Good morning, everyone, and welcome to Loews Companies 4th Quarter 2013 Earnings Conference Call. This call is being recorded. Please note, if you press star 1 to enter the question queue. Prior to the start of today's call, Also, supplemental reference slides are available on Loews Investor Relations website within the investor packet. While management will not be speaking directly to the slide, 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 Kniblock, Chairman, President and Chief Executive Officer Mr. Greg Bridgeford, Chief Customer Officer and Mr. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr.
Kniblock for opening remarks. Please go ahead, sir.
Good morning and thanks
for your interest in Lowe's. We delivered comparable sales growth of 3.9% for the quarter with positive comps in 10 of our 12 product categories and a continued balance of ticket and transaction growth. And our pro services business continued to perform well. We achieved this growth despite a holiday season where the retail sector experienced softer sales than anticipated. Through continued use of our enhanced sales and operations planning process, we balanced softer sales of seasonal gift and holiday decorations with solid performance in core categories for interior refresh projects.
We continue to see strength in recovery markets with particular strength in California, Arizona and Florida where the housing recovery is well underway. In fact, even with pressure exerted by extreme weather late in the quarter in the northern and central areas of the country, we recorded positive comps in all regions except for the region most directly impacted by Superstorm Sandy recovery activity last year. I'm also pleased with our performance in Canada where the team has delivered double digit comps local currency for the 3rd consecutive quarter. Gross margin expanded 40 basis points in the quarter driven by a number of factors that Bob will discuss. And we delivered earnings per share of $0.29 for the quarter, which included approximately $0.02 of charges related to long life asset impairments.
For the year, we delivered comparable sales growth of 4 point percent, our strongest annual comp since 2,005. Earnings per share were $2.14 a 26.6% increase over fiscal 2012. Delivering on our commitment to return excess cash to shareholders, in the quarter we repurchased $958,000,000 of stock and paid $189,000,000 in dividends. For the year, we repurchased $3,700,000,000 of stock and repaid $733,000,000 in dividends. Looking at the landscape for 2014, economic forecast suggests moderately accelerating growth.
Stronger job and income growth should create a more favorable environment for consumer spending, which coupled with the lag benefit of the housing recovery should generate continued growth in the home improvement industry. While credit conditions remain tight relative to the housing boom years, conditions are improving and household finances continue to strengthen, which should also contribute to stronger growth in 2014. Also supporting increased home improvement market growth is positive progression in consumers' views around personal finances and home values that we saw in our Q4 consumer sentiment survey. Homeowners continue to believe the value of their home is increasing and report that they are less likely to decrease spending. With consumers more willing to invest in their homes, the job and income growth forecasted for 20 14 should provide the wherewithal for continued home improvement spending.
In 2014, we will continue to capitalize on opportunities within an improving economy and we'll build on the momentum established in 2013 as we further optimize our business model. We have substantially completed our initiatives to enhance retail relevance, including value improvement, product differentiation and our store labor investment and we will operationalize and refine these initiatives in 2014. Our top line performance improved this year as a result of our focus on cross functional collaboration and consistent execution along with our strategic initiatives, which allowed us to more fully capitalize on market demand. Now we are focused on improving our profitability even while investing in key capabilities to drive sales growth. Over the longer term, we remain committed to satisfying customers' needs whenever and wherever they choose to engage with us and to differentiating with better customer experiences than any other home improvement provider.
Determined to be a customer centered omnichannel retailer, we've been investing in infrastructure, both systems and processes. Our focus is on transforming our current multi channel offering in store, online, including mobile technology, in home and by phone to an omnichannel experience with our brand. Through enhanced customer service tools, we expect to improve our associates' ability to sell seamlessly across channels, introduce new project management tools and to expand fulfillment capabilities beyond our buy online, pick up in store or partial fulfillment of online orders, both of which we do today. And we would cultivate personal and simple connections with customers over and above what we've accomplished to date with MyLowe's. These new capabilities are projected to be in market in 2015.
We will differentiate Lowe's by delivering better customer experiences. In order to help customers visualize their home improvement projects, we will offer a cohesive group of products that provide relevant occasion based solutions and will present them in an inspiring manner. Greg will discuss further how we will begin building customer experience design capabilities in 2014. The commitments we've made to improve for customers and shareholders require unrelenting determination. Completing the transformation we've undertaken is not like flipping a switch.
