Good morning. 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, then our financial update, as well as an extended Q&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-K and in its other periodic filings with the Securities and Exchange Commission. 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 find an explanation as to why Lowe's management believes these non-GAAP financial measures are useful. Thank you again for your attendance. 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. As you can imagine, I've had a very busy and fulfilling five 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 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 in our communities. 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. In doing 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. When I took over as CEO in July, I began a comprehensive reassessment of the business to understand a couple of things. First, I wanted to see why it seemed that we had lost our competitive edge. Second, I wanted to understand why we were underperforming the market. 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.
The past five months, we've had a complete reassessment of the business, established a new leadership team, and worked 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. 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. As you can imagine, we model hundreds of thousands of macroeconomic data points to understand the key drivers of our business. Through that work, we've found that real residential investment, home prices, and income growth have the strongest correlation with our business.
While we love helping customers with big discretionary projects, two-thirds of our business is based on repair and maintenance work. 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 billion home improvement sector, which is very fragmented outside of the top two players. Although I understand why the top two players garner so much attention, the truth is our success isn't mutually exclusive. 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.
Although we have a major competitor in this space, combined, we have less than 20% market share, we have room to grow in both pro and do-it-yourself. 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. We believe that we have a significant opportunity to grow market share by addressing our poor execution. 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. 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. As some of you may remember, when Lowe's led the industry in terms of supply chain capabilities, pro, and store experience. 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 national brands in pursuit of better margins, which dramatically hurt our pro business. In addition, we lost expertise in store operations and in merchandising. We failed to keep up with advancements in e-commerce, IT, and supply chain.
As I mentioned earlier, we rolled up our sleeves, 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. 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. 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, one that presented our current state to the world. These challenges reflect where we have been, not where we are going, and we'll fix these issues. In addition to the omnichannel systems, we have work to do to improve our associate and our customer-facing systems. As an example, let me walk you through how we currently manage large, complex install projects. 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." That kind of equals a kitchen remodel, right?
I said to the team, "How do we manage this kitchen project for the customer?" You want to know what the associates showed me as our project management system? A dry erase board in the back of the store. 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." 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. This is the position we put our associates in. 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. Now that we've identified the opportunities, what are we doing about it? 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 five months. We have two 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. This is the lineup of the leaders that you'll hear from today. Number 2, we have a great balance sheet and the financial wherewithal to reallocate capital to invest in our core retail business.
Let me spend a moment discussing the importance of experience in three key leadership roles. 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 Boltz, and our Executive Vice President of Stores, Joe McFarland, have a combined 55 years of home improvement experience. 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 of Supply Chain, Don Frieson, has over 30 years of supply chain experience. I'm a big believer that experience matters, specifically in key roles in retail. Let me quickly remind you of the progress we've made thus far. Let's begin with the 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 faced 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. As you remember, part of that focus was we closed Orchard Supply Hardware operations. We decided to exit the Mexico market as well as Alacrity Renovation Services and 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 third quarter, 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. 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.
While you hear us discuss certain initiatives today that may be reminiscent to 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. Let me now transition to how we will take advantage of this opportunity we have in front of us. 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 four key areas: merchandising excellence, omnichannel, operational efficiency, and customer engagement.
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%, 60, 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 Frieson and our new CIO, Seemantini Godbole, later today. Moving on to our third 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. 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. As a company, we will become more operationally efficient. Our fourth 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 five times as much as the average DIY customer. Although the pro is an important customer, it's a customer with very basic expectations. My experience has taught me that in order to win market share with the pro customer, you need to do five 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 is 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.
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 genuine understanding of their need. Later today, Joe McFarland 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. 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. 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.
My direct reports and I meet weekly to review progress reports and scorecards for these cross-functional teams. As the old saying goes, we'll inspect what we expect on these key initiatives. 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 will provide specifics on both the short and long-term value we plan to generate from the initiatives we'll outline today. 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 over the next 18 to 36 months will be about driving sustainable growth, the last phase is focused 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. 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. 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, the optimization of shared supplier partnerships and procurement efforts continue.
Similar to the U.S., we're implementing plans in Canada to improve execution, expense discipline, and operational profitability. 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. 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 or 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 Lowe's, 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 started to serve the frosting. This is a new day, this is a new Lowe's. I expect that we will renew our focus on retail fundamentals that we'll outline today. We'll capture market share opportunity and generate significant cash flow over the next several years. 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 Boltz. Good job, man.
Thanks.
Okay.
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, 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. Since joining Lowe's four months ago, I've 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, 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 three end caps in our stores, sometimes as many as four, for smart home devices in the same aisle. 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. 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 household income in this market is roughly $31,000 a year. While Dyson's 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. 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. Having seen all this, we recognize that we have a significant opportunity to improve performance by just executing at a higher level. To do that, we're focused on the retail fundamentals. That means being focused on the right things, the basics, blocking and tackling, and really a need to keep it simple. Within merchandising, it all starts with sales. Now, that sounds obvious, but we have to create a sales-driving culture. 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.
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. We need a cohesive strategy to determine what we focus on, where we invest, and how we're going to assort our products in the store and online. 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.
To do that, our merchants have been meeting with suppliers to make sure that we're 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. 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. We know that retail is a race, 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.
Improving our reset and our in-store execution process is a huge part of improving our speed to market. Going forward, we're committed to having and delivering on merchandising excellence. 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. 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'll define the role of each category at Lowe's and identify the inherent category opportunities in the headroom in order to make intentional and resource allocation and focus on those areas of greatest opportunity for the business. The category definitions that we've landed on are choice, traffic driving, destination, core, and convenience.
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're 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. For these categories, we'll focus on brands, assortment, breadth, depth, and quality. We'll 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'll be minimal promotions and less transition. Then lastly, the convenience categories are the impulse or mission trip items, what we call basket completers. These categories have less price sensitivity, we'll focus on attachment to drive sales and margin.
