Good morning, everyone, and welcome to Loews Company's 4th Quarter 2015 Earnings Conference Call. This call is being recorded. Within the investor packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non GAAP financial measures.
The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr.
Robert Knibloc, Chairman, President and Chief Executive Officer Mr. Mike Jones, Chief Customer 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. We delivered another solid quarter with comparable sales growth of 5.2%, which exceeded our expectations. Our efforts to drive traffic, which Mike will share in more detail, have resonated with customers, resulting in a 3.6% increase in comp transactions, along with a 1.6% increase in average ticket. Our U. S.
Home improvement business achieved 5.5% comps for the quarter with all 14 regions generating positive comps. And our strong performance in Canada continues with double digit comps in local currency for the 3rd year in a row. During the quarter, we generated positive comps in all 13 product categories. We capitalized on increased demand for exterior products as a result of warmer weather with strength in lumber and building materials, outdoor power equipment, lawn and garden and millwork, while at the same time driving strong mid single digit comps in interior project categories such as paint and fashion fixtures. And as a result of our strong brand and service advantages, we continue to drive strong comps in appliances.
Lastly, our Pro business performed above the company average as we continue to build deeper relationships with the pro by enhancing our product and service offering to meet their unique needs. For the quarter, we drove 79 basis points of adjusted operating margin expansion and adjusted earnings per share of $0.59 a 28% increase over last year's Q4. For the year, we delivered comparable sales growth of 4.8 and adjusted earnings per share of $3.29 a 21% increase over 2014. Delivering our commitment to return excess cash to shareholders, in the quarter we repurchased $562,000,000 of stock under our share repurchase program and paid $257,000,000 in dividends. For the year, we repurchased $3,800,000,000 of stock and paid $957,000,000 in dividends.
As we head into 2016, the outlook for the home improvement industry remains positive. Continued support from steady job gains and improved incomes as well as favorable trends in housing should keep home improvement growth buoyant. Further, despite recent volatility in the financial markets, the fundamentals for continued growth in consumer spending remain intact. Consumers should continue to benefit from improved household financial conditions and lower gas prices on top of broader job and income gains. These trends align with the results of our most recent consumer sentiment survey, where favorable perceptions around personal finances remain stable, even though respondents' assessment of the national economy declined slightly.
For the home improvement industry specifically, we continue to see favorable trends as the desire to invest in the home continues to grow. Roughly half of homeowners believe the value of their home has increased, which is double the number feeling that way in 2,009 and many believe this trend will continue as we saw a significant increase in future home value expectations. And while most homeowners indicated their spending levels are staying the same, they're more likely to allocate funds to home improvement compared to other areas. In 2016, we will continue to leverage the favorable backdrop for home improvement, delivering great service to customers, while also anticipating how Lowe's will meet their needs in the future. We take a prudent approach to managing our portfolio of businesses, making decisions that shape how we serve and connect with customers.
Giving careful consideration to how we position Lowe's favorably for sustainable growth, we invest to obtain compelling returns over the long run. As we carry out our capital allocation priorities, which remain unchanged from what we shared previously, our first priority is to invest in the business. We then seek to return excess cash to shareholders in the form of dividends and share repurchases. We demonstrated our disciplined approach to capital allocation with recent changes in our international business. 1st, after a comprehensive strategic analysis, we decided to exit the Australian home improvement market withdrawing from our joint venture with Woolworths.
We made the decision to focus resources on areas of the business where we see greater potential return on investment. 2nd, seeking to reinforce our portfolio of businesses in North America, we committed to accelerating our growth in Canada by announcing our agreement to acquire Rona. The time is right to strengthen the company's Canadian operations 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 the past several years as a result of their restructuring efforts. With this transaction, we see opportunities to further increase revenue and operating profitability in Canada, including enhancing customer relevance by utilizing our strengths as a leading omnichannel home improvement company and drawing on our customer experience design capabilities expanding customer reach and serving a new portion of the market by applying our expertise in certain product categories, including our best in class appliance offering driving increased profitability in Canada by leveraging shared supplier relationships and enhanced scale as well as Lowe's private label capabilities in addition to eliminating RONUS public company cost.
At the same time, we're reinforcing our international businesses. Our U. S. Home improvement business with a dedicated focus from Mike and Rick's team is diligently working to drive profitable share gains within the U. S.
Market. In 2016, their efforts will continue to focus on improving our product and service offering for the pro customer and differentiating ourselves through better customer experiences that make us the project authority. Across the enterprise, we strive to be a customer centric omnichannel company. So we'll continue to enhance our omnichannel capabilities, evolving from a multi offering to an omni channel experience, where all of our channels work in concert with one another, we will support customers at every step of their home improvement journey and build greater affinity for the Lowe's brand. This strategic framework, along with our efforts to improve our productivity and profitability, give us confidence in our business outlook for 2016.
