Good morning, everyone, and welcome to Loews Company's 2nd Quarter 2017 Earnings Conference Call. This call is being recorded. Also, supplemental reference slides are available on Lowe's Investor Relations website within the investor packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non GAAP financial measures.
The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr.
Robert Nibloc, Chairman, President and Chief Executive Officer Mr. Rick Damron, Chief Operating Officer and Mr. Marshall Croome, Chief Financial Officer. Joining during the Q and A session will be Mr. Richard Maltzberger, Chief Development Officer and President, International and Mr.
Mike McDermott, Chief Customer Officer. I would now turn the program over to Mr. Knibwach for opening remarks. Please go ahead, sir.
Good morning, and thanks for your interest in Loews. We delivered 2nd quarter comparable sales growth of 4.5%, driven by improved transaction growth of 0.9 percent and a 3.6% increase in average ticket. We're pleased with our improved top line performance versus Q1 and the acceleration of our comp growth through the quarter as we built momentum with successful holiday events and enhanced messaging, driving traffic improvement to end the quarter with comp sales of 7.9% in July. Our U. S.
Home improvement comp was 4.6% with broad based project demand across product categories and geographies. We achieved positive comps in 13 to 14 regions and in all product categories. Appliances led product category growth with high single digit comps, leveraging our investments in customer experience both in store and online. We achieved strong comps in lawn and garden as we capitalize on seasonal demand. We also continue to advance our pro business, driving outperformance in rough plumbing and electrical and lumber and building materials.
While we're pleased with our sequential comp growth through the quarter, we are disappointed with some aspects of our performance during the first half of the year. In the first quarter, we identified an opportunity to drive more traffic with improved messaging and an optimized promotional strategy. We amplified our marketing messages in early June and we're pleased with our traffic growth. However, in the Q2, comp growth was constrained as a result of disruption caused by changes to our store staffing model earlier in the year, which became more apparent with increased traffic. While we remain confident that the leadership model is right for our long term growth, change brings certain short term challenges.
I'm proud of the way our teams are responding diligently to respond to these challenges, filling open positions, learning new roles and adapting to the new model. But we also recognize an opportunity to invest in incremental continue to We continue to advance our omnichannel strategy, driving 43% comp growth on lowes.com this quarter. A year ago, we upgraded our online shopping experience to make it easier for customers to find the products and information they're looking for. In fact, Internet retailer recognized us with an Excellence Award for Web Redesign of the Year. We will continue to make omnichannel investments to ensure we're supporting customer needs and seamlessly connecting with them whenever, wherever and however they choose.
During the quarter, we made further progress to enhance our product and service offering for the pro customer, delivering another quarter of comps above the company average. In addition to central wholesalers last year, we further expanded our pro customer reach and share of wallet with the acquisition of Maintenance Supply Headquarters. These acquisitions are a significant step forward our strategy to deepen and broaden our relationship with new and existing pro customers, enabling us to better serve the multifamily housing industry through expanded products and services. Internationally, we delivered solid mid single digit comp growth in both Canada and Mexico. We continue to make great progress with our RONA integration, including the conversion of our 1st RONA Big Box store to a Lowe's branded store, where we're combining the best of Lowe's store experience, merchandising and brands with the best elements of Rona's strong pro offerings to create a new stronger Lowe's for the Canadian market.
And we remain excited by the successful execution of our e commerce strategy, improved operating efficiencies and the further rollout of appliances across our national footprint in Canada. We continue to unlock the full value of the acquisition, which will culminate in over $1,000,000,000 of realized revenue and cost opportunities. For the quarter, we delivered earnings per share of $1.68 These results included a $96,000,000 gain from the sale of our interest in the Australian joint venture. Adjusted earnings per share were $1.57 a 15% increase over last year's adjusted earnings per share. Delivering our commitment to return excess cash to shareholders, in the quarter, we repurchased $1,250,000,000 of stock under our share repurchase program and paid $299,000,000 in dividends.
Turning to the economic landscape for the second half of the year, the home improvement industry should continue to see solid gains as consumer health remains strong and economic fundamentals continue to support solid spending growth. Persisting job and income gains should continue to drive disposable income growth and favorable revolving credit usage continues to hover near the highest rates of the current expansion, supplementing the spending power generated by stronger incomes. The outlook for housing remains bright as household formation in the first half of the year is encouraging and expected to continue amid steady job gains. Home price appreciation should persist as housing demand continues to outpace supply and mortgage rates drifting lower from their post election levels should support home affordability in the near term. Our 2nd quarter consumer sentiment survey underscored similar favorable trends.
Consumers continue to have a favorable view of the national economy and their personal financial situation. Over half of consumers believe their home value is increasing and have strong expectations for continued appreciation, resulting in strength and home improvement project intentions. Looking ahead, we're focused on further strengthening our operating discipline and investing in capabilities that maximize value for customers and shareholders. We will continue to leverage our new store leadership model and make necessary investments to customer facing hours to further improve the customer experience. We will also enhance our marketing efforts and leverage promotions in key areas to drive sales in what we believe is a supportive macroeconomic backdrop for home improvement.
