Good morning, everyone, and welcome to Loews Company's 2nd Quarter 2014 Earnings Conference Call. This call is being recorded. Also supplemental reference slides are available on Loews' Investor Relations website within the investor packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non GAAP financial measures.
The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are 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 Nibloc, Chairman, President and Chief Executive Officer Mr. Rick Dammern, Chief Operating Officer and Mr. Bob Hull, Chief Financial Officer. I will now turn the call over to Mr. Nedbloch for opening remarks.
Please go ahead, sir.
Good morning and thanks for your interest in Loews. We delivered solid results for the Q2. Comparable sales were 4.4% with an increase in comp transactions of 3.1% and an increase in comp average ticket of 1.3%. As expected, we recovered most of the outdoor product sales missed in the Q1 due to unfavorable weather conditions. But discretionary interior projects did not perform as well as expected.
Outdoor product sales were strong with a roughly 6.5% comp for the quarter, while indoor comps were roughly 3%. All 14 regions had positive comps for the quarter. Likewise, all 12 product categories had positive comps. We saw particular strength in lawn and garden during the quarter. And the outdoor living experience we discussed on our Q1 earnings call drove success in patio furniture and accessories.
While seasonal categories were strong, we also saw strength in millwork, paint and tools and hardware, which were all above the company average. And we saw solid performance in line with the company average in fashion fixtures, flooring and lumber building materials. We continue to see strength in our pro services business, which outperformed the company average during the quarter. And I'm pleased to share that our team in Canada delivered double digit comps in local currency for the 5th consecutive quarter. We remain focused on improving our profitability even while investing in key capabilities to drive sales growth.
For the quarter, gross margin expanded 20 basis points and we effectively controlled expenses delivering 67 basis points of operating margin expansion and earnings per share of $1.04 an 18.2% increase over last year's Q2. Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $1,100,000,000 of stock and paid $183,000,000 in dividends. As we look at the backdrop for the second half of twenty fourteen, economic forecast suggests continued strength in the home improvement market as employment, income and consumer spending levels continue to improve. At the same time, signals from the housing market appear mixed, as home values have increased moderately, while existing home sales in total have declined this year. However, when distressed sales are omitted from the data, which we believe is a more appropriate indicator of the long term health of our industry, existing home sales have seen a slight increase through the first half of the year, revealing a more positive and sustainable trend.
In light of the positive direct trajectory of these factors, we believe home improvement spending will continue to progress in tandem with strengthening job and income growth. This also aligns with recent consumer confidence readings in our Q2 consumer sentiment survey, which revealed that homeowners' views around personal finances and home values continues to improve. Consumers are indicating stronger intentions to complete a home improvement project, with most of them planning a specific project in the next 3 months. And while most of these planned projects are still small ticket, we are seeing a rise in homeowners planning big ticket projects. Plans we have in place to support our continued top line growth.
Our enhanced sales and operations planning process will help us capture seasonal opportunities in the second half of the year. We also remain focused on improving our product and service offerings for the Pro in order to drive sales for this important customer. And we will continue to build customer experience design capabilities that differentiate Lowe's from other home improvement retailers. Continued improvement in macroeconomic landscape, together with our strengthening execution, strategic priorities and keen focus on productivity and flow through give us confidence in our business outlook for 2014. Before I close, I would like to thank our employees for their hard work in achieving this quarter's solid results and for their continued dedication to serving customers while we further transform our business.
Thanks again for your interest. And with that, let me turn the call over to Rick.
Thanks, Robert, and good morning, everyone. As Robert shared with you, we generated positive comps across all regions and product categories as we continue to capitalize on an improving macro backdrop through our enhanced sales and operations planning process, improved relevance with the Pro and developed customer experience design capabilities. Our lawn and garden category experienced the strongest growth among our seasonal categories, even over strong growth in the Q2 of last year. Customers shopped our compelling offering of live goods as they took advantage of improved weather to spruce up their yards. Likewise, we drove growth in outdoor power equipment over double digit growth in the Q2 of last year with great national brands like Husqvarna, John Deere and Troyville supplemented with the launch of our cobalt line of battery powered handheld outdoor power equipment.