Bob will share those details in a few minutes. This is an exciting time for Lowe's, and I would like to thank our employees for their incredible contribution they make every day. It's their hard work and commitment to delivering outstanding customer service that makes this company great, and I look forward to what their efforts produce in 2016. Thanks again for your interest. And with that, let me turn
the call over to Mike. Thanks, Robert, and good morning, everyone. As Robert shared with you, we delivered another solid quarter with positive comps across all regions and product categories. We executed well in the 4th quarter, growing both average ticket and transaction. We drove the business of 8% overall and 26% online with compelling offers in special buys and tools, holiday decor, appliance and other traffic drivers, creating strong values for customers while remaining true to our strategic focus and core strength in home improvement.
We drove increases in traffic for the quarter through competitive offers, enhanced online selling capabilities and improved marketing speed and flexibility from our digital capabilities where we tested new concepts like deal of the day. We also rebalanced year end promotions to take advantage of the extended outdoor season. Looking at product category performance, we recorded above average comps in lumber and building materials, appliances, lawn garden and paint. We saw particular strength in outdoor project categories led by lumber and building materials, lawn and garden and the millwork as customers took advantage of mild weather to constant soil, mulch and lawn care. Our new landscape lighting experience drove strong performance as well bringing outdoor lighting projects to light by providing inspiration, each strong Thompson appliances for yet another quarter, leveraging our investment and customer experience both in store and online.
In store, our 17 appliance suites showcasing coordinated appliances allows customers to visualize how their appliance purchase will look in their existing or remodeled kitchen, Not just as a single replacement purchase, but as a full set of new appliances and allows us to showcase innovations such as black stainless steel, a new appliance finish and new product collections like the Frigidaire Professional collection, a Lowe's Home Channel exclusive. Online we have enhanced our customer experience and presentation on lowes.com including improved product search, integrated and upgraded product videos, enhanced product presentation like 360 degree views and simplified product groupings to make it easy for customers to make this selection. Our continued focus on knowledge with sales specialists as well as delivery and hallway service combined to drive our sustained share gains in appliances. In fact, J. D.
Power and Associates ranked Lowe's the number one appliance retailer for 2015. Paint benefited from increased project activity as well as growing awareness of our 3 brand offering. With the launch of HGTV Home by Sharon Williams at the beginning of the Q2, we are now providing customers with the full suite of top brands they trust for their next paint project. 11 provides quality at a great value and use the application, thus far specializes in color authority with the 11 color guarantee and HGTV Home by Sherwin Williams provides strong brand recognition, designer coordinated colors and quality that customers trust. We are also proud to announce the expansion of HGTV Home by Sherwin Williams, the introduction of Infinity, our premium one coat paint and primer with exceptional hiding power and coverage available in our stores in March.
As customers engage in both indoor and outdoor projects, we leverage our omni channel capabilities to help them achieve great results, not only in our stores and online, but also through our project specialists who meet the customers in their homes. This capability represents another important element of our omni channel strategy. We have project specialists who focus on the exterior of the home available across all U. S. Stores and we are expanding our interior project specialist program reaching all stores by the end of 2016.
We're very pleased with our in home sales program performance with above average comp again this quarter. With our ability to coordinate style, provide design expertise and find the right contract to the job, we are rapidly becoming the project authority in home improvement. And our customer experience design capabilities continue to pay dividends, leveraging our largest store format and space initially created for the outdoor living experience, we again showcase our holiday decor experience, an inspirational holiday showroom where customers can see everything from point setters and artificial trees to indoor and outdoor decorations and gifts. Developed the collaboration between our merchants, stores and dedicated customer experience design team, the holiday decor experience inspired customers to decorate, raised the awareness of the breadth of our holiday decor and gift offerings and provided project solutions relevant to the holiday micro seasons. The customer response was very positive, driving strong sales and attachments for the products included in the set.
We're now transitioning the space back to our outdoor living experience in preparation for the critical spring selling season. Towards the end of the quarter, as winter storm Jonas approach, we're able to serve customers' needs as they work to prepare for and clean up from the storm. Our supply chain demonstrated agility and flexibility as we work to move inventories such as snow throwers, generators, ice melt and heaters to the areas in the path of the storm. We are proud of the way our supply chain teams and associates responded to the needs of our customers during winter storm Jones. We also continue to strengthen our pro business driving comps above the company average by continuing to advance our product and service offering to meet their unique needs.