We're confident that these investments position us for future success. We will also continue to capitalize on our strengths in capturing project demand in the marketplace and further invest in specific actions required to better serve the needs of Pro, DIY and Diacom customers. We've seen positive customer response to our evolving omnichannel capabilities, continue to meet customers at every critical moment, whether they choose to connect in the store, online, in their home, from their job site or through Lowe's contact centers. Importantly, I would like to thank our more than 290,000 employees for their passion and commitment to serving customers. Before I close, I want to stress that we are taking decisive action.
The team is focused on executing the plans we have in place to capitalize on our strong position in the market. Thanks again for your interest. And with that, let me turn the call over to Rick.
Thanks, Robert, and good morning, everyone. As Robert shared with you, we saw significant improvement in our Q2 comp sales as we drove increased traffic to our stores and lowes.com. We successfully leveraged holiday events designed to take advantage of spring and summer project demand with amplified marketing messages, compelling offers and an integrated omni channel experience. In fact, we built momentum as we move through the quarter reflected in our significant traffic improvement in June July. Value perception was the thing we discussed in Q1 and I'm pleased to say that we made great strides this quarter.
We took a surgical approach to selecting the right products and price points to message in the right media channels, successfully highlighting Lowe's everyday competitive pricing. In the Q2, we achieved positive comps in 13 of 14 regions and posted positive comps in all product categories. We delivered a 4.5% comp with balanced performance in both indoor and outdoor categories. As we capitalize on a supportive macroeconomic backdrop and customers' continued desire to invest in their homes with our project inspiration and expertise, events and targeted promotions, we drove above average comps in categories such as appliances, lawn and garden, lumber building materials and rough plumbing and electrical. We drove high single digit comps in appliances, leveraging our investments in customer experience both in store and online.
We know that an omni channel experience is critical for appliance customers as they gather information to give them confidence in their selection. In store, we have invested in a best in class experience with an extensive product showroom and a broad selection of leading brands, as well as expert associates who can provide valuable advice and appliance suites which allow customers to visualize how their appliance purchase will look in their refreshed or remodeled kitchen. And online, we have continued to invest to enhance the customer experience with improved product search, integrated and upgraded product videos, enhanced presentations like 360 degree views, extended descriptions and specifications, and simplified groupings to make it easy for customers to fully research our extensive appliance options and make their selection with confidence. Our omni channel customer experience together with leading brands, breadth of assortment, competitive pricing, knowledgeable sales specialists, as well as service advantages of same for next day delivery, Holloway, and facilitation of repairs and maintenance continues to drive our performance in appliances. We capitalized on seasonal demand, driving above average comps in lawn and garden with particular strength in live goods and lawn care as well as double digit comps in patio.
Once again, we saw continued strength from the pro customer with comps above the company average. Pro demand drove solid comps in Rough Plumbing and Electrical as we captured pro sales by improving our assortment with destination brands like StartBack, the industry leader in plumbing fields. We continue to be excited about the effectiveness of Destination Brands in attracting pro customers. This strength is evidenced with the addition of A. O.
Smith, the leading brand of residential water heaters, which drove double digit comps in the category. Pro demand also drove strong comps in lumber and building materials. In addition to our outstanding portfolio of brands, we're also deepening and broadening our relationship with the pro customer across all categories with our strong value proposition through our 5 ways to save, as well as our omni channel offering through our growing pro services team and loadsforpros.com. We continue to evolve our capabilities to better connect with the pro across channels and make it simpler for them to do business with Loews. We're seeing the Pro engage in more in the channels that best fit their unique needs, whether that's online with lowesforpros.com, at the market level with our account executive Pro Service or AEPs at the store level with our dedicated team of specialists or our growing national pro services team.
The addition of maintenance supply headquarters complements our acquisition of central wholesalers last year and further expands our capabilities to service multifamily property management customers throughout the country with enhanced product and service offerings, while strengthening our platform for future growth with this important customer. We continue to leverage targeted marketing as well as pro exclusive offers to grow our share of wallet with existing pros, while also generating new business. We're also driving increased awareness of our enhanced buy and bulk program with new signage store, messaging on those for pros.com and marketing campaigns to showcase the great values we provide for the pro. We remain focused on leveraging our omnichannel capabilities to help DIY and DIY film customers throughout their project journey. This quarter, we drove 43% comp growth on lowes.com, driven by events as well as continued strong customer response to the investments we made to enhance our online shopping experience, such as optimized functionality and display for touchscreen devices to support a better mobile experience, improved product and content recommendations, refined search algorithms, improved click to chat capabilities, larger product images, optimized assortments informed by digital line reviews and expanded product views including video content.
We're also leveraging our Milo's platform to drive brand loyalty. Our simplified military recognition program allows active duty personnel and veterans to register through Milo's and receive 10% off their purchases every day. We're also offering free parcel shipping exclusively for Milo's members. Our interior and exterior project specialists are another critical element of our omni channel strategy and a differentiated capability in capturing and servicing project demand for the DIFM customer who needs a bit more help navigating their project. We're advancing our omni channel experience, making it even easier for customers to engage with our in home project specialists and request services on loews.com.
