Good morning, everyone, and welcome to Loews Company's 4th Quarter 2014 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. These risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr.
Robert Kniblock, Chairman, President and Chief Executive Officer Mr. Rick Damron, Chief Operating Officer and Mr. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr. Kniblock for opening remarks.
Please go ahead, sir.
Good morning and thanks for your interest in Loews. I'm pleased that we delivered another strong quarter with comparable sales growth of 7.3%. Comp growth was driven by 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 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 twelve product categories share that our team in Canada delivered double digit comps in local currency for the 7th 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 4th quarter. For the year, we delivered comparable sales growth of 4.3 percent 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 $1,000,000,000 of stock under our share repurchase program and paid $225,000,000 in dividends.
For the year, we repurchased $3,900,000,000 of stock and paid $822,000,000 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. And 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 strong income gains, mortgage rates that remained 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 ratings and the results of our 4th quarter consumer sentiment survey, which revealed that homeowners' views around personal finances and home values continue to improve. In fact, approximately 1 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 increasing.
And 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 omni channel 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. But 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.
And 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. And 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 probe and expanding customer experience design capabilities.
In the Q4, we used our enhanced sales and operations planning process to coordinate inventory flow, advertising and training around our celebrate the season winter campaign. With this campaign, we targeted 4 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 merchandise 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 customers research online before making an in store purchase. And 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 omnichannel 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, so we use targeted promotions, coupled with 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. So we're expanding it to another 4 70 stores in 2015, reaching over 3 fourth 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 stores 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, quick out quickly check out, receive loading assistance and get back on the job. With outdoor power equipment, we met strong Midwest and Northeast demand for snowtrowers. 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 Fostik, Lowe's now has the number 1 and number 2 brands making us the destination for pneumatic tools, particularly for the Pro.
Kichler, the innovative leader in factory lighting is another important brand for Pro customers. And 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 theft and our 5 ways to save value proposition. Additionally, field based pro account executives and our national accounts team make it easy for medium to large sized companies and government entities to do business with us.
We are also completing our beta test of lows for pros.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, Matt 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 format. 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 solutions 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 cost 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 by 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 Loews and I will now turn the call over to Bob.
Thanks Rick and good morning everyone. Sales for the Q4 were $12,500,000,000 which represented a 7.6% increase over last year's 4th quarter. Total average ticket increased by 4.9 percent 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 $56,200,000,000 an increase of 5.3% driven by a comp sales increase of 4.3%, a full year of orchard sales compared with the partial year following the August 2013 acquisition and new stores. For 2014, comp average ticket increased 2.4% and comp transactions increased 1.8%. Gross margin for the 4th 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. Also 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 10 basis points respectively. For the year, gross margin of 34.79 percent represented an increase of 20 basis points over 2013. SG and A for Q4 was 25.24 percent of sales, which leveraged 88 basis points.
The SG and 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 profit 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.
Also given the sales growth, we're 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 deleverage of 30 basis points. The higher expenses were driven by both higher enrollment as well as cost inflation. For the year, SG and A was 23.62 percent of sales and leveraged 46 basis points versus 2013.
Depreciation expense was $362,000,000 for the quarter, which was 2.89 percent of sales and leveraged 28 basis points. The leverage was driven by higher sales as well as assets become fully depreciated. Earnings before interest and taxes for the quarter were 6.53 percent of sales, which represented a 115 basis point increase. For the year, EBITDA of 8.53 percent represented an increase of 76 basis points over 2013. Interest expense at $132,000,000 for the quarter leveraged 5 basis points as a percentage of sales.
Pre tax earnings for the quarter were 5.48 percent 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 Q4. 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 the settlement of prior year tax matters. Q4 net earnings of $450,000,000 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 Q4 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 466,000,000 dollars Inventory of $8,900,000,000 was down $216,000,000 or 2.4 percent from last year. The decrease was a result of better inventory management and improved sell through 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 $5,100,000,000 was up $116,000,000 or 2.3 percent to last year. The increase relates to an almost 2 day improvement in days payable outstanding. At the end of the Q4, 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 $4,900,000,000
an increase of 20% over last year due to net earnings growth and working capital. Capital expenditures were $880,000,000 down 6% from last year. Free cash flow of $4,000,000,000 represented a 28% increase over 2013. During the quarter, we repurchased 14,900,000 shares for $1,000,000,000 through the open market. For the year, we repurchased almost 74,000,000 shares for a total of $3,900,000,000 Looking ahead, I'd like to address several of the items detailed in Loews' business outlook.
