Good morning everyone, welcome to Lowe's Companies' second quarter 2016 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 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, 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. Mike Jones, Chief Customer Officer, Mr. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.
Good morning, thanks for your interest in Lowe's. We delivered a solid first half of the year and made continued progress against our key strategic priorities, providing better omni-channel experiences to more closely connect with customers, deepening our relationship with the pro customer, and driving productivity and profitability. We continue to generate strong cash flows, enabling us to strategically invest in the business while returning capital to our shareholders. In the first six months of 2016, we delivered comparable sales growth of 4.4%, in line with our plan. In the second quarter, comparable sales grew 2%, driven primarily by a 1.7% increase in average ticket. As we've mentioned before, the timing of spring impacts the first half of the year. This year, the season began with robust demand for outdoor projects. Customers took advantage of favorable weather conditions in the first quarter to complete those projects.
In the second quarter, we saw more strength in indoor project demand, leading to strong performance in lumber and building materials, kitchens, tools and hardware, and fashion fixtures. Our seasonal living business also performed well in the second quarter, driven predominantly by air conditioner and patio furniture sales. Healthy macro fundamentals, our project inspiration and expertise, and targeted promotions continued to drive demand, resulting in positive comps in 10 of 13 product categories. We were also pleased with the work we've done to further advance our product and service offerings for the pro customer. The strategic investments we've made to build deeper relationships with the pro are allowing us to capitalize on strong pro demand, driven by a favorable macro backdrop, as our pro business continued to perform well above the company average.
Today, we have a strong foundation for the pro customer, including dedicated service in the store, solid inventory depth, field-based pro account executives, and a national accounts team. Our lowesforpros.com website, relaunched in the second quarter of last year, continues to gain traction. We will continue to build on this strong foundation by incorporating the feedback we receive from pros and our pro services team to constantly improve the customer experience and deepen our relationships with this important customer segment. From a geographic perspective, our U.S. home improvement business achieved 1.9% comps for the quarter, with all regions of the South and the West comping positively. Our northern regions were challenged by an abbreviated spring, which hindered outdoor activity. We continued our strong performance in international markets, including double-digit comps in Canada and Mexico in local currency.
We closed the RONA acquisition on May 20th, and I'm pleased with the progress of our integration. By bringing together Lowe's global scale and resources with RONA's local expertise, we can enhance relevance and expand customer reach, ultimately enhancing our competitiveness and profitability in Canada, establishing a strong presence in Quebec, and positioning us to capitalize on the significant long-term potential of the market. We welcome RONA's talented team into the Lowe's family. For the quarter, operating margin contracted 13 basis points, and we delivered earnings per share of $1.31, a 9% increase over last year's second quarter. These results include an $84 million loss on the foreign currency hedge entered into in advance of the RONA acquisition. This loss had a $0.06 impact on earnings per share for the quarter.
Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $1.2 billion of stock under our share repurchase program and paid $251 million in dividends. Looking ahead to the second half of 2016, the outlook for the home improvement industry remains positive. Persistent gains in the job market and disposable income growth that continues to outpace the economy should further contribute to solid growth in consumer spending. The outlook for housing remains bright, with strong home sales and construction in the first half of the year poised to benefit growth in the second half of the year. With home value appreciation expected to persist and incomes continuing to rise, we expect homeowners to be motivated to spend on their homes. Overall, strong consumer housing fundamentals should continue to benefit the home improvement industry. Our second quarter Consumer Sentiment Survey shows similar trends.
Consumers continue to view their personal finances and home values favorably, with half of homeowners believing the value of their home is increasing. We believe this positive sentiment around home values is driving home improvement spending. Consequently, we continue to see home improvement spending outpace overall consumer spending, as well as positive home improvement project intentions, including strong engagement in big-ticket discretionary projects. Our key priorities in 2016 are focused on leveraging this favorable home improvement backdrop. We are pursuing further top-line growth by differentiating ourselves through better omni-channel customer experiences that make us the project authority and continuing to focus on improving our product and service offering for the pro customer. At the same time, we continue to focus on driving productivity and profitability. The execution of our strategic priorities, along with a solid macroeconomic backdrop, gives us confidence in our business outlook for 2016.
Before I close, I would like to express my appreciation for our employees' unwavering commitment to serving customers. In particular, I would like to thank those Lowe's team members who worked diligently to assist our neighbors that were impacted by the historic flooding in West Virginia and those that are now assisting our neighbors in Louisiana. In circumstances like these, we ship truckloads of critically needed supplies to affected areas, and many of our employees pledge their time to help individuals in need. Lowe's has also donated a total of $750,000 to the American Red Cross to assist with the relief efforts. Thanks again for your interest. With that, let me turn the call over to Mike.
