Good morning, everyone, and welcome to Loews Company's 2nd Quarter 2015 Earnings Conference Call. This call is being recorded. Also supplemental reference slides are available on Lowe's Investor Relations website within the investor packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non GAAP financial measures.
The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr.
Robert Knibloc, Chairman, President and Chief Executive Officer Mr. Rick Damron, Chief Operating Officer and Mr. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr. Knibloc for opening remarks.
Please go ahead, sir.
Good morning, and thanks for your interest in Loews. We delivered solid results for the quarter, and I would like to thank our employees for their hard work and commitment to serving customers. Comparable sales grew 4.3%, primarily driven by a 3.3% increase in average ticket. We achieved this growth by executing well in a challenging environment that included an increasingly severe drought in California and historic flooding in Texas. In fact, comparable sales growth for our U.
S. Home improvement business was 4.6% for the quarter with all 14 regions generating positive comps and positive comps in 11 of 13 product categories. Our seasonal business performed well. Strength in outdoor power equipment and seasonal living offset some of the weakness in some of the softness in lawn and garden, which was most pronounced in the West. We also experienced solid growth in big ticket discretionary project categories such as kitchens, flooring, millwork and fashion fixtures.
And for the Q3 in a row, we drove double digit comps in appliances. Our team in Canada continued to deliver strong comps in local currency. Building on the momentum we've been gaining, we're accelerating our store expansion in this market. We recently acquired 12 former Target store locations and 1 distribution center, with plans to open these locations in 2016 2017. Combined with our organic expansion plans, we expect to have roughly 70 stores in Canada by 2017.
Our business in Mexico also performed well during the quarter, achieving double digit comps in local currency. However, as the U. S. Dollar strengthened, we experienced a 30 basis point drag on our consolidated comp due to foreign currency. For the quarter, gross margin contracted 8 basis points, primarily due to the strength in appliances and outdoor power We leveraged operating salaries in the quarter and delivered earnings per share of $1.20 a 15% increase over last year's Q2.
Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $1,500,000,000 of stock under our share repurchase program and paid $218,000,000 in dividends. In May, our Board of Directors approved a 22% increase in our quarterly dividend from $0.23 per share to $0.28 per share. Looking forward to the second half of twenty fifteen, key drivers of the home improvement industry remain supportive for growth. Economists are forecasting a modest acceleration in both incomes and consumer spending this year and recovery in the housing market continues with moderate home price appreciation and stronger gains in housing turnover. We also continue to be encouraged by the results of our 2nd quarter consumer sentiment survey.
Roughly half of respondents indicated that they believe their home values are increasing, double the number from 2012. And this positive sentiment around home values is reading through to spending patterns. With plans to begin a home improvement project in the next 6 months continuing its recent upward trend. Further, survey respondents indicated that growth in their home improvement spending is outpacing increases in their overall spending, suggesting an affinity the strengthening affinity for the home. Our key priorities in 2015 should allow us to capitalize on opportunities within an improving economy.
We're pursuing further top line growth through continued development of omnichannel capabilities, differentiating our shelves through better customer experiences and improving our product and service offerings for the pro customer. We also remain committed to improving our productivity and profitability with opportunities in a few specific areas, including store payroll, marketing and leveraging our scale to get cost savings on indirect spend. Strategic priorities alongside an improving macroeconomic backdrop together with our keen focus on productivity and profitability give us confidence in our business outlook for 2015. Thanks again for your interest. And with that, let me turn the call over to Rick.
Thanks, Robert, and good morning, everyone. During the Q2, we recorded our strongest performance in big ticket categories such as appliances, kitchens, outdoor power equipment and seasonal living. This is a reflection of consumers' increasing desire to invest in their homes as well as the strength of our product offerings in these categories and our evolving omni channel capabilities. In appliances, we drove double digit comps for the 3rd consecutive quarter. In addition to our leading brands in this categories such as Whirlpool, KitchenAid, Bosch, Samsung, LG, Electrolux, Frigidaire and GE, we provide services advantages like delivery and Holloway and facilitate in home repairs and maintenance.
We have further strengthened our offering with the home channel exclusive launch of the Frigidaire Pro Appliance Series and the introduction of 17 kitchen suites. And understanding that more than 80% of customers start shopping for appliances online, we have enhanced our presentation on lowes.com, including improved product search, enhanced videos, improved presentation like 360 degree views and simplified product groupings. It's no wonder that for the 7th time in the last 8 years, JD Power and Associates has ranked Lowe's highest in customer satisfaction among appliance retailers based upon our knowledgeable sales specialist, breadth of assortment, competitive pricing and delivery. In order to sell the entire kitchen, we display our kitchen products, including cabinets and countertops immediately adjacent to our appliance offering. This quarter, we drove above average comps in kitchens through a combination of targeted promotions and our investment in project specialists who meet customers in their homes.
These employees represent another important element of our omnichannel strategy. We now have project specialists who focus on the exterior of the home available across all U. S. Stores and we're expanding our interior project specialist program into another 4 70 stores, reaching over 3 quarters of our stores by year end. With our ability to coordinate style, provide design expertise and find the right contractor to do the job, we are rapidly becoming the project authority in home improvement.
