Good morning, everyone, and welcome to Loews Company's First Quarter 2016 Earnings Conference Call. This call is being recorded. Also, supplemental reference slides are available on Loews' 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 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 Kniblock, Chairman, President and Chief Executive Officer Mr. Rick Thammerin, Chief Operating Officer and Mr. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr. Kniblock for opening remarks.
Please go ahead, sir.
Good morning and thanks for your interest in Loews. Comparable sales grew 7.3% in the Q1, exceeding our expectations, driven by comp transaction growth of 5.1% and a 2.2% increase in average ticket. I'd like to thank our employees for their continued efforts in serving customers, which enabled our strong transaction growth. The team's project expertise and commitment The team's project expertise and commitment
to customer service allowed us to capitalize on the strong home improvement demand in the quarter.
Healthy macro fundamentals, favorable weather and our compelling offers drove demand resulting in strength in indoor as well as outdoor projects. In fact, we recorded positive comps in all 13 product categories, with particular strength in lumber and building materials, millwork, paint, lawn and garden and tools and hard watch. Our emphasis on providing better omni channel experiences positioned us well, enabling us to connect with customers and provide the advice and assistance they count on when completing their home improvement projects, whether they choose to connect in the store, online, in their home or through our contact centers. We're also pleased with the investments we've made to build deeper relationships with the Pro, as our Pro business performed well above the company average. The work we've done to enhance our product and service offering is allowing us to better serve this important customer segment, and we will continue to deepen those relationships.
From a geographic perspective, our U. S. Home improvement business achieved 7.5% comps for the quarter with all 14 regions delivering positive comps. And we continued our strong performance in international markets, including double digit comps in Canada and local currency. For the quarter, we generated 170 basis points of operating margin expansion.
Included in the quarter's results is a $160,000,000 unrealized gain on a foreign currency hedge entered into in advance of our pending RONA acquisition. Including this benefit, we delivered earnings per share of $0.98 a 40% increase over last year's Q1. Delivering our commitment to return excess cash to shareholders, in the quarter, we repurchased $1,200,000,000 of stock under our share repurchase program and paid $255,000,000 in dividends. I'm also pleased with the progress of our previously announced acquisition of RONA. The transaction was approved by RONA's common shareholders in March.
And last week, we received authorization from the Canadian regulatory agencies, clearing the way for closing of the transaction this Friday. The time is right to fortify our Canadian market presence to take advantage of the significant long term potential we see. We expect to build on the recent progress our team in Canada has made and the positive results Rona has achieved over recent years as a result of their restructuring efforts. Turning to the economic landscape for the balance of the year, the outlook for the home improvement industry remains positive. Persistent gains in the job market as well as disposable income growth that's expected to outpace growth in the economy should contribute to solid growth in consumer spending.
And housing remains a bright spot with home sales and construction activity posting healthy gains to start the year, while home prices continue their steady upward trend. As a result, the home improvement industry should continue to benefit from the solid consumer and housing backdrop, even as the benefit of favorable weather at the start of the year normalizes. And as we survey the consumer, we're seeing similar trends. Our most recent consumer sentiment survey revealed that favorable views around personal finances and home improvement spending are holding steady. Rising home prices are motivating homeowners to invest in their homes and many believe that this trend will continue as the survey reveal a significant increase in future home value expectations.
Likewise, we continue to see home improvement spending outpace overall spending as well as positive home improvement project intentions. We will continue to focus on improving our product and service offering for the pro customer and differentiate ourselves through better omnichannel customer experiences that make us the project authority in order to leverage the favorable home improvement backdrop. Our strategic framework along with efforts to improve our productivity and profitability give us confidence in our business outlook for 2016. Thanks again for your interest. And with that, let me turn the call over to Rick.
Thanks, Robert, and good morning, everyone. We executed well in the Q1, growing both average ticket and transactions. In addition to our successful spring Black Friday events, we drove traffic through compelling offers designed to take advantage of early spring project demand, leveraging enhanced digital capabilities and improved marketing speed and flexibility to reach the spring customer earlier in the season. And as Robert shared with you, we delivered positive comps across all regions and product categories as we continue to capitalize on a favorable macro backdrop and consumers increasing desire to invest in their homes. These favorable trends in home improvement coupled with our compelling product offering and strength in omni channel retailing contribute to a particularly strong performance in categories such as lumber and building materials, millwork, paint, lawn and garden, and tools and hardware.
We achieved double digit comps in lumber and building materials, driven by continued surge in outdoor construction projects, coupled with stronger demand from the pro customer. Millwork also benefited from this dynamic as outdoor projects drove strong performance in windows and doors. And as customers look to improve and enjoy their outdoor living space, the outdoor living experience we introduced in 2014 continued to pay dividends, delivering high single digit comps in patio and outdoor fashions for yet another year. We also continue to see robust attachment of accessories as the showroom feeling created style help customers envision and create their outdoor space. Our targeted offers and events designed to capitalize on early spring drove demand drove demand high single digit comps in lawn and garden category, with particular strength in garden hardlines, live goods, soil and mulch.