Thanks, Robert. Good morning, everyone. In the second quarter, we achieved positive comps in 10 of 14 regions, with all regions in the South and West comping positively. This strength was offset by weakness in our northern regions. We also posted positive comps in 10 of 13 product categories. While comps were below expectation for the second quarter, we delivered a solid first half of the year in line with our plan. As Robert mentioned, the season kicked off with stronger than expected outdoor project demand as customers took advantage of favorable weather bolstered by a strong macroeconomic backdrop. We drove traffic in Q1 through compelling offers designed to take advantage of the early spring project demand, leveraging enhanced digital capabilities to reach the spring customer earlier in the season.
We moved into Q2, we saw softer comps in May, stemming both from Q1 project pull forward and unfavorable weather. Temperatures below normal in our northern regions prevented customers from enjoying outdoor projects. We moved into June and July, traffic rebounded, and we capitalized on stronger demand for indoor projects and customers' continued desire to invest in their homes with our project inspiration and expertise and targeted promotions. This contributed to stronger performance in interior categories such as kitchens and fashion fixtures. We also drove solid comps in appliances, and for the eighth time in the last nine years, J.D. Power and Associates ranked Lowe's highest in customer satisfaction among appliance retailers based on our knowledgeable sales specialists, breadth of assortment, competitive pricing, and delivery.
To take advantage of increasing demand for kitchen projects and to ensure we provide a more holistic solution to a simple kitchen refresh or a full remodel, we display our kitchen solutions, including cabinets and countertops, immediately adjacent to our appliance offering so customers can both envision and design their dream kitchens. This quarter, we drove above-average comps in kitchens through a combination of project inspiration and expertise, our investment in project specialists who meet the customers in their homes, and targeted promotions. Within fashion fixtures, we leverage our customer experience design capabilities to optimize our lighting reset, featuring an expanded collection of lighting styles, finishes, and brands, including the expansion of Kichler Lighting, the largest lighting showroom brand in the industry, along with Progress Lighting and Quoizel Lighting.
Adding to our attractive product offering, we also simplified the presentation, grouping lighting fixtures by style and collection to provide a cohesive decorating solution and make selection easier. Customers have responded well, driving strong comps and fashion fixtures. We've also expanded this enhanced display approach to ceiling fans. Our shower door reset also leverages our customer experience design capabilities, enhancing our shower door offering by designing a complete solution for customer needs, providing a great line design, offering innovation and expanded selection, and product delivery and installation services. In doing so, we're differentiating ourselves as the retail destination for bath and refresh, as well as developing a best-in-class in-store customer experiences that can also serve as a selling center for pros and our project specialist teams. We're also efficiently leveraging our network of regional distribution centers to offer customers product when and where they want it.
Our seasonal living business also performed well in Q2, driven by robust air conditioner sales due to warmer than average temperatures and patio furniture and fashions. We also saw continued strong demand from the pro customer with comps well above the company average. Once again, proactivity drove solid comps in lumber and building materials. Tools and hardware also benefited from increased project activity from both DIY and pro customers. We're able to capitalize on this demand by improving our tool brand assortment with exclusives like Hitachi and BOSTITCH, the number 1 and number 2 brands in pneumatics, and the extension of brands like Vaughan, along with our extensive private label line of Kobalt tools.
We're proud to announce the return of yet another destination tool brand to Lowe's, MARSHALLTOWN, a trusted pro brand and the leading supplier of cement masonry tools, which will roll out to our stores in the upcoming weeks. We also continue to focus on our strategic priorities, leveraging our omni-channel capabilities to help customers achieve great project results. Customers can engage with our associates in-store for expert advice, our content on lowes.com for inspiration, our contact center for ongoing support, or our project specialists who work with them in their homes. This quarter, we launched our new lowes.com site, advancing our online shopping experience with optimized functionality and display for touch screen devices to support a better mobile experience, improve product and content recommendations, refine search algorithms, improve click-to-chat capabilities, larger project images, and expanded product views, including video content.
As anticipated, following the launch, we had a brief period of disruption as customers increased their familiarity with the redesigned site. We are now seeing improved performance and have received great customer feedback on the new site. Our interior and exterior project specialists are another critical element of our omni-channel strategy and a differentiated capability in capturing and serving project demand. They meet with customers in their homes to design, plan, and manage their home improvement projects. Our exterior project specialists are currently available across all U.S. home improvement stores, and we're expanding our interior project specialists program, reaching all U.S. stores by the end of this year. We're very pleased with our in-home sales program performance with above-average comp growth again this quarter.
Our expertise in project inspiration, design, advice, and execution are setting us apart as the project authority in home improvement at a time when consumers continue to demonstrate a desire to invest in their homes. We continue to advance our pro business, driving comps well above the company average by continuing to optimize our product and service offering to better serve the pro customer. Beyond improvements in our tools offering, we have also strengthened our portfolio of pro-focused brands with the addition of GAF Roofing, Owens Corning Insulation, Lennox HVAC, Masonite entry and interior doors, and Hubbell residential wiring devices. We are also working closely with our field-based merchandising team to identify local market opportunities and brands to further optimize the offering for the pro customer.