We achieved high single digit comps in outdoor power equipment with particular strength in walk behind and riding mowers and pressure washers. We offer a wide range of mowers to help customers maintain their yards and we continue to provide compelling and exclusive brands and innovations like our innovative cobalt 80 volt handheld outdoor power tools and the home channel exclusive hustler Raptor 60 inches 0 turn mowers, a brand landscapers know and trust. The outdoor living experience we introduced last year drove strong comps in our seasonal living product category. In fact, our patio and outdoor fashion area recorded strong solid comps again this quarter on top of double digit comps last quarter assisted by robust attachment of replacement cushions and other outdoor accessories. Entering the second half of the year, we will use the seasonal stage to address customer needs for the fall by planting, leaf removal, home mineralization and exterior maintenance.
Then as winter arrives, we will help customers refresh their homes for holiday guests, decorate and organize their home after the holidays. We will focus on using this space to provide the inspiration, guidance, products and services that customers need to tackle the projects that are relevant for each micro season. Our performance in paint was in line with the industry. We are pleased with the launch of HGTV Home by Sherman Williams and look forward to building further momentum with this brand. Brand is the number one purchase driver in paint and Sherman Williams is the most recognized brand in the category.
We expect the addition of HGTV by Sherman Williams to appeal to both DIY and Pro customers. Its long standing reputation for quality as well as the color expertise of HGTV allows Loews to offer customers the top brands they trust for their next paint project. Combined with our outstanding Valspar and PPG Olympic brand partnerships, we expect to grow traffic to our stores and increase overall market share in paint. We also continue to strengthen our portfolio of pro focused brands. In addition to the brands we rolled out in the Q1, including Cold Blatt Masonry Tools, GAF Roofing and Owens Corning Insulation, last month we expanded our line of Hitachi Pneumatic nailers and fasteners, a home channel exclusive to Lowe's stores nationwide.
Lowe's now offers the broadest selection of Hitachi power tools with the latest innovations that deliver lighter, faster and more durable products. We continue to collect feedback from our pro customers and employees to identify other local and national brands that best meet the needs of pro customers. Along with strengthening our brand portfolio, we officially relaunched lowesforpros.com at the beginning of the Q2 and have seen an increase in news for our pro customers in line with our expectations. So far, we have been promoting Lowe's for Pros online and through Pro social media. And in the Q3, we will begin the formal launch through our Pro Appreciation Days as well as other media.
We continue to actively serve the Pro through our account executive Pro Services or AEPs. AEPs call on regional customers to help them order and replenish products across multiple stores. We currently have approximately 135 AEPs in the field, an increase of 25 over last year. Our AEPs have been very effective in growing our business with larger pro customers, especially maintenance, repair and operations or MRO customers. We are pleased with the program's results.
Excluding the AEPs we added this year, we saw double digit second quarter growth in AEP sales, which contributed to solid pro comp sales growth in the quarter. Our focus on strengthening our portfolio of brands, serving regional pro customers through AEPs, as well as our recent relaunch at lowespros.com are part of a broader commitment to build on our strong foundation with the Pro. In addition to our efforts to drive top line growth, we continue to focus on driving productivity and profitability. For the quarter, we capitalized on big ticket market share opportunities with strong growth in categories like appliances and outdoor products, which contributed to a slight decline in gross margin rate, but substantial margin dollar growth. We mitigated the unfavorable mix impact by continuing to partner with our vendors to drive innovation, improve first cost through shared efficiencies and to achieve higher sell through of seasonal products.
Our store teams once again effectively managed payroll, increasing sales per hour in line with comps. We continue to leverage our prior technology investments as well as improved selling processes enabled by our customer experience design team. Most importantly, we have achieved this greater payroll efficiency, while improving customer satisfaction scores. We also drove productivity and marketing by increasing our presence in targeted digital media and leveraging our investment in Milo's. And we continue to identify and implement additional expense efficiencies throughout the year by consolidating the procurement of similar types of goods and services across our corporate and store functions.
The quarter tested the flexibility and capabilities of our supply chain and we passed that test with flying colors. To meet heightened demand in the Pacific Northwest where temperatures were unusually warm, our distribution teams worked efficiently to move portable air conditioners from the Northeast. Likewise, they were instrumental in moving products to Eastern Texas, so we could help customers recover from flooding and begin the process of repairing and rebuilding in the wake of storms. While inventory at quarter end was up 4% to last year, it reflects our commitment to being in stock for items that are most relevant to our customers. For instance, we ended the 2nd quarter with higher levels of appliances to support exceptionally strong sales, as well as higher levels of portable air conditioning units and grills.
We expect to sell through most of this seasonal inventory in the Q3 and to end the year with minimal growth in seasonal in inventory per store. We are pleased with our agile execution in the Q2. 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 over the course of the year. Thank you for your interest in Lowe's and I will now turn the call over to Bob.