Within our seasonal living category, patio and outdoor fashion products topped their solid first quarter results generating double digit positive comps and better than anticipated sell through. This strong performance offset softness in the window air conditioners in the north, which has experienced cooler than normal summer. The strength in patio and outdoor fashion is a testament to the outdoor living experience we rolled out over 2 thirds of our stores in advance of the spring selling season. We removed 15 bays of steel rack to create a showroom feel with about 35% more open space, which is made possible by our larger store format. To help customers envision and create their outdoor space, the experience in product prior to purchasing, we displayed patio sets with coordinating rugs, umbrellas and accessories like pillows, lanterns and planters along with grills and other outdoor products, just as you would expect in your own backyard.
The outdoor living experience is one example of how dedicated customer experience design team is working with customers to better understand their purchase drivers and based on these insights is designing entire experiences from inspiration to purchase and enjoyment. Other categories showing particular strength in the quarter included millwork, paint and tools and hardware. In addition, fashion fixtures, flooring and lumber building materials had solid performance in line with the company average. Fashion fixtures, flooring, lumber and building materials and millwork benefited from customers increasing interest in refreshing both the interior and exterior of their homes and our in home project specialists are simplifying the process by guiding customers through inspiration, design and installation. While we already have project specialists that focus on the exterior of the home available across all U.
S. Stores, we continue to expand our interior project specialist program. Customers have responded very positively to these programs and we are pleased with our performance. The paint category, particularly deck stains and exterior paints, including newly launched Valspar Reserve performed well as customers took advantage of better weather to refresh the outside of their homes. We introduced Valspar Reserve exterior and interior paints at the end of the Q1 to appeal to both DIY and Pro customers and our sales to both customers have exceeded our our attachment of fastening and repair products to sales of lumber and building materials.
As Robert mentioned, our Pro business continued to perform well. In fact, Pro Services comps outpaced the company average for the 12th consecutive quarter, Increasing customer willingness to complete refresh projects coupled with our strong product offering led to notable Pro sales strength. We will continue to invest in our core product and service offering for Pros, a segment that is growing faster than the rest of the home improvement market. We are working to ensure we have the right products and brands pros demand and the inventory depth required to help pros complete their jobs. We also strive to provide pros with great service that makes doing business with us as quick and as convenient as possible.
So we continue to reach out to them through multiple channels whether in store where we have dedicated specialists to answer questions and dedicated loaders to help them get back to the job quickly or at the PROS place of business where our account executives help regional maintenance, repair and operations customers order and replenish products across multiple stores or through our national account representatives who assist customers doing business with Lowe's across the country or online where we are also committed to providing great service to pros. During the quarter, we began the relaunch of lowespros.com, a dedicated platform for pros to purchase online from Lowe's. This site will provide pros useful functionality such as tools to develop requisition list and views of the purchase history as well as customized product catalogs. And the site can be integrated with purchasing systems pros use to manage their business to further streamline their day to day operations. This site is currently being tested with a select group of pro customers and we will receive positive feedback on the site's flexibility and ease of use.
We will expand our test group and continue refining the site with a goal of a broad based release by year end. In addition to our efforts to drive top line growth, we are focused on driving productivity and profitability. And we made good progress in the Q2 as we leverage payroll and inventory. Just over a year ago, we added an average of 150 stores per week to the staffing model for nearly 2 thirds of our stores in order to improve close rate by increasing the proportion of selling hours during high traffic weekday times. This year, we are optimizing this investment by better aligning hours with customer traffic.
This allowed us to meet 2nd quarter customer demand with only a slight increase in payroll hours relative to the Q2 of last year, resulting in roughly 10 basis points of payroll expense leverage. Similarly, last year as part of our value improvement initiative, we reinvested our inventory to provide greater depth of high velocity items in job lot quantities. This year, we have held inventory per store roughly constant in the 2nd quarter even while increasing comp sales. We are pleased with the progress we're making this year on productivity and operating profitability and we will continue to look for ways to make further progress. As we have shared with you previously, our enhanced sales and operations planning process has enabled us to improve seasonal planning, including the cadence of inventory allocation, staffing, associate training and marketing.
This year, the process helped us stay connected on the inventory and staffing needed to recover sales, while ensuring we address key summer holidays, including Memorial Day and July 4th and home improvement occasions such as maintaining lawns and gardens and refreshing patios. Entering the second half of the year, we will use the same process to ensure we are prepared to address a new set of customer needs for the fall such as planting, home winterization and exterior maintenance. Then as winter arrives, we'll help customers refresh their homes for holiday guests, decorate and organize their home after the holidays. Over the next few months, as appropriate by ClimateZone, you'll see us repurpose this space used for outdoor living experience to focus on products used for fall cleanup, outdoor power equipment such as leaf blowers to clear yards, seeding, fertilizer and ultimately holiday decor. Our focus will be on using this space to provide the inspiration, guidance, products and service that customers need to tackle the projects that are relevant for each micro season.