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 2019. We'll 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.
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 stain in markets where houses don't have decks. Going forward, we'll change this 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. 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.
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 2019. 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 to help them make fact-based decision-making. 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've seen the power of assortment optimization in driving sales as well as delivering inventory turns.
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 of city stores, and thus drove an increase in sales per square foot. In 2019, we'll leverage also our exciting brand opportunities with CRAFTSMAN and Sherwin-Williams. We're very excited about the continued rollout of CRAFTSMAN, given the strong response that we've seen in the category thus far. We've rolled out CRAFTSMAN in roughly 220 stores so far in 2018, and we'll continue that rollout throughout the first half of 2019. 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 and 60-volt battery platform.
We'll also introduce new gas-powered products that'll 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 WaterSeal.
The teams delivered a simplified line of structure that makes it easier for customers to select the right product for their painting needs. We have an exclusive line of HGTV Home by Sherwin-Williams, as well as Valspar interior and exterior paints. We can't forget about the accessories because we now have the top paintbrush brand in the industry with Purdy. 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'll 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 eight-week plan, and this reset actually took us 27 weeks to complete. Throughout that long process, the customer was seeing empty shelves, they were growing frustrated, and we missed opportunities to make the sale. We dug in to understand the drivers of this poor reset execution, and I want to share with you five critical observations that we've identified. First, the reset approval process lacked financial rigor. It prevented us from properly prioritizing the most important resets. Second, 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. Fourth, 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. Now by having a clear understanding of the issues and the challenges, we're now focused on implementing our new reset execution process. Specifically, we're doing the following. We're investing in the execution teams in our stores. We've 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've got an average of eight 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'll 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. 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've 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. This will reduce reset disruption at the store and allow for us to complete these resets faster.
We'll 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'll 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. As we work to improve reset ROI through the category management process, we're 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. We'll 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 ROI. This is a new day and a new Lowe's. 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.
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. Now it's my pleasure to please welcome my partner, Executive Vice President of Stores, Mr. Joe McFarland.
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. 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. 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 placed too many hours in associate and tasking activities and not enough in selling activities. 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. Though we expected our stores to function as part of an omni-channel 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. 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&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. 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.
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. We've implemented a filtering and vetting 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 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 emails sent to a store manager in one of our stores in a one-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 six 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. 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 million hours each year writing schedules when a labor scheduling system should be carrying that load. We're now implementing automated scheduling, informed by customer data, to better predict customer demand by time of 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 sales floor 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. 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 two years. 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 one of two 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. 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, we'll drive payroll leverage. We'll use a portion of these payroll savings to add three 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 one best-in-class system to manage orders and services. 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. 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. 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. 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. To improve our in-stock position, first, we developed a comprehensive in-stock process, including standardized procedures for effectively moving product from receiving to the sales floor. 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.
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. 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. We'll give our store managers limited autonomy to reorder appropriate quantities of low-risk, high-velocity SKUs to improve in-stocks on our key items. 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. Let's talk about how we win with the pro customer. 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 one person off the job site and send them to Lowe's to get more supplies, that results in lost productivity for their business.
If that pro has to take three 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 lot 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. 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. At Lowe's, only 20%-25% of our sales actually come from the pro customer. 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 five things. Offering competitive prices, including a strong value proposition for volume purchases. At an individual SKU level, we are competitively priced, but pros find our volume pricing confusing and also unreliable. 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. Second, 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 in attracting customers with the introduction of SharkBite, A.O. Smith, Marshalltown, Hitachi, and Bosch. We're not done. We have the opportunity to partner with other key national brands for the pro. 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. Third, 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. 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. Fourth, 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. 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.
We are now investing in job lot quantities, and we'll 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 Seemantini, 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. 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. 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. I'm very excited today to talk to you about two 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're 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 first quarter of 2019. 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. 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.
One in five 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 million 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, Lowe's is offering paid tuition for trade skills 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 Ivies. They forgot to mention debt is not the pre-req to living the dream. You don't have to lean on a desk when you have the drive to design your own lean. By design, these hands summon creativity. Technology and trade. Two converging paths, Mother Earth and motherboard, 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 trade, the electricians and bricklayers, solar power technicians, energy auditors, tiny home builders for the ones who don't care about the color of a collar. Craftsmanship is a calling. What if the naysayers 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. Are you ready?
We first debuted Track to the Trades in March with a pilot program for approximately 48 associates in four 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 the U.S. as of October. 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. I'll now turn it over to Senior Vice President and Chief Marketing Officer, Jocelyn Wong.
Thank you, Jennifer. 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. 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.
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. 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. This is the more casual DIY customer who likes to do smaller home improvement projects themselves but isn't completely confident in their DIY skillset.
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.
The moment you realize your paint isn't laser proof. At Lowe's, we have the right paint for every family. With our collection of stain-resistant and durable paints, we've got you covered. All projects have a starting point. Start with Lowe's.
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. Heavy DIYers are hands-on makers. They're 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.
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 two times the average, and they shop in store one and a half times more than the average customer. 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." 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. Let's take a look at two 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 them, who seamlessly moves from step one to step done. 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. Lowe's knows you're the type who does it right. Who gets it all done by starting early. Who prizes quality tools as the heirlooms they'll someday be. Who might just go to the ends of the earth for the right power tool.
You won't, because Lowe's is the new home of CRAFTSMAN mechanic sets, power tools, and more, all backed by a warranty you can count on so you can get what you need and get back to the good stuff. Do it right for less. Start with Lowe's.
All right. 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. 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 first place.
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, we've seen exceptionally strong ROI here.