Thanks Rick and good morning everyone. Sales for the 2nd quarter were $17,300,000,000 an increase of 4.5%. The sales increase was driven by both ticket and transactions with total average ticket up 3.3 percent to $67.83 while total customer transactions grew 1.2%. Comp sales were 4.3%, driven by comp average increase of 3.3% and comp transactions growth of 1%. Looking at monthly trends, comps were 3.6% in May, 4.6% in June and 4.6% in July.
In Q2, July 4 fell in fiscal July this year and fiscal June last year. While the shift did not affect comp sales for the quarter, it did impact the market spread. We estimate that normalizing for the timing of the holiday June July comps would have been 3.9% and 5.8% respectively. Year to date total sales of 31.5 $1,000,000,000 were up 4.9 percent versus the first half of twenty fourteen, driven by a 4.7% increase in comp sales. Gross margin for the 2nd quarter was 34.47% of sales, which decreased 8 basis points from Q2 last year.
The decline in gross margin was driven by mix and promotional activity. The mix of products sold primarily appliances and outdoor power equipment negatively impacted gross margin by approximately 20 basis points. Also, we've noted our efforts to adjust our promotional calendar to be more competitive with the market. We anniversaried this promotional change in the Q3. The pressure from these items was largely offset by value improvement.
Year to date gross margin was 34.92 percent of sales, a decrease of 6 basis points from the first half of twenty fourteen. SG and A for Q2 was 20.94 percent of sales, which leveraged 39 basis points. We experienced leverage in a variety of expenses including store payroll, bonus, including store payroll, bonus, maintenance and repairs, utilities, advertising and payroll taxes. These items were somewhat offset by store closing costs of $13,000,000 related to a lease termination for a recent relocation as well as updated lease assumptions for stores closed in 2011. Also in the quarter, our Canadian business incurred $4,000,000 of expenses associated with the recent purchase of certain Target assets.
This was primarily related to the lease termination cost for our existing distribution center as we work to transition into the larger former Target facility. In addition, the recurring costs associated with the 12 store leases that we assumed. These two items totaled $17,000,000 and impacted EBIT and EPS by 10 basis points and $0.01 per share respectively. Year to date SG and A was 22.39 percent of sales, which leveraged 48 basis points versus the first half of twenty fourteen. Depreciation for the quarter was $375,000,000 which was 2.16 percent of sales and leveraged 10 basis points.
In Q2, earnings before interest and taxes or EBIT increased 41 basis points to 11.37 percent of sales. For the first half of twenty fifteen, EBIT was 10 point one 8 percent of sales, which was 56 basis points higher than the same period last year. For the quarter, interest expense was $133,000,000 The effective tax rate for the quarter was 38.8%. Earnings per share was at $1.20 for the 2nd quarter, an increase of 15.4% over last year. For the 1st 6 months of 2015, earnings per share of $1.90 represented a 15.9% increase over the first half of twenty fourteen.
The $1.90 was in line with our year to date plan. Now to a few items in the balance sheet starting with assets. Cash and cash at the end of the quarter was $900,000,000 Our inventory balance of $9,700,000,000 increased $389,000,000 or 4% versus Q2 last year. As Rick mentioned, the increase was driven by appliances to support sales growth as well as seasonal inventory. Inventory turnover was 3.9, up 16 basis points over last year.
Asset turnover increased 11 basis points to 1.74%. Moving on to the liability section of the balance sheet. Accounts payable of $7,100,000,000 represented a 15% increase over Q2 last year, primarily due to the timing of purchases year over year.
At the
end of the Q2, lease adjusted debt to EBITDAR was 2.08 times. Return on invested capital increased 237 basis points for the quarter to 14.98%. Looking at the statement of cash flows, year to date operating cash flow was almost $4,200,000,000 and capital expenditures were $570,000,000 resulting in free cash flow of nearly $3,600,000,000 which is up 2% to last year. In May, we entered into a $1,000,000,000 accelerated share repurchase agreement. At this point, we expect to receive approximately 14,500,000 shares, but the ultimate number of shares will be determined upon completion of the program in the Q3.
We also repurchased approximately 7,200,000 shares for $500,000,000 through the open market. In total, we repurchased $1,500,000,000 in the quarter. We have approximately $4,900,000,000 remaining on our share repurchase authorization. Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook. As Robert noted, the key drivers of the home improvement industry remain supportive for growth.
For the year, we expect a total sales increase of approximately 4.5 percent to 5% driven by a comp sales increase of 4% to 4.5 percent and the addition of 15 to 20 stores, which includes 5 Orchard and 2 City Center locations. We are anticipating an EBIT increase of 80 to 100 basis points and are targeting 25 to 30 basis points of EBIT expansion for point of comp above 1%. While this is our expectation for the year, there will be some choppiness quarter to quarter. For the year, we expect that most of the EBIT improvement will come from SG and A. Expense leverage will come from store payroll, marketing, bonus and leveraging our scale to achieve cost savings on indirect spend.