It's more gradual and deliberate like turning up the dial as we add new capabilities. I want to thank our employees for their dedication and hard work toward this long term commitment. The momentum created by retail relevance initiatives, our strengthening execution and our team focus on productivity and flow through give us confidence in our business outlook for 2014. Bob will share those details in a few minutes. Thanks again for your interest.
And with that, let me turn the call over to Greg.
Thanks, Robert. Good morning, everyone. We continue to drive balanced performance the quarter with strong execution and further momentum from our initiatives. We offset a soft holiday gift giving environment by assisting customers in preparing their home for guests and cleaning and organizing after the holidays. For instance, many customers were looking to replace their older appliances.
Using our enhanced sales and operations planning process, we tightly coordinated advertising, promotions and inventory. As a result, we drew customers to Lowe's and we met their needs through a broad assortment of innovative appliances, which combined with our service advantages of next day delivery in hallway and in house facilitation of service calls provides the best in customer service and simplicity. We also drove strong sales of fashion fixtures, both by making incandescent bulbs available to customers working to beat the government deadline and by providing compelling new fashion plumbing products and sets for customers who are refreshing their bathrooms. And we know that winter weather be unpredictable, so we were ready to respond quickly to the demand for items needed to cope with the January storms across many markets in the northern and central areas of the country. Customers needed snow blowers, space heaters, heating fuels, snow shovels and ice melt as well as pipe fittings to replace those at first from the extreme cold.
Working with our vendor partners, we drove strong performance in these products using our distribution network to quickly and efficiently move them to where they were needed most. Our performance in the quarter is also a testament to the improved line designs and inventory depth resulting from value improvement. I'm pleased to share that at the end of the quarter, we had completely finished the 1st round of value improvement line reviews and substantially all of the associated resets. Resets. We'll continue to conduct line reviews in the normal course of business, but the annual volume of resets will be lower going forward.
Examples of resets completed in the Q4 include core products like pliers and wrenches, the core products such as bathroom vanities and pedestal sinks and seasonal products such as house and patio plants. Value improvement is now fully operationalized. This means that the improved line review and product reset processes are woven into our everyday business and are being used at an appropriate cadence for each of our nearly 400 product lines. Even so, we expect the initial round of value improvement research to further contribute to our profitability in 2014, as we obtain a full year of benefits from resets completed over the course of 20 13. We're now better positioned to meet customers' product needs and drive better inventory productivity.
We are also pleased that we modestly leveraged payroll expense in the quarter. We have made the store labor investment more productive by refining our allocation of these hours by store and by selling department. In the quarter, we increased sales per hour by approximately 2%. As we lap the introduction of the store labor investment in the Q1, we expect to obtain even greater leverage, which will contribute to greater 2014 operating profit. The store labor investment and value improvement are 2 of our initiatives designed to enhance retail relevance.
Our third is product differentiation, which is intended to drive excitement in our stores through better display techniques, including our revised end cap strategy and revamped promotional spaces. Product differentiation has been reset in 1400 stores to date and will be rolled to the remaining U. S. Home improvement stores in the first half of twenty fourteen. In addition to operationalizing our most recent initiatives, in 2014, we will focus on driving more of our revenue growth to the bottom line through expense control and disciplined execution of our plans.
We will also focus on 3 priorities to drive further top line growth. The first two aim to capitalize on opportunities within an improving economy. 1st, we'll use our enhanced selling and operations planning process to address micro seasons by market. And second, we will improve our product and service offering for the pro customer. Our 3rd priority will be to build customer experience design capabilities.
Through our sales and operations planning process, we have addressed an opportunity to improve seasonal planning, including the cadence of product introductions, promotions and staffing. While we've always planned and executed these seasons in our stores, previous planning was completed function by function and then reconciled to minimize conflicts. Now the process starts earlier and is anchored on the customer mindset for the season. The process more thoroughly considers detailed input from all functions to determine resource allocation and it enables Lowe's to provide a consistent messaging experience across all selling channels, stores, lowes.com, contact centers and in home selling. We also have an opportunity to better capitalize on pro market, which is growing faster than the consumer market.