Throughout the year, we strengthened our portfolio of pro focused brands with the addition of Goblok Masonry Tools, JF Roofing, Owens Corning Insulation, Lennox HVAC and Masonite Entry and Interior Doors. In addition to leveraging our long standing partnerships with Hitachi, Stanley Bostik, Bosch, Vaughn and Passload to develop a broad pro relevant selection of tools and fasteners. We are also proud to introduce Cabbage Stains, one of America's most recognized stain brands rolling to our stores in the Q1. We continue to incorporate feedback from the pro customer and store employees into a better offering experience by working closely with our field based merchandising managers to identify local market opportunities and introduce products optimized to local norms to further increase our relevance with pros. Along with strengthening our brand portfolio, we relaunched lows for pros.com at the beginning of the second quarter making it easy for PROs to manage multiple properties and easily purchase items for the locations nationwide.
We are also actively serving the pro through our account executive services or AEPs. AEPs call our regional customers to help them order and replenish products across multiple stores. Our AEPs have been very effective in growing our business with larger pro customers especially maintenance repair and operations or MRO customers. We currently have over 160 pro outsized sales representatives in the field and are very pleased with programs results. Excluding the AEPs we added this year, we saw double digit growth in AEP sales, which contributed to solid pro comp sales growth in the quarter.
Building on this success, we plan to add an additional 35 AEPs in the first half of twenty sixteen. We're also reconnected with pros who have not recently purchased from Lowe's to show them what's changed in our stores and online using target marketing as well as pro focus events to drive awareness and generate new business. For example, our post services team engaged with customers at the International Builders Show in Las Vegas, driving awareness of the platform and services we provide. We then extended the interaction to our stores for a first time builder week with special product and credit offers for the Pro. Our focus on strengthening our portfolio of brands, serving Pro customers through our Pro service team, as well as our re launch of loads for pros.com are part of a broader commitment to build on a strong foundation with the Pro.
In addition to our efforts to drive top line growth, we continue to focus on driving productivity and profitability. Gross margin was flat year over year as improvements driven by our line review process and inflation were offset by the impact of product mix and promotions. Once again, our stores effectively manage payroll hours on solid comp sales growth, driving 25 basis points of payroll expense leverage, but also driving strong customer satisfaction scores. We also continue to drive productivity and marketing by optimizing our media allocation, increasing our presence in targeted digital advertising, expanding our social media presence and reducing print advertising thereby increasing the efficiency and effectiveness of our media vibe while improving our advertising spend, all while maintaining our customer reach and improving exposure. And we continue to identify and implement additional expense efficiencies by consolidating the procurement of similar types of goods and services across our corporate and store functions.
During the quarter, we demonstrated the flexibility and capabilities of our supply chain as our distribution teams worked efficiently to move inventory to meet customer needs, not only as they prepare for winter storms in the Mid Atlantic and the Northeast, but also to meet the heightened demand in the Pacific Northwest. While inventory at quarter end was up 6% to last year, it reflects our commitment to being in stock for items that are most relevant to our customers, as well as timing of spring buys, including the impact Chinese New Year's and a higher level of inventory to support strong sales growth in categories such as appliances. As you can see, we are pleased with our 4th quarter results and the progress we continue to make on our initiatives to drive top line growth, productivity and profitability. We look forward to sharing further progress with you over the coming quarters. Thank you for your interest in Lowe's.
I will now turn the call over to Bob.
Thanks, Mike, and good morning, everyone. Sales for the Q4 were $13,200,000,000 a 5.6% increase over last year's Q4. Total transactions increased by 4% and total average ticket increased 1.5% to 67 point $5 Comp sales were 5.2 percent for the quarter. As you heard from Mike, solid execution drove balanced performance in the quarter. Comp transactions increased 3.6% and comp average ticket 6%
and comp average
ticket increased 1.6%. Looking at monthly trends, comps were 2.8% in November, 7.3% in December and 5 point 3% in January. For the year, total sales were $59,100,000,000 an increase of 5.1%, driven by comp sales of 4.8% and new stores. For 2015, comp average ticket increased 2.5% and comp transactions increased 2.2%. Gross margin for the 4th quarter was 34.66 percent of sales, which is flat to last year.
In the quarter, product cost deflation and value improvement aided gross margin, but were offset by pressure from the mix of products sold and promotions. For the year, gross margin of 34.82 percent of sales represented an increase of 3 basis points over 2014. In January, we made the decision to exit our joint venture in Australia. There is a process in the joint venture agreement for purposes of determining the value of our portion of the joint venture. We are working our way through that process and expect it to be completed in the next month or so.
We recorded a $530,000,000 non cash impairment charge in the Q4. The charge includes the cumulative impact of the strengthening U. S. Dollar over the life of the investment. The valuation is based on our best estimate of our onethree interest in the quarter, while the earnings per share reduction was $0.56 Finally, as a majority and $48,000,000 for Q4 and the year respectively.
As a result of our decision to exercise our put option, we are no longer required to make capital contributions or absorb future operating losses. My comments from this point will be focused on our operating performance and will exclude the impact of the joint venture impairment. Adjusted SG and A was 24.55 percent of sales, which leveraged 69 basis points. The leverage came from a number of areas. Mike mentioned too, store payroll which leveraged 25 to 20 basis points, respectively.