With the relaunch of lowesforpros.com last year, we've also made it easy for pros to manage multiple properties and quickly and easily purchase items nationwide. Thus far, we've been pleased with our program rollout, given positive customer response and results which have exceeded our expectations. We're also serving a pro customer through our Account Executive Pro Services or AEPs. AEPs work with larger regional customers to help them order and replenish products across multiple geographies and locations. Our AEPs have been very effective in growing our business with larger pro customers. We currently have over 200 pro outside sales representatives in the field and continue to be very pleased with the program's results. Excluding the AEPs we added this year, we saw a double-digit growth in AEP sales, which contributed to the strong pro comp growth in the quarter.
Building on the success, we continue to grow the program, adding additional AEPs to continue capturing market opportunity with large pro customers. Our focus on further strengthening our portfolio of brands, continuing to build our omni-channel offering through our growing pro services team, and our relaunch of lowesforpros.com are all a part of a broader commitment to build on our strong foundation with the pro. In addition to our efforts to drive top-line growth, we continue to focus on driving productivity and profitability. For the quarter, gross margin declined three basis points. Our operating performance drove 17 basis points of improvement with the result of our ongoing line review process. The RONA transaction negatively impacted gross margin by 20 basis points. Bob will provide the details in a moment. As you can see, we had a solid first half of the year.
As we look forward to the second half of 2016, we believe we are well positioned to capitalize on a favorable macroeconomic backdrop for the home improvement industry, we continue to execute our strategic priorities and make progress on our initiatives to drive top-line growth, improve productivity, and profitability. Thank you for your interest in Lowe's, I'll now turn the call over to Bob.
Thanks, Mike. Good morning, everyone. This is the first quarter that we're including RONA in our financial results. While we closed the acquisition May 20, our second quarter includes only five weeks of RONA results as they are consolidated on a one-month lag. In conjunction with the transaction, RONA's operating results are adjusted to reflect purchase accounting as well as to align their accounting policies with U.S. general accepted accounting principles. Regarding RONA, they will be included in our comp sales calculation after we anniversary the transaction in the second quarter of 2017. On to our Q2 results. Sales for the second quarter were $18.3 billion, an increase of 5.3%. Total customer transactions grew 3.7%, with RONA accounting for about 75% of the increase, and total average ticket increased 1.6% to $68.91.
The sales increase was driven by the addition of RONA, an increase in comp sales, and new stores. For Q2, $461 million, or 2.7% of the sales growth, came from RONA. New stores contributed approximately 60 basis points of the sales growth. Comp sales were 2%, driven by comp average ticket increase of 1.7% and comp transactions growth of 0.3%. Looking at monthly trends, comps were negative 2.8% in May, positive 5% in June, and positive 3.8% in July. The timing of Memorial Day and July 4 versus last year had fairly significant impacts on the monthly comps. We estimate that normalizing for the timing of the holidays, comps would have been positive all three months, with comps of 1.7% in May, 2% in June and 2.3% in July. We estimate that weather negatively impacted comp sales in the quarter by 110 basis points.
Year-to-date sales of $33.5 billion were up 6.4% versus the first half of 2015, driven by a 4.4% increase in comp sales, 1.5% from RONA and 0.5% from new stores. Gross margin for the second quarter was 34.44% of sales, which decreased three basis points from Q2 last year. Gross margin was negatively impacted by the RONA transaction due to both purchase accounting adjustments and mix. The purchase accounting adjustments were required to write the opening inventory balance up to fair value. As this product is sold, the higher cost of goods hurt gross margin. The mix impact was a function of RONA's lower gross margin rate. In the quarter, these items negatively impacted gross margin by 20 basis points, which more than offset 15 basis points of benefit from value improvement.
Year-to-date gross margin was 34.71% of sales, a decrease of 21 basis points from the first half of 2015. SG&A for Q2 was 21.2% of sales, which deleveraged 26 basis points. The deleverage was primarily driven by a foreign currency transaction loss and store payroll. As mentioned on our first quarter call, in anticipation of the RONA acquisition, we entered into a foreign currency hedge to lock in the purchase price in U.S. dollars. In the first quarter, we recorded a $160 million unrealized gain. In the second quarter, the Canadian dollar strengthened, resulting in an $84 million loss. This item negatively impacted Q2 SG&A by 45 basis points. In the quarter, store payroll deleveraged 30 basis points driven by wage pressure as well as lower-than-planned sales. These items were partially offset by 24 basis points of leverage in bonus and 16 basis points of leverage in employee insurance.
