow-up for Dave, back to the financial guidance, I appreciate the hesitation to put a timeframe on those targets. But are we to assume that the 12% operating margin goal coincides with 3.70 a foot? Like that those are tied together or one happened before the other?
I'm just trying to understand.
No, I would think of them as tied together. I think what you're hearing us a little bit is while we have confidence in many of the on all the programs we have in place, when they're actually when we know when they're going to be implemented, then when we actually turn the corner, when we start reaping some of the benefits of those initiatives, we don't have quite as precision or quite as line of sight from a precision standpoint, from a timing perspective to pin those down at this point in time. So that's why there's a little ambiguity in exactly when we're going to deliver that 12%. But I think it is reasonable to understand that we're going to do this in a time frame that's fairly expedient.
All right. Well, this concludes our 2018 Analyst and Investor Conference. Thank you for your time and attention today and for your interest in Loews. We invite those attending in person to join us for lunch as well as product demonstrations down the hall. And thank you very much.