In addition, we expect fixed cost leverage associated with sales growth. Our confidence that flow through will accelerate in the second half of 2015 is based on a few items. First, gross margin pressure from both the changes in the promotional calendar and mix should dissipate in the second half and we have much easier second half prior year comparisons. Also in the Q4 of 2014, we increased bonus accruals, which had drive leverage in Q4 this year. Lastly, we expect additional leverage from credit as a result of program growth.
The effective tax rate is expected to be 38.1 percent. The higher rate relative to 2014 is a result of a settlement of prior tax matters recognized in Q1 twenty 14, the higher tax rate impacts earnings growth by roughly $0.06 per share. For the year, we expect earnings per share of approximately $3.29 which represents an increase of 21.4% over 2014. We are forecasting cash flow from operations to be approximately $5,000,000,000 Our capital forecast for 2015 is now approximately $1,300,000,000 which results in estimated free cash flow of $3,700,000,000 for 20.15. We expect to issue incremental debt during the year as we manage to the 2.25 times lease adjusted debt to EBITDAR target.
Our guidance assumes approximately $3,800,000,000 share repurchases for 2015. Regina, we're now ready for questions.
Our first question will come from the line of Simeon Gutman with Morgan Stanley.
Thanks. Good morning. Good morning. So I think the key question is on flow through and thanks for some of that color, Bob. You mentioned that there is going to be some seasonal choppiness first half of this year.
That looks like it was the case because it's below average. You mentioned a couple of items that will, I guess, accelerate that for the back half. I guess, can you reiterate, I guess, what gives you the confidence? Are there some indirect cost saves that are in place or those are still to come? And then as far as the promotional cadence goes, can you just remind us what is a general comment about the overall business?
Or is that within certain categories?
So Simeon, I'll start with kind of the mechanics of the improved flow through in the second half and I'll let Mike talk about changes to the promotional calendar impact on the second half. So there's a number of items that give us confidence that second half flow through is going to be higher than the first half. I called out 3 in my comments. So let me give you a little bit more color around those 3. I mentioned the promotional calendar and mix pressure dissipating as well as easier compares.
If you look at 2014 gross margin improved 42 basis points in the first half of twenty fourteen and declined 6 basis points in the second half. So we do have easier compares in the second half. For 2015, gross margin declined 6 basis points. We expect about 20 basis points of improvement in the second half or roughly a 26 basis point swing. 2nd, in bonus, for the first half of twenty fifteen, we've seen 7 basis points of deleverage in bonus.
We expect about 13 basis points of leverage in the second half of twenty fifteen or roughly a 20 basis point swing. Lastly, Credit was flat to 2014 for the first half. We expect about 15 basis points of leverage in the second half of twenty fifteen for a swing of 15 basis points. So those three items have aligned share of what gives us confidence in the flow through. We do have a couple of other items given timing of projects like facilities, repairs and store environment projects where the first half is a little bit heavier than the second half.
But we do have a number of items that we can point to that give us confidence in the second half flow through.
I'll talk to the promotional environment. I would describe the promotional environment as stable. I'd say in the Q2, we targeted promotions largely at appliances, largely at appliances on the big ticket categories with the intent to match the promotional intensity of the competition. So while our promotional intensity increased relative to the Q2 of last year and was consistent with the competitive environment, we expect that to abate in the second half of the year as we wrap when we started to increase our promotional intensity last year, which was around Labor Day.
Simeon, this is Rick. I would just add to that is the one thing we did in the second half of last year, which was timing around the promotional events is around the holidays with the 2 day extensions of the events. We will not comp that until Labor Day this year. So that's what also Bob was mentioning when we talk about promotional pressure is those incremental 2 days that did not happen last year this time during the first half, we'll begin to comp that actually in Q3.
And just to clarify, the store closing costs, I think some of the Canada costs, those any of those linger into the 3rd or back half? And then I'm assuming that's you're excluding that from some of your leverage assumptions for the remainder of the year?
So those the $17,000,000 I mentioned was in the first half. The only thing that extends into the second half is the carrying costs for the 12 target leases. That's relatively small. That was only about $500,000 of the $4,000,000 in Q2, but that is embedded in our outlook for the year.
Your next question will come from the line of Matthew Fassler with Goldman Sachs.
Thanks a lot and good morning to you. I want to focus on a couple of sales items. First of all, can you talk about the impact of the weather related businesses on the comp overall and especially on transaction count whether that had a material impact and whether you saw the cadence of the business change as both you move past the peak of the outdoor season and perhaps some of the weather issues particularly in Texas would have faded?
So Matt I'll start with the transaction count impact. So we mentioned that we had 2 categories that were below average. Loan and Garden was actually negative. If you think about tickets below $50 they were only up 0.8%. So they were positive, but really hurt by Lawn and Garden and the weakness in business largely because of the strange weather we had in the quarter.
Okay. And then a second follow-up. I know that paint based on your slide deck was also below the company average. You do have some new product intros. What's the state of that category for you?
Was there a weather impact there as well? Is it product transition that you think is impacting that business for Lowe's?
We saw the bulk of our pressure in paint largely in exterior categories as well. Exterior stains in particular is where we saw the bulk of our pressure largely in Texas and the Midwest. We're very pleased with the Sherwin Williams rollout. We love our relationship with Dallas Farm PPG. We're excited about our paint business.