Year-to-date SG&A was 21.69% of sales, which leveraged 70 basis points versus the first half of 2015. Depreciation for the quarter was $366 million, which was 2% of sales and leveraged 16 basis points. In Q2, earnings before interest and taxes or EBIT decreased 13 basis points to 11.24% of sales. The RONA impacts to gross margin and the foreign currency hedge negatively impacted EBIT by 65 basis points in the quarter. For the first half of 2016, EBIT was 10.86% of sales, which was 68 basis points higher than the same period last year. For the quarter, interest expense was $166 million. The effective tax rate for the quarter was 38.1%. Earnings per share was $1.31 for the second quarter, an increase of 9.2% over last year. The foreign currency hedge negatively impacted earnings by $0.06 per share.
For the first six months of 2016, earnings per share were $2.29, representing a 20.5% increase over the first half of 2015. The foreign currency hedge aided earnings per share by $0.05 in the first half of the year. To a few items in the balance sheet, starting with assets. Cash and cash equivalents at the end of the quarter was $2 billion. Inventory at $10.6 billion increased $900 million, or 9.3% versus Q2 last year. Approximately 85% of the increase relates to the addition of RONA. Inventory turnover was 3.89 times, essentially flat to last year. Asset turnover increased four basis points to 1.78. Moving on to the liability section of the balance sheet. Accounts payable of $7.7 billion represented an 8% increase over Q2 last year due to the timing of purchases year-over-year, terms improvement, as well as the addition of RONA.
At the end of the second quarter, lease-adjusted debt-to-EBITDAR was 2.45 times. Return on invested capital was 15%. The net impact of last year's non-cash impairment charge related to our Australian joint venture and this year's foreign currency hedge gain hurt ROIC by 194 basis points. Looking at the statement of cash flows. Year-to-date operating cash flow was $4.6 billion and capital expenditures were $490 million, resulting in free cash flow of just over $4.1 billion, which is up 15% to last year. In May, we entered into a $500 million accelerated share repurchase agreement. At this point, we expect to receive approximately 6.3 million shares, the ultimate number of shares will be determined upon completion of the program in the third quarter. We also repurchased approximately 8.9 million shares for $700 million through the open market. In total, we repurchased $1.2 billion of stock in the quarter.
We have approximately $1.2 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, a reminder, fiscal 2016 will include an extra week in the fourth quarter for a total of 14 weeks and 53 weeks for the year. Second, since we've closed the RONA acquisition, our outlook now includes the impact of the transaction as well as their operating performance. Finally, the first half of 2016 came in essentially on plan, and we are confident in our ability to achieve our goals for the year. As a result, the only changes to our outlook are related to RONA. Let's get into the outlook. As Robert noted, the forecast for home improvement industry remains positive. For 2016, we expect a total sales increase of approximately 10%, driven by a variety of factors.
First, we are forecasting a comp sales increase of 4%. Second, we expect RONA to contribute 4% to sales growth. Next, we estimate that the 53rd week will aid total sales by 1.5%. Lastly, we plan to open approximately 45 stores, which adds five-tenths of 1%. For the EBIT growth rate, we are excluding the impact of last year's Australian joint venture impairment charge and this year's net FX hedge gain. We believe excluding these large one-time items is a better representation of our operating performance. We're anticipating an EBIT increase of approximately 50 basis points. While the acquisition of RONA adds EBIT dollars, there is a negative impact to the percent of sales. There are two factors causing this. First, RONA's EBIT is lower as a percent of sales. As part of our synergy case, we expect that RONA's EBIT will improve over time.
Second are the impacts of purchase accounting I noted a moment ago. This primarily hurts 2016, with minimal impact in 2017 and beyond. Combined, these items pressure EBIT by 35 basis points for the year. The negative impacts to Q3 and Q4 are estimated to be 60 and 50 basis points respectively. For the year, we expect EBIT dollars to grow by approximately 16%. The effective tax rate is expected to be 38.1%. For the year, on a GAAP basis, we expect earnings per share of approximately $4.06. We are on target to hit our original 2016 operating plan. I'd like to walk you through our EPS outlook, starting with the $4 per share we communicated on the Q4 call in February. From here, we add the net gain from the foreign currency hedge of $0.05.
Lastly, we add $0.01 as we expect RONA's operating results to more than offset the acquisition and integration costs. As a result, we do expect the RONA transaction will be modestly accretive for the year. We are forecasting cash flow from operations to be approximately $5.6 billion. Our forecast for capital expenditures is approximately $1.5 billion. This results in an estimated free cash flow of $4.1 billion for 2016. Our guidance assumes approximately $3.5 billion in share repurchases for 2016. Regina, we are now ready for questions.
To ask a question, press *1 on your telephone keypad. To withdraw your question, press the # 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 Michael Lasser with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. Robert, are you surprised that the business didn't sequentially improve more than it did, adjusting for some of the calendar shifts over the course of the quarter, given the demand pull forward that you saw earlier in the year? Based on that, what's still inspiring your confidence that business can accelerate to 3%-4% comps the back half of the year?
