Good morning, everyone, and welcome to Lowe's Companies' fourth quarter 2014 earnings conference call. This call is being recorded. Please note, if you pressed star one to enter the question queue prior to the start of today's call, your signal did not register. You will need to press star one again to enter the queue. Also, supplemental reference slides are available on Lowe's Investor Relations website within the investor packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non-GAAP financial measures. The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures.
Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr. Robert Niblock, Chairman, President, and Chief Executive Officer, Mr. Rick Damron, Chief Operating Officer, and Mr. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.
Good morning, thanks for your interest in Lowe's. I'm pleased that we delivered another strong quarter with comparable sales growth of 7.3%. Comp growth was driven by a 4.9% increase in comp average ticket and a 2.3% increase in comp transactions. The mix of comp ticket and comp transactions was consistent with our expectations. Comparable sales growth for our U.S. business was 7.4% for the quarter. We saw balanced performance across the country again this quarter with all three divisions, the North, South, and West, generating comps within a tight range. In fact, all 14 regions had comps greater than 5%. Likewise, we reported positive comps in all 12 product categories, and our pro services business continued its strong performance with comp sales in line with the company average during the quarter.
I'm also pleased to share that our team in Canada delivered double-digit comps in local currency for the seventh consecutive quarter. We remain focused on improving our profitability, even while investing in key capabilities to drive sales growth. For the quarter, we drove 115 basis points of operating margin expansion and earnings per share of $0.46, a 59% increase over last year's fourth quarter. For the year, we delivered comparable sales growth of 4.3% and earnings per share of $2.71, a 27% increase over fiscal 2013. Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $1 billion of stock under our share repurchase program and paid $225 million in dividends. For the year, we repurchased $3.9 billion of stock and paid $822 million in dividends. As we head into fiscal 2015, macroeconomic fundamentals are aligned for modestly stronger home improvement industry growth.
Jobs, incomes, household financial conditions are expected to continue strengthening in 2015, building on the momentum gained in 2014. Coupled with an increase in revolving credit usage, these trends set the stage for higher discretionary consumer spending. The sharp decline in energy prices should allow consumers to pump less money into their tanks and more into home improvement and other forms of discretionary spending. Improvements in housing should persist in 2015 as well. Strong income gains, mortgage rates that remain historically low, and moderating home price growth should keep home affordability at elevated levels and provide more support to home buying in 2015. Expected growth in the home improvement market is further supported by recent consumer confidence readings and the results of our fourth quarter consumer sentiment survey, which revealed that homeowners' views around personal finances and home values continue to improve.
In fact, approximately one half of homeowners now believe the value of their homes is increasing. Along with the positive progression in sentiment, this quarter, even more homeowners indicated their home improvement spending was increasing. While most of the home improvement projects they have planned are still small ticket, the survey indicated a boost in plans for big-ticket projects versus this time last year. In 2015, we will continue to focus on a few key priorities to capitalize on opportunities within an improving economy. We'll further pursue top-line growth by differentiating ourselves through better customer experiences and improving our product and service offering for the pro customer. In addition, we continue developing omnichannel capabilities as part of our long-term commitment to meet customers on their terms whenever and wherever they choose to engage with us.
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. These efforts give us confidence in our business outlook for 2015. Bob will share those details in a few minutes. First, I would like to thank our more than 265,000 employees for their hard work and dedication. Their steadfast commitment to serving customers is critical to our success and an important driver of this quarter's strong results. Thanks again for your interest. With that, let me turn the call over to Rick.
Thanks, Robert, and good morning, everyone. As Robert stated, we delivered strong performance in the quarter. I'm pleased to share that our store employees earned a record payout from our sales and service employee incentive program. This program rewards store employees for achieving their sales and profitability targets and for delivering outstanding customer service. We continue to capitalize on an improving macro backdrop through our enhanced sales and operations planning process, improving relevance with the pro, and expanding customer experience design capabilities. In the fourth quarter, we used our enhanced sales and operations planning process to coordinate inventory flows, advertising, and training around our Celebrate the Season Winter campaign. With this campaign, we targeted four important shopping occasions: interior refresh, holiday decorating, gifting, and getting organized.
For each occasion, our store, logistics, merchandising, and marketing teams collaborated to ensure that we had relevant products available to customers at the right time, that they were effectively advertised and strategically promoted to drive traffic, and cross-merchandised to build the basket. As a result, we drove both online and in-store transactions and ticket growth, and we fulfilled orders in the most convenient manner for customers. Our ability to sell products from a store, online, in-home, or through our contact centers is a distinct competitive advantage because it allows us to engage customers on their terms, whenever and wherever they choose. We know that for many projects, more than half of customers research online before making an in-store purchase. For purchases made on lowes.com, approximately 60% are picked up in-store, 10% are delivered from the store, and the remaining 30% are partial shipped.