Our landscape lighting experience was also a success, helping customers visualize their outdoor lighting projects and making selection and installation easy, while offering innovative technologies like LED. This project strength extended to inside the home as well, as we also saw strong performance in interior project categories. Within fashion fixtures, we leveraged our customer experience design capabilities to optimize our recent lighting resets, showcasing an expanded collection of lighting styles, finishes and brands available both in store and online, including the introduction of Kichler and Koisel lighting, both home channel exclusives. Along with Progress Lighting, we now offer the top 3 lighting brands in the industry, providing our customers with an exceptional array of options and styles. We combined our extended product offering with a simplified presentation, designs with the needs of the customer in mind, grouping lighting fixtures by style and collection to provide a cohesive decorating solution and simplify selection.
Customers have responded well, driving double digit comps in interior decor lighting and chandeliers and we are now extending this approach to stony fans to leverage our relationship with Hunter fans as well as our private label brand and sourcing capabilities. We saw mid single digit comps in appliances, flooring and kitchens further demonstrating the consumers continued willingness to engage in interior projects. Paint performed above the company average driven by strength in both interior and exterior projects. Our paint lineup, which showcases Valspar, Sherman Williams and PPG Olympic provides customers with a full suite of top brands they trust for their paint projects. Tools and Hardware also benefited from the increased project activity from both DIY and Pro customers.
We were able to capitalize on this demand by improving our tool brand assortment with exclusives like Hitachi and Bostik, the number 1 and number 2 brands in Pneumatic and the extension of brands like Von along with our extensive private label line of Cobalt tools. Whether working on indoor or outdoor projects, our omni channel capabilities help customers achieve great results. Customers can engage with our associates in store for expert advice, our content on those.com for inspiration, our contact center for ongoing support or our project specialists who work with them in their homes. On lowes.com, we have upgraded our online shopping experience with enhanced product content and search functionality, improved visual tools such as 360 degree product views, improved video content and the continued expansion of click to chat capabilities to better support the customer's digital experience. As a result, we continue to see positive customer response and very strong growth in our online channel.
Our exterior and interior project specialists who meet with customers in their homes to design, plan and complete their home improvement projects represent another critical element of our omni channel strategy. Our exterior project specialists are available across all U. S. Home improvement stores and we are expanding our interior project specialist program reaching all U. S.
Stores by the end of this year. Our in home sales program continues to outperform with above average comp growth again this quarter. Our expertise in project inspiration, project design and project execution are setting us apart as a project authority in home improvement at a time when the consumer continues to demonstrate a willingness to take on home improvement projects. We continue to strengthen our Pro business, driving comps well above the company average by further advancing our product 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 and Masonite Entry and the interior doors.
We continue to collect feedback from pro customers, our outside sales team and store employees, while working closely with our field based merchandising managers to identify local market opportunities and brands to further optimize our offering for the Pro. We have also advanced our omni channel resources for the Pro. We continue to utilize feedback from our Pro customers and Pro services team to enhance the features and functionality of our lows for pros.com site that we relaunched last year, making it easy for pros to manage multiple properties and quickly purchase items nationwide. Thus far, we have been pleased with the program rollout given the positive customer response and early results, which have exceeded our expectations. Another critical element of our omni channel offering for the Pro customer is 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 are a key component of our strategy to grow our business with larger pro customers. We currently have over 180 pro outside representatives in the field and have experienced great success with the program with continued strong growth in AEP comp sales. Building on this success, we will continue to grow the program, adding additional AEPs to continue capturing market opportunity with large pro customers. We are also reaching out to the pro through targeted marketing and special events such as credit events, bonus dates and spring pro appreciation dates to drive awareness and generate new business.
We have been pleased with these results in driving both incremental purchases with existing pro customers and building relationships with new customers. Our work to strengthen our portfolio of brands as well as expand our omni channel offering through our growing pro services team and our re launch of lowespros.com are part of a broader commitment to build on a strong foundation with the Pro. This foundation includes dedicated service in our stores, inventory depth aligned with the needs of the Pro, including a 5% off everyday loyalty program for Pros using Lowe's proprietary credit as well as reduced delivery rates. In addition to our efforts to drive top line growth, we continue to focus on driving productivity and profitability. For the quarter, gross margin contracted as strong performance in lower margin categories such as lumber and build materials led to a negative mix impact.
While we plan targeted promotions to capitalize on strong spring demand, the participation rate in those offers exceeded our expectations, which together with markdowns associated with reset activity led to a negative rate impact. Our stores once again effectively managed payroll hours on very strong comp sales growth, driving payroll expense leverage. They drove this leverage while achieving continued strong customer satisfaction scores. As you can see, we had a strong Q1. We continue to make progress on our initiatives to drive top line growth and are focused on improving productivity and profitability.