And we're working to centralize our process for providing installation quotes, allowing for greater efficiency and consistency. We're rolling out this capability in the flooring category over the course of the year with all U. S. Markets online by Q1 2018. As Robert discussed, comp growth improved sequentially through the quarter, but was constrained as a result of the disruption caused by our changes to our store leadership model earlier in the year.
Those changes streamline management to provide better leadership and accountability. Specifically, we reduced the number of assistant store managers and eliminated the department manager role then created the service and support managers in an effort to increase stores' focus on training and empowering associates to deliver an improved customer experience. We are confident that the leadership model is the right one for our long term growth. To more fully capitalize on our strong traffic trends and ensuring we're delivering an excellent customer experience, we are investing in hours at the customer service associate level. As we look forward to the second half of twenty seventeen, we are excited by our new floor tile reset, which showcases leading style options, simplifies the shopping experience and helps the customer visualize how their new floor will look in their home.
We're also proud to announce the launch of Scott Living Indoor Furniture with fully coordinated collections from Drew and Jonathan Scott of HGTV's Property Brothers available on lowes.com. Our digital showroom features coordinated looks and design tips, helping customers envision their newly decorated space. We will continue to focus on optimizing our digital marketing efforts to deliver customized messaging and compelling content to the right customer at the right time, driving improved engagement and increased sales. While we've already seen positive results from these efforts, media optimization is an ongoing process. Thank you for your interest in Lowe's, and I will now turn the call over to Marshall.
Thanks, Rick, and good morning, everyone. Sales for the 2nd quarter increased 6.8% to $19,500,000,000 supported by total customer transaction growth of 3.1% and average total ticket growth of 3.5% to $71.40 RONA sales were approximately $1,000,000,000 or 3 percent of sales growth. As a result of the calendar shift from the 53rd week in fiscal 2016, this year's Q2 included 1 less week of spring 1 less week of spring and one more week of summer than last year. While this had no impact on comp sales, it did decrease 2nd quarter total sales growth by approximately $285,000,000 or 1.7%. Comp sales were 4.5% for the quarter, driven by an average ticket increase of 3.6% and improved transaction growth of 0.9 percent.
Run it was included in the comp calculation for the first time in the month of July. Looking at the monthly comp trends, comps grew 0.6 percent in May, 5.3% in June and 7.9% in July. As Robert and Rick indicated, we were pleased with our improved top line performance versus Q1 and the acceleration of our comp growth through the quarter as we built momentum with successful holiday events and enhanced messaging, driving traffic improvement in both June July. During the quarter, we continued to capitalize on market opportunity as we opened 4 new stores in the U. S, which drove 80 basis points of growth.
Gross margin for the Q2 was 34.21 percent to sales, a decrease of 23 basis points from the Q2 of last year. The decline was primarily the result of promotional activity and excessive benefits from value improvement and 10 basis points of inflation. SG and A for the quarter was 20.16 percent of sales, which leveraged 101 basis points. In last year's Q2, we recorded an $84,000,000 loss on the settlement of a foreign currency hedge entered into in advance of the Rona acquisition. This provided 46 basis points of leverage this year.
An additional 49 basis points of leverage was driven by a $96,000,000 gain from the sale of our interest in the Australian joint venture. Also, we drove 20 basis points of payroll leverage, primarily as a result of our new store leadership model. Somewhat offsetting these items was 10 basis points of deleverage in advertising as a result of our efforts to amplify our consumer messaging. Depreciation and amortization for the quarter was $357,000,000 which leveraged 20 basis points. Operating income increased 98 basis points to 12.2 percent of sales.
The comparison to the prior year loss on the foreign currency hedge positively impacted operating income by 46 basis points, and the gain from the sale of our interest in the Australian joint venture also positively impacted operating income by 49 basis points. Interest expense for the quarter was $159,000,000 which leveraged 10 basis points. Effective tax rate for the quarter was 36.2 percent compared to 38.1 percent in the Q2 of fiscal 2016. The year over year change in our effective tax rate was primarily the result of the gain from the sale of our interest in the Australian joint venture. The gain represents the proceeds in excess of book value, but did not result in tax expense in the quarter due to a reduction of previously established deferred tax valuation allowances.
Earnings per share on a GAAP basis was 1.68 percent for the quarter. The gain from the sale of our interest in L Strain joint venture increased EPS by approximately $0.11 for the quarter. Adjusted earnings per share was $1.57 a 14.6 percent increase over last year's adjusted earnings per share of $1.37 Turning to the balance sheet. Cash and cash equivalents at the end of the quarter was $1,700,000,000 Inventory at $11,400,000,000 increased $803,000,000 or 7.6 percent versus the the Q2 of last year was primarily driven by appliances to support sales growth as well as timing associated with seasonal builds. Inventory turnover was 4x, an increase of 11 basis points over the Q2 of last year.