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. As you know, customers don't consume media in a linear way. 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 tool kit for his latest project, but he's not yet sure which brand to buy. He does a quick search on Google and clicks on a Lowe's search ad.
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's not ready to make a purchase just yet, so he puts his search on hold for the time being. 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 tool kit he's interested in. This prompts him to actually go to the store, interact with the product, and make a purchase. All along his journey, we're able to measure the impact of the digital advertising on his eventual purchase, which leverages location data.
Because we understand his journey was successful, we can scale and target others like him with relevant, effective advertising. 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. 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 customers, 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.
Through our military discount, we will provide over $1 billion 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. 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. Let's take a moment to look at this creative.
Our military roots run deep. Lowe's started when two GIs returned from World War II. After serving their country, serving their community came naturally. More than 75 years later, in 2018, Lowe's will proudly contribute nearly $1 billion to military families all over the U.S. with our everyday military discount. From our thousands of Red Vest veterans and the entire Lowe's family, we thank you for serving.
You've heard others speak today about our efforts to enhance the customer experience. That experience often begins with the reach of our marketing effort 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 local markets. Localization plays an important role in marketing as well, 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. 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 Frieson.
Thank you, Jocelyn, good morning, everyone. It is 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. 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 1,600 stores, super centers, 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.
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 650 locations throughout the U.S. and Puerto Rico. I've worked throughout my career to build world-class supply chains, now I have the absolute privilege of applying that experience to transform the supply chain here at Lowe's. 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 or 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. As a result, we've seen growth in orders with fulfillment via delivery, pickup in store, parcel shipments, and they've all outpaced the growth of what we call the in-store take with channel.
We had to take a very critical look at our supply chain and determine where we were properly positioned and how we would serve that demand. Quite frankly, and simply stated, we found that Lowe's 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 omnichannel 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 or FDC since 2013, which is two to three years beyond our average historical pace.
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. 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.
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. There's a lack of visibility to special order product and the lead times associated with those that affects our competitiveness in the market. The flow challenges across the network result in either excess inventory or not enough inventory that lead to lost sales. Underpinning all of these challenges is the lack of data connectivity throughout the entire ecosystem.
We have slow, antiquated systems that are complex, that utilize different platforms, that don't connect with each other. In an omnichannel system, supply chain actually infiltrates every aspect of the business. The good news is that all of these challenges are addressable. 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.
We'll do that through optimizing a network of assets in our distribution systems, as well as the flow of product between those assets. 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, then having to place it in top stock. 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.
While more frequent shipments to stores can drive higher transportation costs, we believe we'll see sufficient benefits from the improved in-stock, as well as the efficiencies from reducing slow-moving inventory to offset the increased cost. 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. To provide a delivery date to the customer, we provide a conservative estimate to account for that uncertainty. If the estimated delivery date is three weeks out, we could possibly lose that sale.
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. In addition to improving flow management and inventory visibility, the second 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. 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-dock network. We will 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.
Think about things like riding lawnmowers, grills, patio furniture, and storage sheds. They will move to a network of cross-dock delivery terminals for last-mile delivery to the customer. 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 three years. This network of bulk distribution centers and cross-dock facilities will 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'll 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. 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. Let me take you through a very quick example that will illustrate how these changes will impact our customers and our associates. 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 whether 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 that Charlotte store gets credit for the sale.
That will help the teams really focus on fulfilling sales in the most efficient way possible. The third 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 first direct fulfillment center in Tennessee in the third quarter of this year. That direct fulfillment center will fulfill approximately 75% of the U.S. and two-day ground demand. It will relieve RDC capacity by handling break pack for the entire network. In addition, we're evaluating our second direct fulfillment center to be located in the Western U.S., which will recover the remaining 25% of parcel demand with two-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. To illustrate the potential for our omni-channel 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 back rooms. We currently have 84 parcel shipping stores, and the additional back room capacity in our stores will now give us the potential to have over 1,700 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 $1.7 billion in our supply chain over the next five 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. We believe we have the plans, the skills, the experience, and the capital to capture that opportunity.
Thank you for your time this morning. Now please help me welcome Executive Vice President and Chief Information Officer, Seemantini Godbole.
Thanks, Don, and good morning, everyone. It's a pleasure to be here with you all today. Prior to joining Lowe's just over four 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. 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, six of them have system improvements as a critical dependency.
Having joined Lowe's only four 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 under-invested 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 2009, 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 four-year program. It was shut down after seven years, and in the end, it delivered less than half the original business value intended. Inconsistent leadership, evidenced by the rotation of five CIOs in last eight years, drove 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 three main areas. First, creating a best-in-class architecture to support our omnichannel ambition. Second, establishing an operating model that accelerates our development.
Third, building a best-in-class team of highly skilled and motivated technology professionals. First, 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 of 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'll 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 omnichannel 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 AR/VR 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 six to three, 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 results, customized content, an 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 million and $550 million 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. 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 multi-year 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.
Time's gone inside out. Time gets distorted then. There's a tense gravity. I don't got time for holy rollers. No, they may wash my feet. I won't be their soldier. There's a tense gravity. There's a tense gravity. I'm just your satellite. I'm just your satellite. I know that time's gone inside out. Now it's only like I told you. No, they may wash my feet. They do not make me clean. Break out of character. Time keeps on going when we got nothing else to give, we got nothing left to give. 'Cause our time's gone inside out. I don't make time for holy rollers. There's only you I need. They do not make me clean. No, there's no phone, and no labels to put on, to this thing we keep, and dip into when we need.