We look forward to sharing further progress with you through over the course of the year. Thank you for your interest in Loews, and I will now turn the call over to Bob.
Thanks, Rick, and good morning, everyone. Sales for the Q1 were $15,200,000,000 an increase of 7.8%. Total transaction count increased 5.5%, and average ticket increased 2.2% to $68.08 Comp sales increased 7.3% driven by a comp transaction increase of 5.1% and average ticket growth of 2.2%. Looking at monthly trends, comps were 8.3% in February, 9.1% in March and 4.9% in April. Comps were stronger earlier in the quarter as we capitalized on favorable weather to drive above planned comps.
April sales were consistent with their plan coming into the quarter. Gross margin for the Q1 was 35.04 percent of sales, a decrease of 43 basis points from last year. The decrease in gross margin
as a
percent of sales was due to rate pressure as well as the mix of products sold. The rate pressure related to targeted promotions and markdowns associated with the recent activity. SG and A was 22.28 percent of sales, which leveraged 188 basis points. 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 quarter, we recorded a $160,000,000 unrealized gain, driving 105 basis points of expense leverage. Also, store payroll leveraged 13 basis points as we continue to optimize our staffing model. Utilities leveraged 11 basis points as a result of warmer weather relative to last year. Lastly, there were numerous other expenses that leveraged between 5 10 basis points in Q1.
Depreciation for the quarter was $357,000,000 which was 2.34 percent of sales and leveraged 25 basis points compared to last year's Q1 as a result of higher sales and assets becoming fully depreciated. Earnings before interest and taxes increased 170 basis points to 10.42 percent of sales. The unrealized gain on the FX hedge accounts for 105 basis points of the increase versus last year. Interest expense at $156,000,000 for the quarter delevered 8 basis points to last year as total debt increased $4,100,000,000 versus the Q1 of 2015. We issued $3,300,000,000 of unsecured bonds in April.
The transaction consisted of 3, 10 30 year issuances with a weighted average interest rate of 2.72%. The proceeds will fund the Rona acquisition as well as refinance current year maturities. The effective tax rate for the quarter was 38.2%. Earnings per share of $0.98 for the quarter represents 40% increase over last year's $0.70 The $0.98 includes $0.11 related to the FX hedge gain. We exceeded our earnings plan for the quarter even without the gain.
Now to a few items on the balance sheet, starting with assets. Cash and cash equivalents at the end of the quarter were $4,600,000,000 The higher cash balance is a result of the April bond deal. Our inventory our 1st quarter inventory balance of $11,100,000,000 increased $441,000,000 or 4.2% over the same period last year. Inventory turnover was 3.83x, an increase of 5 basis points over Q1 2015. Moving on to the liabilities section of the balance sheet.
Accounts payable of $8,800,000,000 increased 798,000,000 dollars or 10% over Q1 last year. The increase in accounts payable is due to the timing of purchases in the quarter versus last year and a 3 day improvement in days payable outstanding. At the end of the Q1, lease adjusted debt to EBITDAR was 2.45x. The higher the target leverage was a result of the April bond deal. We expect to be back in line with our 2.25x target within 1 year of the RONA transaction closing.
Return on invested capital increased 64 basis points for the quarter to 14.98%. The net impact of the noncash impairment charge recognized in the 4th quarter related to the exit of our joint venture in Australia and FX hedge gained this quarter reduced ROIC by 145 basis points. Now looking at the statement of cash flows. Operating cash flow was $3,200,000,000 Capital expenditures were $208,000,000 resulting in free cash flow of $3,000,000,000 Free cash flow was $766,000,000 or 34.1 percent over the same period last year. In February, we entered into a $500,000,000 accelerated share repurchase agreement.
We expect to receive approximately 6,800,000,000 shares, but the ultimate number of shares will be determined upon the completion of the program in the Q2. We also repurchased approximately 9,700,000 shares for $700,000,000 through the open market. In total, we repurchased $1,200,000,000 in the quarter. We have approximately $2,400,000,000 remaining on our share repurchase authorization. The remaining $53,000,000 of share repurchases shown on the statement of cash flows relates to shares withheld from employees to satisfy statutory tax withholding liabilities.
Looking ahead, I'd like to address several of the items detailed in Loews' business outlook. First, as a reminder, fiscal 2016 will include an extra week in the Q4 for a total of 14 weeks 53 weeks for the year. We estimate that the 53rd week will aid total sales by approximately 1.5% and earnings per share by $0.05 to 0 point 06 dollars 2nd, while we have received shareholder approval and authorization from regulatory agencies, we have not closed on the Rota acquisition. As a result, our outlook excludes the impact of this transaction. Finally, while we did outperform our Q1 sales and earnings plan, we continue to think about spring within the context of the first half of the year.