We'll do this by enhancing our product and service offering with this important customer. While pros shop across the store, the penetration of sales to pro customers is highest within the traditional building and maintenance categories, including lumber and building materials, millwork, rough plumbing and electrical and tools and hardware. So we grouped those categories under the leadership of a general merchandise manager who is focused on ensuring we have the types of products and brands that pros demand. Of course, winning the pros business also requires great service to make doing business with us as quick and convenient as possible. So we continue to ensure we reach out to PROs 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 Pro's place of business, where our account executives help regional maintenance repair and operations customers order and replenish products across multiple stores or through the national account representatives who assist customers doing business with Lowe's across the country.
In the Q2, we will relaunch lowesforpros.com, which will provide a dedicated platform for pro customers to purchase online from Lowe's. Lowe's for Pro's will also allow pricing, develop requisition list and view purchase history. And Lowe's for PROs will be enabled for convenient mobile access. We also have an opportunity to more broadly enhance the customer experience. Customers already give us credit for a better customer experience and we are strengthening that advantage.
We're developing a process to coordinate the elements of great occasion based customer experiences. To clarify, I'd like to define occasion. Customers don't simply shop for products, they shop to repair something, to replace something, to refresh a room or to complete a major remodel. These are occasions. And we have the opportunity to build experience around these occasions that will inspire customer devotion, differentiate Lowe's in the marketplace and ultimately lead to superior business results.
To do so, our customer experience design team is getting customers understanding how they think about home improvement projects from planning, shopping and buying, to using and enjoying. And based on those insights, designing an ideal experience with all channels in mind. Now that experience must meet 3 critical criteria. 1st, it must be desirable to our target customer. 2nd, it must be feasible.
In other words, it must fit within our organization's competencies. And third, it must be viable, something that we can deliver in a profitable and sustainable way. In 2014, we will begin building these customer experience design capabilities. We will also introduce a number of changes to our stores and website that will become a stage for future experiences. We'll invest in experiences that will that we expect to drive market share growth and solid return for investors.
We expect 2014 reset expenses to be approximately flat to 2013 as declining expenses associated with line reviews are offset by increased customer experience design resets. As Robert said, we continue to turn up the dial of our transformation. Even as we focus on optimizing our business model, driving profitability and capitalizing on market opportunities within an improving economy, we investing in customer experience and omni channel capabilities to drive future sales growth. Thank you for your interest in Loews. And I'll now turn the call over to Bob.
Thanks, Greg, and good morning, everyone. Sales for the Q4 were $11,700,000,000 which represents a 5.6% increase over last year's Q4, but was approximately $100,000,000 below our expectations as the result of the extreme January weather Robert mentioned. Total transaction count increased by 4.4% and total average ticket increased 1.1% to $63.08 As discussed last quarter, the Orchard Supply smaller format neighborhood hardware stores are located in densely populated markets and offer a product selection focused on paint, repair and backyard categories. As a result, Orchard stores have more transactions per square foot, but fewer per store and a lower average ticket than a traditional Lowe's store. So while Orchard aided total company sales by approximately 100 basis points and added roughly 2 60 basis points to our transaction growth, it negatively impacted average ticket by almost 150 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 the Q3 of 2014. Comp sales were 3.9 percent for the quarter. As you heard from Greg, further momentum from our initiatives and improving execution drove balanced performance in the quarter. Comp average ticket increased 2.4% and comp transactions increased 1.4%. Looking at monthly trends, comps were 3.3% in November, 6.3% in December and 1.4 percent in January.
For the year, total sales were $53,400,000,000 an increase of 5.7 percent, driven by a comp sales increase of 4.8%, the Orchard acquisition and new stores. For 2013, comp average ticket increased 3.2% and comp transactions increased 1.6%. Gross margin for the quarter was 34.67 percent of sales, an increase of 40 basis points over last year's Q4. Value improvement helped gross margin by approximately 40 basis points in the quarter. Also, sales mix and lower inventory shrink aided gross margin, but these items were essentially offset by markdowns necessary to clear seasonal product and our proprietary credit value proposition.
For the year, gross margin of 34.59 percent represents an increase of 29 basis points over fiscal 2012. SG and A for Q4 was 26 0.12% of sales, which deleveraged 69 basis points. The SG and A deleverage was driven by a variety of factors. In the quarter, we incurred $32,000,000 for in expense for asset impairments. This compares to $8,000,000 for asset impairments and discontinued projects last year, resulting in 20 basis points of expense deleverage for the quarter.