But we did see some weather impact in the Q2.
That's great. And just a final quick follow-up Mike. So just to play devil's advocate on the promotional cadence. You did get more promotional last year. Your appliance business has been extremely strong, presumably hand in hand with that promotional stance.
How are you thinking about the sales in the businesses where you got more promotional as that promotional intensity abates?
We like the fact we changed here obviously. We think we've done a number of things. We think the promotional piece was a part of it. But keep in mind that our promotional cadence was aligned relative to match the promotional environment that we were in. I'd say a little different.
We went from under promoting to promoting at the industry level. That said, when you look at the outperform in appliances, it's not coming from voting at the level of the industry and our outperformance coming from the things that we talked about, improved display of appliances, having the vignettes and the suite of appliances that we talked about having the next day delivery of appliances. The fact that we control our appliance inventory is a powerful thing. We want to see that controls their appliance inventory. So we like the growth in big ticket, but it's not coming from additional promotion beyond what you see at the industry level.
Thanks so much for that Mike.
And Matt, this is Robert. Just to as a reminder with respect to paint, when bringing in the HGTV, And Matt, this is Robert.
Just to as a reminder with respect to paint, when
bringing in the HGTV Home
by Sherwin Williams product that reset didn't complete till the end of April. So now obviously you have to hit the reset complete end of April. We've been working obviously through this quarter build the awareness with the consumer that that product is now available in our stores in addition to as Mike mentioned the Valspar and Olympic product that we have. So building that awareness to the consumer and we're pleased with the traction we're starting to get with that brand.
Understood. Thank you.
Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.
Good morning, guys. You guys have clearly made a lot of merchandise changes to appeal to your Pro customers more. But I'm curious, when you talk to your Pro customers, what attributes do they seem to value the most from your segment? Is it price? Is it brand?
Selection? Proximity of the store? Like if you guys could kind of create a hierarchy that would be very, very helpful.
Scott, this is Rick. I'll talk a little bit about it and then I'll turn it over to Mike to talk a little bit about the brands. When we talk to the Pro, one of the largest, I think, contributing factors is location. Proximity to the store is a definite aspect of the Pro environment. If you're not convenient from a location standpoint, then you don't you're not as relevant.
And that's based on what we know from a research standpoint. I would say that we continue to look at other aspects of where we are from a general purpose. And we talk about the 5 ways to say we know that delivery and services play an important role as well as price. But I would say the biggest things that we've got right now would be location. It would be having the right brands and then making sure that we're competitive from a price standpoint and a services standpoint.
I think all of that is fairly equal in the way when we think through where we are.
And I'll build on that Rick. When we talk to pros and this is in no particular order, but brands certainly are important to them. Inventory depth is very, very important to them. Breadth of assortment, so they can go to one place and complete the job is important. And localization is equally as critical.
There are local norms and building codes that we got to get right. We deployed a field based merchandising team to help ensure that we get better on localization. We're pleased with the progress that we're making. Then to Rick's point services are important like job site delivery and access to credit. So I don't I'm careful not to put one above the other.
We got to have them all and program is working towards getting better at all of them.
And so when you guys
I'm sorry.
I was just going to say Scott, in addition to the key drivers that Mike and Rick mentioned, 2 other things that also resonate very well. So actually you got to have the brands, you got to have the depth of inventory, you got to have the convenience and that is our value proposition on our proprietary credit resonates very well with the pro customer and the relaunch of Lowe's for pros that we just launched. We're also getting great feedback from pro customers that it's a much more convenient way to do business with us as well. So that's a new item that just really launched this quarter.
Got you. All right. Thanks a lot gentlemen.
Your next question comes from the line of Kate McShane with Citi Research. Hi. Thank you. Good morning. We noticed that you outpaced your largest competitor in ticket by over 150 basis points.
And I wondered if this was solely a function of the strength of appliances or did any other categories contribute to that? And you also saw drivers of that as well?
It's Mike Charles. I can talk to that. We're very pleased in our growth in ticket. In fact, this quarter's average ticket is the highest recorded since 2007. So the teams did a great job.
The higher mix of appliances and outdoor power equipment drove approximately 1 third of the growth in ticket. The remainder of the increase was driven by customers moving higher price points within product categories. In fact, we observed higher ticket growth in pretty much every product category.
Yes. Kate, this is Rick. I'd also add to that that our service businesses also contributes to that. Our services business for the quarter outpaced the total company comp. And when you look at that, the PSI, our interior specialist programs and exterior specialist programs performed very well.
We're very pleased with the results that we get there in those two aspects also drive higher average ticket from a project standpoint.
Okay. Thank you.
Thank you.
Your next question comes from the line of Christopher Horvers with JPMorgan.
Thanks. Good morning, guys. So I wanted to focus on the acquisition of the stores in Canada. The 4 Target stores, I think you said you'll be at 20 stores by 2017. At what point do you have mass in that market to where you'll see profitability growing?
I think you're not making money at this point due to the mass. When do you see it getting to profitability?