We are confident in our plans and hope to sustain the momentum, but we are in the middle of the spring season and believe it's prudent to maintain our previously provided outlook. Now let's get into that outlook. As Robert noted, the forecast for home improvement industry remains positive. For 2016, we expect total sales increase of approximately 6%, driven by a comp sales increase of 4%, the impact of the 53rd week and the opening of approximately 45 stores, which includes 20 Orchard locations and 12 stores in Canada. For ease of modeling, the EBIT growth rate excludes the impact of last year's Australian joint venture impairment charge and this year's FX hedge gain.
We are anticipating an EBIT increase of 80 to 90 basis points. The effective tax rate is expected to be 38.1 percent. For the year, on a GAAP basis, we expect earnings per share of approximately $4.11 with the incremental $0.11 from our prior guide coming from the FX hedge gain. We are forecasting cash flows from operations to be approximately $5,400,000,000 Our capital plan for 2016 is approximately $1,500,000,000 This results in estimated free cash flow of $3,900,000,000 for 2016. Our guidance assumes approximately $3,500,000,000 of share repurchases for 2016.
The share repurchase assumption is not expected to be affected by the RONA acquisition. Regina, we're now ready
for questions. Our first question will come from the line of Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Good morning, guys. Good morning, Scott. I hate to kind of lead with a short term factor like weather, but Bob, is there any estimate you guys have in terms of what kind of impact the weather had on the comp in the quarter in total? And by any chance, would you have, let's call it, a monthly cadence kind of on a weather adjusted basis month by month?
Scott, so we estimate that weather impacted Q1 performance by roughly 150 basis points. As I mentioned in my comments, that impact was more pronounced 1st part of the quarter. I don't have the 150 basis points dissected by a month at this time.
Okay. And then just I appreciate that. And then just on the margin, you mentioned a couple of different things impacting it from the promotions to mix. Can you give us any color regarding the relative size of the impact of each of those factors?
Scott, the three factors that we mentioned, the mix of products sold, the reset activity, target promotions, each had roughly 15 basis points impact.
So roughly even. All right. Thanks a lot, guys.
I hope to pass the torch. Your
next question will come from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Thanks. So first, I guess a follow-up to Scott's first question regarding the 150 basis points, Bob, you answered on the seasonal impact. Can you talk about how much or the weather impact, how much that could have been from projects that got started earlier versus outdoor seasonal products that sold through?
Yes. As I mentioned in my comments, Simeon, we think about spring as more
of a
first half event. We don't spend a lot of time trying to dissect what might have sloshed between quarters. So certainly, the mild winter weather enabled exterior projects, we saw that show up in some of the categories that Rick mentioned that outperformed. But the ultimate impact will be determined at the completion of the Q2 when we review our spring results.
Got it. Okay. And then thinking through gross margin, are you able to share with us the difference in product margin in some of those categories, seasonal lumber and building materials? And should we see the gross margin bounce back to some extent in the Q2, reflecting the product mix?
So what I would say is that the lion's share of the mix impact related to lumber and building materials. So if the demand for those categories remains strong, we could have additional mix pressure in the second or the remainder of the year. However, we would also generate additional sales from that demand. In addition, the other two items, the targeted promotions and the reset activity, are largely Q1 events, and we don't expect a lot of residual impact beyond Q1 for those items.
Okay, great. Thank you.
Thank you.
Your next question comes from the line of Greg Melick with Evercore ISI. Please go ahead.
Hi, thanks. Two questions. One is
about the
guidance and the fact that it was a good strong start to the year. And if we keep that 4% comp guidance, on my math, it implies that the rest of the year, we're going to be running like 3% or 3.5%. Is that what you're seeing now, especially given if I remember correctly, May is actually an easier comp than April was a year ago? Then I have a follow-up.
Greg, this is Robert. I'll start and I'll turn it over to Bob. I think just as we've done in the past few years, generally coming out of the Q1, we've not changed our guidance for the year. So we're following a cadence very similar to what we've done in the past. We think it's too early in the year to be changing our guidance.
I think this is very consistent with what you've seen over the past few years, whether we've started off with a robust Q1 or Q1 that was, let's say, weather challenges we had a couple of years ago. But Bob, if you'd like to?
Yes. So, Greg, a couple of things I'll reiterate from my comments. First, we felt good about April. April was on plan. 2nd, we hope to sustain the momentum that we're seeing.
So we're excited about
our plans to remain confident in
our ability to execute. There's nothing to suggest that we're not able to execute the guidance we put forward.
Okay. So if April was on plan, presumably May is on plan?
As we talk about, we guide annually. We feel good about the opportunity to deliver our results. We're not going to get into the short term nuances of this quarter versus that quarter, but we are confident in our ability to execute.
Okay, great. And I guess the follow-up was about the margin progression in the Q1 and more on the gross margin side. You talked about targeted promotions, some related to reset. Are there other categories that you're going to be resetting and doing this with that we should expect in the second and third quarter just for the rest of the year? Or was that something more specific to the Q1, as we think about the rest of the year and how it plays out?