This speaks to our ability to leverage our existing infrastructure with the omni-channel capabilities we are introducing. From a category standpoint, we drove above company average comps in flooring, kitchens, appliances, lumber, building materials, millwork, and outdoor power equipment. We drove company average comps in fashion fixtures, tools, and hardware. Customers are increasingly interested in refreshing the interior and exterior of their homes. We used targeted promotions coupled with our investment in project specialists to drive performance in fashion fixtures, flooring, kitchens, appliances, and millwork. We are pleased with the project specialist programs. Currently, we have project specialists who focus on the exterior of the home available across all U.S. stores. Our interior project specialist program has an average ticket above $10,000 and customer satisfaction scores over 15 points higher than the industry standard.
We're expanding it to another 470 stores in 2015, reaching over three-fourths 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. Within lumber and building materials, we met strong unit demand for dimensional and treated lumber with robust inventory depth. We also leveraged our store's canopy program, in which each market selects the most relevant lumber and building materials to be stacked just outside the pro entrance under the canopy. This program helps pros quickly find items like lumber, plywood, and wallboard, quickly check out, receive loading assistance, and get back on the job. With outdoor power equipment, we met strong Midwest and Northeast demand for snow throwers. In tools and hardware, we saw particular strength in power and pneumatic tools.
We have a compelling assortment of national tool brands, and we've expanded our relationship with Hitachi to include pneumatic tools. Combined with Bostitch, Lowe's now has the number one and number two brands, making us the destination for pneumatic tools, particularly for the pro. Kichler, the innovative leader in backyard lighting, is another important brand for pro customers. I'm pleased to announce that we just recently added this leading brand to our lighting assortment. Expanded relationships with brands like Hitachi and the additions of brands like Kichler build on a solid foundation to serve the pro. In fact, 14 consecutive quarters of pro comps at or above the company average are a testament to this foundation, which includes dedicated service in our stores, inventory depth, and our Five Ways to Save value proposition.
Additionally, field-based pro account executives and our national accounts team make it easy for medium to large-size companies and government entities to do business with us. We are also completing our beta test of lowesforpros.com, which has been well-received by our pilot customers. This dedicated platform is fully transactional and will provide pros useful functionality such as the ability to develop requisition lists and view their purchase history, as well as customized product catalogs. This site can also be integrated with purchasing systems pros use to manage their business, further streamlining their day-to-day operations and helping them work more effectively. We have received positive feedback on the site's flexibility and ease of use, and expect to make it available to all pros this spring. Last quarter, Mike told you about the holiday decor experience we implemented in all of our stores using the stage created for our outdoor living experience.
This stage leverages our larger store formats. Developed through collaboration between our merchants, stores, and customer experience design team, the holiday decor experience inspired customers to decorate, raise their awareness of the breadth of our holiday decor and gift offerings, and provided project solutions relevant to the holiday macro season. The customer response was very positive, and we improved sales, inventory sell-through, and gross margin for the products included in this set. We are now transitioning this space back to our outdoor living experience in preparation for the critical spring selling season. In addition to our efforts to drive top-line growth, we are focused on driving productivity and profitability. During the quarter, our stores once again effectively managed payroll hours as comp sales accelerated, increasing sales by hour by approximately 5% and driving 28 basis points of payroll expense leverage.
They drove this leverage while maintaining great customer satisfaction scores and best-in-class inventory shrink performance. We are pleased with the progress this year on sales growth, productivity, and operating profitability, and we are committed to further improvement in 2015. In 2015, we expect to drive sales growth as we further capitalize on an improving macro backdrop through increased relevance with the pro, improved customer experiences, and the continued development of omni-channel capabilities. We will increase gross margin by continuing to partner with our vendors to drive innovation and lower first costs by leveraging our supply chain fixed costs. We will continue to leverage payroll as we further align payroll hours to customer traffic and more efficiently complete non-customer-facing tasks. We will also drive expense productivity as we increase sales while reducing fixed expenses.