Chris, I think we have 39 stores open today. We've acquired the additional 12 Target former Target locations. We obviously already had some stores in the pipeline that we in our organic growth pipeline. So we said combined with Target locations what we had in the pipeline by 2017 will be to about 70 stores. Actually, we were just about to the point of would have been breakeven next year in Tark in Canada with our current operations, had we not taken on
the additional locations that it will take a year or so to get those opening up
to speed. So, locations and it will take a year or so to get those opening up to speed. So by the time we get to that 70 store mark, we'll have a pretty good critical mass to grow off of there in Canada.
And then on a related note, can you give us your updated thoughts on your Australian investment? I know you've become more involved in that business over the past year or so. How are trends occurring there? And what's your latest thought for us on process on your investment there?
Yes. Actually I was just down last week for our joint venture board meeting. I met with the team, walked some of the stores. The team down there has gone in and looked at opportunity to improve the operations. They've come in with a new format and working on resetting the layout of some of the stores.
New stores were opening, obviously, I think it's a new layout, but resetting some existing stores, getting increasing the range of product in categories where we didn't have quite enough range down there with the customer and creating much better theater for presentation of the product in areas like flooring, tool world, those type of things and very pleased we're seeing great performance over the new format compared to the original layout that we had opened in the stores. So very pleased with the progress the team is making down there. As we've talked previously on the calls, we've slowed down the rate of expansion to be able to make sure that we get the stores out of the ground operating at a higher annual rate and then being able to go back and take some of this expanded range in the new layout into the existing base of stores that we have. So overall, very impressed with the visit I had last week and the progress that I see the team making down there.
Perfect. And then one quick follow-up. On the Bob you mentioned the leverage in credit in the back half. Is there a timing of 3Q versus 4Q where you would expect those basis points?
Chris, we'd expect it over both Q3 and Q4.
Perfect. Thanks very much.
Thank you, Chris.
Your next question comes from the line of Mike Baker with Deutsche Bank.
Hi, thanks. Couple of questions. 1, did I just hear you say, so a third of the ticket increase was due to going to higher price point items, which to me sounds a little bit up to continuum. Is that coming back now in the better economy? Can you compare that 1 third of the ticket increase to how it's been the last couple of quarters?
We don't call it up to continuum, but it certainly is an outtake from the value improvement initiative where we have improved line designs that allow us to sell up the continuum. Certainly, we've done a lot by way of training with our store associates to enable them to be able to sell up as well. And our relationship with our vendor partners are absolutely critical where we collaborate with them to have both better products, more innovation and better line designs and price point progressions that allow us to sell up as well. So why we don't hold up the continuum? It's there's certainly a lot of similarities to what was being done under that program as well.
And is that something that has been accelerating over the last couple of quarters?
I'd say it depends on category. There are some categories where we're seeing it accelerate. There's some categories that some of the innovation starts to get older where it's starting to modulate some. But what we've challenged our merchants to do is to go out there and find innovation each and every day and to work with our vendor partners to ensure that we have the ability to sell up the price point because the innovation allows us to do it. And just to touch on that, if you look at some of the launches as of recent like our Cobalt 80 volt products, handheld products doing very well.
Our American Standard VorMax toilet, it's to my knowledge, when you stop cleaning toilet in the market, that continues to do very well. Our CentrTeed work surface for PROs, close £3,000 of weight over 4 by 8 square foot area doing very well. So we have a number of new launches that give our associates something to talk about so that they can sell off the price point.
Okay. Makes sense. One more quick one if I could. Buybacks if stick to your guidance for the year, I think you're going to buyback about $1,100,000,000 in the back half which is a lot less than you bought back in the first half. Is there any upside to the buyback plan?
So Mike we've repurchased $2,500,000,000 to date. That outlook suggests $3,800,000,000 which would give us $1,300,000,000 in the second half. Certainly, if we've got better performance in the second half, we could see some upward there. But at this point in time, we're comfortable with the $3,800,000,000 target.
Okay. Thanks a lot.
Thank you, Mike.
Your next question comes from the line of Dennis McGill with Zelman and Associates.
Hi, good morning. Thank you. Wondering if you could maybe just walk through any regional disparities you saw in the quarter if you think about year over year comps just to help flush out the weather impacts a little bit more.
When you look Dennis this is Rick across the regional performances, we were very pleased with the consistency we saw across regions. If you look at it from a divisional perspective, we saw the strongest performance in our Southern division across the country. But the balance between regions was pretty consistent across the country as well.
So I guess the weather impacts you noted would be more consistent. I guess there's weather impact everywhere as far as an overhang in your view?
Yes. Well, I think we definitely saw more weather impact particularly if you talk about rain in the southern markets and the western markets, the drought in California. But you're always looking at weather from what happened this year to what happened last year. You always had migration between markets and geographies that you see from that perspective. But when you see when we look at it, like I said, the south, the North and then the West was probably our the way that we would break out our overall performance from a divisional perspective.