Okay. It's more specific to the Q1 and normalizes throughout the balance of the year.
Got it. Thanks. Let someone else have a chance.
Thanks, Craig.
Your next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead.
Thanks. Good morning. So following up on the margin, so was gross margin in line with your plan? And then the other side of it is the SG and A came in much better even if you back out the foreign currency hedge gains. So that was very strong.
So was that also in your plan? And as you think about putting up a 7% comp in the Q1, which is fantastic, the flow through, I guess, wasn't very large. And I know that you talked about that, that 1Q was going to be light, but you were also, I think, embedding more of like a 5% comp. So I guess that those extra two points didn't drive as much flow through as one would have thought.
So the gross margin came in a little bit below our plan for a couple of reasons. First, as Rick talked about, we had greater take rate in the targeted promotions. So we had an estimate of the impact. The customer receptivity was stronger than we anticipated, which is certainly a good thing and kudos to the team for identifying the items that resonate with customers. 2nd, we expected the impact from the reset to be a little bit more balanced Q1 and Q2.
We had good sell through on the reset activity. Therefore, the impact was more pronounced in the Q1. As I mentioned, that kind of clears the deck Q2 going forward. And then lastly, the mix pressure was a little bit higher than anticipated based on the strong demand in lumber building materials. As it relates to the flow through, so the lower than anticipated flow through is almost entirely attributable to the decline in gross margin versus planned, again, based on the factors I just described.
Understood, understood. So the SG and A came in where you thought it would be. And there was no up and down because of a switch like you talked about in the Q4, a switch between financing offers versus promotional offers? No.
There was a solid nuance within credit as it relates to our partner, and they made a change that impacted us last year regarding the loan loss reserve. The trailing impact of that hit Q1. There was some modest pressure in Q1. That's largely done, so that's a pressure in Q1 that we won't see Q2 going forward, but not otherwise, Chris. Nothing out of the norm.
Understood. And then as a follow-up, there are a lot of companies who are sort of talking negatively about the consumer target, for example, this morning, following other companies' department stores last week, Costco being a little bit light. So is there anything as you peel back demand, whether it's regionally, California is ticket versus traffic deceleration in the quarter, is there anything that you're seeing that would suggest a deteriorating consumer backdrop?
Chris, this is Robert. As I outlined in my comments, as we've seen the consumers, we look through our consumer sentiment survey with what their intentions are around spending, with what their intentions are around investing in the home as we're seeing continued improvement in the job market, we're seeing continued improvement in wages, we're seeing continued improvement in home values is driving continued improvement in their intentions for discretionary spending, which I think the best evidence of that is in the 5.1% increase that we saw in comp transactions during the quarter. And nothing that we've seen in our sentiment surveys has led us to believe that the consumer when they we ask them how do you feel 6 months out with regard to purchase, nothing shows any change in their intentions as we survey them today. So that I think is why, as Bob took you through, strong Q1. We're aware of what others are saying out there with regard to the consumer.
But when we take the our strong Q1 performance and what we're hearing from the consumer when we survey gives us confidence in reiterating our guidance for the year that Bob is taking me through.
Thanks, guys.
Your next question will come from the line of Michael Lasser with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. So this is the 2nd quarter in a row where you were a little bit more promotional. It seemed to have maybe a greater impact this quarter. Can you talk about the influence that of the increased promotional activity that you engaged in had on the comp?
And what are you learning about consumer price elasticity across various categories? And I know it's a 3 part question, I apologize. Is this is the promotional activity more pronounced in store or online? Thank you.
Good morning, Michael. I can take that.
First, let me I just talk about where we focused our promotions and a little bit about the how we went about it Q1. We're more focused lawn and garden seasonal living, tools and hardware, major appliances and interior projects, because we thought those would be the types of products and projects that consumers' mindset would be geared towards. We leverage our sales and operation planning process. And what's important about this process is it allows us to have a better sense on the micro seasons that apply to the consumer's mindset so that we hit the consumer with the right promotion at the right time. We're much faster in being able to flex our promotions and our digital assets because of some of the investments that we made in our digital capabilities.
And what we saw was the higher take rate. And as Bob said earlier, that's certainly a good thing. Our flexible supply chain allows us to make adjustments to where the consumers making purchases and ensure that we don't disappointed by not having product. But I wouldn't say that the intensity and depth of promotion was greater. What I would say is that our execution around promotions continues to get better.
So, we're doing a much better job of getting the right promotions in front of customer at the right time, leveraging our digital capabilities as well as some of the process that we put in place.
And are you learning anything about price elasticity? It seemed like last quarter it was focused on appliances, maybe this quarter was more on seasonal and tools. And so maybe the construct of the home improvement industry, which conventional wisdom says that there's not the elasticity isn't as great here as in other categories may not be true and you can push that a little harder to drive more traffic. Is that the right way you're is that the way you're thinking about it?
