Good morning, everyone, and welcome to Lowe's Companies Second Quarter 2017 Earnings Conference Call. This call is being recorded. Please note, if you pressed star one to enter the question queue prior to the start of today's call, your signal did not register. You will need to press star one again to enter the queue. Also, supplemental reference slides are available on lowes.com 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 Niblock, Chairman, President, and Chief Executive Officer, Mr. Rick Damron, Chief Operating Officer, and Mr. Marshall Croom, Chief Financial Officer. Joining during the Q&A session will be Mr. Richard Maltsbarger, Chief Development Officer and President, International, and Mr. Mike McDermott, Chief Customer Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.
Good morning, and thanks for your interest in Lowe's. We delivered second quarter comparable sales growth of 4.5%, driven by improved transaction growth of 9/10 of a percent and a 3.6% increase in average ticket. We are 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 of 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 capitalized on seasonal demand.
We also continued to advance our pro business, driving outperformance in rough plumbing and electrical and lumber and building materials. While we are 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 are pleased with our traffic growth. However, in the second quarter, 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. We also recognize an opportunity to invest in incremental customer-facing hours to ensure that we're providing an excellent customer experience in light of increased traffic. We're taking these decisive actions to ensure our results meet our expectations going forward. We've continued to advance our omni-channel 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 omni-channel 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 in 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 first 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. We remained 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 billion of realized revenue and cost opportunities. For the quarter, we delivered earnings per share of $1.68. These results included a $96 million 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 on our commitment to return excess cash to shareholders, in the quarter, we repurchased $1.25 billion of stock under our share repurchase program and paid $299 million 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 economic 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 second 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 in 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 and DIY customers. We've seen positive customer response to our evolving omni-channel capabilities intended 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. With that, let me turn the call over to Rick.
Thanks, Robert. 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 moved through the quarter, reflected in our significant traffic improvement in June and July. Value perception was a 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 second quarter, 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 the refreshed or remodeled kitchen. 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 or next-day delivery, haul away, 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 SharkBite, the industry leader in plumbing fittings. 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 five ways to save, as well as our omni-channel offering through our growing pro services team and lowesforpros.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 Lowe's. We're seeing the pro engage 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 Services 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 in bulk program with new signage in store, messaging on lowesforpros.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 DIFM 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 touch screen 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 online reviews, and expanded product views, including video content. We're also leveraging our MyLowe's platform to drive brand loyalty. Our simplified military recognition program allows active duty personnel and veterans to register through MyLowe's and receive 10% off their purchases every day. We're also offering free parcel shipping exclusively for MyLowe's members.
Our interior and exterior project specialists are another critical element of our omnichannel 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 omnichannel experience, making it even easier for customers to engage with our in-home project specialists and request services on lowes.com. 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 streamlined management to provide better leadership and accountability.
Specifically, we reduced the number of assistant store managers and eliminated the department manager role and 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 ensure 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 2017, 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 second quarter increased 6.8% to $19.5 billion, 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 billion or 3% of sales growth. As a result of the calendar shift from the 53rd week in fiscal 2016, this year's second quarter included one less week of spring and one more week of summer than last year. While this had no impact on comp sales, it did decrease second quarter total sales growth by approximately $285 million, 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 9 tenths of a percent. Rona was included in the comp calculation for the first time in the month of July.
Looking at the monthly comp trends, comps grew 6 tenths of a 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 and July. During the quarter, we continued to capitalize on market opportunity as we opened four new stores in the U.S., which drove 80 basis points of growth. Gross margin for the second quarter was 34.21% to sales, a decrease of 23 basis points from the second quarter of last year. The decline was primarily the result of promotional activity in excess of benefits from volume improvement and 10 basis points of inflation. SG&A for the quarter was 20.16% of sales, which leveraged 101 basis points.
In last year's second quarter, we recorded an $84 million 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 million 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 million, which leveraged 20 basis points. Operating income increased 98 basis points to 12.2% of sales.
The comparison to the prior year loss on the foreign currency hedge positively impacted operating income by 46 basis points. 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 million, which leveraged 10 basis points. Effective tax rate for the quarter was 36.2%, compared to 38.1% in the second quarter 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 for the quarter.