As Robert noted, economic forecast suggests 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 approximately 4.5% to 5%, driven by a comp sales increase of 4% to 4.5% and the opening of 15 to 20 stores, which includes 6 Orchard and 2 City Center locations. Expect to record our highest comp in Q1. This is an important quarter for home improvement in the East as compared to last year.
While we expect the first half comp to be higher than the second half, we do expect that the 2 year comps will improve sequentially through the year. We're anticipating an EBIT increase of 80 to 100 basis points. As I noted during our Analyst and Investor Conference in December, we are now targeting 25 to 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 Q1.
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 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 the fixed cost leverage associated with sales growth. The effective tax rate is expected to be 38.1 percent. A higher tax rate relative to 2014 is a result of the settlement of prior year tax matters recognized in Q1 2014. A 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 $5,000,000,000 Our capital plan for 2015 is approximately $1,200,000,000 This results in estimated free cash flow of $3,800,000,000 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. We had approximately $2,400,000,000 remaining under share repurchase authorization at the end of the fiscal year. Our guidance assumes approximately $3,800,000,000 in share repurchases for 2015.
All future share repurchase authorizations are subject to Board approval. Regina, we are now ready for questions.
Our first question will come from the line of Alan Ryskin with Barclays. Please go ahead.
Thank you very much and congratulations guys on a nice quarter year. Robert, maybe looking at the industry and your performance kind of 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, Al, I think we've talked about that some in the past and how really when you look through all the prior cycles when housing was turnover was going up and down home values continue to maintain their homes continue to maintain their value and actually continue to increase during a lot of those cycles. But we saw that kind of disconnect in this most recent downturn when home prices dropped dramatically. So 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. So people are reengaging 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 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. But at the end of the day, income and housing continue to be the things that drive our business. So there was a little bit of a disconnect in the downturn, but we are seeing consumers reengage and we feel good about that. That's a little bit of what's built into our guidance for 2015.
Okay. Thank you. And 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?
So Alan, the impact was essentially nominal to us. Our international business in Canada and Mexico are relatively small pieces of our portfolio of businesses. So 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, Alethia.
Next 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% to 9.5%.
Is that the right interpretation? And 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?
So 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. So if you think about our EBIT guidance for 2014, we started the year at 65 basis points and delivered 76 basis points. So I would suggest that it's some level of conservatism. As I mentioned in my comments, we took a prudent outlook prudent approach to our outlook for 2015 and the 80 to 100 basis point range is consistent with that.
Okay. And then 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. So is that just the 4th quarter thing? Did you do just so well around Black Friday with consumers that kept the consumer rate a little bit higher?
Or was there something that changed on that side?
Yes. This is Robert. You hit the nail on the head. We actually 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 Q4 with a 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, Simeon. It was really the result of the holiday in 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.
So 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. We show strength that we did not lose anything relative to any type of transaction size that we monitor or watch during that time frame as well. So we feel good with the Pro. We still feel good with the strength of the Pro and their response to our process and programs.
And 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, Go Black, other brands that we're bringing back into the portfolio as well as those brands we launched during Q4. So we feel really good from where we are today and entering into 2015 with relevance for the Pro.
Okay. 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. So 25 to 30 basis points rule of thumb for 2015, which is higher than you've targeted in the past.
But in the Q4, 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?
So Mike a bit of it was the impact of insurance. Some of it was the bonus payout that Rick 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.
And actually so if I could follow-up on that two points. 1, within the gross margin you talked about price action. Can you give us more details there? And 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?
So two things. The payout is based on our planned performance. So as we our outlook for Q4 was at a 7.3% comp. So 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's comment on targeted promotions.
Okay. Thanks. Makes sense. Thanks Mike. 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. So we saw really good performance for your big ticket bucket and slower performance from your smaller ticket stuff. Does that is there any suggestion that as the consumers 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? And then conversely, is that potentially coming at
the expenses from the smaller ticket stuff?
Michael, 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 on experiences. We've talked about the project nature of the business and the way we're focused on the project nature of the business while we saw that's why we saw strong performance in areas that we outlined for you like kitchen and appliances, flooring,
those types of things.
And 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 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. So a lot of what the team has been working on over the past few years was setting ourselves up to take advantage of the macro environment that we find ourselves moving into now, which I think played itself out in the Q4 and I think is what's built into our guidance for 2015. So Mike, if you want to dovetail on top of that?