Asset turnover increased 8 basis points to 1.86. Accounts payable of $8,600,000,000 represented a $953,000,000 increase or 12.4 percent over the Q2 of last year due to the timing of purchases and terms improvement. At the end of the second quarter, lease adjusted debt to EBITDAR was 2.21x. Return on invested capital was 17%. The net impact of the gain from the sale of our interest in Australian joint venture and prior year charges negatively impacted ROIC 553 basis points.
Now looking at the statement of cash flows. We generated strong operating and free cash flow in the quarter of $5,100,000,000 to $4,600,000,000 respectively. As we allocate capital, we are focused on investments that align with our strategic priorities to expand our home improvement reach, develop capabilities to anticipate and support customer needs and generate profitable growth and substantial returns. Our recent acquisition of Maintenance Supply Headquarters demonstrates how we've made strategic investments to further grow our Pro business by expanding our ability to serve the multifamily housing industry. The transaction is expected to be slightly accretive to earnings this year.
After strategic investments, we look to return excess cash to shareholders. In the quarter, we paid $299,000,000 in dividends. And in May, we entered into a $500,000,000 accelerated share repurchase agreement, which settled in the quarter for approximately 6,400,000 shares. We also repurchased approximately 9,400,000 shares or $750,000,000 through the open market. In total, we repurchased $1,200,000,000 of stock in the quarter.
We have approximately $2,600,000,000 remaining on our share repurchase authorization. Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook. First, as we've discussed, we were pleased with the acceleration of our comp growth through the quarter. The result of our amplified marketing messages, compelling offers and integrated omnichannel experience. The incremental investments we've made in these areas are paying off, and we'll continue those investments into the second half of twenty seventeen.
2nd, as Robert and Rick shared, we've also made the decision to reinvest in incremental customer facing hours in the second half. We believe this will allow us to more fully capitalize on our strong traffic trends and ensure we're delivering an excellent customer experience. Finally, we are seeing incremental pressure from our private label credit card program due to increase in program costs driven by higher losses as well as casualty claims due to increased workers' compensation costs. We still expect a total sales increase of approximately 5%, driven by a number of factors. First, we are forecasting comp sales increase of approximately 3.5%.
2nd, the Rona acquisition drives about 2% growth. And also, we plan to open 25 stores, which represents approximately 1% sales growth. Keep in mind, total sales growth will be reduced by roughly 1.5% related to the comparison of 52 weeks in 2017 versus 53 weeks in 2016. However, on a GAAP basis, we are now anticipating an operating margin increase of 80 to 100 basis points as a result of the investments and incremental expense pressures that I just described. Remember, a full year of run rate results versus roughly 7 months last year will pressure operating margin by an estimated 15 to 20 basis points for 2017.
Effective tax rate is expected to be 36.9% this year. For the year, on a GAAP basis, we are now expecting earnings per share of $4.20 to $4.30 Please refer to Page 13 in our supplemental reference slides for a summary of adjustments as you compare 2017 to 2016. We are forecasting cash flows from operations to be approximately $5,900,000,000 capital expenditures of approximately $1,400,000,000 This results in estimated free cash flow of approximately $4,500,000,000 for 20.17. Our guidance does assume approximately $3,500,000,000 in share repurchases for 2017. Regina, we're now ready for questions.
Our first question comes from the line of Peter Benedict with Robert Baird. Please go ahead.
Hi, guys. Thanks for taking the question. First, just on the store labor hour investment, is that full time or part time? Is that weekend, weekday? Help us a little bit more about what you're going to be adding there.
Sure, Peter. This is Rick. We are primarily focused on adding the incremental labor to the weekend timeframes, as well as high traffic area timelines during the week. The effort is to continue to retain our seasonal labor from our spring hires as those still have significant knowledge and we're simply retaining those where historically we would be moving down from a staffing labor standpoint into the fall from the peaks of summer.
Okay. That's helpful. And then as you guys think about I know back at the December meeting, kind of the 3 year plan that was laid out had some benchmarks, 25 basis points of flow through around 50% OpEx growth as a percentage of the sales growth. Obviously, 2017 numbers aren't meeting those objectives. What curious kind of are you do we need to rethink kind of the longer term algo a little bit here, maybe you assume a little bit more OpEx or less flow through?
Is that how we should be thinking about it? Just curious your thoughts here.
Yes. Peter, this is Marshall. We are maintaining our targets that we previously communicated back in December. Obviously, this year, won't hit those targets, but productivity is still alive and well, and it's actually helping us offset the incremental investments we're making this year. And we know we've got more runway to go as we move forward.
So the investments we're making from staffing, again, we're leaning into it to take advantage of the increased traffic, leaning into optimized promotions and knowing that we've got opportunities to utilize price optimization tools, continuing value improvement efforts and continuing to evaluate promotional effectiveness. So longer term, we've got other productivity measures for optimizing labor, leveraging fixed costs, reducing indirect spend, lower depreciation and enhancing profitability in Canada.