The gain from the sale of our interest in the Australian joint venture increased EPS by approximately $0.11 for the quarter. Adjusted earnings per share was $1.57, a 14.6% 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 $1.7 billion. Inventory at $11.4 billion, increased $803 million or 7.6% versus the second quarter of last year was primarily driven by appliances to support sales growth, as well as timing associated with seasonal builds. Inventory turnover was four times, an increase of 11 basis points over the second quarter of last year. Asset turnover increased eight basis points to 1.86. Accounts payable of $8.6 billion represented a $953 million increase or 12.4% over the second quarter of last year due to the timing of purchases and terms improvement.
At the end of the second quarter, lease-adjusted debt to EBITDA was 2.21 times. Return on invested capital was 17%. The net impact of the gain from the sale of our interest in the Australian joint venture and prior year charges negatively impacted ROIC by 153 basis points. Looking at the statement of cash flows. We generated strong operating and free cash flow in the quarter of $5.1 billion and $4.6 billion 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 million in dividends. In May, we entered into a $500 million accelerated share repurchase agreement, which settled in the quarter for approximately 6.4 million shares. We also repurchased approximately 9.4 million shares for $750 million through the open market. In total, we repurchased $1.2 billion of stock in the quarter. We have approximately $2.6 billion 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 omni-channel experience. The incremental investments we've made in these areas are paying off, and we'll continue those investments into the second half of 2017.
Second, 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%. Second, the Rona acquisition drives about 2% growth. 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 in incremental expense pressures that I just described. Remember, a full year of Rona results versus roughly seven months last year will pressure operating margin by an estimated 15 to 20 basis points for 2017. The 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-$4.30. Please refer to page 13 in our supplemental reference slide for a summary of adjustments as you compare 2017 to 2016.
We are forecasting cash flows from operations to be approximately $5.9 billion, and capital expenditures of approximately $1.4 billion. This results in estimated free cash flow of approximately $4.5 billion for 2017. Our guidance does assume approximately $3.5 billion in share repurchases for 2017. Regina, we're now ready for questions.
To ask a question, press star one on your telephone keypad. To withdraw your question, press the pound key. In order to allow questions from as many individuals as possible, please limit yourself to one question and one follow-up. Our first question comes from the line of Peter Benedict with Robert W. Baird. Please go ahead.
Hi, guys. Thanks for taking the question. 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 time frames, 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. 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. As you guys think about, I know back at the December meeting, the three-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. Curious, do we need to rethink the longer-term algo a little bit here? Maybe assume a little bit more OpEx, a little less flow through. Is that how we should be thinking about it? Just curious your thoughts here.
Yeah. Peter, this is Marshall. We are maintaining our targets that we previously communicated back in December. Obviously, this year won't hit those targets. Productivity is still alive and well, and it's actually helping us offset the incremental investments we're making this year. We know we've got more runway to go as we move forward. 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. Longer term, we've got other productivity measures for optimizing labor, leveraging physical cost, reducing indirect spend, lower depreciation, and enhancing profitability in Canada.
Yep. Peter, this is Robert. As Marshall Croom outlined, we're still holding to our three-year guidelines that we gave you last year, and productivity's 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 Michael 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. We think we've got a better opportunity to capitalize on that.
It was what Rick Damron and his team are doing is saying, "Let's hold the labor that we normally would've 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." That's what we're doing, is we're reinvesting some of the benefits of productivity into what we feel is a strong macro environment.
Okay. Makes sense. Thanks so much, guys. Good luck.
Yep.
Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
This is Joshua Gutman for Simeon. On gross margins, what's going to enable you to make numbers in the back half? It looks like gross is expected to be up. Just curious your thoughts there.
This is Michael McDermott. Obviously, as we communicated at the end of the first quarter, 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 order 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 tail items to make sure we're harvesting profitability to offset that investment.
We've got a lot of work underway in the merchandising team to balance the improvement of value perception with our cost position.
The long-term EBIT margin guidance of 11.2%, it's a pretty substantial expansion from what's expected to be in 2017. How do investors gain confidence in that margin opportunity? Do you think this happens in the back half or in 2018?