I don't have the right, to ask where you go at night. The way you sip my head, to think someone's in your bed. I get a little bit angry and jealous. I don't want you to get it on with nobody else but me. With nobody else but me. I get a little bit angry and jealous. Don't want you to get it on
My hands, they glow like I just lost a World War. The scene slips away to the evenness of fate. It's a sheet of work 'cause I don't really want you, girl. You can't be free 'cause I'm selfish, I'm obscene. I get a little bit Genghis Khan. I don't want you to get it on with nobody else but me. With nobody else but me. I get a little bit Genghis Khan. I don't want you to get it on with nobody else but me. With nobody else but me. I wanna make up my mind but I don't know myself. No, I don't know myself. I wanna make up my mind but I don't know myself. No, I don't know myself. I wanna make up my mind but I don't know myself. No, I don't know myself.
I get a little bit Genghis Khan. I don't want you to get it on with nobody else but me. Ooh. With nobody else but me. I get a little bit Genghis Khan. I don't want you to get it on with nobody else but me. Ooh. With nobody else but me. Ooh. Ooh. 16 years without a generous place to call my own. I've dried my tears looking for a place to rest my bones. All these years could never choose the ones that I have known. Despite my fears, I'm sure that I can make it on my own. Party drugs and limousines. Oh, mama, this is killing me. I'm half the man I used to be, oh. Six feet of love and gasoline. Oh, mama, I need rescuing. What 16 years has done to me, oh. Ooh. Ooh.
16 years burning every bridge that I have known. In five years, the world is gonna revolve around my own. Party drugs and limousines. Oh, mama, this is killing me. I'm half the man I used to be, oh. Six feet of love and gasoline. Oh, mama, I need rescuing. What 16 years has done to me, oh. Ooh. There's nothing like getting pulled away. There's nothing like the feeling of being alone on a New York street. Gives everything some meaning. There's nothing like being torn apart from a love you know right from the start. There's nothing like this feeling. There's nothing like getting pulled away. There's nothing like the feeling of being alone on a New York street. Gives everything some meaning. There's nothing like being torn apart from a love you know right from the start. There's nothing like this feeling. Party drugs and limousines.
Oh, mama, this is killing me. I'm half the man I used to be, oh. Six feet of love and gasoline. Oh, mama, I need rescuing. What 16 years has done to me, oh. Ooh. It's what 16 years has done to me, oh.
I locked myself in a hotel room. Waited all night for the walls to move. I loved some girls that I barely knew. I made some friends and I lost some too. Crashed my car, I was 17. My brother in the seat right next to me. The things I've learned from a broken mirror. How a face can change when a heart knows fear. For all the things my eyes have seen, the best by far is you. If I could fly, then I would know what life looks like from up above and down below. I'd keep you safe. I'd keep you dry. Don't be afraid, Cecilia. I'm the satellite, and you're the sky.
Ladies and gentlemen, the conference will resume in two minutes. Please take your seats.
Cafe crawl through Amsterdam. Been around the world with a punk rock band. I've seen London and played Japan. I've been knocked down, I got up again. For all the places I have been, I'm no place without you. If I could fly, then I would know what life looks like from up above and down below. I'd keep you safe. I'd keep you dry. Don't be afraid, Cecilia. I'm the satellite, and you're the sky. Oh. Oh. I'm the satellite. Oh. You're the sky. Oh. For all the things my hands have held, the best by far is you. If I could fly, then I would know what life looks like from up above and down below. I'd keep you safe. I'd keep you dry. Don't be afraid, Cecilia. I'm the satellite, and you're the sky. Oh. You're the sky. Oh. I'm the satellite. Oh.
You're the sky. Oh. You're the sky. Can I sit next to you? Can you sit next to me? Get the stars out your eyes, come and bring them to me. I've been down so long.
Ladies and gentlemen, the conference is about to resume. Please take your seats.
It's just that I've been down so long. I gotta give me my way. Can I sit next to you? Can you sit next to me? Oh. I walk back to Memphis alone, because you'd do it for me. Ooh, I know you would. All the kicks from the sticks. All the kicks that we knew. I put all that aside, concentrate on you. All the kicks from the sticks. All the hits that we took. All them stitches we got. All our brains all cooked. Oh. Someday I'm gonna get where you are. I've been down so long. Been down but now I gotta get left alone. Oh.
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. While my first official day was in late November, I've 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 2019 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 three key areas to drive significant shareholder returns. This will be our roadmap for unlocking value as we go forward. First is our drive towards operational excellence throughout the enterprise.
Second is our ability to generate significant levels of cash flow. 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. 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. 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. 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 the large and growing home improvement sector. As Marvin shared earlier, this nearly $900 billion market is very fragmented outside of the top two 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. 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 240 and 255 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 and $4.24 a share, and adjusted diluted earnings per share of between $5.08 and $5.15 per share. We will generate a very healthy $5.5 billion of free cash flow. 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. Given all the moving parts in 2018, I will spend just a minute re-baselining our financial performance so that you can better manage our progress going forward. This slide starts with the midpoint of our 2018 GAAP guidance and eliminates charges associated with the strategic reassessment, including between $460 and $580 million of additional charges that we expect to occur in the fourth quarter.
The amounts, the nature, and the timing of any additional charges associated with the intended 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 rebaseline so that you have the right jumping-off point from 2018. First, we have closed all Orchard Supply Hardware stores, which removes roughly $560 million in sales from our base and eliminates about $60 million in losses associated with that business.
The exit of our 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 million in sales and eliminate approximately $40 million in losses. 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. We've added back the liquidation impact of those closures. Finally, we've completed an aggressive rationalization of inventory, removing both low-performing and slow-moving items. We've added back the impact of that event in both the U.S. and in Canada. The net effect of all this rebaseline is a rebaseline of an operating margin of 9.3% and EPS of $5.51 per share for 2018.
Here's a quick roadmap 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 2019, we will shift our attention to realizing many quick wins across our business, but also aggressively implementing the initiatives that we outlined earlier today. 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. Clearly, transformation of the supply chain and establishing a robust omni-channel platform will require investments beyond 2019.