Absolutely. Thank you, Robert. Yes, I'd add to 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, having the right inventory depth, having the right breadth of assortment, we think that's also going help us over the long term continue to build better traffic.
So 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 customers 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 of from a sales perspective? And where you think you can just 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 reengaging in big ticket categories, but hasn't necessarily started in earnest. So 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 give
us some can you quantify in some way?
What I can tell you is at the peak those items were those 3 categories were close to 19%, 20% of our sales. Today they're 16% to 17%. So while all boats have been rising, they're still lagging as a percent of the mix.
That's very helpful. Thank you so much.
Thank you, Mike.
Next question comes from the line of Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Good morning, guys. So 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. Now 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? Or is this just kind of a more overall aggressive stance on the merchandising front?
Scott, I'll start and then have Mike
jump in. Certainly, as we talk about at AIC, we have a strong focus on the
AIC, we have a strong focus on the pro customer and we
know that to continue to and we've had great performance
as Rick outlined for you. But 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 stores, the depth of inventory and also the key brands that they rely on. So 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. So Mike, if you want to? Sure.
Absolutely. I'd say the customers, the Pro, the tools, value improvement that we use to go after better serving this customer and certainly brands are enabling to make sure we serve customers well. And so to Rick's point earlier, you think about that and Henry Coating, this hubble wiring devices, CRK fasteners, Lennox HVAC, Orange County installation, just really, really great job by the merchants partnering with our team and store operations to grab the brands. But it's not just in Pro. If you think about what we've done in the DIY space, HGTV by Sherwin Williams, the Granddad, the quality of Sherwin Williams to the core expertise of HGTV, we're really, really excited about that.
And 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. So excited. And there's a ton of work in tools very specifically as well. Erwin Lennox, we talked about both the Erwin brand and Lennox brand. Rick made reference of Hitachi Neimatics.
If you couple that with our exclusive Bostik, exhaust destination for Pneumatic. Rick spoke about adding back Goldblot Hand Tools and that's added to our current portfolio of brands, which includes Bosch, FortiCable to name a few. So 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 we want as well as showing up both growth for DIY and the and our customers are still looking for strong tool performance. So we're excited about what's going on. And to
your point,
great, great work. Great.
Thanks a lot guys.
Next question will come from the line of Jessica Mase 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?
Yes, Jessica. This is Rick. I'll start and then I'll let Mike jump in as well. We continue to be pleased with the highperformancelows.com. It was up 25 percent for the quarter, 2.5 percent of our total sales for the year.
When you look at dotcom, the thing that we're really working on is, as you said, we've been doing buy online pickup in store for over a decade. So it's something that we're really continuing to focus on. Dennis Knowles and the team have done a phenomenal job on store operations and 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. And it continues to focus on our ability to drive our omnichannel aspects of what we're trying to accomplish and do as an organization and create that visibility across stores, dotcom, contact centers and on-site or in the home. So 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 of quarters and in 2014 is really enhancing the experience that the customers have when they jump on our site. So we've been working on delivery scheduling. You've seen us work on improving our search capabilities and adding several 1,000 additional search terms to avoid getting back no search results. We've improved our filtering of products and we're also working on improving our content and improved content for 17,000 highly visible items on the site. So we're really
looking holistically at the site to make sure that we continue to drive what
we are 97%, 98% of all transactions still go through our stores. That's evidenced by the fact that we talked about the 60% pickup, the other 10% delivered. And then a large portion of our parcel orders are actually shipped from our stores. So 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.
I guess I'd add anything you purchase online. So the consumer often starts online for inspiration, getting a better sense of how they want to pull their project together. And they like to couple that with an in store experience, so that they can work their way through the project. But applying to this fashion fixture, outdoor power and tools are certainly mainstays for online. And we take an approach that for the consumer, they want us to be relevant whenever and wherever they want to interact with us.
And so we recognize that often they start online and from there say in store discussion. I will also be 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. And to Rick's point earlier, a couple of brands that have been added, Progress Lighting and Kitchener Lighting will be featured online. And in our online tools, we'll 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. So it's for us it's about the cohesive experience of which online is certainly a key piece of it.
Great. That's very helpful. Thank you. Your next question will come from the line of Matthew Zasler 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 Q4. 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?
So 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 build materials, a lower margin category. Those are the 2 main drivers of the I guess 3rd, 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 improvement that I mentioned.