Okay. Thanks. And then Bob, with respect to the second half margin expansion guidance and if you were to look at the top and bottom end of your range, what are the potential negative offsets to the positive discrete items you mentioned that would flex you from the top to the
bottom? Well, certainly, if you think about negative impacts, if revenue comes in lower than expected that would pressure the amount of fixed cost leverage we've got planned. And then if there's any acceleration in the promotional environment that would certainly impact gross margin. We feel good about a lot of things we're doing. We've spoken about the capabilities we put in place with regard to indirect spend.
That's going to deliver savings without regard to the sales environment. Also to the extent we've got pressure on sales or gross margin in the second half that would probably accelerate the amount of bonus leverage that we've got. So we've got some mitigants that we believe would offset any pressure that might come our way. Okay.
But fair to say that the vast majority of the variance is top line driven?
I think there's a number of risks that is certainly one of them.
Okay. Thank you, guys.
Your next question comes from the line of Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. So over the last 4 quarters, as you've matched the promotional cadence of the market, outdoor power equipment and appliances have performed above the company's average. So as you think about the second half of the year when you don't expect an incremental step up in the promotional activity, what categories do you anticipate will get better such that your comps will remain around this level, especially with the comparison getting more difficult?
We expect to still see growth in outdoor and power equipment and appliances. We're excited about seasonal living behind some of the work that you see us do with our CX customer experience organization as we go into the back half of the year. We're excited about some of the launches that we have in flooring, in particular in laminate. Laminate for the Q2 was up double digits and we got a great launch that we just did with one of our vendor partners that we're pretty excited about with our Pergo laminate product partnering with Mohawk. So excited about that.
I tend to look at it more as where do we have launches that will drive incremental growth. And certainly, MEM is exciting for us. HVAC is excited for us. We did a key launch with Renai and tankless water heaters, we're excited about that. Hitachi Pneumatic and some of the work that we did in tools, we're excited about as well behind Goblet.
And so again, I'm cautious to try to predict where the industry is going to drive growth. I tend to focus a little more on where the initiatives are. And we got some great initiatives and some great resets that we think are going to drive performance in the back half.
Yes. Michael, this is Rick. The one thing I would add to that is, we think in lumber and build materials, you'll see the deflation begin to abate, which will help as well. And then paint will be another key category as we go into the back half of the year as we create more awareness around Sherman Williams and we see the weather become more conducive, especially on the exterior side of business to drive that category.
Let me ask the question I guess from a different way. Are there categories or product areas right now where you're under the market from a promotional perspective? And could you see yourself going above the market based on the return that you've been able to achieve with the promotional activity that you've engaged in over the last year?
I think we're promoting at about the market for most of the categories. And to the extent we see share opportunities in a given category, then we may lean a little heavier into promotion for that particular category, so I would answer
that. Mike, to Mike's last point, when you think about OP and appliances, I think there's some share opportunities out there as we've seen shift in from an industry standpoint. Certainly, I think we've got a great lineup as Rick took you through in his comments on appliances some of the new products that we've got out there that's resonating well in OPE. So we expect that to continue to be strong. But then layering on the other things that Mike talked about including from paint not only is it the new brand, what patent in the weather challenge, but it's also we reset all the stores in the first half of the year, Q1 of the year.
So we had disruption in our paint department obviously as we were going through that reset that's all behind us as well.
Okay. That's helpful. And just quickly as my follow-up. Robert, there was discussion around the MRO market opportunity in your prepared remarks. Maybe you could provide some broader thoughts on how you think Lowe's can pursue that market potential especially in light of what's happening in the competitive landscape?
Yes, Michael. That was actually I think in Rick's comments. I'll let him address that.
Yes.
Yes. When you look at that, we've talked over the last several years about our holistic strategy for the Pro and improving our product and service offering as Mike talked about with brands and we've talked about in the outside selling organizations and what we've done in our 5 ways to save program and the launch of lows for pros.com really help us continue to feel confident in our strategic priorities around the pro customer. We feel confident in our ability to continue to meet and exceed their expectations from that standpoint. I think it's also important to remember that the MRO has historically been a very strong customer for us. And really the advent of our account executive pro services is in place to help us continue to facilitate the growth of the MRO space.
And we know that lowesforpros.com will continue to drive affinity with that customer, which has a tendency to shop more as much from a dotcom platform as in the store. So we feel good with where we are, but we're always evaluating our strategies and our priorities to make sure that we remain relevant for that customer.
Okay. Thank you so much.
Your next question comes from the line of Peter Benedict with Robert Baird.
Hey, guys. Bob, quick one on the balance sheet, the improved AP inventory ratio. You mentioned a little bit timing there, but the strength has been going off for about 5 quarters now. So can you give us a sense of maybe what you're doing differently there? And how long you think you can sustain these improved trends in payable?
Sure, Peter. So accounts payable is up 15% year over year primarily related to timing of purchases. At quarter, we also saw roughly a 2.5 day improvement in days payable outstanding. The merchant team has been working really hard to evaluate today's inventory on hand relative to days payable and try to get better coverage there. That's something that has been guided of late.