Just recognizing that those are three-year targets, it won't be all accomplished in 2017. It'll be baked into the productivity opportunities we have moving forward. Leveraging the traffic driver with marketing optimization. Focusing on optimizing labor as we move forward. That will continue to be an ongoing discipline. Even with the reinvestment in back half of the year, we'll still leverage payroll in 2017. Excited about the other opportunities we have from a productivity standpoint to drive towards that 11.2% EBIT growth, that target that we set. Obviously very excited with what we have in the pro space with the Maintenance Supply Headquarters, an 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 J.P. Morgan. Please go ahead.
Thanks and good morning. Just curious, how would you think about the shift of the spring business in 2017 between the first quarter and the second quarter? To play devil's advocate, we've heard others such as Tractor Supply and Scotts talk about a very strong July. 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 feel good as we take a look at our July performance was very well-balanced across categories, we certainly enjoyed positive performance across all products and outside and inside indoor categories. It was not all isolated to just seasonal in the June and July timeframe. To that same message, we did enjoy an extended spring. Particularly our lawn and garden business did perform above the average, 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, we feel really good about our performance of our private label, Sta-Green fertilizer, seed, and soil products. Innovation as well as market demand served us well.
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. You're also stepping up the commitment on the labor hours. 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?
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, 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. 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, Christopher.
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.
Yeah, 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. Recognize that we probably had an opportunity to have provided a better customer experience and even better capitalize on the trends. Our belief is that we hold onto these labor hours that we've got, people that are trained in the stores, that Rick and his team have trained.
As we get into the fall, we'll continue to monitor that as Mike and his team work to even further optimize our marketing message. 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. We hope then that resonates into capturing additional sales from the traffic that the marketing team's driving into our stores.
As you look at you affirmed the full-year comp guidance of three and a half. Does this investment, should we believe or expect that this could create upside to that sales guidance if you get payback from this? Or is this more defensive of defending your ability to just get to that original target?
Yeah, I think we're still early in the process. Obviously, we're excited about the trends that we're seeing. We're investing because, one, first of all, first and foremost, to deliver our guidance for the year because we've been just slightly short of that for the first half of the year. It's to make up the shortfall and to the extent that we execute well, hopefully some upside to those numbers. We've not baked that in, so.
Secondly, in terms of the point of emphasis, I guess I came into the year hearing the productivity focus, the 11 two margin target, and seeing you making decisions that seem more of 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 to the comments regarding price optimization and even labor optimization while labor's being invested here. I guess the central goal, Robert, is the focus improving the sales growth or is the focus improving profitability?
I think it's both. As I indicated, Eric, we've had actually great success from our productivity efforts. We've still got a lot more work to do there. We've said all along that productivity is not just about cutting costs, it's also investing back into areas that matter most to the customer. We think, as we said, we knew we had an opportunity to improve our marketing. As you know, we've had new tools and we've continued to better optimize that. The team's working to get better leverage out of our marketing spend. We saw an opportunity there. We're pleased with the, like I said, the online performance, the traffic we're driving into our stores, and we think there's an opportunity to even capitalize further on that.
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, we think it allows us to achieve those three-year targets that we laid out.
Great. 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 second quarter comps were disrupted by the store staffing that you've outlined. Can we infer from the sharp acceleration in your July comp that you think those issues are largely behind you? 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. 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 top managers and their attrition into permanent roles has actually gone faster than we had originally budgeted. We knew there was some disruption. 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 when we laid out our guidance for the year, thus the revisions in guidance.
More than anything, the work that we've done, as I've said 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. 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. 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 our 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. I think those changes are beginning to pay off, and it shows in our June and July performance. Our teams remained 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.
We'll continue to make sure that we support them with the 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. 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 Michael McDermott. Well, certainly we don't take our number one position on appliances or our continued growth and 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 and what they desire. We're 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. Now in the second quarter, we grew at three 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. 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. 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. Good morning. My question is around conversion. I know you guys have been able to track conversion pretty well historically. Could 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.
Yeah. 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. 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. We see that as an opportunity.
Thus 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. We feel good with where we are. We still know there's opportunity for us to continue to get better, 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 lowes.com perspective, we saw balanced improvement and strength actually in traffic conversion and ticket across all product categories. As it relates to the omnichannel experience, we really look at conversion both in-store and online. To Rick's points, we'll continue to invest there to make sure it improves.
That's helpful. 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. There's no change in sales. Is the change just SG&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. That's putting pressure on the gross margin line for the year. It actually went from about 20 basis points of drag to about 30 basis points, to think about that from the year standpoint.