For example, we will reduce our total marketing spend even while increasing our presence in targeted digital media, and we will obtain further expense efficiency by consolidating the procurement of similar types of goods and services across our corporate and store functions. Likewise, we will increase inventory turns approximately 15 basis points as we continue to hold inventory per store flat while increasing comp sales. With solid depth of high-velocity items and job lot quantities in place, we will obtain additional inventory productivity as we continue to thoughtfully conduct our line review process. We are excited about the further improvements we will make to our business in 2015 and look forward to sharing our progress as the year unfolds. 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 fourth quarter were $12.5 billion, which represented a 7.6% increase over last year's fourth quarter. Total average ticket increased by 4.9% to $66.17, and total transactions increased 2.5%. Comp sales were 7.3% for the quarter. As you heard from Rick, further momentum from our initiatives and improving execution drove balanced performance in the quarter. Comp average ticket increased 4.9% and comp transactions increased 2.3%. Looking at monthly trends, comps were 6.7% in November, 7.2% in December, and 8.2% in January. For the year, total sales were $56.2 billion, an increase of 5.3% driven by a comp sales increase of 4.3%, a full year of Orchard sales compared with a partial year following the August 2013 acquisition and new stores. For 2014, comp average tickets increased 2.4% and comp transactions increased 1.8%.
Gross margin for the fourth quarter was 34.6% of sales, which was roughly flat to last year. In the quarter, the mix of products sold negatively impacted gross margin by 25 basis points. Price actions hurt gross margin by approximately 10 basis points. These items were essentially offset by value improvement and better seasonal sell-through, which helped by 15 and 10 basis points respectively. For the year, gross margin of 34.79% represented an increase of 20 basis points over 2013. SG&A for Q4 was 25.24% of sales, which leveraged 88 basis points. The SG&A leverage was driven by a variety of factors. In the quarter, store payroll leveraged 28 basis points due to better alignment of hours to customer traffic and strong comp sales. Property tax expense leveraged 21 basis points due to favorability in property valuations recognized this year.
At our analyst conference in December, we noted that expense productivity would come from utilizing our scale to reduce the spend on indirect goods and services. In the quarter, these efforts allowed us to leverage telecommunications and armored car expenses. Given the sales growth, we were able to leverage fixed costs. Lastly, we had approximately 30 basis points of expense leverage associated with last year's asset impairments. These items were offset somewhat by employee insurance de-leverage of 30 basis points. The higher expenses were driven by both higher enrollment as well as cost inflation. For the year, SG&A was 23.62% of sales and leveraged 46 basis points versus 2013. Depreciation expense was $362 million for the quarter, which was 2.89% of sales and leveraged 28 basis points. The leverage was driven by higher sales as well as assets becoming fully depreciated.
Earnings before interest and taxes for the quarter were 6.53% of sales, which represented a 115 basis point increase. For the year, EBIT of 8.53% represented an increase of 76 basis points over 2013. Interest expense at $132 million for the quarter leveraged five basis points as a percentage of sales. Pre-tax earnings for the quarter were 5.48% of sales. The effective tax rate for Q4 was 34.5%. The lower rate this quarter relative to the 38.7% last year was driven by tax provisions that had expired but were retroactively extended by Congress for calendar 2014 in the fourth quarter. The tax rate for the quarter was also lower than our expected 36%, resulting in an EPS benefit of $0.01 per share. For the year, the effective tax rate was 36.9% compared to 37.8% for 2013.
The lower tax rate for the year was the result of a settlement of prior year tax matters. Q4 net earnings of $450 million increased 47% versus last year. Earnings per share of $0.46 for the quarter were up 59% to last year. For 2014, earnings per share of $2.71 were up 27% versus 2013. The earnings per share performance for both the fourth quarter and the year represent record highs for the company. Transitioning to the balance sheet, cash and cash equivalents at the end of the quarter were $466 million. Inventory, $8.9 billion, was down $216 million or 2.4% from last year. The decrease was the result of better inventory management and improved sell-through of seasonal goods. Inventory turnover was 3.85, an increase of 11 basis points over last year. Asset turnover increased 10 basis points to 1.69. Moving on to liabilities.
Accounts payable at $5.1 billion was up $116 million or 2.2% to last year. The increase relates to an almost two-day improvement in days payable outstanding. At the end of the fourth quarter, lease-adjusted debt to EBITDAR was 2.15. Return on invested capital increased 243 basis points to 13.9%. Now looking at the statement of cash flows. Cash flow from operations was $4.9 billion, an increase of 20% over last year due to net earnings growth and working capital. Capital expenditures were $880 million, down 6% from last year. Free cash flow of $4 billion represented a 28% increase over 2013. During the quarter, we repurchased 14.9 million shares for $1 billion through the open market. For the year, we repurchased almost 74 million shares for a total of $3.9 billion. Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook.
As Robert noted, economic forecasts suggest modestly stronger growth in the home improvement industry in 2015. While we are optimistic about both the macro forecast and our improving execution, we've taken a prudent approach to our 2015 outlook. For the year, we expect total sales increase of approximately 4.5%-5%, driven by a comp sales increase of 4%-4.5% and the opening of 15-20 stores, which includes 6 Orchard and 2 city center locations. We expect to record our highest comp in Q1. This is an important quarter for home improvement and the easiest compare to last year. While we expect the first half comp to be higher than the second half, we do expect that the two-year comps will improve sequentially through the year. We're anticipating an EBIT increase of 80-100 basis points.