So Michael, we've got tools that allow us to understand the effects of promotions and price elasticity of items, right? That's the magic is to have the right level of promotions that resonate with customers, not too much because too much promotion creates some leakage in the system and less than ideal flow through. So we do have some tools in place to allow us to evaluate the effectiveness of the promotion and drawing customers in, trying to get a sense of the close rate as well as the elasticity of the items. So we are continuing to turn knobs and pull levers to maximize the effectiveness there.
And Bob, mentioned that you think promotions will be less of an impact on the gross margin in the second quarter. Is that because you're going to pull back on the promotions? Or you think this will be more effective and less dilutive? And then I'm done.
Yes. So as Mike said, one of the key areas that was focused in Q1 was lawn and garden. And some of the higher take rate and higher effective promotions were around that category. Those are not things that we expect to repeat in the Q2 or beyond for that matter regarding lawn and garden, which allows us to be comfortable with that. The impact is largely contained in the Q1.
Okay. Good luck with the strength. Thank you.
Thanks, Michael.
Your next question comes from the line of Matthew Vazalore with Goldman Sachs. Please go ahead.
Thanks a lot and good morning. A couple of quick ones here. I know you gave the monthly cadence as reported. Did the Easter calendar shift impact the monthly cadence at all?
It did, Matt. As we think about Easter impact, it with the change, Easter would have impacted March. March would have been 9.7 percent. April would have been 3.4%.
Got it. That's very helpful. Second question, can you talk about what you saw directionally for online growth this quarter and any changes and how the customer DIY and or Pro is using lowes.com?
Yes, Matt. Lowes.com and e commerce grew 23.5% for the quarter, and we saw strong growth in traffic as well as conversion to the sites. So we feel good about the investments that we've made over the past year and really beginning to drive increased shop ability of the site. I think the key aspects there is when we go back and we talk about the things we've done to the site to really make it more customer friendly. Like I said in my comments, the enhanced video content that we're adding to the site, the improved product descriptions as well as increased content, There is also resonating well with the customer.
So those aspects of it, I think, continue to help us drive incremental growth from the Dotcom platform. Lowe's for pros from an e commerce perspective, is performing extremely well, as we said, exceeding our expectations. And we're extremely pleased with what we're hearing and the feedback we're getting from consumers as well as our AEPs in the field about the usability of the site, the functions that enables to make the ability for the pro to shop much more easily with us. So we're really proud of those 2 things as we continue to move forward. We have not seen a shift in the mix of business regarding
the
in store pickup. We still see that as roughly 60% of all e commerce transactions that are picked up. That's even heavier as it relates to Lowe's for Pros. Delivery still continues to grow as a component of that and parcel is about 30% of our dotcom sales.
Thanks so much for that answer. Appreciate it.
Your next question comes from the line of Seth Sigman with Credit Suisse. Please go ahead.
Thanks. Good morning. So one follow-up question on the gross margin. In the past, you guys have talked about some offsets in either product cost deflation or value improvement, which I don't think was called out in the quarter. Can you speak to those items and if you see that as those as bigger opportunities as we move through the year?
So Seth, those items continue to be in play. We did see some modest benefit from both those items in the quarter, but they were offset by the 3 negative factors that were mentioned.
Got it. Okay. And then just a specific question on the appliance category. I think that category saw one of the biggest swings in the quarter, went from outperforming in the past to below the company average. And I think that's just optics to some extent as I think that you said the category was still up mid single digits.
But is there anything else to read into that as we try to understand both where we are in the cycle and also perhaps how the competitive landscape may be changing in that category specifically? Thanks.
No, we don't think there's anything else to read into it. If you look at our appliance business, it's outperformed for the last 5 quarters. It's cycling over a double digit comp to 2 year stack. It's well above the company average. We continue to have one of the best assortments with all of the national brands.
We continue to take advantage of next day delivery hallway in house facilitation repairs and maintenance. We're really proud of the fact that we control the last three feet of the appliance experience. We don't outsource that. J. D.
Power is just recognized us as the best in appliance retail satisfaction. The investment that we made in floor space gives us one of the largest floor space in the industry. And the reason why we think that's important is that if you consider our floor space and appliances coupled with our floor space and cabinets, it positions us well to take advantage of the side quest that continues to play through. And the last thing I'd say is that, in kitchens in particular, if you look at the high ticket items in kitchen, things like cabinets and countertops, we saw strength there. So that suggests to us that the cycle is still well intact.
Okay, makes sense. Thanks very much.
Your next question will come from the line of Mike Baker with Deutsche Bank. Please go ahead.
Thanks. One follow-up question to an earlier one. How much did the greater uptake on the promotional activity impact the comps?
Certainly, it had some impact, Michael, as lawn and garden is one of the best performing categories. So it was certainly a driver of the quarter. But as the team described, there's many actions impacting the Pro, impacting the Paint category, impacting a variety of things that help drive the totality of the performance in the quarter.