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.
Finally, we expect that improvements to lowes.com will yield better top-line results. 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 to roughly 9.6% in 2019. We expect the primary drivers of operating margin expansion beyond sales growth to come from SG&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 $6.5 billion in cash from operations in 2019. We are planning for capital expenditures of roughly $1.6 billion in 2019, which is elevated compared to our historical run rate of about $1.2 billion over the past several years.
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. 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 and international investments will be very modest, requiring only about 15% of planned capital spend. We expect that the next 12-18 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. 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. 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 $370.
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%, 270 basis point improvement from our re-baseline levels in 2018. This improvement will be largely achieved through a combination of both sales leverage and better SG&A performance. This level of performance would slightly outpace our peak level achieved some years ago. Finally, with accelerating sales growth, improved operating margin, and better capital deployment, it is our goal to enhance ROIC by 1,600 basis points to 35%. 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.
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. 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. We feel we can maintain that flexibility at a slightly higher leverage level. We will now target an adjusted debt to EBITDA ratio of 2.75 times versus our previous target of 2.25 times.
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 one year requiring a significant outlay of funds, which provides us incredible flexibility as we issue additional bonds and increase our leverage. Looking forward over the next three 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 billion. 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 billion in free cash would be generated. Additional cash of about $9 billion could be made available as we reach our new leverage level of 2.75 times.
This will result in approximately $25 billion 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 has authorized $10 billion in additional share repurchases to be completed over time. This brings our total share repurchases from an authorization standpoint to $14.5 billion. During 2019, we expect to complete between $6 billion and $7.5 billion of share repurchases, significantly above the roughly $3.5 billion 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 2019 of $6 to $6.10 per share, or approximately 10% over the 2018 re-baseline levels. Here's a handy summary of our capital allocation priorities.
Our first priority, as always, we'll 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 2.7x adjusted debt to EBITDA. We are committed to making disciplined, risk-adjusted decisions when deploying our cash. We will invest in projects that help us 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 Lowe's. 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. 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.
For our live audience, there will be microphones on either side of the aisles to take your questions. Please limit your questions to one plus one follow-up.
Thank you
Let the music in tonight. There's been no music. Let the music of your life get right back to music. Let the music in tonight. There's been no music. Let the music of your life get right back to music.
Nice job, Dave.
Let the music in tonight. There's been no music.
Okay, let's get started.
Oh, wow. Okay.
Great. Hi, good afternoon. Greg Melich with MoffettNathanson. I guess I wanted to start with, I think 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? Why do it all internally in-house when there's probably a lot of other places you could get that expertise?
So, let me-
I'll follow up on leverage.
I'll take the first part, and I'll let Seemantini get into the specifics. As we did a search for our new Chief Information Officer, we really wanted someone that could help us think about the future. If you think about large companies making large-scale transformations, you don't make those buying package software. 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. She has that. I'll let her speak specifically to the vision around doing it in-house versus going outside.
Yeah, that's a good question. I think 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 package software. For example, if you want to run your company's payroll, that's a great place to buy a package 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. This is something we want to internally do.
2,000 engineers is our estimate, given our omni-channel 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. 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.
Let me give you kind of where we are today. We have quite a bit of package software that we customize. We're paying licensing fee for a product that we can't even get serviced on because it's so customized. We have the worst of both situations, and we have to work our way out of that. Relative to where these individuals will be located, that is still under discussion. We're fortunate to have office locations, not only here, but on the West Coast, different parts of Carolina and around the country. Seemantini 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. That's to come.
Dave, welcome. It's great to have you here.
Nice to be here.
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 2.75x now when it looks like the organization has a lot of change going on?
Yeah.
There are some macro headwinds-
Yeah
in terms of housing turnover and whatnot. I guess what sort of world environment would you see that 2.75 target where it might make sense to go back to two and a quarter? 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 where the company is today and levering up to 2.75 will 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 and beyond. I do think it's appropriate to get our leverage back up there. 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.
Thank you. Simeon Gutman from Morgan Stanley
Marvin, you somehow lost five or 10 points of pro share in five 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? Then if you can talk to us about what do you think your share of wallet is with the pro customer. We think your competitor is somewhere in the mid-teen, so you put both of you together, it's still pretty small piece of the market.
Sure.
Where is all that other business that would tell us that it doesn't have to come from them? Is there any big buckets of low-hanging fruit there?
Simeon, I'll take the first part of that, then I'll let Joe McFarland provide some additional context. The pro penetration has always been an estimate. 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. From that, we felt that the number is closer to 20%-25%, again, based on a renewed view of the estimate, 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 billion home improvement marketplace, and 50% of that is pro.
We know there's a lot of share out there that us and our largest competitor does not have a significant amount of. We do know that the fragmentation of the home improvement marketplace, including pro, is a very available marketplace for us to go to try to drive the business. 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.
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. Then we've matched up known transactions, like transactions, to the pro. 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. Through our own internal, really kind of deep dive and resetting the expectations of pro, we believe that 20%-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. All of this opportunity that's out there, and between the two 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've launched our very first kind of joint partnership in understanding how we leverage MSH inside of a Lowe's store, and how we leverage the Lowe's store with the MSH customers as well. Very early days, but I think we're pleased with the reception we're receiving from the customers, and we think there's a lot of synergies there. The opportunity ahead of us as we add supervisors, as we increase the depth in job lot quantities, as we improve the service model with the loaders, the MSH, as we sharpen 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.
My follow-up is for David. Can you share any color on what each point of comp is worth to EPS? My premise is that it's worth more to you going from a two to a three than zero to a two.
Yeah. 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's a bit of an initiative implementation year, I think once we get the business, I'll 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 Bosshard at Cleveland Research. The slides I had didn't have X's for the years for the 12% margin.