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 Q2 were $16,600,000,000 an increase of 5.7% driven by comp sales and Orchard Supply Hardware. Total customer transactions increased 5.6% and total average ticket increased 1 10th of 1 percent to $65.65 As previously discussed, the Orchard stores have more transactions per foot, but fewer per store and a lower average average ticket than a traditional Lowe's store. So while Orchard aided total sales by approximately 100 basis points and added roughly 220 basis points to our total transaction growth, it negatively impacted total average ticket growth by approximately 115 basis points. The Orchard stores are considered non comp, but will be included in our comp sales calculation after the anniversary of the acquisition in Q3 2014.
Comp sales were 4.4% for the quarter. Looking at monthly trends, comps were 4.7% in May, 4.6% in June and 3.7% in July. As a reminder, in last year's Q2, July had the highest comp at 11.3%. For the quarter, comp transactions increased 3.1% and the comp average ticket increased 1.3%. As you've heard discussed, we recovered most of the outdoor product sales missed in the Q1 due to unfavorable weather conditions as evidenced by our roughly 6.5% comp in exterior products categories.
However, interior categories at approximately 3% comp performed lower than the company average. Year to date sales of $30,000,000,000 were up 4.2% versus the first half of twenty thirteen, driven by a 2.8% increase in comp sales, the addition of Orchard and new stores. Gross margin for the Q2 was 34.55 percent of sales, which increased 20 basis points over Q2 last year and is up 62 basis points on a 2 year basis. The increase was driven primarily by value improvement. Year to date gross margin of 34.98 percent of sales, an increase of 42 basis points over the first half of twenty thirteen.
SG and A for Q2 was 21.33 percent of sales, which leveraged 40 basis points. Bonus expense leveraged 28 basis points due to lower expected attainment levels relative to last year. Also in the quarter, we experienced leverage in store payroll and advertising largely as a result of the sales increase. These items were somewhat offset by employee insurance, which deleveraged 17 basis points, primarily a result of the Affordable Care Act, which drove a 10% increase in enrollment. Year to date SG and A was 22.87 percent of sales, which leveraged 17 basis points from the first half of twenty thirteen.
Depreciation for the quarter was $375,000,000 which is 2.26 percent of sales, leverage 7 basis points compared to last year's Q2 as a result of the sales growth. In Q2, earnings before interest and taxes or EBIT increased 67 basis points to 10.96 percent of sales. For the first half of twenty fourteen, EBIT was 9.62 percent of sales, which was 60 basis points higher than the same period last year. For the quarter, interest expense was $126,000,000 and deleveraged 6 basis points to last year as a percentage of sales. The effective tax rate for the quarter was 38.6 percent, which was higher than last year's 37.5 percent.
The higher rate, which was consistent with our expectations, was a result of tax programs that expired at the end of last year. Net earnings were just over $1,000,000,000 for the quarter, an increase of 10.4% over Q2, 2013. Earnings per share of $1.04 for the 2nd quarter were up 18.2% to last year. For the 1st 6 months of 2014, earnings per share of $1.64 represented a 20.6% increase over the first half of twenty thirteen. Now to a few items on the balance sheet starting with assets.
Our cash and cash equivalents balance at the end of the quarter was just over $1,000,000,000 Our inventory balance of $9,300,000,000 increased $209,000,000 or 2 percent versus Q2 last year. The majority of the increase was driven by the addition of the Orchard stores. Inventory turnover was 3.74, up slightly over last year. Asset turnover increased 10 basis points to 1.63. Moving on to the liabilities section of the balance sheet.
Accounts payable of $6,200,000,000 represented a 9% increase over Q2 last year caused by the timing of purchases year over year. At the end of the second quarter, lease adjusted debt to EBITDAR was 2.07 times. Return on invested capital increased 199 basis points for the quarter to 12.61%. Now looking at the statement of cash flows. Cash flow from operations was $3,900,000,000 an increase of $567,000,000 over last year, largely due to working capital as well as growth in net earnings.
Capital expenditures were $384,000,000 a 2% increase over last year. Year to date free cash flow of 3 point percent higher than the first half of twenty thirteen. In May, we entered a $750,000,000 accelerated share repurchase agreement. At this point, we expect to receive approximately 15,900,000 shares, but the ultimate number of shares will be determined upon the completion of the program in the Q3. We also repurchased approximately 8,100,000 shares for $380,000,000,000 through the open market.