Yes, Peter, this is Robert. As Marshall outlined, we're still holding to our 3 year guidelines that we gave you last year and productivity is still a key focus that we're working on. We've seen actually a lot of benefits from our productivity efforts. As we've outlined, part of those is part of what Mike McDermott and his team did is in amplifying and improving our marketing message, particularly when we look at opportunities in the digital space. We saw great results from that, including the improved traffic performance that we saw in the stores.
And we think we've got a better opportunity to capitalize on that. So it was what Rick and his team are doing is saying, let's hold the labor that we normally would have been pulling back on, see if we can do a better job of capitalizing on that and see if we can drive incremental sales through the process. So that's what we're doing is we're reinvesting some of the benefits of productivity in what we feel is a strong macro environment.
Okay. Makes sense. Thanks so much guys. Good luck.
Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Hey, this is Joshua Seiber on for Simeon. On gross margins, what's going to enable you to make numbers in the back half because it looks like gross is expected to be up? Just curious your thoughts there.
Yes. This is Mike McDermott. Obviously, as we communicated at the end of the Q1, we needed to focus on improving our value perception and making sure we were amplifying our marketing reach with our customers. We did that by leaning hard into changing our anchor points and communicating critical values to customers. We're also continuing to improve our competitiveness both on in stock as well as special items, and that's putting some level of pressure on gross margin.
We've got optimization efforts in place, working closely with our vendors to make sure we're improving our first cost as well as pricing tactics, making sure that from a head core tail perspective, we're competitive on head items where required and we're working hard on pricing of tail items to make sure we're harvesting profitability to offset that investment. So we've got a lot of work underway in the merchandising team to balance the improvement of value perception with our cost position.
Okay. And then the long term EBIT margin guidance of 11.2%, it's a pretty substantial expansion from what's expected to be in 2017. So how do investors gain confidence in that margin opportunity? And do you think this happens in the back half or in 2018?
Again, just recognizing that those were 3 year targets, so it won't be all accomplished in 2017. So it will be baked into the productivity opportunities we have moving forward. Again, leveraging the traffic driver with marketing optimization, again focusing on optimizing labor as we move forward that will continue to be an ongoing discipline. So even with the reinvestment in the back half of the year, we'll still leverage payroll in 2017. And again, excited about the other opportunities we have from a productivity standpoint to drive towards that 11.2 percent EBIT growth in that target that we set.
So obviously very excited with what we have in the pro space with the maintenance supply headquarters and opportunity to grow and expand that footprint and leverage back into our existing store base.
Okay. Thank you.
Your next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead.
Thanks and good morning. I was just curious how would you think about the shift of the spring business in 2017 between the Q1 and the Q2? And the Play Devil's Advocate, we've heard others such as Tractor Supply and Scott talk about a very strong July. So what gives you the confidence that July's strength is actually driven by your actions versus the weather working with you that month against the backdrop of what's been a pretty tough year otherwise?
This is Mike McDermott. I can lay some foundation there. Actually, I feel good as we take a look at our July performance was very well balanced across categories, and we certainly enjoyed positive performance across all products and outside and inside indoor categories. So it was not all isolated to just seasonal in the June July timeframe. At the same to that same message, we did enjoy an extended spring, particularly our lawn and garden business did perform above the average, and the team took full advantage of those weather conditions to really highlight the quality of our products.
The merchants and the growers did a fantastic job on quality of live goods, and we feel really good about our performance of our private label Stay Green fertilizer seed and soil products. So innovation as well as market demand served us well.
And then can you talk about your view on share in pro and DIY? Obviously, you are stepping up advertising dollars. It sounds like dollar spent, not necessarily promotional level. And you're also stepping up the commitment on the labor hours. So is there something that you're seeing on the share side in either pro or DIY that is causing you to step up these investments?
Yes. We continue to see both macro environment opportunities as well as favorability in both the pro and DIY markets. Pro outcomped our average again this quarter, so we continue to feel good about that. We see an opportunity to continue to expand our penetration in that category. Pro represents about 30% of our sales and about 50% of the home improvement market.
So again, a lot of the investments we're making and the actions we're taking, we think, will yield fruit. From a DIY perspective, we saw nice advancements in our DIY product categories, again, both interior and exterior, giving us positive momentum going into the back half.
Thanks very much. Have a good back half.
Thanks, Chris.
Your next question comes from the line of Eric Bosshard with Cleveland Research. Please go ahead.
Good morning. Good morning. Two things. First of all, curious as you think about the investment that you've outlined today, what you expect or where you expect the payback from that to show up is the first thing I'd be curious.
Yes, Eric, I'll start. As we said, as you saw from the comp trajectory in the quarter, May was not what we had anticipated by the time we got through the month in the Memorial Day performance. Our incremental investments in marketing and the enhanced focus on digital had not been fully kicked in by then. As we saw that kick in and we saw the incremental traffic that we're driving into the stores, we were very pleased obviously with the trajectory through the quarter, but recognize that we probably had an opportunity to have provided a better customer experience and even better capitalize on the trends. So our belief is that we hold on to these labor hours that we've got people that are trained in the stores.