Risk insurance deleveraged approximately 10 basis points due to favorable adjustments experienced last year that didn't repeat this year. Property tax expense deleveraged approximately 10 basis points due to an increase in property valuations and cycling a favorable adjustment from last year. The strengthening U. S. Dollar caused losses in market values of forward cash positions and forward contracts causing almost 10 basis points of deleverage.
Also building and site repair reset and proprietary credit expenses each deleveraged about 5 basis points in the quarter. For the year, SG and A was 24.08 percent of sales and leveraged 16 basis points versus 2012. Depreciation expense was $370,000,000 for the quarter, which was 3.17 percent of sales and leveraged 56 basis points. The leverage was driven by the increase in sales as well as assets becoming fully depreciated. Earnings before interest and taxes for the quarter were $627,000,000 which represents a 27 basis point increase to 5.38%.
EBIT was about $15,000,000 below our expectations, driven by lower sales and the impairment expense. We're pleased with our efforts to manage expenses to mitigate these two items. For the year, EBITDA of 7.77% represents an increase of 72 basis points over 2012. Interest expense $128,000,000 for the quarter deleveraged 11 basis points as a percentage of sales. The increase in interest was attributable to the $1,400,000,000 increase in total debt relative to last year.
Pre tax earnings for the quarter were 4.28 percent of sales. The effective tax rate for Q4 was 38.7%, which was consistent with our expectations. The higher rate this quarter relative to the 36.7% last year was driven by expiring tax provisions, which impacted year over year earnings growth by approximately $10,000,000 For the year, the effective tax rate was 37.8% compared to 37.6 percent for 2012. Q4 net earnings of $306,000,000 increased 6.3% versus last year. Earnings per share of $0.29 for the quarter were up 11.5 percent to last year.
The asset impairment expense resulted in an EPS drag of approximately $0.02 for the quarter. For fiscal 2013, earnings per share of $2.14 were up 26 point 6% versus 2012. Now to a few items on the balance sheet, starting with assets. Cash and cash equivalents at the end of the quarter was 391,000,000 dollars Inventory at $9,100,000,000 was up $527,000,000 or 6% over last year. Approximately 30% of the increase was driven by orchard supply and the remainder to support demand.
Inventory turnover is calculated by taking a trailing 4 quarter's cost of sales divided by average inventory for the last 5 quarters, which was 3.74 times, which was flat to last year. Asset turnover driven using the trailing 4 quarter sales divided by average assets for the last 5 quarters increased 12 basis points to 1.59 times. Moving on to the liabilities section of the balance sheet. We ended the quarter with 386,000,000 dollars in commercial paper outstanding. Accounts payable at $5,000,000,000 was up nearly 8% to last year.
The increase in accounts payable relates to the timing of purchases. At the end of the quarter, lease adjusted debt to EBITDAR was 2.23 times. Return on invested capital measured using the trailing 4 quarters earnings plus tax adjusted interest divided by average debt and equity for the last 5 quarters increased 217 basis points for the quarter to 11.5%. Now looking at the statement of cash flows. For the year, cash flows from operations were $4,100,000,000 cash used for capital expenditures was $940,000,000 resulting in free cash flow of almost $3,200,000,000 which was a 24% increase over 2012.
During the quarter, we repurchased 19,900,000 shares for $958,000,000 through the open market. Also in the quarter, we received approximately 1 point 6,000,000 shares as part of the final settlement associated with the accelerated share repurchase program executed in Q3. For the year, we repurchased almost 87,000,000 shares for a total of $700,000,000 I'm pleased to announce that our Board has approved an incremental $5,000,000,000 share repurchase authorization. With $1,300,000,000 remaining on the prior authorization, we had total share repurchase authorization of $6,300,000,000 at year end with no expiration date. Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook.
As Robert noted, the economic forecast suggests modestly accelerating growth in home improvement industry in 2014. We are optimistic about our improving execution, but with a recent slowdown in both housing activity and jobs growth, we've taken a cautious approach to our 2014 outlook. For the year, we expect a total sales increase of approximately 5%, driven by a comp sales increase of 4% and the opening of approximately 15 big box stores and 5 Orchard Supply locations. We expect to have our highest comp in Q1. This is an important quarter for Home Improvement and the easiest compare to last year.
In addition, we expect the first half comp to be modestly higher than half of the year. We are anticipating an EBIT increase of approximately 65 basis points. As we've discussed in the past, 20 basis points of EBIT expansion per point of comp above 1 percent is a good rule of thumb for the year. However, there might be some choppiness quarter to quarter. Let me offer 2 items that will put some pressure on the flow through for the Q1.