In total, we repurchased a little more than $1,100,000,000 in the quarter. We have approximately $4,300,000,000 remaining under share repurchase authorization. Looking ahead, let me share our business outlook. We expect a total sales increase of approximately 4.5 percent driven by a comp sales increase of 3.5% and the opening of 10 home improvement stores and 5 Orchard locations. Our sales outlook is modestly lower as a result of our year to date performance.
However, our improved flow through assumptions allow us to maintain our prior EBIT expectations. We are anticipating an EBIT increase approximately 65 basis points and expect that the improvement will come from both gross margin and expense leverage. The effective tax rate is expected to be 37.2% for the year. We expect earnings per share of approximately $2.63 for the year, which represents an increase of 22.9% over 2013. We are forecasting cash flow from operations to be approximately $4,100,000,000 Our capital plan for 2014 is approximately $1,200,000,000 This results in an estimated free cash flow of $2,900,000,000 for the year.
We expect to issue incremental debt during the year as we manage to the 2.25 times lease adjusted debt to EBITDAR target. Our guidance assumes approximately $3,400,000,000 in share repurchases for 2014. Kim, we are now ready for questions.
We are now ready for questions. Thank you. Our first question comes from Eric Bostard with Cleveland Research Company.
Good morning. Good morning,
Eric. Curious on your thoughts on market share performance. Obviously, a lot of things going on in merchandising and leadership changes within that. Curious on how you're seeing the progress there and how you expect that to play out as we move forward?
Yes. I'll start and talk about it Eric. And then we've got Mike Jones in the room and he can jump in as well. Certainly, there has been a lot of changes in the organization. But I really feel really good about the transition.
Greg retired earlier in the year, long term employee, done a phenomenal job for the organization. Mike has jumped right in without missing a beat. I think that Mike and Mike McDermott, who is now our Chief Merchant, both working hard to try and dissect on a category by category basis, where we have opportunity, where we see particularly with where our stores are located, with the way we go to market, our ability to try and develop better customer experiences. And also as we've mentioned several times, strength that we're trying to go after with an opportunity with the Pro customer, opportunity to get the brands we need, obviously depth of inventory, the things we've talked about that we've improved in the past. So we see a significant amount of opportunity as we said.
Pro continues to lead the overall comp. We see that continuing in the back half of the year as we continue to work with our sales and ops planning process, dive into some of the categories we're dissecting on a category by category basis, where some of that opportunity is and we've got plans
in place to go after.
We won't fix it all within the next quarter or 2, but over the balance of next few quarters, we think we've got a lot things that will help drive sales. Mike, do
you want to? Yes. I'd add to that. At a high level, we feel real good about continuing to drive the top line and drive growth for the company. We feel real good about the engagement of our merchandising team.
We love the merchandising tools that have been deployed. We feel very good about our vendor partnerships. When we look at market share, it is category by category, as Robert mentioned. We do see some choppiness in the way the industry continues to get forecast. So we watch it very closely.
And again, we look category by category to ensure that we feel comfortable that our plans are delivering growth.
I guess a follow-up.
When you think about the changes that you're making and I appreciate Robert that it's not the next quarter or 2, but when do you think you do have sort of your best and brightest merchandising strategies in place implemented? When can we start to look for that to really be in place and gaining traction with the customer?
Well, I'd say we've done a lot of foundational work over the past couple of years with the depth of inventory, the job lot quantities, those type of things for the PROs. We've kind of threw that whole massive value improvement process, which was the original line of resets where we cleaned up inventory. We've got some key things we're working on from a website standpoint to improve the functionality of our website that will be delivered in the next 12 months. And then things like our outdoor living experience that we rolled out this year, that's where you start to really see the organization come together to deliver something different and better in store than the way we went back to market previously. And they're continuing to go through and figure out based on working with Mike and his team where are the opportunities where we can put our resources to place that will resonate in the greatest way with the customer, obviously, for competitive reasons.
We're not going to talk about what's coming along those lines. But I think when you look at what we're doing with the Pro customer, what we're doing on the brand side, the fact we're through the line review process, I think over the next and what we're doing from the website, I think what you're going to see over the next 12 months, you'll see some pretty significant improvements in our execution above and beyond what we've already been working on.
Great. Thank you.
Thanks, Eric. Thank you.
Our next question comes from Alan Rifkin with Barclays Capital.