Great. And then my second question, your inventory was actually down outright year on year, which is a very strong performance perhaps even more than you're guiding for going forward. So is that a function of the strong Q4? Is the port a part of it? Or is just your outperforming your goals with no constraint to sales as a result?
So I'll take part of it and let Rick talk about the port. As I mentioned and so as you're just talking about we're trying to grow comps at a mid single digit keeping inventory versus floor flat. So a lot of effort and energy around improving the productivity of inventory. So and that showed up in Q4. The second is improved seasonal sell through.
So 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 of 20 13 based on the strength of the seasonal set the customer experience design work we had far better seasonal sell through Q4, 20 14 than we did 20 13. Therefore, we didn't have any carryover inventory. Yes.
And Matt I'd just add that we also account in transit inventory in our numbers. So whether it's sitting at port or in our DCs, it's still in our total inventory numbers. As it relates to our port to the port issues, I'm extremely pleased with the efforts of our supply chain in getting our products moved to the port during this
slowdown. As a matter of
fact, we feel fairly good and
confident about our
inventory position heading into spring. Good and confident about our inventory position heading into spring. Currently, we have over 3 months of forecasted sales of seasonal products already in our distribution centers and in our stores. So 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 get it to our stores the most quickly and time effective means possible.
But 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. Spring with our current inventory levels and it's particularly against our forecasted expectations for the 1st 3 months.
Thanks so much for that.
Next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead.
Thanks. Good morning, guys. Hi. So 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?
And do you think that the lift is accelerating and still on the come? Or how would you frame that out?
So Chris, as we think about drivers of our business, it's really 3 household net worth, employment and housing. So certainly less dollars going towards fuel is going to be more discretionary dollars for the consumer to spend. So that's a fact. What we don't know is exactly how much of that's going to savings, how much going to restaurants, vacations, etcetera, how much is going towards home improvement. So we know the customers got a little bit more walking around money.
To your specific question, Chris, I can't determine we can't determine the specific impact to our comp the
Q4. 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 mean, 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?
Chris, 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, yes, the more that it becomes part of your discretionary income versus kind of a one time impact. And so 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. So 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.
And you're not seeing anything in the oil patch now that's a concern to you, stores exposed there?
As I said in my comments, we saw a broad outperformance across all of our divisions and all of our regions in the company.
Thanks, Greg. 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 of questions. First on the pro account growth, up 24% in the Q4. 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. When 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. And then the addition of the programs continue to resonate very well with the PROs. So when you look at account growth for the year in context, accounts grew at 16% for the year.
Okay, good. Thanks for that, Rick. And then 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 kind of temperatures warming out there kind of 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 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 over the majority of our stores, the Deep South, we were already into spring. And so therefore, we didn't want to disrupt the spring selling season in Deep South. We came back in the fall of the year reset all of those.
And so that's the earliest indication we would have would be from the Deep South. And what we're the receptivity from those consumers to what we've done with the outdoor living experience has been very strong. So we're pleased with the early indications and just waiting for spring to get here for the rest of the country.
Okay. And just lastly just on the flooring business looks like above average here in the Q4. It had been running kind of I guess I think in line. So what drove that change? Was there it was something that you guys think you did?
Or was it just kind
of a broader pickup in that category? We didn't do a tile reset late last year, but we're seeing pretty good strength beyond what we did to reset. So I think I'd suggest that the category itself, the industry has done better.
Great. Thanks, Mike.
Regina, we've got time for one more question.
Our final question will come from the line of Arun Rubinson with Wolfe Research. Please go ahead.
Thank you. Yes, Ben and Cleanup. Good quarter. I had a couple of questions on the cost. Wondering if you can delineate rattled off a few costs that you look like you're digging into in a pretty minute way, which is intriguing to me.
So 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. And then I know in the past when I've asked you, 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 SG and A opportunities that might be I would say opportunities irrespective of volume.
So, 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 talked about. So 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.
And 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 there 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. And we've got a number of categories in 2015 and we're looking at things from store pictures and displays, supplies, the 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.
That sounds like a great area of focus. Thanks and good luck.
Thanks. Appreciate it, Aram. And as always, thanks for your continued interest in loads. We look forward to speaking with you again when we report our Q1 2015 results on Wednesday, May 20. Thanks and have a great day.
Ladies and gentlemen, this does conclude today's conference. Thank you all for joining. You may now disconnect.