Utilities expense leveraged 12 basis points, primarily the result of warmer weather. Employee insurance leveraged both the number and severity of claims. Also, given the sales growth, we were able to leverage fixed costs. For the year, adjusted SG and A was 23% of sales and leveraged 62 basis points versus 2014. Depreciation expense was $369,000,000 for the quarter, which is 2.79 percent of sales and leveraged 10 basis points.
Adjusted earnings before interest and taxes for the quarter were 7.32 percent to sales, which represented a 79 basis point increase. For the year, adjusted EBIT of 9.31 percent represented an increase of 78 basis points over 2014. Interest expense at $144,000,000 for the quarter deleveraged 3 basis points as a percentage of sales. Regarding the reported tax rate, the impairment gives rise to a capital loss versus an operating loss and therefore is not immediately deductible. To the extent the company's future capital gains, we'll be able to offset this loss.
Adjusted net earnings for the quarter were $541,000,000 which increased 20.2% versus last year. Adjusted earnings per share of $0.59 for the quarter were up 28.3 percent to last year. For 2015, adjusted earnings per share of $3.29 were up 21.4% versus 2014. Consisting to the balance sheet. Cash and cash equivalents at the end of the quarter were $405,000,000 Inventory at $9,500,000,000 was up $547,000,000 or 6.1 percent over last year, Roughly $200,000,000 or 2.2 percent of the growth was driven by the timing of Chinese New Year with the rest of the increase to support sales growth.
Or 10% over last year. The increase relates to both higher inventory levels and a 2 day improvement in days payable outstanding.
At the
end of the quarter end of the 4th quarter, lease adjusted debt to EBITDAR was 2.14. Return on invested capital increased 18 basis points to 14.1%. We estimate that the impairment charge negatively impacted ROIC by 2.38 basis points. 2015 was the 3rd consecutive year that ROIC improved by more than 200 basis points. Now looking at the statement of cash flows.
Cash flow from operations was $4,800,000,000 capital expenditures were $1,200,000,000 resulting in free cash flow of $3,600,000,000 During the quarter, we repurchased 7,600,000,000 shares or $562,000,000 through the open market. For the year, we repurchased almost 54,000,000 shares, which included $3,800,000,000 from the company's share repurchase program as well as shares withheld from employees to satisfy statutory tax withholding liabilities for a total of 3,900,000,000 $9,000,000,000 Looking ahead, I'd like to address several of the items detailed in Loews business outlook. But first, I want to highlight that fiscal 2016 will include an extra week in the Q4 for a total of 14 weeks and 53 weeks for the year. Lowe's fiscal year end on the Friday nearest the end of January. This means we'd have a 53 week year roughly every 5 years.
Our last 53 week year was 2011. For 2016, 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 Secondly, while we have reached agreement to acquire RONA, we have shareholder and regulatory approvals ahead of us. As a result, our outlook excludes the impact of the RONA transaction. Now let's get into the outlook. As Robert noted, the forecast for the home improvement industry remains positive.
While we're optimistic about that forecast, we've taken a prudent approach to our 20 16 outlook. 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, largely the result of the Target lease acquisition. For ease of modeling, the EBIT and EPS growth rates exclude the impact of the impairment charge. We are anticipating an EBIT increase of 80 basis points to 90 basis points from a combination of gross margin, SG and A and depreciation. As you've heard from others, there is wage pressure in the marketplace.
Our outlook for 2016 assumes roughly 7 basis points or $0.03 per share of pressure associated with above average wage inflation. For 2016, we expect 25 to 30 basis points of EBIT expansion per point and comp above 1%. While this is our expectation for the year, there will be some choppiness quarter to quarter. Similar to last year, 2,000 EBIT expansion will be stronger in the second half of the year, primarily driven by gross margin bonus and the impact of the 53rd week. As a result, we are forecasting EBIT expansion of 50 to 60 basis points for the first half and 115 basis points to 125 basis points for the second half of the year.
And looking at our guidance model relative to first call, the mean estimate for the first half of the year appears to be heavy by about $0.02 per share in both Q1 and Q2, and the Q4 looks light, likely as a result of the 53rd week. The effective tax rate is expected to be 38.1%. For the year, we expect earnings per share of approximately $4 which represents an increase of 21.6 percent over 20.15 adjusted EPS. We are forecasting cash flow 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 20.16. We expect to issue incremental debt during the year as we manage to the 2.25 debt to EBITDAR target.
We had approximately $3,600,000,000 remaining under share repurchase authorization at the end of the fiscal year. Our guidance assumes approximately $3,500,000,000 in share repurchases for 2016. The share repurchase assumption of $3,500,000,000 is not expected to be affected by the Rona acquisition. Regina, we are now ready for
questions. Our first question will come from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Thanks. Good morning. Bob, just a quick follow-up on the progression of the flow through for the year. I guess that we were under the impression there were some indirect costs that had come out in the middle part of this the last year and that would still roll through the model in the 1st part of 2016. And so why I guess isn't that the case?