Thank you very much. So you've kept your earnings guidance the same despite taking down revenues slightly both on a comp basis in total for the year. Bob, could you just provide a little bit more clarity as to where on both the gross margin and SG and A line you're going you're anticipating seeing the incremental leverage that you can maintain the earnings guidance?
Sure, Alan. So as we think about the outlook for the year, we've maintained it at 65 basis points. But we do expect roughly the same level of gross margin improvement that we previously expected. We'll get a little bit better performance on expense leverage. As you've heard us talk about in prior years, we're really focused on productivity and profitability on a number of fronts.
And that's showing up in 40 basis points of SG and A leverage in Q2 even with 17 basis points of headwind due to the Affordable Care Act. As we think about the second half, we'll drive further expense leverage going into the year. So we feel good about that. So really the change is more on the expense leverage side than the margin side for second half of the
year. Okay. Thank you. And one follow-up if I may. Is there any discernible difference between the performance of your stores by class of year with respect to the comp?
Our more recently opened stores comping above the corporate average? Or where do we stand there?
Thank you. So Alan, generally speaking,
we don't see a material difference in comp performance based on year of opening. What we do see is stores within markets performing roughly similar. So it's local market economics. The local economy and the state of local housing are more impactful to a store's performance versus the year they opened.
Okay. Thank you.
Thank you, Alan.
I think our next question comes from Aaron Robinson with Wolfe Research.
Thanks. Couple of things. One, I'm hoping you can give us a little bit of clarity on the Australia business, where you are strategically with that and how that impacts the P and L because I'm pretty sure there's some losses that are incurred there. And then the second question is on the distribution side. Most companies that we talk to have kind of changes going on, on the distribution side, whether it's for e commerce or for something else.
You guys have always had a very established and very advanced distribution network, but I don't think we've heard a lot about it. So would you mind giving us an update to see how that's going to stay a competitive advantage for you as your peers make progress there too? Thanks.
Yes. Aaron, it's Robert. I'll start on the Australian question. I'll let Rick and Bob follow-up on the distribution. On the Australia question, we've got 49 Masters stores opened as of the end of their fiscal year, which was the end of June.
As you know, that's 49 stores. I think they've been open in a little less than 3 years. So great getting a great foothold there. We also as you know, we also bought another business there called Danks that now trades around the home timber and hardware group that was bought about time we started the joint venture. And it really does distributors to a lot of the independents in the area.
There's about 400 or so independent stores to distribute to, but they also have 28 company owned stores. So we've gotten a good foothold. I think the initial receptivity of the business has been good. Obviously, as is the case, anytime you open up a new concept in the market, there's the competitive response that normally takes place. And just when you're taking a business from Greenfield growing up growing the business, making sure that you are being able to staff and grow that business.
So what the joint venture decided to do is they're slowing down slightly the new store growth to allow a little bit more maturity and being more targeted and strategic and where those new stores will go. So they will have a little less cannibalization on existing stores and more in the markets that are underserved. So they're pulling back to about 10 to 15 stores per year over the next few years. Previously, it was closer to about 20 stores a year. So we're still excited about the opportunity there.
There's a lot that we bring to it with our global sourcing and brand private label brand capabilities. And as from a financial standpoint, the losses from that obviously, it's an equity investment. So it runs through the P and L as a separate line item. It's not operations aren't consolidated, but those quarters only have 1 third of the operations.
And the dollar amounts that are run through each quarter for that?
I don't think we speak for it.
We haven't spoken directly to that, Arum. You can take what Masters reports. So since we are a minority participant, we'll let our majority partner speak for the business. But you can take what they report on the home improvement business and refer what the impact to us is. It is a $0.02 per share this year.
Okay. Thank you.
This is
Rick. I'll give you an update on the distribution teams. First, let me say, extremely proud of what both our supply chain and stores were able to accomplish in the movement of goods and making sure that we had the products available for the customer during Q2. During our most volatile time of the year from a seasonal standpoint, the teams did a phenomenal job in making sure we had products for the customer. 2nd, I would say, Aaron, as you've mentioned, we have a world class distribution center that is and was stood up to supply our brick and mortar stores.