Rick and his team have trained as we get into the to the fall, we'll continue to monitor that as Mike and his team work to even further optimize our marketing message and we hope to see that translate into better experience continue to drive better in store experience and better sales trajectory. We've put a lot of effort into our online experience here over the past year or so as highlighted with the 43% growth in the quarter. We think there's an opportunity to improve our in store experience as we head into the fall of the year. And we hope then that that resonates into capturing additional sales from the traffic that the marketing team is driving into our stores.
So does that as you look at you affirm the full year comp guidance of 3.5%. Does this investment should we believe or expect that this could create upside to that sales guidance if you get paid back from this? Or is this more defensive of defending your ability to just get to that original target?
Yes, I think, we're still early in the process. Obviously, we're excited about the trends that we're seeing, but we're investing because, 1, first of all, 1st and foremost, deliver our guidance for the year because we've been just slightly short of that for the first half of the year. So it's to make up the shortfall and to the extent that we execute well, hopefully some upside to those numbers, but we've not baked that in.
And then secondly, in terms of the point of emphasis, I guess I came into the year hearing the productivity focus, the 11.2 margin target and seeing you making decisions that seem more profitability. Now it sounds like there's a little bit of a shift to balance more of driving sales and sales growth. Even Marshall's comments regarding price optimization and even labor optimization, while labor is being invested here. Is I guess the central goal, Robert, is the focus improving the sales growth or is the focus improving profitability?
I think it's both. So as I indicated, Eric, we've had actually great success from our productivity efforts. We still got a lot more work to do there. But we said all along that productivity is not just about cutting costs, it's also investing back into areas that matter most to the customer. So, and we think as we said with the we knew we had an opportunity with to improve our marketing as we've had new tools and we've continued to better optimize that.
The team is working to even to get better leverage out of our marketing spend. We saw an opportunity there. We're pleased with the online performance, the traffic we're driving into our stores that we think there's an opportunity to even capitalize further on that. So it's partially using that productivity savings to invest in a better experience and capture share in what we think is a robust market. Placing with that, then we think it allows us to achieve those 3 year targets that we laid out.
Okay. Thank you. Thanks, Eric.
Your next question comes from the line of Alan Rifkin with BTIG. Please go ahead.
Thank you very much. Robert, you said that the 2nd quarter comps were disrupted by the store staffing that you've outlined. Yet, can you infer from the sharp acceleration in your July comp that you think those issues are largely behind you? And if so, why then is your comp and revenue guidance for the back half of the year not been lifted? Thank you.
I'll start and then ask others to jump in, Alan. But certainly as we indicated, we do think there was some disruption from the model. The further we get away from the change, obviously, people are getting settled into their new roles. We've talked about some of the attrition with some of the prior department managers and then their attrition into permanent roles has actually gone faster than we had originally budgeted. So we knew there was some disruption, but the further we move away from the change people are getting settled into their new roles, I'm pleased with the way the team is responding.
As we indicated, we're a little bit behind where we anticipated and we laid out our guidance for the year, thus the revisions and guidance. But more
than anything, the work
that we've done, as I've said
in for the thing, the work that we've done, as I've said in from a marketing standpoint to sharpen our messages and the enhanced efforts, we're seeing the great performance online and we're also seeing better traffic trends coming into our stores. So we're using that as an opportunity. If you think about the changes that we've made from a management standpoint and getting the right management structure in the store, it allows us to put more associate customer facing hours on the floor of the store to take advantage of that opportunity. So we think that's going to drive additional sales, but we don't want to get ahead of ourselves from a guidance standpoint.
Alan, I would say that we're making investments, as Robert said, to capitalize on the traffic growth and better leverage the long term benefits of the model that we have in place. The reality is our omni channel environment today requires us to continually evaluate how we're meeting the needs of our customers and that will continually drive change both in how we meet those needs. It requires us to be perpetually learning, training, ideating, and getting better every single day. And I think those changes are beginning to pay off and it shows in our June July performance. Our teams remain extremely focused on serving the customer.
Their dedication to serving the customer is second to none and I'm extremely proud of what they've done and how they've led through that change throughout the year. And we'll continue to make sure that we support them with resources and the training and the tools they need to be able to meet the needs of our customers every day in this environment.
Okay. Thank you. And then a follow-up, if I may. With respect to appliances, you guys continue to put up terrific comps with high single digit gains in this quarter. Obviously, with the recent news about Sears and Amazon, are there any changes contemplated in terms of marketing within this category?
Thanks. Alan, this is Mike McDermott. Well, certainly, we don't take our number one position in appliances or our continued growth in market share in
the category for granted. We've made significant investments over time to be the number one player, and our customers continue to tell us that a focus on omni channel engagement and experience is what they expect what they desire. So we're very, very focused on continuing our leadership from selection through enjoyment, through the service proposition all the way through the retirement and making sure that our displays, our well trained associates, our expansive brand and innovation portfolio continue to make a difference. And on the Q2, we grew at 3 times the market in the appliance business. The operations team added inventory to make sure we could take advantage of the opportunity.