As I noted during our Analyst and Investor Conference in December, we are now targeting 25-30 basis points of EBIT expansion per point of comp above 1%. While this is our expectation for the year, there will be some choppiness quarter to quarter. For example, let me offer 2 items that will put pressure on the flow-through for the first quarter. In Q1 last year, we had 70 basis points of gross margin expansion, our strongest quarter of the year. This year, we expect gross margin to be flattish in Q1, while improving roughly 20 basis points for the year. Also, in Q1 last year, we had our lowest comp and therefore reduced bonus accruals. This year, we plan to accrue to target levels, resulting in deleverage of 25 basis points in Q1, while leveraging roughly 10 basis points for the year.
We expect that most of the EBIT improvement will come from SG&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 the fixed cost leverage associated with sales growth. The effective tax rate is expected to be 38.1%. A higher tax rate relative to 2014 is a result of the settlement of prior year tax matters recognized in Q1 2014. The higher tax rate impacts earnings by roughly $0.06 per share. For the year, we expect earnings per share of approximately $3.29, which represents a 22.5% increase over 2014. We are forecasting cash flows from operations to be approximately $5 billion. Our capital plan for 2015 is approximately $1.2 billion. This results in an estimated free cash flow of $3.8 billion for 2015.
We expect to issue incremental debt during the year as we manage to the 2.25 times lease adjusted debt to EBITDA target. We had approximately $2.4 billion remaining under share repurchase authorization at the end of the fiscal year. Our guidance assumes approximately $3.8 billion in share repurchases for 2015. All future share repurchase authorizations are subject to board approval. Regina, we are now ready for questions.
To ask a question, press star one on your telephone keypad. To withdraw your question, press the pound key. In order to allow questions from as many individuals as possible, please limit yourself to one question and one follow-up. Our first question will come from the line of Alan Rifkin with Barclays. Please go ahead.
Thank you very much, congratulations, guys, on a nice quarter and year. Robert, maybe looking at the industry and your performance from 30,000 feet, it certainly seems like the macro environment is improving, even if housing is okay but not great. As you look at your business, do you think there's less cyclicality, and is it less tied to housing today than it has been in years past?
Well, Alan, I think we've talked about that some in the past and how really when you look through all the prior cycles, when housing turnover was going up and down, Homes continued to maintain their value and actually continued to increase during a lot of those cycles. We saw that kind of disconnect in this most recent downturn when home prices dropped dramatically. We're kind of going through the cycle. We're getting home prices starting to come back up. That's driving confidence among homeowners that they can reinvest in their home again, and certainly there's been a lot of deferred investment, kind of the wish list, the to-do list on the refrigerator.
People are re-engaging in that, and that's what we saw in our survey, where we're starting to see a slight increase in those that are not only taking the discretionary projects on, but also starting to move into larger projects because they're getting confidence in the macro environment, confidence in the value of their home. At the end of the day, income and housing continue to be the things that drive our business. There was a little bit of a disconnect in the downturn, but we are seeing consumers re-engage, and we feel good about that, and that's a little of what's built into our guidance for 2015.
Okay. Thank you. One follow-up, if I may. With respect to foreign currency effects, what were the effects on your 2014 numbers in aggregate, and what impact do you have built in in your 2015 guidance as a result of the strengthening dollar?
Alan, the impact was essentially nominal to us. Our international business, Canada and Mexico, are relatively small pieces of our portfolio of businesses. It did have a modest drag on comps, 10 or so basis points for the quarter, and about the same for the year. As we think about FX going into 2015, at this point, we've modeled roughly the same levels as where we are today.
Okay. Thank you, Bob. Thank you very much.
Thanks, Alan.
Question will come from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Thanks. Good morning. Just a minor point, but just to clarify, Investor Day, I think you mentioned margins of at least 9.5% in 2015. I think the guidance range for 2015 now, if our math is right on GAAP, EBIT is around 9.3%-9.5%. Is that the right interpretation? If so, is the range, I guess the wider range, is that just conservatism, or has something changed in how you're looking at next year?
What I would say is that when we put our outlook for the year, this is something that we expect to achieve and hopefully beat. If you think about our EBIT guidance for 2014, we started the year at 65 basis points and delivered 76 basis points. I would suggest that it's some level of conservatism. As I mentioned in my comments, we took a prudent approach to our outlook for 2015, and the 80 to 100 basis point range is consistent with that.