And can you just put a little more color around why bonus and GM? I don't know if those were mentioned in any part of the year, but what are the factors that are going to, I think help you with flow through in those areas?
So Simeon, there's a variety of factors that contribute to flow through being a little bit heavier in the second half of the year. Gross margin, really based on the mix of products primarily. We had a greater mix impact in the Q4 and the second half of the year than we did in the year as a whole. That's the primary difference driving a little bit heavier gross margin expansion in the second half than the first half. For bonus, we came into the year expecting 10 basis points, ended up being flat as a percent of sales for 2015 relative to 2014.
A lot of that difference came in the 4th quarter on the strength of our sales performance. Our bonus programs are predicated on sales and earnings performance and on the strength of our sales performance.
Our bonus programs are predicated on sales
and earnings performance and based on the strength of the sales results for the Q4, we increased bonus accruals. As a result, we'll have the opportunity to leverage against that build in Q4 2015. Another smaller item store environment, such as the timing of projects, weighted more in the first half versus second half as we think about 2016 versus 2015. And then impact of the 53rd week, we have roughly $900,000,000 of additional sales in the 4th quarter. That's going to drive roughly 15 basis points of higher EBIT in the second half of the year as a result of that.
So those are the major factors giving rise to the difference in flow through second half versus first half.
And to clarify, are there incremental indirect costs that could come during the year? And then I'll just ask my follow-up in case I get cut off. Just the volatility or the variability in the months in the quarter, November was weak, I think but you mentioned Black Friday was good, I think, but November was a little weak. December was great against tough compares. Does anything explain that?
Anything strategically? Does it sync up with promotions, etcetera?
As it relates to the second question, really tough weather first half of November, primarily in the Southeast. So if you think about our footprint, our Southeast orientation that had an impact on the first half of November. After that, we saw a much improved performance in the second half of November. And as Mike indicated, we had very good Black Friday performance. As it relates to other indirect costs, we continue to work on our indirect spend and would expect to see a leverage throughout 2016 from those efforts.
Okay, thanks.
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. It's about the promotional activity that you undertook during the quarter. Is that something that you had planned on doing? Or was it more in response to what you saw in the marketplace and then responded in kind?
Good morning, Michael. This is Mike Jones. I'd say, it seems like this, most of it was planned. We do make adjustments as we see the competitive activity in the marketplace, and we will, at times, move out of one form of promotion to another. One of the things that you saw us do was move from credit as a primary form of motion at certain points in the quarter into other forms of promotion.
But the total activity level is exactly where we planned it to be. The executing towards that activity level, we do make adjustments within the
quarter.
So just trying to interpret what you're saying, Mike. You had planned to do some promotions in the Q4. You were going to move away from offering extended terms of free financing towards more pricing and discounting. That's how it happened. And is that a right interpretation of how it unfolded?
I'd say a little different. We plan to do promotions within the quarter. We promoted to the level that we plan to promote to. And one of the adjustments that we made in the quarter was less financing and more towards discounts is what we did in the quarter. So total level is exactly where we expected it to be with some adjustments within the quarter on how we got there.
Are there signs that the sector is becoming more promotional? Maybe it's some struggle just with their survival, they're doing things to be more relevant and so you're having to respond or is it just that this is the direction the world's heading?
I don't think so. I think where those are having challenges, the challenges are probably something other than just straight price. I think there are folks having challenges around their format, and I'm not sure they're going to promote their way out of those kind of challenges. And so, I would describe the market as very rational. When we go after what we target for share gains, we do it in a way that's rational.
I think the majority of us do exactly that. So, I don't see it becoming more promotional. I don't see I don't think I see anyone doing anything that's going to suggest that the market goes in a bad space as we saw other people trying to survive. I just haven't seen that.
Michael, this is Robert. Also keep in mind, it's not just the promotional cadence that we executed in the quarter versus our plan. It also comes into play the success of those promotions. So for example, we didn't plan appliances to be high single digit comps for the quarter. There was opportunity there.
Obviously, as we've talked about in the past that particularly the Q4, that's a category of merchandise that is from a competitive standpoint is something that gets promoted through the holidays and we had great receptivity, great success with the appliance offering, the suites that Mike talked about being in the store. So part of it is not only staying on the program, but the success of what we saw, which drove some of that mix impact as well.
The EBIT impact of promotions in Q4 was about as planned. The complexion, as Mike described, between gross margin and SG and A was a bit different.
Good morning. A couple of follow-up questions. So in January, with Deepa talked about yesterday that being mainly a December phenomenon. Was there a benefit from the big storm in January? Trying to get an understanding of what's a real good indication of the underlying run rate of demand in the business that looks like a 5.3% in your guide into 4% for the year?