Well, Michael, if you look at the adjusted calendar numbers that Bob gave you, we certainly saw the sequential improvement in comps over the quarter. If you also look at the 40% of our business in the second quarter is outdoor seasonal products. When you think about the impact that weather had, the rain impact we had in May, obviously, the late spring, which impacted the North and the extreme heat that we ran into later in the quarter. We still saw sequential improvement when we look at everything from talking to our consumer sentiment survey, everything we're hearing from the consumer, they are still highly engaged in discretionary spending around the home, driven by how they feel about the overall housing market and the value of their home continuing to increase.
When we look at the macroeconomic environment and look at the impacts that weather had on our particular business in the quarter, it still sets us up incredibly well. I'll get Mike to jump in on some of the things that he thinks is going to drive the excitement for us on our outlook for the back half of the year and what we're focused on.
Absolutely. The macro backdrop certainly is constructive. Consumers wanting us to do projects feels good. As you get into the back half, you start to lean more towards interior projects. Certainly, less weather impact on interior projects. We're positioned to take advantage on some of the strong demand in the back half with expected interior projects. We've spoken about our Project Specialist Program being expanded to all stores. I spoke earlier about the investment that we've made in digital. I like how we're positioned from a product perspective with our strength in appliances, our full vignettes, our delivery, all brands, and installation. I like how we're positioned in fashion lighting with our three-brand strategy around Kichler Progress and Quoizel. Our flooring lineup is second to none with Pergo Laminate, Cali Bamboo, and our STAINMASTER brand. We like our position in paint.
We've talked a lot about Sherwin-Williams, Valspar, and PPG Olympic, the exclusives that we have there. We've done a lot of work around stain, bringing back Cabot and expanding our Minwax. If you think about the pro business, we continue to be more relevant with pro with the return of brands like MARSHALLTOWN on top of those other brands that we took back and spoke to early in the year. We think we're well-positioned going into the second half. We think that macro is going to play to have made a lot of investments, in particular on interior strength and on some of that demand.
That's helpful. My follow-up question is, over the last few quarters, you've engaged in targeted promotions. What have you learned from that, and how is that going to inform your promotional posture moving into the second half of the year and beyond? Thank you so much.
Sure. Absolutely. Well, first, we continue to learn. Both the promotional landscape as well as marketing, digital marketing continue to evolve. We continue to utilize media mix modeling so that we can optimize every dollar spent against the best return. We continue to migrate from print advertising and analog into digital. We're not seeing a fundamental shift in promotional cadence or promotional depth. The market remains very rational in terms of promotions. What we are seeing are new and enhanced techniques on getting our promotions in front of our customers. As an example, we have a very strong social media footprint on Snapchat, Facebook, on Instagram. In the second quarter, we drove 27 million impressions on social media alone, and that's on top of 32 million impressions in the first quarter.
With our digital capabilities and our ability to continue to flex promotions, we're finding we can get the right promotion in front of the customer at the right time. We're learning a lot. We continue to evolve it, and it's an evolving space.
Thank you so much, and good luck with the rest of the year.
Thanks, Michael.
Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Thanks. Good morning. Can you share with us the spread between some of the weather-impacted markets and the non? I think you mentioned, just to clarify, 110 basis point shortfall from weather. I don't know if you can share maybe the percentage of markets where there was weather, but I don't know if it gets to something like a 400 basis point-500 basis point negative impact in weather markets.
Sure, Simeon, I'll start. Robert talked about the 40% of outdoor/seasonal business. That certainly is a strength of ours. While we experience the same weather as everybody else, we're disproportionately impacted by the strength in those categories. As we talked about Q1, we had weather favorability of 150 basis points that came back in the second quarter. In Mike's comments, he talked about the strength we saw in the West as well as positive comps in the South. Certainly, we had pressure up in the Northeast, which contributed most of the pressure associated with weather.
Yeah. Simeon, this is Robert. If you look at part of your question, the spread. The West was our best-performing area of the country, best-performing division. As we said, the North was our weakest-performing division. There was almost a 500 basis point spread in comps between those two divisions. Hopefully that addresses the spread questions you were talking about from what we saw from market to market.
Yep. Okay. I guess a follow-on to that, you said that, I guess, if it was 110 basis points, I presume you were expecting to do a three. A three in on top of, I guess, next to the seven. The first half, you were looking more at a five, compared to the guidance of four. Is that fair? Do you think about the back half in a similar way where, you've set up and if things go well, there could be some upside to that?
Yeah. Regarding the first half, Simeon, we delivered a 4.4 comp, which was essentially on plan for the first half. Q1 came in a little better, based on the weather benefits. Second quarter came in a little bit worse, based on the weather drag. We're on plan for the first half of the year. As we think about the second half, we essentially are looking at a three and a half comp in Q3 and Q4 to achieve the 4% comp for the year. We feel comfortable and confident with our ability to achieve that.
Okay, thanks.
Thank you.