Okay. The follow-up is, I think you mentioned the pro grew in line with the house, and I think the past few quarters, it was a little stronger. Is that just a fourth quarter thing? Did you do just so well around Black Friday with consumers that kept the consumer rate a little bit higher, or is there something that changed on that side?
Yeah, this is Robert. You hit the nail on the head. We've had, for a number of quarters, the pro exceeding our overall business, but we had really good, strong performance, which led to the strong comp that we delivered in the fourth quarter with great response from our retail consumer. I'll let Rick jump in and talk a little bit more detail about what we're seeing from the pro.
Yes. It was really the result of the holiday and the retail consumer. When you look at the pro in general, we still saw strong demand across all regions with the pro. As a matter of fact, when you look at account growth, which is a measure that I look at to determine health of the pro and still the viability of our processes and programs, our pro accounts grew 24% during the quarter. Still a huge take rate from pros as they look to leverage our benefits of our value proposition, as well as we continue to meet their needs. We did see positive comps across all ticket sizes and ticket ranges for the quarter as well, which shows strength that we did not lose anything relative to any type of transaction size that we monitor or watch during that timeframe as well.
We feel good with the pro. We still feel good with the strength of the pro and their response to our process and programs. Moving into 2015, we still think that we have room to continue that growth with the brands that we're launching in 2015. A lot of what we talked about during the AIC with GAF Roofing, Owens Corning, Lennox, Goldblatt, other brands that we're bringing back into the portfolio, as well as those brands we launched during the Q4. We feel really good from where we are today and entering into 2015 with relevance for the pro.
Thanks, nice results.
Thank you. Appreciate it.
Your next question comes from the line of Mike Baker with Deutsche Bank. Please go ahead.
Hi. Thanks, guys. Two questions. One, just on the margin efficiency point. 25-30 basis points rule of thumb for 2015, which is higher than you've targeted in the past. In the fourth quarter, it was only 18 basis points. Is it really just that insurance issue? Was that the only factor that led you to come in below that rule of thumb, or are there other things on the margins, in particular, to call out?
Mike, a bit of it was the impact of insurance. Some of it was the bonus payout that Rick D. Damron mentioned. Going into the quarter, we expected a little bit more leverage in Q4 on the bonus line that we experienced, but we're happy to pay the associates. They delivered strong results for the quarter, and they deserve it. The other piece I would mention, Mike, is the mix, the 25 basis point mix impact hurt the flow through as well.
If I could follow up on that, two points. One, within the gross margin, you talked about price action. Can you give us more details there? Secondly, when you say less leverage on the bonus, I'm sure it's not that you expected a better comp, it's just that the payout was evidently higher. Is that the right way to think about it?
Two things. The payout is based on our planned performance. Our outlook for Q4 was at a 7.3% comp. We out delivered our expectations by a greater degree going into Q4, which led to the increased bonus payout. As it relates to your first question on price actions, really, Mike, that ties back to Rick D. Damron's comment on targeted promotions.
Okay, thanks. Makes sense.
Thank you, Mike.
Last one.
Your next question comes from the line of Michael Lasser with UBS Investment Bank. Please go ahead.
Good morning. Thanks a lot for taking my question. I was hoping to get a little bit more perspective on how you think your share is trending within the different buckets of ticket. We saw really good performance for your big ticket bucket and slower performance from your smaller ticket stuff. Is there any suggestion that as the consumer's reengaging with some of the bigger spend projects, that the store location matters a little bit less, so you're picking up more of your fair share in that spending arena? Conversely, is that potentially coming at the expenses from the smaller ticket stuff?
Mike, I'll start and I'll get Mike Jones to jump in a little bit. I think certainly it's a lot of the things we've been working on, when we talk about the omni-channel differentiating, own experiences. We've talked about this project nature of the business and the way we're focused on the project nature of the business, that's why we saw strong performance in areas that we outlined for you, like kitchen and appliances, flooring, those types of things.
I think a lot of that is dovetailing with my comments earlier about the consumer getting reengaged in some of those projects that, for lack of a better term, have been deferred in the middle of the downturn, as they're now getting more comfortable with the macro environment, getting more comfortable with their income, job outlook, and more comfortable, quite frankly, that the value of their home is going to continue to move in the right direction. A lot of what the team's been working on over the past few years was setting ourselves up to take advantage of the macro environment that we find ourself moving into now, which I think played itself out in the fourth quarter, and I think is what's built into our guidance for 2015. Mike, if you want to dovetail on top of that.
Absolutely. Thank you, Rob. Yeah, I'd add to it that along with really doing well on large ticket and gaining share, what Rick talked about with respect to pro, ensuring that we continue to build out our portfolio of brands, have the right inventory depth, have the right breadth of assortment. We think that's also going to help us over the long term continue to build better traffic. While we think our plans allow us to have both, we think that we're seeing some of our project execution relative to being able to engage the customer start to pay off early.