And we have been over the last several years continue to look for ways to optimize that channel to really be able to deliver our omnichannel experiences. So a couple of the changes that we have made over the past year, one being our ability to offer flexible fulfillment to our customers and through our stores. Flexible fulfillment allows us the capability to ship from 35 of our excuse me, 54 of our stores as well as all of our distribution hubs and nodes direct to consumer on parcel product that allows us to better leverage that inventory and drive greater flexibility there. The teams continue to work on driving productivity both in the distribution center itself as well as in trends, particularly in Q throughput. So as we look at Q2, the teams were able to really offset a lot of the incremental cost in fuel with greater productivity and greater cube movement through the distribution center.
We continue to look for ways to optimize the what we stock and maintain in our network versus what we use to cross stock and what we flow through as a cross stocking channel. And we feel comfortable that we've optimized that spend in the way that those products are flowed through the alternate channels. And then we continue to look for new ways to meet the customers' demand in the future through our through supply chain strategy improvements. So we have a lot going on, but we feel comfortable with where we are and pleased with the performance we're getting out of the network.
Is that all? No, I'm just kidding. That sounds great. Thanks for the help.
Thanks, Sarah.
Next question comes from Brian Nagel with Oppenheimer and Company.
Hi, good morning.
Good morning, Brian.
So I wanted to maybe dive a little deeper into the comment you made regarding the discretionary interior projects, which were somewhat weighted upon your sales here in Q2. Question first, I'll maybe describe more specifically what that is? Is it a specific product category that caters to interior? Did you see any differences geographically? And do you think it was more a function of just the overall environment competitively or something Lowe's
did? Yes. Well, yes, as we said overall, we had a lot of interior categories that performed well during the quarter. But we did see some weakness in a couple areas. One of them as you know in our we give comps for kitchen and appliances area.
When you dial down with that within appliances, we were going up against an incredibly strong comp last year. We were teens comps last year in the Q2. So when you look at our performance over 2 years, we were still average double digit comp over that 2 year period. So that was obviously something that was a little bit of a challenge in the second quarter. It was a competitive environment out there for major appliances and tough numbers we were going up against.
We also saw air conditioners with the summer as Rick mentioned in his comments not being as warm as what we had expected. Air conditioner sales were a little weak in July. And then couple of parts of flooring were a little weak in the quarter. So those were some areas that we saw some weakness in from the consumer, all of which we're looking at and kind of determine how do we better performance and that is in our share of the opportunity as we head into the back half of the year.
So on the flooring specifically, the 3 you mentioned, is there something again, is that do you think that's more of a competitive issue? Or was it again, it's more function of the
environment? Yes, if
I can jump in. Just a couple of things. Just to put a final point on the appliance discussion, we saw certainly high teens comps in major appliances specifically Q2 of last year. And if you take a look at our 2 year performance on major appliance, we see double digits. So it's actually performing very well.
That said, we had profiled a little more strength in appliances, as well as AC certainly. And I'd add flooring to that as well. To answer your question on flooring, we see very good performance in tile. We see very good performance in carpet. We see a little pressure in wood and laminate.
And we think part of its industry, we think part of it is that the competition has caught up with some of the first to market innovations that we launched last year. And our merchandising team continues to look at new first to market innovations that we can launch going forward.
Got it. Got it. Thank you. And then maybe just one follow-up. On the guidance, you modestly lowered the guidance for the year.
Just to be clear, the way the press release I think your comments in your prepared remarks said too, that's really a function of sales in Q1 and Q2. Your internal sales plan for Q3 and Q4 remains the same?
That is correct, Brian.
Thank you.
Thank you.
Thank you. And our next question comes from Chris Horvers with JPMorgan.
Thanks. Good morning. I also wanted to follow-up on the guidance. So in the first half of the year you comped just under 3% and then in 2Q, you comp 4.4% with the seasonal business up 6.5% and bring that number up. So two related questions.
What do you think the seasonal recapture was in 2Q? And as we try to think about what the underlying comp trend is, to give us some light to that? And then what gives you the confidence that you can hit that 4% to 4.5% implied comp in the back half? Thanks.
I'll start and this is Robert and then I'll have Bob jump in with any additional color. The pickup from Q1 impact was probably about 150 basis points going into Q2. And so that but as we did say Q2 was our strongest comp performance last year, particularly strong as we just talked about in major appliances and the performance we had with high teen comps for the quarter in major appliances last year. We also talked about the weakness that hit the 2nd quarter with regard to ACs and that was a little bit of a drag on the 2nd quarter, particularly in July's outperformance. As we look to the back half of the year and we normalize all of that, as we look at easier comparisons over the back half of the year, as we look at, as I said in my comments, our continued acceleration that we see growth over the back half of the year in employment, income growing, home price appreciation hanging in the FHFA forecast for home price appreciation is pretty much the same this year as it was last year.