They did
Perhaps you could clarify that. I guess Two questions. One, if you could help us understand the thought process.
Yeah.
I know it's a new Lowe's. Traditionally we're used to three-year plans.
Yeah.
Is that it implied is three years? 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. Could you just talk a little bit about connect those two dots, please?
I'll take the second part. Relative to the three-year plan and the X's, this is a really new team. I think that's worth noting. This is also a company that candidly does not have a great track record of hitting financial forecasts. We wanted to be appropriately conservative in determining our long-term view of the business because 2019 is a rebalancing year. We're definitely focused on a three-year plan and beyond that relative to supply chain and IT, and digital. The X's represent our near-term view, and you can define near-term in any way you want, but it's our near-term view. 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 is end caps, off-shelf space and pro. The big unlock for us in driving sales productivity is the pro business. Anytime you have a customer that's worth 5x more than traditional DIY, that's a customer you need to track because they unlock so much productivity value in the store. Bill can talk about the value of MST in driving productivity, the field merchandising team, and some of the things his team's working on right now to just be more productive with our space in the store.
Thanks, Marvin. 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. We'll look at bay productivity. 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, how we grow our assortments online, so that we can supplement what we're doing inside of our store and build out those assortments online at a faster rate. We can invest as Joe covered in his presentation, so that we can invest in job lot quantities and those high moving SKUs for the pro customer. That's where we're headed.
Hi. Thanks. It's Mike Baker from Deutsche Bank, and these are maybe specific questions that you won't answer, but I'll give it a shot. Within that 370 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 hundreds of millions of dollars. Do you have any kind of specificity in there? If that's a word.
Yeah. Listen, at this point in time, 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 go through that in detail. I will rest assured that 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 that to the performance. We have pretty clear line of sight to that. We're not really at this point in time prepared to disclose that.
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 week and most weekends. It's not uncommon for me to be in a store like this weekend that's a plus 2% comp with over 1,000 out of stocks. Out of stocks in 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 doesn't matter if it's in the overhead or stockroom, you're out of stock. When I look at that, I have two emotions. One, 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 the 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. 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. 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." We look at all of these things, and not just from a perspective of anecdotes.
Joe and Don are working intently on the in-stock piece, Bill is working on the assortment from a pro perspective, and Joe's working on the service model. We're working on all of these things. To Dave's point, we can't give you a basis point value to each. 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. 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, this is for Jocelyn and Jennifer. I think, as I look up there, you two are the only people who were there with the previous management team. 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 three years ago?
It's going to be really hard to say something negative when I'm sitting next to her. She is definitely free to do that. She knows she is.
That's cool. 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. 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. 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. I'll 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. 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. 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. Then finally, one of the things that I think 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. 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. 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. Laura Champine from Loop Capital. Dave, when you mentioned the potential to raise $9 billion in debt, would that be likely front-loaded given the rising interest rate environment?
Well, we wouldn't do that. That $9 billion is really over a three-year period of time. We certainly would not do that in 2019. We will obviously take our leverage ratio up in 2019. 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 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 shock to the credit markets, I think.
I almost think that after the first of the year, we'll get a better reassessment of how the credit markets work and how they look and how frothy they might be to determine how we go to market.
Got it. This one's for Marvin, related to the expectation that interest rates will rise 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? 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 to our business. Income growth, home price appreciation, and real residential investment. 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. The difference is correlated to the value of your home. If your neighbor sells his or her home and they lose money, everything you buy, it feels like an expense. If they sell their home and the value is up, 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.
Even if interest rates are up and we acknowledge that, and you have some affordability indexes ticking in a place where they're higher than they have been, but still relative to 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 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. The macro is still supported, but more than anything, we believe we can create our own tailwind. I can go on and on about the anecdotes of out-of-stocks, about how we're not servicing the pro business.
That photo that Joe McFarland 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 walls. 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. You're going to make this trip to the store, you're going to walk in with one or two people, and there's no product. You've just created a serious productivity issue for yourself. 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." You create some confidence.
Jocelyn is going to help us invite those pros back in to let them know that there's something different here, and we can start to win a greater share of their wallet. 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 sub-sectors, we've seen retailers who've maybe lagged 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. There's no one on this presentation stage here that hadn't had some level of transformation in their experience. Every single thing that Joe McFarland presented, we've executed before. Everything that Bill Boltz presented, he's executed before. Everything that Seemantini Godbole talked about from a large-scale transformation, she's done it before in different places. Don's experience in supply chain, he's done these things before. 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 an 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. Having done this before as a leader in different roles, we've made mistakes, we've learned. 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. 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. That gives me confidence that we can do this.
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? As recently as three weeks ago, we saw your website go out-
Yep
on one of the busiest shopping days of the year. How much have you factored in, and how much should we expect to see some disruption along the way?
I think we're not naive enough to believe that we won't have some disruption, the disruption won't affect every corner of every aspect of every part of the business. 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. 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. Also, we test and learn. In the past, this company has been notorious for just rolling out a large-scale change without testing or piloting anything.
We're even piloting the job lot quantities.
Yeah.
We did not just decide to just rush in and shove inventory to the store. 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. All of us making sure that we felt good about it, making sure that it represented what we felt was the right presentation. So we're testing and learning so that we can minimize the disruption. Again, will there be some disruption? Sure. Will that impact our business in a large-scale negative way? We don't see that as a possibility.
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. 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's some investments we're making.
Hi, Brian Nagel from Oppenheimer. Thanks for taking my questions. I have a couple, I guess, largely financial questions, probably for Marvin and Dave. First off, on the 12% operating margin target, I reckon that's a nice bounce from where we are currently.
Yeah.
It's still lower than your primary competitor. On your slide, you had a benchmark of the 14%. I don't really know what that pertained to.