In Q1 last year, we had negative a negative comp and reduced bonus accruals. This year, we plan to accrue to target levels resulting in deleverage of 20 basis points in Q1, while leveraging roughly 20 basis points for the year. Also, we will experience risk insurance deleverage in the Q1 as we cycle favorable adjustments from Q1 last year. This item is expected to deleverage 20 basis points in the Q1, but only 10 basis points for the year. We expect EBIT improvement will come from both gross margin expansion and SG and A leverage.
Our initial focus during our transformation was on market growth. While market growth is still a priority, we are also focused on flow through. The effective tax rate is expected to be 38.1 percent. The higher rate is driven by the expiration of tax provisions at the end of calendar 2013. A higher rate impacts earnings per share by almost $0.01 per share.
For the year, we expect earnings per share of approximately $2.60 which represents an increase of 21.5% over 2013. Our outlook our 2014 outlook includes approximately $35,000,000 of incremental expenses associated with the Affordable Care Act or about $0.02 per share. We are forecasting cash flows from operations to be approximately $4,100,000,000 Our capital plan for 2014 is approximately 1,200,000,000 dollars This results in estimated free cash flow of $2,900,000,000 for 20.14. We expect to issue incremental debt during the year as we manage to the 2.25 times lease adjusted debt to EBITDA target. Our guidance assumes approximately $3,400,000,000 in share repurchases for 2014, spread evenly across the 4th quarters.
Regina, we are now ready for questions.
Our first question will come from the line of Greg Melich with ISI Group.
Hi, thanks. I wanted to ask strategically on the store expansion, the 15 big boxes, where are they going? And also why Orchard Supply stores? What do you see there? And how you think of using them?
Greg, this is Robert. On the Orchard Supply stores, I think we got about 5 of them we're planning for this year. There's a lot of focus on remodeling the existing 72 stores that we purchased. As you know those stores had not had a lot of investment put in them a number of years and we are seeing a nice lift in the remodeled stores. So that's a big focus.
I think they got about 10 remodels
or so that they'll be able to
accomplish this year. So and we are continuing to be any new stores for Orchard are really focused on dense urban metro areas that would have some clear air from a big box, so that
you can really focus on being
a community store and go to market with the key categories that they focus on. Beyond that on the other 15 stores, we've got about 6 in the U. S, 4 in Canada and about 5 down in Mexico.
Okay, great. And then on SG and A, I think Bob you mentioned the proprietary credit only hurt SG and A by 5 bps. Did your credit penetration decline? Or was something what was behind that? And in terms of the outlook, any color you could give on that test of additional labor you did last year, whether you expect to do more of that or how the traction is on that?
Sure, Greg. I'll take the credit question and let Rick speak to you about plans for labor productivity in 2014. So credit penetration in the 4th quarter was 26.5%, which is 160 basis point increase relative to the comparable quarter last year. As we think about the credit deleverage, which really we had some favorable developments in loan loss reserves in Q4 last year. We had a little bit less favorable performance this year, creating some expense pressure, which drove the 5 or so basis points of deleverage from
a credit perspective. Hey, Greg, this is Rick. Regarding the labor investment, we made the decision into Q3 to move the test into a permanent part of our staffing model and completed that session this past year. We were very pleased with what we saw as our employees learn more about the store. We're able to get them into departments and get them trained.
We saw greater productivity from that, which ultimately led to an improvement in close rate of 80 basis points in Q3 and Q4. So we were very pleased with the results and we do not foresee any incremental investment required or any additional tests necessary. We're very comfortable with the investment we made and we'll continue to drive greater leverage and productivity through 2014 with
Your next question will come from the line of Laura Champine with Canaccord.
Your close rate performance was impressive. How do you measure that? Laura, so a couple of different ways. So of late, we've been using satellite imagery. So we take pictures of parking lots throughout course of the year.
We match that up with actual transaction counts in stores. Of late, we've been actually using some technology that involves traffic counters in the stores, which gives us close rate by day by hour, which is going further allow Rick and the team to optimize labor going forward. We've tested both methodologies for the same stores and got similar results. We're pretty comfortable with the methodology. It allows us to forecast and see actual improvement in close rates.
Great. Thank you. Thank you.