I'll start, Chris, and I'll let Bob talk specifically about how things fell in January. Just kind of as we said in our comments, if you think about the quarter, I mean, no year or what, but certainly overall warmer weather for the majority of the quarter that extended the season for the outdoor product categories, which is what we went through your kind of lawn and garden, lumber and building material, those that we saw really strong outdoor power equipment that we saw really strong performance for. But then when you add stuff like Hurricane Jonas hit I'm sorry, Superstorm Jonas hit, we were really in really great shape with the products that customers need at that point in time. So anytime that you're selling snow throwers and ice melt, those things, you're not selling a lot of other stuff. But when the customer needs that product being in supply of those products, which our merchants did a great job with having secured the access to the product, as Mike took you through our supply chain, did a great job of getting that product in the market where the customer needed to where it was impactful for the customer have that product.
So all in all, there was great execution in the quarter and taking advantage of the opportunity that was there. Bob, you want to talk specifically the weather impact of January?
So as Robert said, with extreme weather, you're selling the impacted products, but your traffic is basically down. You're not selling any of the exterior products. The weather impact for the quarter was largely contained to December, roughly 50 basis points impact for the quarter. But as I mentioned, most of that impact was felt in December.
And then so as a follow-up to that, the 5.3 in January, maybe thinking about that and then reflecting on the comp progression throughout the year and how you're thinking about the Q1, first half versus second half?
So as we think about 2016, we see the 4 quarters in a relatively tight band. There's some movement up or down, but it's not substantial for the year. So as we think about the 4%, it should be fairly consistent across the 4 quarters.
Understood. And then one follow-up, which is on the EBIT line. So we had modeled, I think almost 20 basis points of bonus leverage. So in the Q4 and it sounds like that was flat. Was that basically the delta versus your model in terms of driving the leverage?
And as you think about getting to the 25 to 30 basis points next year, it seems like sales upside results in less margin flow through as you saw in the Q4. So I guess trying to reconcile those two things.
Yes. So the flow through was impacted in the quarter and for the year by two factors. And we've talked about both, bonuses 1 and the mix impact on gross margin is the second. If you have rough math on the year, which would get us into the 25 to 30 basis point range, we are comfortable with the guided range for 2016 and would also be in that 25 to 30 basis point range.
Just
a question kind of on the spring upcoming. I mean, how does the warmer winter kind of set you up for the spring? Have you guys made any adjustments in terms of the timings of your sets, how you're approaching the spring business?
Good morning, Peter. It's Mike Jones. Hi, Mike. Yes. From an inventory perspective, I talked earlier to having brought in inventory a little sooner to be sure that we're prepared for the spring.
But we're also looking at category performance so that we can take advantage of what we think is going to be some upside. With the way we've made some adjustments to how we're doing our resets in terms of outdoor patio and some of those categories. So, yes, we're ready for the spring. We think it could be a good spring for us and we want to be there to take advantage of it. And you saw us do that on the other side of the fall as well, taking carrying some of the fall lines longer into the year to take advantage of what looked like a longer fall season.
Yes. Peter, this is Rick. I'd also add to that. Just from an
inventory perspective, Bob talked
about the impact of Chinese New Year and the perspective, Bob talked about the impact of Chinese New Year and the timing of that and the impact that had on the inventory layers for the quarter. So majority of that product is spring related. So we have that in our systems. It's in our DCs and being loaded into the store. So we feel good both from a staffing perspective as we plan the quarter as well as the flow of inventory that we won't have and we won't see any significant gaps if the weather continues to hold as is or accelerate into an early spring.
Okay. That's helpful. And then just on the big ticket comps, they were solid, 6.6%, those transactions above 500, but they did slow a little bit or decelerate from the Q3. Just curious given what's going on in the stock market, some of these energy markets, just curious if you're seeing anything kind of when you peel back the onion, any kind of wealth effect impacts on some higher ticket project demand? Again, it doesn't look like it's impacting the overall business, but anything in particular you can point out there either regionally or what have you?
Thank you.
We're not, Peter. Our business continues to be driven by income and housing. So really solid progress on the number of jobs added throughout 2015 as well as late in the years, starting to see some real wage appreciation as it relates to housing continued solid turnover through 2015 as well as mid single digit home price depreciation. So all those factors continue to drive demand for home improvement, and we see similar factors going into 2016.
Your next question comes from the line of Greg with Evercore ISI.
A couple of questions. I want
to start with deflation, what you're seeing in lumber and copper in the quarter and what the outlook you think is into this year?
So those two items, lumber and copper, negatively impacted Q4 by 35 basis points. We expect roughly similar impact in Q1, but the impact dissipates as we progress through 2016.