That's very helpful commentary. My follow-up question is, when you look at your different categories, can you give us some sense of where the categories relative to peak that are still furthest off from a sales perspective, and where you think you can still have an opportunity to regain those sales?
Michael, that would be all the big-ticket discretionary categories. As Robert commented, the consumer is feeling better about their situation, feeling better about re-engaging in big-ticket categories, but hasn't necessarily started in earnest. If you think about kitchens, flooring, millwork, all three of those categories are the furthest away from where they were back in the peak.
Can you quantify in some way?
What I can tell you is at the peak, those three categories were close to 19%, 20% of our sales. Today, they're 16%-17%. While all those have been rising, they're still lagging as a percent of the mix.
That's very helpful. Thank you so much.
Thank you, Michael.
Next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Good morning, guys. It seems to me like you guys have been a lot more aggressive with adding new brands the last couple of quarters from Sherwin-Williams to some of the new products and brands mentioned during the call. Are these still all part of the value improvement efforts, or is this a specific focus to expand your pro business, which is a clear initiative? Is this just kind of a more overall aggressive stance on the merchandising front?
Scot, I'll start and then have Mike jump in. Certainly, as we talk about at AIC, we have a strong focus on the pro customer. We've had great performances Rick outlined for you. To continue to drive that relevance with the pro, it's everything we're doing from the quality of the people, the account executives, the service analysis, the depth of inventory, and also the key brands that they rely on. That's been a dedicated focus for Mike and his team to make sure as we talk to the pro customers, we have the dedicated brands that they want. Mike, if you want to-
Sure. Absolutely. I'd say the customer is the pro. The tool is a value improvement that we use to go after better serving this customer, and certainly brands are enabling to make sure we serve this customer as well. To Rick's point earlier, you think about what we've added. Henry, Hubbell Wiring Devices, GRK Fasteners, Lennox HVAC, Owens Corning Insulation. Just a really, really great job by the merchants partnering with our team and store operations to grab the brands. It's not just in pro. If you think about what we've done in the DIY space, HGTV HOME by Sherwin-Williams, a brand add that the quality of Sherwin-Williams to the core expertise of HGTV. We're really, really excited about that.
If you look at grills as an example, another one that we don't talk a lot about, but we have both Weber and Char-Broil, the number 1 and number 2 brand in grilling. Excited. There's a ton of work in tools very specifically as well. Irwin Tools we talked about, both the Irwin brand and the LENOX brand. Rick made reference of Hitachi pneumatics. If you couple that with our exclusive of Bostitch, makes us the destination for pneumatics. Rick spoke about adding back Goldblatt hand tools. That's added to our current portfolio of brands, which includes Bosch, DEWALT, Kobalt, Porter-Cable, to name a few.
The merchants have done a phenomenal job at really going out into the supply base, working with our vendor partners to bring back the right brands that both the pros tell us they want, as well as shoring up both growth for DIY and our customers that are looking for strong tool performance. We're excited about what's going on. To your point, great work.
Great. Thanks a lot, guys.
Next question will come from the line of Jessica Mace with Nomura Securities. Please go ahead.
Hi, good morning and congrats on a nice quarter.
Thank you, Jessica.
My question is about the online business. I was wondering if you could give us a little bit more color on the performance and maybe talk about with such a large portion of sales from that business picked up in store. Are there any particular categories you see really driving overall sales?
Yeah. Jessica, this is Rick. I'll start, and then I'll let Mike jump in as well. We continue to be pleased with our performance at lowes.com. It was up 25% for the quarter, 2.5% of our total sales for the year. When you look at .com, the thing that we're really working on is, as you said, we've been doing online pickup in store for over a decade. It's something that we're really continuing to focus on. Dennis Knowles and the team have done a phenomenal job on store operations in improving the experience on the front end to make it easier for the customers to transact and get their products in and out of the store quickly.
It continues to focus on our ability to drive our omni-channel aspects of what we're trying to accomplish and do as an organization and create that visibility across stores, .com, contact centers, and on-site or in the home. It's a component of what we're really doing from an overall strategic standpoint. What we've been focused on over the last couple quarters and in 2014 is really enhancing the experience that the customers have when they jump on our site. We've been working on delivery scheduling. You've seen us work on improving our search capabilities and adding several thousand additional search terms to avoid getting back no search results. We've improved our filtering of products, we're also working on improving our content
We have improved content for 17,000 highly visible items on the site. We're really looking holistically at the site to make sure that we continue to drive what we are working on. The thing that we're still extremely pleased with is that the store remains very relevant with the customer. In fact, almost 97%, 98% of all transactions still go through our stores. That's evidenced by the fact that we talk about the 60% picked up, the other 10% delivered, and then a large portion of our parcel orders are actually shipped from our stores. They continue to play a critical role as we leverage that asset and continue to move forward in the future. [Mike], I don't know if there's anything that you want to add to that.