Your next question comes from the line of Matt Fassler with Goldman Sachs. Please go ahead.
Thanks a lot. Good morning. I'd like to follow up on sales, if we could. I guess my question is to the extent that the impact of weather peaked in May, and abated gradually through the quarter, and you had the heat driving air conditioner sales, why don't you think the recovery on a calendar-adjusted basis was more rapid? Also within that, did you see it was all of the recovery, the sequential recovery on an adjusted basis, a function of traffic? If traffic recovered more, did tickets subside during that period of time?
From a traffic and ticket perspective, the performance was relatively flat across the months of the fiscal period, similar to the comp performance. The adjusted figures of 1.7, two, and 2.3, fairly narrow band. We saw ticket and traffic perform largely consistent for the three months of the period.
Just by way of follow-up, I understand the macros are where they are and lots of tailwinds pointing in your direction, given that none of the three months of Q2 on an adjusted basis were a parity with the second half comp guide. Is there anything you're seeing today, here at the outset of Q3, that's reinforcing your confidence in that three and a half for the second half of the year?
With the start to Q3, we are confident in our ability to achieve the 2016 targets. Certainly, there's much less potential for weather impact in Q3. Based on the sales volume in Q4, there is always potential for weather, but it's less of an impact. We talked about some modest disruption associated with the lowes.com platform in Q2. That's behind us. We're seeing really strong performance subsequent to that. The other thing I would suggest, Matt, is we've had some modest deflation pressure on sales in the first half of the year. More so in Q1, less so in Q2. That should flip with strength in lumber prices to modest inflation in the second half of the year.
Got it. Thank you so much.
Thanks, Matt.
Your next question comes from the line of Christopher Horvers with JP Morgan. Please go ahead.
Thanks. Good morning. Just looking at the category performance, you had weakness in millwork, rough plumbing and electrical, paint, really core repair and remodel project categories. How should we think about that, and think about the favorability of weather? Was that a pull forward into one Q? Also, did you actually see some pull forward into 4Q 2015 last year, and this is just normalization, and we're going to get back to stronger trend? On that, it sounds like you're expecting 3.5% in both the third quarter and the fourth quarter. Do you think that that fourth quarter could be a hidden tough weather comparison considering that category performance?
Let me take the first part of that on the category performance. Where we saw pressure with the categories below average, in most cases, it's because of outdoor sales. In outdoor power equipment, as example, we had very soft mower sales. In millwork, we had soft doors and windows sales. However, with some of our interior millwork categories, we actually saw very robust sales. In paint, we had soft sales in exterior coatings, but positive comps in interior coatings. Another way to think about it, if I think about big-ticket strength, as an example, in the second quarter, kitchen cabinets actually showed strength. Chandeliers and vanity lightings were up double digit. Wood and vinyl flooring was up double digit. Bath vanities were up double digit. We had some exterior projects that were up quite strong as well.
Shingles were up double digits, boardings were up double digits, fencing was up high single digits. Where we did see real softness was in exterior projects, in particular the type that DIY customers would take on. The macroeconomics feel pretty good. Rough plumbing and rough electric, we had deflation, in particular around copper, that impacted the category.
Chris-
Okay. Go ahead, sorry.
Potential pressure from weather. In looking at the second half, our comparisons in Q3 are 4.6% and Q4 5.2%. Not much of a difference in our comparisons we're going up against in the second half 2015. Based on the factors that Mike described, the efforts with the pro, our replatforming lowes.com site, the progress we're making on Lowe's for Pros, enhancing our PSI offering and the reset you described, we feel confident in the second half of the year.
Okay. As a follow-up, could you, I'm not sure if you said this, but could you quantify what you thought the lowes.com disruption was? On the other side, perhaps what you thought air conditioners lifted comps in the second quarter. Thank you.
Chris, the estimated impact of the .com disruption in Q was roughly 25 basis points. As far as ACs, I don't have the Actually, I do have that impact. That's roughly 20 basis points of impact to the second quarter.
Thank you.
Thanks, Chris.
Your next question comes from the line of Greg Melich with Evercore ISI. Please go ahead.
Hi, thanks. I wanted just another sales follow-up and then understand RONA a little bit better. Were lowes.com sales down in the quarter when you said that 25 basis points disruption, or was it just less gross than you expected? Also, just to be clear, are we currently this quarter running in that sort of 3%-4% plan that you have for the second half?
Yeah, Greg, this is Rick. On the lowes.com performance, we still had a solid double-digit comp performance on the platform at 14%. We expected roughly a five-week disruption period from the relaunch of the platform. Historically, that's what we've always seen. That held true again. We ran back to normal run rates after that five-week period when the customers became adjusted to the new site and how the new site functioned.
We're also seeing good lowes.com performance to start Q3. As I mentioned a moment ago, with Q3 start, we're confident in our ability to hit the targets for the year, as well as the 3.5% for the second half.