Okay, great. And then second, I just wanted to make sure I got the CapEx cash flow buyback tied together correctly. It looks like you'll be generating $3,500,000,000 of free cash flow, but buying back $3,500,000,000 of stock and that's excluding the acquisition or anything you might get from the Australian joint venture. So if we get the deal in Canada done early, should we expect that $3,500,000,000 to be less? Or does that $3,500,000,000 sort of factor in that, that expense is kind of out there?
And I guess why CapEx ticked up this year to $1,500,000,000
So regarding CapEx, the higher number of store openings is the biggest driver for CapEx. There was some timing of projects. A couple of stores slipped from 2015 to 2016 as well as some other projects, which moved about $100,000,000 from 2015 to 2016. Adjusting for that, we basically compare one $4,000,000 in 'sixteen to 1.3 $15,000,000 Bear in mind that the 'fifteen number includes roughly $200,000,000 associated with the purchase of the Target DC and leases. Specific to the buyback and cash flow generation, you are correct that it excludes both the RONA transaction and any funds received from the joint venture.
However, even if the transaction goes through in the middle of the year, we do not expect that the 3,500,000 share repurchase would be reduced.
Okay, great. And then online growth, I think, Mike, you mentioned up 26%, but that was around Black Friday. Do you have a number for the whole quarter?
Yes, Greg,
this is
Rick. For the quarter, the online business was up 26% in total. So that was a quarter number.
Okay, got it. And what percent of sales now?
3% of total sales.
Thanks. Good luck, guys.
Thanks, Greg.
Your next question comes from the line of Seth Sigman with Credit Suisse. Please go ahead.
Thanks. Good morning, guys. First a question on the long term guidance, the 11% EBIT margin goal. I know you said you would update us at some point, but just as we look at the numbers, it seems to imply a similar margin improvement in 2017 as 2016, but of course 2016 has that extra week. So on a 52 week basis, it
suggest roughly the same level of EBIT improvement in 2017 versus 2016. So you're would suggest roughly the same level of EBIT improvement in 2017 versus 2016. So you're correct on that. Regarding the 53rd week, while it is an extra week, it's essentially one of our lowest, if not the lowest volume sales week of the year. So it's not a terribly productive sales week.
It has some impact on the second half of the year, as I mentioned, but the EBIT impact is only about 3 basis points for the year. So minimal impact in 'fifteen going into 'sixteen going into 'seventeen.
Okay. Got it. And then a question on the Pro side of the business. You mentioned that was performing above the company average. That seems to be a change versus the last couple of quarters at least.
Can you elaborate on that trend? Do you think that's an industry trend or something specific that's resonating? And then I guess on the other side of that, does it imply any major change in the trend for the DIY side of the business?
This is Robert. I'll start and then I'll let the other guys jump in. Yes, I think part of what we signaled was giving the favorable weather that we had during the quarter that I think that also helped drive some strength in the pro business, because you think about the ability for a lot of the project categories that we talked about for them to continue to work and implement. And on top of that, a lot of the other initiatives that we've put in place such as laserpros.com, the incremental resources that we've put in place or that is resonating with the consumer. So I think part of it is kind of an industry macro that the weather set up and allowed for incremental opportunity in those product categories, which drove some of that business.
And then on top of that, some of the specific stuff that and resources we've put behind our pro initiative and becoming more relevant with that pro customer.
Yes. This is Rick. And I'll agree with Robert, weather had an impact on the Pro when we look at the categories of performance, particularly through the months of December. But I think it also continues to resonate and highlight the way the Pro continues to respond to our initiatives, both from a brand perspective, both from a service standpoint and a value standpoint that we remain relevant. Mike highlighted earlier, 160 people adding another 35 into that organization, continues to perform extremely well and resonate with the customer, particularly on our large MRO counts and our national counts as we continue to see those grow.
And the our core programs of our 5 ways to save for the pro customer continues to resonate really well. So we think we'll continue to build upon a solid foundation that we've put in place over the last couple of years.
Okay. Thank you.
Your next question comes from the line of Eric Bouchard with Cleveland Research. Please go ahead.
Good morning. Curious if you could talk a little bit about your thoughts on market share with both the DIY customer and pro customer, how you'd evaluate the performance in 2015 and how you think about how that might performance how that performance might compare in 2016?
I'll start, Eric. Obviously, we think that as we look at plan and expectations, I think the team did a good job of capitalizing on opportunities that presented itself in the market. Great examples, appliances and how we the amount of business we did in appliances consistently throughout the year. As we look forward to what the market looks like in 2016, the initiatives we have in place, I still believe that we feel good that some of the changes have taken place in the marketplace that we feel good that we'll continue to with our initiatives gain share in 2016 as well.