I guess I'd add that anything can be purchased online. The consumer often starts online for inspiration, getting a better sense of how they want to pull their project together. They like to couple that with an in-store experience so that they can work their way through the project. Appliances, fashion, fixture, outdoor power and tools are certainly a mainstay for online. We take an approach that for the consumer, they want us to be relevant whenever and wherever they want to interact with us. We recognize that often they start online and then from there, it leads to an in-store discussion. We're also very careful to make sure that as we tie back our merchandising approaches, that we're leaning into both what's important from a project perspective as well as what's important from an online perspective.
To Rick's point earlier, a couple of brands that have been added, Progress Lighting and Kichler Lighting will be featured online. Our online tools will help them both make selections and ship to the home or make selections and come into our stores and see that product and make the selection. For us, it's about the cohesive experience, of which online is certainly a key piece.
Great. That's very helpful. Thank you.
Your next question will come from the line of Matthew Fassler with Goldman Sachs. Please go ahead.
Thanks a lot. Good morning. My first question relates to the mix issues that you discussed impacting gross margin in the fourth quarter. If you could just give us a bit of color as to what categories drove that and how you would expect that dynamic to play out as we start the new year.
Matt, as you might expect, the biggest driver of that was appliance. Strong growth in appliances in the quarter. Double-digit growth in appliances. Also had some strength in lumber and building materials, a lower margin category. Those are the two main drivers of outdoor power equipment. Some elevated generator sales in the quarter based on weather. As we think about 2015, we're modeling a modest mix drag going into 2015, but that's embedded in the roughly 20 or so basis improvements that I mentioned.
Great. My second question, your inventory was actually down outright year-over-year, which is a very strong performance, perhaps even more than you're guiding for going forward. Is that a function of the strong Q4? Is the port a part of it? Is this just you're outperforming your goals with no constraint to sales as a result?
I'll take part of it and let Rick talk about the port. As you mentioned, as you were just talking about, we're trying to grow comps at a mid-single digit, keeping inventory and store flat. A lot of effort, energy around improving the productivity of inventory. That showed up in Q4. The second is improved seasonal sell-through. If you think about some of these seasonal goods are good quality product that we'll choose to carry over throughout the course of the year. We, in fact, did that in Q4 2013 based on the strength of the seasonal set, the customer experience design work. We had far better seasonal sell-through Q4 2014 than we did 2013, therefore, we didn't have any carryover inventory.
Yeah. Matt, I'd just add that we also count in-transit inventory in our numbers. Whether it's sitting at port or in our DCs, it's still in our total inventory numbers. As it relates to the port issues, I'm extremely pleased with the efforts of our supply chain in getting our products moved through the port during this slowdown. As a matter of fact, we feel fairly good and confident about our inventory position heading into spring. Currently, we have over three months of forecasted sales of seasonal products already in our distribution centers and in our stores. We feel good from that perspective.
We continue to monitor the process in general at the ports, and we continue to take steps to minimize any further impact, such as moving product and cargo through other ports, rerouting the product to where we can get it to our stores the most quickly and time-effective means possible. The teams have done a great job in flowing our product off the port, getting the containers moved through, and really proud of what they were able to accomplish. We feel good going into the spring with our current inventory levels, and particularly against our forecasted expectations for the first three months.
Thanks so much for that.
Next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead.
Thanks. Good morning, guys.
Good morning.
I think there's a great debate out there on how much of the gas price declines will flow to the consumer, what categories are going to benefit and when. From where you sit, whether the consumer research or what you're seeing, is there a way to attribute any of the 4Q comp to, and the industry growth really broadly, to lower gas prices? Do you think that the lift is accelerating and still on to come, or how would you frame that out?
Chris, as we think about drivers of our business, it's really three: household net worth, employment, and housing. Certainly less dollars going towards fuel is going to be more discretionary dollars for the consumer to spend. That's a fact. What we don't know is exactly how much of that's going to savings, how much of that's going to restaurants, vacations, et cetera, how much is going towards home improvement. We know the customer's got a little bit more walking around money. To your specific question, Chris, I can't determine or we can't determine the specific impact to our comp in the fourth quarter.
Is there anything to say that, I guess, especially because you sell a lot of big-ticket durables, is there anything to say that the benefit should actually accelerate? I think it's sort of general anesthesia. It helps all categories, but is there anything that you're seeing or could say that perhaps that once it's believed to be sustainable by the consumer, that the home improvement category would see a greater lift in the future?