Your next question will come from the line of Michael Lasser with UBS.
Good morning. Thanks a lot for taking my I wanted to dig in a little bit on the some of the investment spending you're going to do this year. So last year, you underperformed the benchmark of 20 basis points of leverage for every 1% of comp above and beyond that one. And due in part to some of the investment spending, percent and due in part to some of the investment spending. So I guess the expectation was there may be a little bit of catch up this year.
It sounds like you're going to perform in line with your rule of thumb. When at what point do you start to see the leverage some of those investments pull back and the flow through really start to hit the P and L? Or do you have to continually invest in order to maintain that market share? So Michael, the first part, the rule of thumb, if you take the 4.8% comp subtract 1 that gives you 3.8 times 20 would suggest 76 basis points of EBIT expansion We had 72. So we modestly missed the target.
Remember, we guide off the GAAP and our target is based off GAAP. There are some non operating fluctuations year to year, but it is what it is. So I would suggest we're fairly much on our rule of thumb for 2013. Greg, you want to talk about investments and experiences relative to resets? Sure.
So as Bob was describing, right now, Michael, we're looking forward and cycling down the massive amount of reset activity that we had through value improvement, which is obviously going to allow for more flow through. But we are in the process of testing and piloting some customer experience work within the stores that we think is very important for now for the foreseeable future. There'll be more of a balance of the total spend when you look at the resets remerchandising associated with customer experience and the decline in the large amount of resets that for the 1st round of value improvements that we've seen over the last 2 years. So it somewhat balances out when you look at all the reset remerchandising spend per store. Okay.
And a follow-up question is on and remerchandising spend per store. Okay. And a follow-up question is on the $3,400,000,000 in share repurchases that you're expecting this year. That's a little bit below what you've done for the last few years. So what's influencing that part of the outlook?
Thanks. Yes. So we've talked about a little cautious outlook coming into 2014. So as a result, our comp outlook of 4% is below what we would have intimated at the Analyst Conference in December of 2012 for 2014. If you think about 2013, our initial comp outlook was 3.5%, we delivered 4.8%.
That's roughly $650,000,000 higher versus the expected comp plan. In addition, our EBIT was about $175,000,000 higher than planned, which is about a 26% flow through rate. So if the market opportunity is there, we're going to capitalize on the opportunity and we're going to deliver enhanced profitability. Okay. Thank you very much.
Thank you, Mike. Your
next question will come from the line of Brian Nagel with Oppenheimer.
Hi, good morning. Congratulations on a nice quarter. I wanted to ask a question. This will be a quick one just on the weather. You mentioned the weather
a lot of retailers talk about the weather. But
is there a simple way we should think about what impact the weather had upon that comp and what the comp would have been had it not had you not seen the weather? And then as a follow-up to that, what about gross margins? Was weather a positive or negative for the gross margin in the quarter? Thanks.
The $100,000,000 that I referenced is approximately 100 basis points of comp, Brian. So would have taken the 3.9% to approximately 4.9%. And then as it relates to gross margin, I mentioned mix had a modest positive impact based on the mix of products sold. So slight favorable impact on gross margin rate.
Okay. And then and I don't know if the weather has actually turned any parts of the country yet. I'm sitting in Nashville, it's still pretty cold here. Are there markets where you've seen the weather start to turn and maybe any indication that you've seen in sales in those markets so far? Yes.
Brian, this is Robert. Obviously, it was an extreme weather. And as I mentioned in my comments, Bob gave you the impact that we thought it had on the Q4. But in those parts of the country where we've seen the weather improve or where we haven't been as impacted by the extreme weather, we've been pleased with the comp performance we're delivering.
Okay. Thanks a lot.
Thanks, Brian.
Your next question will come from the line of Abram Rubin with Wolfe.
Hi. Thanks. Thanks for taking my question. Two quick things, if it's okay. One, I'm still trying to make sure I understand this customer experience.
It sounds great, but can you guys walk us through kind of a for instance or 2 to make sure that it kind of clicks in my mind? And then I had a follow-up.
Sure, Aram. This is Greg. I'd be happy to. So when you go back to the question that we talked about Michael talked about a minute ago with investment spend. Some of the programs that we are testing right now have to do with going deep into customer research and see what's important for customers and make sure that we can start to build an experience that hit the attributes that they're looking for both from all phases of a project all the way from inspiration to planning to getting started to getting supplies all the way through enjoyment.