Okay, understood. 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? 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.
Yeah. This is Michael McDermott again. We certainly saw an opportunity in the first quarter to get more competitive as it relates to our promotional strategy, specifically around holidays. 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. 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. 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. 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 Michael Baker with Deutsche Bank. Please go ahead.
Thanks. I just want to clarify a little bit, this quarter, what happened. You said you're below plan year to date, and it seems like the sales are on plan, correct me if I'm wrong. Is it that the gross margins were below plan year to date, or expenses are above plan year to date? 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. I'm just trying to figure out how expenses overran. Is it really just because you ramped up so much in June and 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. We're still in the process of working towards that. As I said, as we talked about on the first quarter call, and Mike had indicated we had an opportunity to, one, enhance our marketing message, things like making sure we're highlighting the opening price points at the appropriate time. We also saw opportunity to invest more in digital, and that's part of what drove our online performance. We had great payroll leverage in the second quarter. We think there's an opportunity to invest part of that to capitalize on the traffic that the marketing team is driving in. Then from a SG&A standpoint, I'll let Marshall talk about.
He talked about some of the one-time drivers from some of the specific things that were above what we had planned in the quarter and for the back half of the year, so.
Yes, while we leveraged retail operating hours, we did have the incremental advertising spend, along with a couple of other items I alluded to, some of the pressure we'll see in the back half with casualty claims, workers' comp claims, and cost there. We saw a little bit of that in the second quarter. Also as we're being competitive in the marketplace from an appliance standpoint, a little pressure on delivering fleet. The bigger drivers are in the back half are 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?
We came in with a plan, I think it was roughly 35 stores. We since have gone through and scrubbed and evaluated certain locations, and some of them we're just deciding not to open at this time or we'll defer until a later point in time.
We have an approximate number, Mike. We've had a couple that have slid into our 2018. We've had a couple sites that we chose not to move forward with. We went ahead and updated the guidance on that but didn't make any change to our sales guidance.
Were those big box stores, Canada, Orchard Supply? Just curious which ones are sliding.
This is Richard. It was a relative mix, primarily within the Canadian market and our Orchard operation is where we decided to either postpone and/or observe some of the changes that we're making before we proceed. As Robert said, we have taken a few sites where we've made different decisions than we had previously estimated last fall.
Understood. I 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 above the company average recently, though this quarter was a bit softer. Are there any specific call-outs that would explain the underperformance of this category?
Flooring continues to be an important category for us. We were certainly positive in the category. Actually hosted 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. 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. 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. Most of it will be spent into those categories.
Thank you very much.
Regina, we have time for one more question.
Our final question comes from the line of Matt Fassler with Goldman Sachs. Please go ahead.
Good morning, thanks a lot for squeezing me in. My first question relates to juxtaposing the recent results and the guide for this year against your reiterated long-term guidance. 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, though, looking for the kind of incremental margins that the long-term guide calls for is ambitious in an environment where you need to invest and on the 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 just think, 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. We have a better line of sight to not only productivity efforts that we're driving this year, but in 2018 and 2019 above and beyond that. Also looking at what we're leveraging from 2017 into 2018 and 2019 from capability builds to how we're leveraging the growth. Continuing to take a look at our optimal 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. At this time, we're comfortable with those longer-term targets in the productivity at this point in time. If we have better line of sight to revise that, we'll provide that on an upcoming call.
Thanks for that. oh, 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 everybody gets settled into the new roles. The incremental work we're doing from a marketing standpoint as we continue to refine and get better at that. I think there's opportunity for additional leverage against those things as we settle into the new cadence there. 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. By way of my follow-up, just a couple clean-up items on the P&L and on the guide. The impact of Canada on the different line items this quarter, and also what kind of buybacks embedded in the guide, and that's all I have. Thank you.
Basically, for the year, we just talked to 15-20 basis points impact to operating margin. For-
For Canada.
For Canada.
Right. What about in the quarter? Because I think you'd given that out in prior quarters.
It was roughly about 20 basis points for the quarter.
Thank you.
Share repurchase, again, we'll target $3.5 billion this year in 2017.
Great. Thank you so much for that.
Okay. Thank you, Matt.
Thanks. As always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our third quarter results on Tuesday, November 24th. 21st, I'm sorry. Have a great day.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.