And as I mentioned, once you normalize for distressed sales, continued slight improvement in housing turnover rate. We see that we've in everything we're doing, we've been talking about so far on the call, we're trying to continue to strengthen our execution. We look at the macro landscape pull out together. We think our back half forecast is still reasonable from a top line standpoint. So to the point, yes, we adjusted for where we're at for the first half of the year, but we still feel confident on what we're seeing or
what we think we can
deliver on the back half of the year. So Bob?
The only thing I would add is so as Rick mentioned in his comments, we've seen great progress with PROS for 12 consecutive quarters. But as you've heard us describe, there's still a lot of focus in that area and we expect continued traction and momentum in the second half of the year, which gives us confidence in our second half outlook.
Is there something particularly on the Pro, a certain initiative perhaps that you can point to? Or is it just sort of the continued improvement across the store in terms of close rates and more focus gaining traction?
Sure. This is Mike Jones. A couple of things. First, if you look at our three business areas, our building and maintenance business area was above the average. So it's very encouraging.
We are continuing to see better traction. We are seeing improvements in brands and we've returned some brands back to Lowe's, heavy coatings being an example, a expanded lineup with Lennox and Erwin. Certainly, our BOSS brand continues to do well. DeWalt does very well. So that feels very encouraging.
The team continues to work that very hard. Our depth of inventory continues to improve. And we've made the necessary inventory trade off decisions so that as we become more relevant with PROs, you don't see the pressure in the balance sheet. So we are making those trade offs so that we can better serve the PROs and still protect our operating performance. And then the last piece I'd say is that our pro selling team is doing an excellent job, excellent job of engaging our pros and helping us build those relationships we need to continue to grow that business.
Rigsby called Lowe's for PROs, which is our portal designed specifically for PROs to help us transact with them, help us make doing business with us easy for them and frankly help them drive productivity in their own businesses. So we're very encouraged by the work that we see with PROS and we continue to build on it. Chris, this is Rick. I'd just like
to reiterate a point that Mike made. I think what we're continuing to see and feel comfortable with is the initiatives that we put in place over the last 18 months regarding both the organizational design to enable our stores, our field teams as well as our national teams to really meet the needs of the customer in the way that they need service. Then you look at the value statements that we've made, whether it be through inventory or whether it be through our contractor pack programs that merchants are driving or proprietary value prop initiatives continue to respond very well with the Pro. As a matter of fact, when you look at Q2, our Pro applications grew 23% over last year. So we continue to see the Pros respond very well to the initiatives that we got in place.
As Mike said, we continue to work on brands and inventory depth where needed to continue to maximize that opportunity. But we feel good with where we are and we feel very good with the way the Pro is responding to the actions we've taken.
And then just related to that. So can you talk about close rates in the store? I know you added value improvements resets are done and fully reset. How and labor hours are now in there. So can you talk about close rates as well?
Thanks very much.
So Chris, we have done all of the above to focus on improvement in close rates. What we've seen through the first half of the year is roughly 100 basis point improvement in close rates. So we feel good about progress we're making, but we
know there's still work ahead of us. And Chris, I'll just add. This is Rick again. And I think as a testament to what we've done there, you look at the fact that we were able to leverage our payroll costs during the quarter, increasing our sales per hour by 4%. And even when you look at the first half in totality, even with the soft Q1, we were still able to increase our sales per hour work by 3.5%.
So we feel the initiatives that we put in place is working. As Bob said, we're seeing roughly 100 basis point of close rate improvement and we'll continue to refine how we schedule, how we staff our stores to make sure that we're meeting our traffic patterns and the needs of the customers as they enter.
Thank you.
Thanks, Chris.
Thank you. Our next question comes from Matt Fasko with Goldman Sachs.
Thanks a lot and good morning to you. I'd like to try to connect the dots a bit between Robert some comments you made about doing some work on the online piece and talking about your interior projects. Where do you think you sit in terms of customers researching projects and leading in through online? Are you where you want to be? Or do you see that as an opportunity for the business?
Certainly, I said in the interior products we talked about part of that being the tough comp compare we had for major appliances specifically, it highlights a number of interior areas that are doing well. I think from an overall online standpoint, we've seen and made progress with the website. There's things like delivery scheduling and those type of things that we need to get work on. So it makes it a better easier experience for the customer. But we are seeing great transaction growth online on website.