We I mentioned to you a couple of years ago that we devoted 6 research, consumer research analysts from our research team to the merchants to begin this process a a couple of years ago. So for instance, going on right now and we're probably about halfway through this reset, we've looked at the fashion bath area and it was a challenge for customers to try to pull together a bath refresh project. They don't go behind the wall in a refresh, but they potentially change out faucets, vanity tops, mirrors, lighting, a lot of details on the kind of on this side of the wall of the bathroom. So what they told us that they wanted was they wanted to visualize the results of this project and they wanted to bring they struggled to bring style and finishes together and look across the entire array of fixtures and accessories. And they want to understand what this looks like in end use, but they also wanted to touch and feel the projects, the different products and they wanted styles that met their taste.
So what we did was we literally created pods. These are 8 foot to 16 foot pods to bring these different styles and finishes together in these categories faucets, bath hardware, bath lighting, mirrors, wall surfaces and even countertops. And then we in these pods, we brought the height down. So literally all these projects these products would be within reach of the customer, which was an important aspect of the shop for them. And then with the work we've been doing through the value improvement program and the cluster work that we've been using, we are able to localize those assortments.
So when they go into the store that's in their market, those styles and those finishes and even things like a 4 inches center spread or an 8 inches center spread for a faucet will be more relevant to that market than before we entered into this process. So we're trying to bring all those elements together that reflect the needs that they told us they really that provided them value and inspired them in a bath refresh project. So this is baby steps in a process that we're engaging in, we're piloting, we're learning from some of these first few projects, but you'll see more of it as we move into the latter part of 2014 and certainly in 2015.
Greg, that was such a helpful response. I think I'll spare you my second question and pass on the queue.
Thank you. Thanks, Aaron.
Your next question will come from the line of Seth Basham with Wedbush.
Good morning. I want to follow-up on that regarding the customer experience design. That was a really helpful response, I agree. But if you could help us understand a little bit in terms of the cadence of investment and then the expected benefit in 2015, that would be helpful. And I have a follow-up on it.
These are our rotating series of programs. In 2014, you'll expect you should expect that we'll do a lot of piloting as we learn what's working within these different tests. We'll be a trial in probably 5 or 6 categories, but it will be stretched out through the year. So we won't begin to see the payoff until 2015 in virtually all of these different projects. The bath refresh, we might see a payoff in this latter part of 2014, but I'd say for the other pilots that we're doing, we'll see returns begin in 2015.
And when you think about the returns, in some cases, it's going to be it's going to come back to us in different ways. For example, if we do an outdoor living reset and we accessorize product with the what we call the anchor product of a project, for example, accessorize complete patio set. One of the goals there would be to sell the set with the accessories at full price prior to the end of the season. That has significant financial implications in that category. That's different from the timing and the type of project that you're engaging if you're doing a bath refresh.
In that case, it might be able to create that entire look of product and to be able to offer installation services and literally be able to offer the complete project installed for customers. So there's different financial components that will be part of the outcome and because they were trying to build these experiences around the attributes that customers are saying these are gaps, these are gaps or pain points in my current experience. So as we I said earlier that as we approach these customer experience design, we have to make sure that we have the capabilities to offer these attributes to customers and meet them. And we also need to make sure that these produce the financial results that are sustainable. So we look we start with the customer.
We look at the potential to recreate that experience. We look at the attributes that we're going to offer, make sure they fit our capabilities and make sure we have a clear understanding of the financial outcome. And it can be very different based on the occasions that we're trying to serve to customers through experience design.
And just to tie back to Greg's comments and part of your question and remember because he talked about the amount of investment we're making on in store resets as we're rolling off all of the line review value improvement resets. That you said the amount of reset activity would be fairly similar year to year last year to this year because we're now some of the customer experience resets that Greg talked about that we'll be investing in.
That's really helpful. And just a follow-up. These investments play right into the increase we're seeing in big ticket comps relative to small ticket comps. Can you give us those metrics for the Q4? And tell us how you expect them to play out in 20 14 and 20 So in the Q4, the tickets above 500 were 8.9 percent comps.
Tickets below 50 were 1.2% and the middle was the 50 to 500 was 2.2%. As we think about the 4% comp in 2014, about 2 thirds of that will be driven by ticket 1 thirds by increase in transactions. So we do expect to see continued performance in the above 500 category.