And specific to the numbers for the calendar Q4, the mix 4.44 was up 4.6. Our comparable growth was up 5.1. We know that's not a precise measure of the industry, but direction we feel like we're growing a little bit ahead of share. As we think about 2016, we do some work with some partners to try to estimate what the expected growth rate is for our industry. And that would suggest roughly a 4% growth rate for 2016, which sits right on top of our comp with other with new stores that suggest an opportunity to take share in 'sixteen.
I guess specifically, to follow-up on the Pro side, the investments you're making there, especially in the outside selling efforts. I'm curious if you think that allows for a notable improvement in your market share performance with the Pro? Or is 2015 reflective of what that growth rate or what that market performance is going to continue to look like?
Eric, this is Mike Jones. We think there's potential for it to continue. If you look at some of the brands that we brought back in fashion lighting with Kichler, progress lighting in Korzell, that's a 3 brand approach. This approach is a home channel exclusive. You won't find these brands at any other home channel.
And if you look at our strength in fashion line through this past quarter, we're up double digits. Paint, above the company average. Sheryl Williams now bringing on Infinity, Reserve and Olympic. Again, another 3 brand approach. You won't find this particular approach at any of the home channel.
And with the addition of Cabot to couple with Olympic as the knockout punch number 1 and number 2, you won't find that at any other home channel as well. That's going to let us continue to drive share gains and pain. If you look at our approach in nomadic with Hitachi nomadic coupled with Stanley Bostik, that's the number 1 and number 2 nomadic brand in the U. S, you won't find that at any other home channel. I can go through our portfolio of brands that we bought back and exclusives that we have.
And over the past
3 years, we think we've got a
fantastic job. We think that positions us to continue to build more relevance with the Pro. And when you couple that with the other initiatives that we have, we think we've got runway. And we've talked before about GAF coming back, Owens Point installation coming back, we talked about it exclusive, we talked about Gold Black coming back. I mean, we've got a portfolio of plans that we brought back to Lowe's that we think position us for share gains, to Robert's point, both with Pro and with DIY.
So we're comfortable about how we're positioned going into 2016. The team has done a fantastic job at bringing back brands. We think we need to build towards being the project authority and home improvement. We're very comfortable how we're positioned.
Eric, this is Rick. The only thing I would add to that again is the introduction of Lowe's for pros.com in the second half of the year, just getting the slags under it. As we continue to gain traction from that initiative, I think it sets us up well to continue to gain share from the MRO customer as we continue to get traction with those recruits.
Great. Thank you.
Regina, we've got time for one more question.
Our final question will come from the line of Matthew Dassler with Goldman Sachs. Please go ahead.
Thanks so much guys for squeezing me in. I have two questions. The first relates to big ticket and to some of your category disclosure. One category you cited as being a bit softer is kitchen, which I know is kind of a traditional big ticket project oriented category. And my sense is that, that world had had some momentum for you.
So anything in particular holding you back and any macro reading you would take from performance in that category?
This is Mike Jones. No, we don't think it's anything macro. Kitchen is a largely challenged by some pull forward due to October promotions. We had some reset activity in the kitchen as well. But I would talk about the reduced credit promotions that also impacted So we don't think there's anything macro there.
Got it. And then the second question, as we think about bonuses and incentive compensation, it sounds to something really what happened was the sales beat by a greater degree than the earnings and the way the incentives that essentially worked against you and sort of dug the earnings hole just a little bit deeper. As you think about the incentive structure for the stores and the way you pay out bonuses, Is there any thought being given to reworking those in a way that they're more profit or gross profit driven? I understand that the store level associates can't necessarily think about the earnings for the enterprise, but in a way that incentivize sort of the best kind of business that you can do?
Matt, this is Robert. I think, yes, you obviously hit one of the items that put a little pressure on the quarter and that was the sales growth rate versus the earnings growth rate, if you want to call it. And what I'll tell you is that every year we look at our incentive compensation programs all the way across the organization and try and set us up for what we think is going to drive the right response across the organization to take care of the customer and drive the business. And this has been an evolution that we've been on all the way back from when we were just single channel and everything. The incentive compensations were heavily focused, what took place in the four walls of that store to really now today being an omnichannel organization where a store manager is not only compensated on what happens inside their store, but also what happens in their market as well.
So it's an evolution we've gone through as we're going from single channel to multi channel to now omnichannel. But that's part of what Rick and his team do every year is look at the incentive compensation structure and make sure that it's appropriate line. We're very happy with the behaviors that it's driving, but it is something as we continue to evolve, the other parts of our business become bigger parts of the total sales. It is something to look at to make sure that we're driving the right behavior of keeping the customer in the center and always focused on what's best for the customer. That's our job and we'll be doing that.
All right.
Thank you so much.
Well, great. Thanks. And as always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our first quarter results on Wednesday, May 18. Have a great day.
Ladies and gentlemen, this concludes your conference for today. Thank you all for joining and you may now disconnect.