Okay. Yes, I think the 4 product categories, I think, was Mike Jones mentioned as where you focused promotions, 2 were above, 2 were below company average. So I was looking for more color on that, but okay, understood. Another question, you did keep the 80 to 90 basis point guidance for the year on the margins, which means for every comp point above 1%, you're going to look for between 27 to 30 basis points of improvement. You're obviously below that here.
So is the reason that you didn't change that, is it what you said earlier about not changing the comp outlook, just too early in the year? Or are there specific reasons to believe the flow through will be not only better than it was in the Q1, but better than that 27% to 30% typical rule of thumb?
So I would just say, Michael, we think there's potential upside on the sales line. Again, we feel good about the momentum we saw in Q1. We hope to sustain the momentum. However, we feel it's way too early to start thinking about changing outlook for the year. So we do think there's some upside on the top line.
We talked about some gross margin pressure in the Q1 that won't continue. So we've certainly taken that into account. However, we do feel even better than we did 90 days ago about our ability to continue to drive expense productivity and leverage, which gives us confidence in the outlook. To the extent, sales are better and some of that's driven by lumber building materials categories and the flow through might be closer to 25 basis points. But again, it's too early to start changing pieces of the outlook.
Okay. Thanks. Understood. Thank you, Mike.
Your next question will come from the line of Eric Bosshard with Cleveland Research Company. Please go ahead.
Two things. First of all, from a bigger picture perspective, just wonder, Bob, if you could comment on how we should be thinking about gross margin, understand the moving parts in the Q1. But as we think about this year or the next couple of years, strategically, how are you thinking about balancing promotions and sales relative to gross margin? And what path does that suggest for gross margin?
So two things. 1, that ties back to our previous answer and then second would be long term gross margin performance. So as I mentioned earlier, we do have tools that allow us to evaluate the effectiveness of promotions. As we think about promotions, some are to drive specific to drive sales, some are specific to grow the basket and some are just general awareness around the brand and the categories we carry. So we continue to turn knowledge and pull levers to maximize the effectiveness there.
Taking a step back, Eric, as we think about gross margin, we do expect some modest gross margin improvement annually. As we think about gross margin, it's probably not going to be 2017 till we actually eclipse the gross margin rate we had in 2010. So it's not like we're forging new ground and looking for gross margin peaks that have never occurred before. So roughly over that 8 year period, it's called a flattish gross margin over a long period of
time. And then secondly, understand the influence of weather and your desire to not talk about the very near term, but the difference in performance in April May relative to February March, anything that you learn in looking through that, can you isolate the weather? Is there anything else different that's going on that explains the magnitude of the step down?
2 things regarding weather. So I mentioned 150 basis points impact for the quarter. If you exclude the weather, we would still be in our sales plan. So the underlying demand for our category is strong. The macro fundamentals that drive our business housing and incomes continue to be constructive.
Beyond that, no other nuances impacting the quarterly excuse me, the monthly cadence.
Okay. And within I guess, your commentary within April being on plan would suggest that's where you expected to be despite whatever happened with weather. Is that the proper way to read that?
That is correct.
Okay. Thank you.
Thank you.
Your next question will come from the line of Seth Basham with Wedbush Securities. Please go ahead.
Thanks a lot and good morning.
Good morning, Seth.
My first question is just around Pro and specifically Lowe's for Pros. You've had that in place now for a couple of quarters. Can you give us an update on the effectiveness and the traction you're gaining from that initiative?
Sure. As I stated earlier, we've been very pleased with the receptivity from the consumer and the pro customer regarding those for pros. We continue to see strong growth quarter over quarter as the customers come aware of the site. If you want to look at Q1, we saw significant growth in new registered pros on the site as well as conversion and growth as a percent of total.combusiness. So we feel great about what we're seeing.
We continue to improve the functionality of the site through feedback from our customers and our sales teams to make it more conducive and easier for the customers to navigate. The other thing I would say as we continue to look at the site is to keep in mind the functionalities that it did provide that we did not have the capabilities of before. So the PROs, for example, were not allowed we're not capable of using their in house credit. They can now. PROs did not receive their 5% voucher usage on priorloads.com.
They can today. Tax exempt accounts weren't available to them prior usage they are today. So all of those things are resonating extremely well, and we continue to work on making the site more effective, more efficient. But to date, we've been extremely pleased with what we've seen, both from a registered user content as well as sales performance.
Great. That's helpful. And then secondly, on cost control, great performance this quarter. As you look through the balance of the year, Bob, when you think about labor optimization, marketing indirect costs, can you give us some order of magnitude of the benefits you expect from each of those?
Sure. I'll give you some high level perspective. For the year, we continue to think indirect spend is going to pay dividends for us. That's in the 15 or so basis point range. Bonuses is 10%.
Like we talked about the analysis around promotions, we continue to do the same thing regarding resets and things of that nature. We think we'll get about 10 basis points of leverage on that spend this year. Risk insurance is going to be less of a drag. That's about 5 basis points. Employee insurance, also less of a drag.