Rick and his team increased staffing. We added delivery drivers, and we continue to take advantage of the market by providing great experiences. So from a marketing perspective, we're going to continue to lean into the category as we have and make sure that digitally we've got great content online, fantastic navigation and obviously we're going to maintain our competitive posture from a pricing perspective. So I feel good about the appliance business, good about continuing to grow our number one position.
Great. Thank you very much. Appreciate it.
Your next question comes from the line of Seth Basham with Wedbush Securities. Please go ahead.
Thanks a lot and good morning. My question is around conversion. I know you guys have been able to track conversion pretty well historically. Can you give us a sense of what the trends have been like lately? That would be helpful in framing some of the changes you're making.
Yes. Glad to. As we look and we talked about the increased traffic that our marketing efforts were driving into the stores, we saw an opportunity to continue to improve our conversion. Conversion is something that quite frankly we always want more of. No matter where we are, we always want more.
And we're working our store operators are working extensively in making sure that our people in the stores and our associates in the store, the times are there, the customers are there, that we're merchandised correctly and that we're executing the fundamental basics of the business inside the box. I'm extremely pleased with the progress they're making and the efforts they're taking and we see that as an opportunity plus the investment in labor into the back half of the year to ensure that we continue to make sure that we meet the needs of the customers when they come in. So we feel good with where we are. We still know there's opportunity for us to continue to get better, and we're making the investments necessary for us to be able to do that with the teams.
The other thing I'd add to that from a dotcom perspective, we saw balanced improvement and strength actually in traffic conversion and ticket across all product categories. So as it relates to the omni channel experience, we really look at conversion both in store and online. And to Rick's points, we'll continue to invest there to make sure it improves.
That's helpful. And just to understand for the back half of the year, the primary improvement in sales trends that you're expecting is coming from conversion as opposed to improvements in traffic, right?
We actually would anticipate a more balanced view of transactions and tickets as we move into the back half of the year versus the first half.
Thank you very much.
Your next question comes from the line of Seth Sigman with Credit Suisse. Please go ahead.
Thanks. Good morning. I wanted to just clarify on the updated EPS guidance for the year. So there's no change in sales. Is the change just SG and A or did you guys lower the gross margin expectation also?
I think at one point you were expecting it to be flat for the year.
Yes. As we updated in our guidance, we're expecting about 10 more basis points of incremental gross margin pressure, driven by some of the actions that we're taking leaning into the amped up and amplified marketing that we are doing that's helping drive the traffic. So that's putting pressure on the gross margin line for the year. So it actually went from about 20 basis points of drag to about 30 basis points, if you think about that from the year standpoint.
Okay, understood. And then so as a follow-up on the pricing strategy, it feels like the discussion around promotional activity, value perception, even marketing has escalated quite a bit over the last few quarters. Can you help us understand that trend a little bit better? What is causing that? What are you seeing in the marketplace perhaps?
And how should we think about that in the context of what's been a pretty stable EDLP type of strategy in the space over time? Thanks.
Yes. This is Mike Fitzherman again. We certainly saw an opportunity in the Q1 to get more competitive as it relates to our promotional strategy, specifically around holidays. So obviously, that was seen in our value perception metrics. We leaned in there.
We matched the competitive intensity of the marketplace in some of the select categories where we saw some expansion of aggressiveness. But for the most part, as we go into the back half of the year, our focus is really exposing the values that we already had in our plan. So some of that's going to be some of that margin pressure is going to be mix oriented, but we feel good about our position. We got to focus on optimization to make sure that we're making the right investments, but a big focus on the macro environment strength and our ability to jump in and take advantage of that.
Our next question comes from the line of Mike Baker with Deutsche Bank. Please go ahead.
Thanks. I just want to clarify a little bit this quarter what happens. You said you're below plan year to date. And it seems like the sales are on plan, correct me if I'm wrong. So is it that the gross margins were below plan year to date or expenses are above plan year to date?
And if it's the expenses, what I'm trying to reconcile is it sounds like you didn't have enough labor earlier in the quarter, I suppose in May, to drive sales. So I'm just trying to figure out how expenses overran. Is it really just because you ramped up so much in June July?
Mike, this is Robert. We started off in Q1, we indicated that we were behind. We missed our sales plan. We thought we'd make it up over the next couple of quarters. So we're still in the process of working towards that.
As I said, we did as we talked about on the Q1 call, and Mike had indicated, we had an opportunity to 1, enhance our marketing message, things like making sure we're highlighting the price points at the lower end of the opening price points at the appropriate time, as well as we saw opportunity to invest more in digital and that's part of what drove our online performance. We had great payroll leverage in the Q2. We think there's an opportunity to invest part of that to capitalize on the traffic that the marketing team is driving in. And then from a SG and A standpoint, I'll let Marshall talk about we had he talked about some of the one time drivers and some of the specific things that were above what we had planned in the quarter and for the back half of the year.