Christopher, this is Robert. Certainly, I think as you listen to economists speak out there, they would say that the longer that it were to go on, yeah, the more that it becomes part of your discretionary income versus kind of a one-time impact. Yes, I think it's reasonable to assume the longer that goes on, the more likely consumers will spend a portion of that, and the more likely part of it winds up in our channel. That's positive. We view that as a potential positive as we think about our outlook for 2015. On the other hand, depending on how long it takes place, the impact it has on a slowing global economy, U.S. exports, multinationals, and the impact that could have on overall jobs and those type of things.
Don't lose sight of that it's not just a one-way street, that there can be other impacts as well that we need to take into consideration.
You're not seeing anything in the oil patch now that's a concern to you, stores exposed there.
No, as I said in my comments, we saw broad performance across all of our divisions and all of our regions in the company.
Thanks, guys. Have a great spring.
Thanks, Chris.
Your next question will come from the line of Peter Benedict with Robert Baird. Please go ahead.
Hey. Hi, guys. A couple questions. First, on the pro account growth up 24% in the fourth quarter, can you give us maybe some perspective around that? Give us a sense of how fast that had been growing, how fast it grew for the year. Just trying to understand, put that into context.
Sure, Peter. You look at this, like I said, we've been investing to grow our pro business over the last couple of years. We talk about the organizational designs that we've made, the inventory investments that we've made, and the value propositions as we go through. The addition of the programs continue to resonate very well with the pros. When you look at account growth for the year in context, accounts grew at 16% for the year.
Okay, good. Thanks for that, Rick. I guess, on some of the categories, you talked about the OP strength, snow throwers, maybe generators. Anything on the early spring side, though, maybe out west, as you see temperatures warming out there, the view towards the OP category this spring?
The only thing I would say, Peter, is that like I said, we're early into the process. If you recall, last year, we talked on the call extensively about the outdoor living experience and how we had set that and the great response that we saw from customers from an outdoor living. By the time we were setting that over the majority of our stores, the Deep South, we were already into spring, therefore, we didn't want to disrupt the spring selling season in the Deep South. We came back in the fall of the year, reset all of those. That's the earliest indication we would have would be from the Deep South. What we're seeing, the receptivity from those consumers to what we've done with the outdoor living experience has been very strong.
We're pleased with the early indications and just waiting for spring to get here for the rest of the country.
Okay, this lastly, just on the flooring business, looks like above average here in the fourth quarter. It had been running kind of, I guess, I think, in line. What drove that change? It was something that you guys think you did, or was it just kind of a broader pickup in that category?
We did do a tile reset late last year, we're seeing pretty good strength even beyond where we did the reset. I think I suggest that the category itself, the industry, has done better.
All right. Great. Thanks, Mike.
Regina, we've got time for one more question.
Our final question will come from the line of Aram Rubinson with Wolfe Research. Please go ahead.
Thank you. Yes, batting cleanup. Good quarter. Had a couple of questions on the cost. Wondering if you can delineate. You rattled off a few costs that you look like you're digging into in a pretty minute way, which is intriguing to me. I'm wondering if you can kind of just highlight some of the costs again you're looking to kind of trim back on. You mentioned advertising, I think, and a few other things. I know in the past when I've asked you've mentioned that the profit margin gap between you and your nearest competitor you think is almost entirely due to volume. I'm wondering, though, as you drill in a little deeper, if you think you might be finding some kind of SG&A opportunities that might be opportunities irrespective of volume.
Aaron, when I take a look at relative profitability, when your gross margins are essentially the same, there's only one place to look, is operating expenses. As we think about operating expense opportunities, we do think there's a number of areas that we've talked about. Certainly, we had some elevated bonus in 2014. We'll plan for target levels in 2015, increased leverage in store payroll, some advertising leverage. Those are the big buckets. Depreciation dollars actually fall in 2015, so we get some healthy leverage there. Beyond that, the whole indirect spend category, we talked about it at the analyst conference in December. I talked about some discrete items in Q4, not because they were large drivers, and I mentioned telecom and armored car specifically, just to give you a sense that it's real and it's working.
We've got a number of categories in 2015, and we're looking at things from store fixtures and displays, supplies, entire category, various services. There's a variety of different activity around that where we think we can become much more efficient going forward that will help improve the flow-through that we talked about in the 25 to 30 basis points.
That sounds like a great area of focus. Thanks, and good luck.
Thanks. Appreciate it, Aaron. As always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our first quarter 2015 results on Wednesday, May 20th. Thanks, and have a great day.
Ladies and gentlemen, this does conclude today's conference. Thank you all for joining. You may now disconnect.