We're still seeing the overall majority obviously of what is transacted online translating to either pickup in store or the store delivery fee. So the kind of omni channel aspect of it is working together really well. And certainly, customers online, in many cases they may be buying online, picking up in store or they may be it may be they may be ensure that that product is available when they get to the store. And then in many cases they're also shopping the store and getting add on sales on top of that. So I think there is still we know that there's still a significant amount of influence sales coming from what's happening online.
But the world's changing at a fast pace, technology is changing. We know that we've got to continue to improve our online experience and that's what Mike and his team are working on.
Got it. And then secondly, I'm not sure if you touched on this in your comments. You spoke a lot in thinking about your sales outlook about the macro factors and where they're evolving through the second half of the year. I guess you exited the quarter looking at July at kind of a subdued 1 year comp, but on a 2 year basis pretty consistent with where you were through the quarter, which was pretty good relative to trend. How is your quarter to date experience impacting your sales thinking?
And is it consistent with the numbers that you have out there?
Yes. We feel good about our start to August and particularly in light of the fact that when we look at once again it's from a 2 year compare standpoint August last year is our toughest comp comparison we're going up against. So we feel good about the way we started the quarter in light of what our guidance is for the back half of the year Matt.
Thank you so much guys.
Matt one other point I'd make. As we think about the impact of air conditioners, it had about a 30 basis point negative impact for the quarter, it had about a 60 basis point negative impact for July. So that's a headwind in July that won't carry towards the back half of
the year. Understood. Thank you so much.
Thank you.
Thank you. Our next question comes from Peter Benedict with Robert Baird.
Hey, guys. Thanks. Just quick question. Bob, you spoke about a lot of the progress you're making on the expense front. How about gross margin?
Just an update here on the long term view. Do you still think that kind of tops out around 35%? Or do you think you can maybe find ways to push it past that?
Yes. We haven't set any arbitrary limit on what gross margin could be. I think we know we've got some work to do as a result of the value improvement. We're seeing that play out in both in terms of gross margin improvement experienced in 2013 2014. As we've talked about, we created the process to bring more formality and rigor to the process.
We've always done line reviews. We're always going to do line reviews. So that's not to suggest that wave 2 or wave 3, there's no benefit there. However, we also recognize that there's competitive pressures in the marketplace, moving in sales by channel. So we do expect to continue to make progress with value improvement.
Our long term outlook beyond value improvement didn't suggest material increase beyond maybe 5 to 10 basis points per year. So we haven't set any arbitrary cap and we know there's still work to be done with value improvement and with other areas.
Okay. Thanks. That's helpful. Fair enough. And then just a clarification of the interior project specialists, I guess they're not available nationwide now.
I guess when do you think you guys could have that capability rolled out nationally? Okay. This is Rick.
As of this This is
Rick. As of this year, we originally started this
process in this program a couple of years ago. We had it test in really 3, 2.5 regions this past year, completed in Q1 of this year. We rolled it to another 5 82 stores. We're looking at the rollout campaign into 2016. We see another 3 to 4 regions possibly being rolled out then and then remainder in 2016.
Okay, great. Thanks very much.
Thank you. Our next question comes from Damian Katz with Morningstar.
Good morning. Thanks for taking my questions. My first question is on some of the medium term goals that you have, which is EPS next year and EBIT and ROIC goals. Do you still feel confident that you can achieve them this far into 2014? And then if you are willing to comment on any of the rumors about Brazil that came out last week, I'd be glad to hear what you say.
Sure, Jamie. I'll take the long term outlook. So we still stand by the 2015 outlook that we provided at our analyst conference a couple of years ago. As we've talked about, we're making good progress this year, specifically improvements in flow through on the incremental point of comp to the bottom line. Other efforts in place to further those efforts, as you heard the team talk regarding product categories, continue to understand opportunities to take share pro DIY across the merch category.
So we feel good about the outlook we provided for 2015.
Jamie, this is Robert. With regard to the rumors on Brazil, obviously, we don't comment on specific rumors of nature like that. And I would just reiterate what we've said in the past, our continued focus is on improving our existing operations in the U. S. And other international markets where we're at today.
And in that light, we continue in both things to look at opportunities. But with regard to coming on specific rumors, no, we won't comment on that.
One moment please.
It sounds like we don't have any more left in the queue. So thanks for your interest in Loews and we look forward to speaking with you again when we report our Q3 20 14 results on Wednesday, November 19. Have a great day. Thank you.
Thank you. And this concludes today's conference. You may disconnect at this time.