Got it. That's helpful. On RONA, just to make sure I got these right. In this quarter, the hit I get was about $35 million of purchase accounting and hitting the COGS, right?
That's about right.
If for the full year it's a 35 basis points hit to the plan, it implies it's about a $200 million hit. Could you help us walk through how much of that $200 million hit is fees to lawyers and bankers? How much of it's purchase accounting? How much of it is integration costs? I thought you said accretion of RONA was next year, not this year, but just wanted to clarify that.
What we're seeing, if you exclude the net gain on the hedge, as we bring in the operating performance of RONA, that more than offsets transaction and integration costs. From an EPS perspective and from an EBIT dollar perspective, it's accretive. What's happening is there's two items. If you pull in RONA's results, which have a lower EBIT percentage, has the effect of mixing the total company's EBIT down. Second are the purchase price accounting adjustments. By the impacts I gave you for the year and then specifically for Q3 and Q4, the 60 and 50 basis points impact on EBIT, you should be able to take RONA's 2015 reported financials to be able to discern the mix and the purchase price accounting impact for the second half of the year.
It is accretive from an EBIT dollar and an EPS standpoint, but it does have a negative impact as a % of sales.
That $35 million that we saw in the second quarter, we're not done with the purchase accounting. There's more of that in the next two quarters.
There is more of that. That's why there's a 60-
That's the 50 to 60. Okay.
That's purchase accounting and the EBIT mix.
That's great. I apologize to just stick a third one in, but on the categories, which were the, I think there were three categories that were actually down in the quarter. Could you mention which ones those were?
Yeah, I just spoke to them. It's outdoor power equipment, millwork, and paint.
Millwork and paint. Great. Thanks a lot.
Sure.
Your next question will come from the line of Dan Binder with Jefferies. Please go ahead.
Great. Thank you. With regard to the changes in promotion, some of that we saw in credit promotion, with some of the broader percentage off promotions that you ran. I was just curious, as you look back, how would you grade the level of promotional effectiveness, and how should we think about those programs going forward in Q3 and Q4? Will we continue to see them?
Dan, we talked a lot about promotions in the first quarter, certainly margin down 43 basis points. We talked about some specific things we did in Q1 to take advantage of the spring season. Again, it's a strong proportion of our business, and we had favorable weather. We indicated that that pressure was largely contained to Q1. As we think about our gross margin performance, absent the RONA impact up 17 basis points in the second quarter, Mike can take you through the array of options we have for promotions. We do think about the tools and capabilities we have to align the promotional tactics around the categories and the timing to stimulate demand and build baskets.
I guess I would probably describe the promotional environment. Again, I think it's rational. I don't know that you're going to see any substantial increases in promotional depth. I think you'll see us leverage our consumer insights and analytical capability to tweak promotions to make them more efficient. I think you'll see us use some of our marketing digital capabilities to ensure that we're getting better utilization on how we extend our promotions. Again, I would define the promotional environment as rational with much better tools to help us optimize on how we bring promotions in front of our customers. I think that the learnings are inherent in some of the digital tools that are being deployed, and how we better utilize promotions to get a return on every dollar spent.
I was wondering separately if you could just talk to us a little bit about what happens next with the RONA integration, how long that will take, what do you tackle first? What changes should we see to that organization first, whether it's in stores or back of the house?
Hey, Dan. Richard Maltsbarger is in the room. RONA reports up through him as head of international. I'll get him to address your questions.
Yes, Dan, thank you for the question. The integration is going quite well so far. We've made great progress on our initial plans. Our initial focus has been very much on placing the right leaders and the right structure in order to be able to manage the integration and to be able to manage the joint planning of the two organizations as we shape a new culture to compete in Canada. As we said when we were putting the deal together, we have three core fundamental tenets of what we're doing with our integration and our plan. This is about revenue and cost synergies as we go about competing in the Canadian market with better customer relevance by leveraging our strengths in omni-channel and our approach to be able to bring all of our channels together to serve customers.
Our expanded customer reach through our strengths and expertise in key product categories, including introducing appliances into the RONA stores across the country, then increased profitability. We do believe that the combined scale of our two organizations, both in our direct purchasing and our indirect purchasing, as well as eliminating key things like public company cost, will allow us the opportunity to possibly double profitability within the first five years. All indications to date are that we're well on track for that. We're quite encouraged by what we see.
Thanks.
Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Good morning, guys. I have a question on the 110 basis point impact you highlighted from weather. Wouldn't all of the weather impact really been in the month of May? It seems like that would be a really sizable hit if it was just in that one month. Did you see disruptions throughout the quarter that maybe we're not thinking about properly?
Scot, as we think about weather impact, we compare actual temperature and precipitation to historical norms to determine the weather impact. The majority of the weather impact certainly was in May. There was some minor impact as well in July because of the extreme heat.