We saw about a day improvement last year. We ought to have roughly a day and a half or 2 day improvement this year. So while the timing will come and go at year end we should see some improvement just from the days payable outstanding. There's a number of tools in place including a supply chain financing program that's been quite effective to allow our vendors to leverage Lowe's balance sheet.
Okay. Perfect. Sounds good. And then maybe Rick quick one for you on the OPE strength particularly with respect to the riders. Do you think we're running a kind of a replacement cycle there?
I mean that's a category that has not had a lot of strength for several years. So just curious what you think is going on there if it's more than just kind of a one season type thing?
This is Mike Jones. I'd say it's 2 things, one of which is innovation. We're seeing a lot more innovation on tractors than what you've seen in the past. And there is a bit of replacement cycle as well. So I think we're getting a lift from both.
Yes. And then the only thing I would add to that Peter is as Robert spoke about earlier, we continue to gain market share in that category. And we think with the brand, the lineup, the innovation that we had, we'll continue to gain market share in that category throughout the year.
Okay. Thanks so much guys. Good luck.
Regina, we've got time for one more question.
Your final question comes from the line of Greg Melich with Evercore ISI.
Great. Thanks. I'll make it count, I guess. I guess, two questions. First on just overall sales.
Bob, if we look at your guidance, it looks like you did a comp of 4.8% in the first half and it implies that the second half you're assuming about a 3% to 4%. And if that's the case, how should we think about SG and A leverage ex the bonus stuff that you talked about given that you just there's less comp in the plan? What else might be helping it?
Yes. So first half comps were 4.7%, Greg second half comps would be in the 4 ish range. So not terribly dissimilar. There's a variety of factors that would contribute to leverage. Rick talked about the good work done in with the store operations team to continue to thoughtfully put associates in front of customers.
It allows us to be more effective in our utilization of payroll. That certainly continues in the second half of the year. I mentioned the credit. We've got project related expenses around facilities repairs and store environment projects that were first half weighted. We'll get benefit there.
And then indirect spend, it's a capability that continues to get momentum. That should give us some benefit greater benefit in the second half of the year. So what I would say is that there's not a lot of difference in the first half versus second half and then we've got some other discrete items that should drive SG and A leverage.
Great. And I'd love whoever wants to do it give us an update on your online and your multichannel business the dotcom sales how much they grew? And also given the low pros lowes for pros relaunch any incremental metrics there as to the take up would be great.
Thanks. I'll start, Greg. This is Robert and then I'll turn it over to Rick to talk for Bose Pros. We continue to see a great performance from an online standpoint. I think as Rick went through his comments, he talked about some of the finished online or come to the store.
But overall, lowes.com, which is resonating really well with the customer, particularly when we have more and more customers starting their purchase process online. They may, as you know, finish online or come to the store. But overall, lowes.com was up about 20% in the quarter. And I'll get Rick to talk about the receptivity we've had for Lowe's for Pro's launch.
Yes, Greg. I think the thing that we've really been looking at of course, we've had about a quarter of worse the data that we've been evaluating as we continue to move through. And we're learning as we see shopping behaviors of the pro on the category and on the site, what they're looking at, what categories are really resonating well. We've been very pleased with the receptivity of the site itself. We're measuring things such as category of products that are being purchased, assortments that are being evaluated.
We're looking at the amount of channel pickup. Are they picking up in store? Are they picking up through the delivery? Or is it being parcel? So we think we're very pleased with what we're seeing from that standpoint so far.
As Robert said on lowes.com grew roughly 20% in the quarter. And I think that continues to be driven by several factors and one of the most being the new innovation that we're putting on the side itself. When you look at what we've been able to do in the last first half of the year, the patio configuration tool, you heard me talk about accessories helping the seasonal living categories in the quarter. There's no doubt that that tool is really helping us from a dotcom standpoint. And then you look at what we've done to really be able to show product differently on the site.
We've increased the number of 3 60 degree product views, another 3,500 items were added during the quarter in Q2, gets us up to roughly 15,000 items where we're able to spend the view of that category. Product videos, we talked about how increasingly the appliance shoppers going to dotcom first to evaluate product categories. We added another 200 videos into that category during the quarter, added 4,000 enhanced images and pictures to the site as well, introduced the search engine capabilities that we're looking at for more intuitive search. And so as a result of that, we saw traffic lowes.com increase 19% for the quarter, and we saw a slight increase in conversion as well. So when you look at the holistic aspect of the dotcom platform, we feel very good with the innovations we've added, with the technology improvements that we've made.
Like I said earlier, with Lowe's for PROs, we're very pleased with what we've seen there. We've actually seen a double digit increase in new customers to Lowe's that are on the site that had not previously shopped with us before, which is very exciting when we think through the rollout of the site itself.
And that would take Dotcom up to about 3% of the business. So I it was my guesstimate right there?
So, Greg, it's about 3% of our business now.
Okay, great. Thanks a lot guys. Good luck.
Thank you, Greg. Thanks. And as always, thanks for your continued interest in Loews. We look forward to speaking with you again when we report our Q3 results on Wednesday, November 18.
Have a great day.
Ladies and gentlemen, this concludes today's conference. Thank you all for joining. You may now disconnect.