Yeah
The question I have is that a top in the model, or is that more of an interim type goal? 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 significantly higher or meaningfully higher?
Yeah. I'll deal with the structural, and I'll let Dave talk about how we see that as an interim rather than top of our expectation. 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 markets. 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 one-third of the gap. There's two-thirds that are 100% within our control. It's poor execution of resets. It's an inefficient in-stock process. It's lack of a focus on pro, et cetera.
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. 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. Structurally, yes, but modest. I'll let Dave talk about where we see the business going beyond what we presented.
Yeah. 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 are about to implement in 2019, and what will that deliver over the next several periods. That's what you're seeing on the slide. Now, we haven't really taken a step back into Marvin's presentation earlier today. Once we get 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.
Let me give you an anecdote. Don showed, he gave an analogy on appliance delivery. As he said, unfortunately, that's a true story. Let's just think for a second. If you pull all the appliances out of the store, or 90%, almost 80% are delivered, but yet we house them in the store. 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. The second-largest spend we have from cost of goods sold is payroll. The amount of payroll that we have tied up in appliance delivery, just appliances in our store, is enormous. Not to mention storage containers, damage, transportation costs, the inefficiencies of all that.
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. As we think about the future and Don's five-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. That's just one of many examples that we're very encouraged with the possibility to generate operating profit. Our competitor doesn't have to deal with that, and that's a compare and contrast from a cost perspective.
My follow-up question also on guidance. For 2019, I found it quite impressive. I'm sure others did as well. With all that's going on, you're still assuming, so to say, up here in terms of sales-
That's right.
operating margins.
That's right.
Within that guidance, this may be more qualitative. From a macro standpoint, are we assuming much change from what we're seeing currently? Second, how much of that guidance reflects the beginnings of the benefits of the changes you're making at 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 2019. The cadence of that delivery is probably more back-half weighted just by the practical nature of the reality that once you've put in a fix, the financial benefits take a little while to accrue. You're seeing that effect on 2019 as we think about our financial plan.
Thanks for taking the question. This is Jason Haas from Bank of America. I wanted to ask Dave on the 30 basis points in margin improvement, if you could give us a walkthrough on that in terms of It just sounds like you're going to be adding some labor to the stores and I guess at the corporate level. What really are the offsets to that that gets you the leverage? Thanks.
Yeah. Well, you want to talk about the store payroll real quick?
Yeah. 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 examples. If you think about what I showed, the green screens on our front-end cash registers. We have a fix going in late Q1, early Q2. 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. You think about the amount of time, and if we hire 30,000 cashiers this year, and we can take their training down by eight hours, if by putting the new touchscreen interface on the registers, if I can shave 10 seconds off of every transaction we have. 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'll be in all stores by the end of March of this year.
A lot of productivity tools going on that, going from manual process to digitized process. 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 the stores through straight productivity gains.
At the end of the day, there's kind of three things driving operating margin for '19. One 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. Finally, we're honing our advertising costs to be more productive in targeting. Those three things are driving our performance in '19.
We'll also be a lot more focused on SG&A in 2019 than historically. Beyond the store, but non-store-based positions also.
Great, thanks. 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. 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. As I mentioned, we have a much more rigorous capital allocation process that we put in place. The hurdle rate for new store approvals have become a little bit more stringent, which is the way it should be. That does not prevent us from having voids that we will address. 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.
Scott.
Thanks. Good afternoon, Christopher JP Morgan. 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. Can you talk about the level of turnover in terms of the direct reports of the major functions? Could we say, X% has turned over and Y still to come? 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.
Good time.
For the world to hear. 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. 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 upgrade. 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 billion retailer, our past leader of transportation and delivery had never been in supply chain before. Never. Was managing this massive fleet and this significant cost center for us and had no experience.
That's an example of Don coming in and making a decision that he has contacts in the market to go out and find deep skill-based knowledge to come in to upgrade those types of positions. [uncertain] is new in her role, and she's assessing her team. 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, and if we don't have that talent, let's go out and get it. If we have the talent, let's promote. Bill has made promotions within merchandising of existing leaders. Joe has made promotions, and so has Don. It's a combination of both. It's not just bring 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. It's a combination of all those things.
Is there a next level down where?
Yes, it cascades. We have to be smart. I mean, spring is our holiday season, we're not going to go into the spring season disrupting organizational structures. 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.
My follow-up is for Dave. You mentioned after the first year looking at capital markets.
Yep.
This is about $4 billion of debt. Is that the?
Yeah, somewhere in that zip code. Yeah.
Is your concern, it's you can't get it all done at once,
No
at the right rate? Or that you need to cascade it over a period of time?
It's a rate issue, quite honestly, at this point in time. Yep.
Thanks very much.
Yep. Scott had a question.
Hey, guys. Scott Mushkin over at Wolfe Research. Thanks for taking my question. I think with Michael's question, you kind of answered. I think one of the fears I'm hearing from everybody is the organization's just going to run too fast. 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. I know there's a big market share out there. At the same time, it seems like Lowe's has some unique qualities, a 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. Thanks.
Well, I think it's a fair question, I think you answered it in the fact that this is a big market. Rather than being fixated on one competitor, 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. We're really focused on that. We understand that if you take our largest competitor and combine them with us, it's less than 20% market share. As I said, this is not a win-lose zero-sum assignment. It's not as though we're competing for a contract like Boeing and Airbus. You got a winner and a loser. It's a fragmented market.
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 of what's happening with our largest competitor. That's the way we're looking at this. Differentiation for the sake of differentiation is something that we're not interested in, differentiation to serve the needs of a customer because that customer's 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. 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.
Yet we can tweak that, and we can speak to a broader demographic by spending less money. That's the approach that we're taking, that is, how do we attract more customers in this fragmented marketplace and not be so concerned about one competitor?