Yes, while we leveraged retail operating salaries, we did have the incremental advertising spend on with a couple of other items. I alluded to some of the pressure we'll see in the back half with cash related claims, workers' comp claims and cost there. We saw a little bit of that in the Q2. And also as we're being competitive in the marketplace from a client standpoint, little pressure on delivering fleet. But the bigger drivers are in the back half or leaning into the marketing message to reinvest in that and to try to capture more of the sales that we're seeing coming through to offset some of those back half pressures.
Okay. Makes sense. As a follow-up, you did slightly lower your store count outlook for the year. What's behind that and how does that play into the guidance?
So we came in with a plan, I think roughly 35 stores. We since gone through and scrubbed and evaluated certain locations and some of them were just deciding not to open at this time or will defer until a later point in time.
We have an approximate number, Mike. We had a couple that have slid into 2018. We've had a couple of sites that we chose not to move forward with. So we've thought we went ahead and updated the guidance on that, but didn't make any change to our sales guidance.
So were those big box stores Canada, Orchard Supply, just curious what which ones are sliding?
So this is Richard. It was a relative mix, primarily within the Canadian market in our Orchard operation is where we decided to either postpone and or observe some of the changes that we're making before we proceed. Or as Robert said, we have taken a few sites where we made different decisions and we approved those estimated last fall.
Understood. Appreciate the color. Thank you.
Thanks a lot.
Your next question comes from the line of Michael Lasser with UBS. Please go ahead.
Good morning. It's Michael Goldsmith on for Michael Lasser. Thanks a lot for taking our questions. The flooring category has been in line or above the company average recently, although this quarter was a bit softer. Are there any specific callouts that explain the underperformance of this category?
Yes. Flooring continues to be an important category for us. We were certainly positive in the category. Actually, we posted very strong performance in carpet, vinyl and laminate flooring, but saw some opportunity in floor tile as well as hardwood. We're in the middle of a significant reset in the floor tile category.
It's obviously becoming more and more important as customers lean into the new and innovative styles. But we have felt disruption as we ramp down our existing assortment. That reset should be complete by the end of the month, and we anticipate to be back on a growth trajectory above average on the other side of that reset.
That's helpful. And then with regards to the incremental labor being put in the stores, is this broad based? Or is it focused on specific categories?
We're looking at it from a perspective of analyzing the data as we look at our marketing plans as we move into the second half of the year. We're investing those hours against those categories where we're putting the additional weight from the marketing investments that we're making. So it will be more most of it
from the line of Matt Bessler with Goldman Sachs. Please go ahead.
Good morning and thanks a lot for squeezing me in. My first question relates to juxtaposing the recent results in the guide for this year against your reiterated long term guidance. So your productivity initiatives have been underway for a period of time. The profit growth and the margin trajectory that you're generating in absolute terms are quite solid. Is it possible that looking for the kind of incremental margins that the guide, the long term guide calls for is ambitious in an environment where you need to invest in omni channel, you're facing wage pressure, not many retailers are putting up operating leverage just as we think about the appropriate forecasting context for 2018 and beyond?
I'm just thinking, Matt, this is Marshall. At this point in time, we're comfortable with reconfirming the guidance as we lean into the back half with some of these incremental investments. Again, we have a better line of sight to not only productivity efforts that we're driving this year, but in 2018 2019 above and beyond that. And also looking at what we're leveraging from 2017 into 2018 2019 from capability builds, how we're leveraging the Pro, continuing to take a look at our option staffing complement and how we're trying to match labor to traffic that we're seeing and fixed costs, indirect spend I've mentioned earlier. So again, at this time, we're comfortable with those longer term targets and the productivity at this point in time.
We have better line of sight to revise that. I will provide that on an upcoming call.
Thanks for that. And then sorry.
Matt, this is Robert. I would just say, also keep in mind that we've made quite a few changes this year, both with our store labor model that will settle in over time as we're going to get settled into the new roles, the incremental from a marketing standpoint as we continue to refine and get better at that. So I think there's opportunity for additional leverage against those things as we settle into the new cadence there. And then keep in mind that Marshall took you through some one time items, the IBNR and other stuff that he talked about and credit losses that we think moderate those things don't necessarily repeat as we get into the next 2 years of that 3 year guidance.
Thanks for that Robert. And then my way of my follow-up, just a couple of cleanup items on the P and L and on the guide. The impact of Canada on the different line items this quarter and also if there's any what kind of buybacks embedded in the guide and that's all I have. Thank you.
Basically for the year, we just talked to 15 to 20 basis points impact to operating margin. And then for For Canada. For Canada. Yes.
Right. And what about in the quarter, because I think you've given that out in prior quarters?
It was roughly about 20 basis points for the quarter.
Thank you.
And then share repurchase, again we'll target $3,500,000,000 this year in 2017.
Great. Thank you so much for that.
Okay. Thank you, Matt.
Thanks. And as always, thanks for your continued interest in Loews. We look forward to speaking with you again when we report our Q3 results on Tuesday, November 21st, I'm sorry.
Have a great day.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now