Advertising, about 5 basis points. And a couple of kind of indirect items, fixed cost leverage, 10 or so basis points. And the impact of the 53rd week gives us about 5 basis points. So a lot of good items to drive expense leverage for 2016. That's helpful detail.
Thank you. Thank you.
Your next question comes from the line of Kate McShane with Citi Research. Please go ahead.
Thank you. Thanks for taking my question. One area that I just wanted to make sure I address today is just about the supply chain. I know it's something that has been discussed by both you and your biggest competitor in the home improvement channel as a competitive advantage and a way not to get disrupted. Can you walk us through any efficiencies achieved in the supply chain this quarter and what opportunities you're working on over the next 6 to 12 months?
Sure. The aspect of supply chain, it's been a significant advantage for us for years as we talk about how we build out supply chain and the avenues that we have. I think as we look at the omni channel environment over the last several years, we've enabled several new functions to the supply chain to allow us to continue to meet that demand, flexible fulfillment, which allows us to ship from a store group as well as our RDC. So we're able to meet 94% of our customer demand with next day shipping rates by utilizing that flexibility within the system. We continue to maximize the productivity of the supply chain through new initiatives, such as Project Rhythm, which we work with vendors in smoothing out orders and order flow to make sure that we're as effective as possible.
We continue to drive labor efficiency in the supply chain through utilization of lean system of practices and processes and making sure that we're able to get the effective use of tubing out the trailers and the trucks to move forward. Fleet and fuel cost continues to be an advantage in the tailwind currently. So we continue to see those avenues playing significant dividends for us over the next several months and quite frankly, the next couple of years. As we look into the construction of possibly the Internet Fulfillment Center or DFC, Direct to Customer Fulfillment Center, which we have currently plans underway and being built out for a forecasted opening in the 2018 time horizon.
Thank you.
Martina, if we got time for one more question.
Our final question will come from the line of Peter Benedict with Robert Baird. Please go ahead.
Hi, guys. Thanks for taking one more here. So a couple of questions. First, I mean, the comment about Pro being well above the company average. I know it was above average in the Q4, but it sounded obviously the tone to that comment was a lot stronger.
Any way to quantify that, this gap relative to maybe historical trend? Is this about as strong a gap as you've seen? Just trying to get a flavor for just how strong that momentum is right now.
So the pro performance, Pete, in Q1 was approaching double digits.
Okay. Good. That's helpful, Bob. Thank you. And then, on the online business, what are the largest categories that you guys are selling online right now?
And then what are the fastest growing? I mean, are there certain categories that are kind of coming on strong? Just curious how that looks.
A couple of things. I'd say for the most part, where you see simply placed items, they tend to do better online, like appliances as an example. But one of the differences in our strategy is that we help customers pull together projects. And that tends to lend itself more towards omni as the best tool to serve those customers' needs. But the our encouragement of online is moderated by the fact that we tend to be more project oriented than simply replace, thus we talk about being the project authority and not talk to just products.
Yes. And I wanted to add to that as we continue to look at overall traffic to the site. As I said earlier, we've been extremely pleased with receptivity to new functionality of the side from the consumer. And I think that's representative in the results over the last couple of quarters as well as the investments that we're making to make content more effective for the customers from an aggregation of data perspective as well as product information. As such, we've been extremely pleased with the sales from the site, the visits to the site have continued to grow as well as improvements in conversion and average ticket.
So as Mike talked about, we continue to see those core fundamental categories continue to do well, the single product categories, particularly in appliances and those categories. And again, I think it's important to highlight that the store still plays a critical role in the omni channel world, where our customers are choosing to either pick up or have delivered 70% of all of our transactions from those.com, from the store with 30% still being parcel. So we feel good with where we are. We feel good with the traction we're making in making the site much more effective and user friendly.
Very helpful. Last part would be on lawn and garden. Obviously, strong in the quarter, but curious about the spread north versus south. I mean, certainly a lot stronger in the south, I think, than the north. How large was that gap?
And what kind of opportunity do you see in lawn and garden in, call it, the north, northeast, over the balance of the Q2? Thank you.
We think spring is still to come in the Northeast certainly. So we think there's still some lawn and garden business to go get. But I do want to just say one thing. If you think about our business, we have some strong promotions in lawn and garden. The rest of our business continues to do extremely well.
So, if you look at paint as an example where we had really high comps above the company average, applicators, exterior stains, exterior paint, spray paint, caulk, interior stains, all double digit. So we feel good about some of the spring that's ahead of us. We think that's going to drive our lawn and garden business. We feel even better about some of our big initiatives that are also driving our business.
Terrific. Thanks so much, guys.
Thanks, Pete.
Thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our Q2 results on Wednesday, August 17. Have a great
day. Ladies and gentlemen, this concludes today's conference. Thank you all for joining and you may now disconnect.