Hi there. Right here.
Yeah.
Marvin, you have laid an ambitious plan for Lowe's and you're transforming the company. You've brought in a lot of talent as well. 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?
Well, I talked about the operating plan on the slide with the mission statement, our four objectives, and our 10 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. Collectively, there's no problem that they can present that somebody sitting up here shouldn't have the ability to solve. You drive accountability first by having clarity. Jennifer mentioned the fact that if you could go out in the stores a couple of months ago and ask the question, what's the mission for the company? Nobody could answer it. As a matter of fact, this team couldn't answer it because there wasn't one that was clearly articulated.
It starts with clarity of mission, then it starts with the key objectives to deliver the mission, and how do you measure. If you can't measure it, then you can't execute it. 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 looked. Well, not anymore because we have one scorecard for the company that we're all looking at. We're looking at the same data, and we're defining success the same way. As simple as that sounds for a large company is needed.
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. 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. If we can invest capital in Lowe's as core retail business and make a difference in operating margin, make a difference in comp sales, make a difference in return on invested capital, we're providing the shareholders the value that they deserve. Refocusing and narrowing our priorities will also help to drive accountability.
Let me give you just an anecdote 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. When you think about from an execution standpoint, we 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. When I arrived, we didn't have a core store operations team in the company. We had no Senior VP of Operations. The labor team reported to one 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. What that ended up doing is on a weekly basis, I showed you the stack of emails that one store manager would get. That's a buffet. We had teams picking and choosing what they were going to do because there was so much to do and so much placed on them. We took the task management, and when I arrived, we were executing somewhere in the low 50s to high 40s% of all the tasks that would go out. Restricting those, making the right priorities, we're at a 98%-plus execution rate, and I'm challenging the people that are below the 98 on why we're not at 100.
If we're 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. This is email all store managers in this district. I shut down 35,000 email lists that existed in the company. You think about getting to the root cause of why our execution was where it was. Everybody had a hand in. It was a free-for-all in what the stores were asked to do.
I think there's one other thing, you asked the question around accountability. We're driving a weekly meeting now, 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. When we walk out of this room, it is held in this room, we're all on the same sheet of music relative to what has to be executed. That is a big difference from where we were from an accountability perspective.
Joseph Feldman, Telsey Advisory Group. 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 the pro, it's very sticky, very routine. They like their few places to shop, and that's it. How do you go out and grab them even though you're doing all these great initiatives?
Well, I had the pleasure of running the pro business for our competitor for six years. I remember when Lowe's had dominant market share in home improvement in the pro, they switched. They switched because we stopped selling the brands. They switched because we stopped investing in service. They switched because we stopped investing in inventory. They switched because we started to focus on inventory versus plan versus inventory turns, the things that Bill talked about and Joe talked about.
It is our expectation because we have 1,700 locations in the U.S., we're very convenient, that if we can just take a step back 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. If we deliver those things consistently, that's the key word, consistently, we think with Jocelyn's team's help to invite them back in, we can win that customer back over time, that's our goal.
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 pros' attention and really trying to figure out what are the ways, what are the messages to get the pro back to Lowe's. We've had really good success. 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've talked about, the job lot quantities, we can really partner in a very meaningful way.
From just sending out the invitation, that's what my team's been doing for the last year, is testing what should be on the invitation, what's the best way to send the invitation. That would tell me the pro is ready. It's when we're ready and we bring all those pieces together, I think the opportunity is pretty significant.
Thank you. A quick follow-up, maybe for Bill. With merchandising and the category management that you're doing, do you expect to end up focusing on any different categories maybe, or de-emphasize any categories? I know the big competitor is talking about home decor a little bit more. Just anything you can help on that.
Yeah, great question. I think that the role of the category helps us, one, 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. If you think about our stores and the different locations that they're in, there's that opportunity that that process provides you. 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 in decor categories, for example.
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. All of that is part of the category management process.
We have time for one more question.
Pressure's 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. 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.
Yes. It's a very timely question. We have a quarterly, hourly bonus program for our store associates that no one knows how it's calculated. It is so complicated that 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 bonus is called and how it's calculated?" No one has got it right yet. 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.
We're taking a step back and we're simplifying it going into 2019, 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. It's a great program. 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 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, and I was like, "What is this?" 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.
Yeah. It gives you an example that we have great programs, and we don't do a good job of communicating. 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.
Yeah.
We have different performance metrics for bonuses based on the function that you're in. I am not a proponent of that. We're going back, and Jennifer and I will be meeting with the comp committee, and we're presenting three metrics that will be consistent across finance, supply chain, merchandising, stores, HR, et cetera, et cetera, just for clarity and also for alignment. It is my expectation that whatever I'm reviewed on, so will the store managers. I want it 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. 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. I guess as my follow-up for Dave, back to the financial guidance. I appreciate the hesitation to put a timeframe on those targets. Are we to assume that the 12% operating margin goal coincides with $370 a foot? Like those are tied together or-
Yeah.
One happened before the other. I'm just trying to understand.
I would think of them as tied together. I think what you're hearing us a little bit is while we have confidence in all the programs we have in place. We know when they're going to be implemented, when we actually turn the corner, when we start reaping some of the benefits of those initiatives, we don't have quite as precision, quite as line of sight from a precision standpoint, from a timing perspective to pin those down at this point in time. That's why there's a little ambiguity in exactly when we're going to deliver that 12%. I think it is reasonable and understand that we're going to do this in a timeframe that's fairly expedient.
This concludes our 2018 Analyst and Investor Conference. Thank you for your time and attention today and for your interest in Lowe's. We invite those attending in person to join us for lunch, as well as product demonstrations down the hall. Thank you very much.