Okay. If we were to try and eyeball or back of the envelope some of those impacts, the June numbers should have been relatively clean in terms of the monthly comp that you provided with July, just a slight change versus what you disclosed?
Yes. What we did is we've given you the weather impacts based on the methodology I just described. What I can't quantify is the exact amount of pull forward and the impacts to each of the first six months of the fiscal year. Right. I can't tell you how that changed consumer behavior and the timing of their purchases.
Okay, understood. Then can you provide any more color or magnitude in terms of the difference that you saw regarding the comp growth between the DIY and pro? Because it seems like you guys highlighted a couple of times the strength of the pro this quarter. Thanks.
Yeah. There was almost a 400 basis point gap in the pro comp relative to the DIY comp.
400 basis points . Great. All right. Thanks, guys.
Scot.
Your next question comes from the line of Peter Benedict with Robert W. Baird. Please go ahead.
Hey, guys. Sticking with the pro a little bit, just curious how the MRO business has been trending for you guys. Maybe get a comment there.
Sure. We continue to be pleased with what we're seeing from the MRO customer segment, especially when we look at the pro in general. We continue to make and leverage our investments, as Mike highlighted earlier, to continue to drive relevance and build relationships with those customers. You look at our Lowe's for Pros launch is really something that we continue to see the MRO customer gravitate to as it becomes easier for them to shop our stores and make it easier for them to purchase and build segmented product lists. Then you look at the investments in our inventory depth as well as our AEP networks and our national sales teams, I think all combine to help us continue to drive that performance.
As we've talked about, pro is now approximately 30% of our total volume, continues to grow at a faster rate than our DIY business as the pro continues to leverage our strengths in the categories, the brands that we're bringing in and continue to introduce, as well as our five ways to save value propositions. We think holistically, those aspects drive greater relationships and synergies across all pro customers, not just one segment.
Okay, perfect. My follow-up is just back to RONA. As we think longer term, Bob, does RONA impact the EBIT margin flow through profile benchmarks that you guys have spoken to in the past at all? Thank you.
Pete, thanks for the question. As you know, we've got an analyst conference in December. We'll update you on our long-term financial targets at that time.
Okay, fair enough. Thanks, guys.
Virginia, we've got time for one more question.
Our final question will come from the line of Mike Baker with Deutsche Bank. Please go ahead.
Thanks. I wanted to ask about some of the bigger ticket items because the big ticket growth was as low as it's been in a couple of years. Appliances, I think, in line this quarter and below average last quarter. Can you discuss with us what's going on there? It seems like you're not doing as well as some competitors. There's been some new entrants in this space. Is that having an impact at all?
No, we're not seeing any impact from new entrants. I guess I would think about appliances as we had comps in line on top of very strong comps last year. Our two-year stack on appliances is very, very strong. We like how we're positioned in appliances. We like that we have the largest dedicated showroom floors on appliances. We like where we are with respect to our J.D. Power and Associates ranking. We like the fact that we do our deliveries. We really do appreciate the way we do our display techniques with appliances with full vignettes that allow the customer to envision more appliances in their home. The way I would think about appliances is that it's a critical category for us.
We will work to maintain our number 1 position, and it's a great way for us to sell the entire kitchen and leverage the cabinets and countertop space that we have right next to the category. We continue to be very bullish about it and we think that we're gaining share in 2016, just as we did in the second quarter.
Okay. You think you gained share in the second quarter?
Yeah, when we look at our performance in appliances versus the industry, we actually believe we gained share in the second quarter.
Okay, interesting. I wanted to follow up on paint as well with some of the moves you guys made earlier in the year with some vendors. I guess you explained it by that outdoor was weak, but are you surprised that the paint business isn't doing better at this point, or is it really just because of the weather?
We felt good certainly in the fourth quarter and the first quarter on paint with both quarters being above the company average. We can clearly see that we're gaining share fourth and first quarter. As we look at the second quarter, we can see this clear split, this clear line of demarcation between indoor and outdoor. We think there's some opportunities for us to continue to enhance our line design, but outside that, we feel real good about our brands. When you have Sherwin-Williams, Valspar, and PPG Olympic, those exclusive brands are very powerful. We think it positions us well.
Okay, lastly just one more bigger ticket. Pro, can you repeat the gap? Did you say 100 basis points gap? How does that compare with the previous quarters?
The number is 400 basis points.
400, okay.
Right. Which is slightly higher than what we saw in the first quarter. As you think about the big ticket categories and the comp performance above 500, our worst performing category in the quarter was outdoor power equipment. Think riding mowers. We've got number 1 share. That's a big ticket category, had a disproportionate negative impact on that segment of our business.
Why was that weak again? Just the weather, you think?
Yes.
Okay. Thank you.
Thanks, Mike.
Thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our third quarter results on Wednesday, November 16th. Have a great day. Ladies and gentlemen, this concludes today's conference. Thank you all for joining, and you may now disconnect.