Great. Thank you.
Your next question will come from the line of Keith Hughes with SunTrust.
Thank you. Just to dig in on your last answer on the 8.9% on the greater than 500 ticket, within the categories, were there any ones that stood out there to help drive that number?
The biggest one in the Q4 was outdoor power equipment. We also had strength in which is snow throwers, pottersley. And then appliances and fashion fixtures, those were the 3 categories that propelled the big ticket growth in the Q4. And Keith also flooring was a strong category. This is Greg.
And it always tells you a lot about the weather when your top selling subcategory is snow throwers. We hit historical highs in sales of snow throwers.
I'm sure you have in places where you normally don't as historical as. One follow-up question. You had mentioned about more installed sales. Can you elaborate that a little more? Are there sort of categories you're going to be pushing more on that?
Or any detail would be helpful.
Yes, Keith. This is Rick. As we think about installed sales, we continue to see strength across all the major drivers of our programs this past year. As Greg mentioned, flooring performed extremely well and we continue to see growth in that category as customers look to update flooring and to new styles and new trends. The other components of that, Keith, that we have invested in over the past couple of years have been our in home selling models.
As we talk about our strategy to be able to meet customers anytime and anywhere they like, we realized that in home was a major component of that. So we now have our project sales exterior specialists in all stores and all markets across the country. We also have our interior specialist programs, which we had significant tests for the past couple of years in 2 regions and some other geographical areas. We're continuing to roll that out in 2014, and we will grow that into 5 additional regions in this upcoming year.
Okay. Thank you.
Your next question will come from the line of Kate McShane with Citi Research. Thank you. Good morning. Good morning. My question is on gross margins.
I'm just wondering how you are thinking about managing this going forward. Will you continue to push the gross margin higher? And if so, will that be reinvested or flowed through?
So Kate, if you think about our outlook back from the analyst conference in December of 2012, we talked about a third of the EBIT improvement coming from gross margin, which is about 90 basis points. In 20112012, our gross margin fell roughly 84 basis points. So really, we're just talking about recovering back to 2010 levels. Once we do that, we don't expect significant margin expansion on an annual basis after that. It's more of a maintenance mode.
I think Kate, this is Greg. I would also say that the work we do in sales and operations planning, I think tries to create that proper balance between driving transaction, driving ticket. And in doing so, we try to drive basket builds, so that the outgoing gross margin is something that is accretive for us. So it's a good mix that we've been getting better and better, I think, over the last 18 months since we've instituted this process of making sure that what we direct customers to through our advertising and through our in store merchandising creates the gross margin outcome that we want as drive the entire basket of attachments and anchor items.
Okay. Thank you. Your next question will come from the line of Mike Baker with Deutsche Bank.
Thanks. Two questions. So since you keep referencing that December 2012 outlook, I think about outlook you talked about a 9.7% operating margin. Even with the 65 basis points that you talked about in 20 14, you'll be a ways away from that. Can we still expect 9.7% by 2015, which would imply a pretty big jump in 2015 versus 2014?
So Mike as we think about the rule of thumb of 20 basis points of EBIT expansion for point of comp, hopefully we'll see strength in 2014 and be able to over deliver both the sales and EBIT plan in 2014, which would suggest a much lesser increase required in 2015. So simple math, if you take a look at the rule of thumb, that would just suggest 20 basis points per point of above 1, a 5.5 comp in 2014 and 2015 gets you there. However, if there's a more modest comp and there's an opportunity to further focus on expense productivity, there might be another way to get there. So we do have line of sight to drive market growth and enhance profitability, whether that's through line design and building baskets as Fred just described or as Rick talked about further optimizing the labor investment we've already made in our stores. We're really focused on that.
Okay. Thanks. So that was my longer term question. Now the short term one, so Q1 has guided above 4%. Is that what you're seeing in February?
Or is it more of a function of March is it was I think last March was down 10%, so very easy comparison coming. But then again, of course, April was a tough comparison. So where are you, I guess, relative to that 4% higher than 4% plan for the Q1?
So we did have a negative comp in the Q1 last year. The 1st 2 weeks of February were tough. Trends have improved significantly since then and we are very comfortable with our outlook for the Q1 and for the year.
Your next question will come from the line of Scot Ciccarelli with RBC Capital Markets.
Can you provide any more color in terms of what you're seeing on the Pro or contractor front? And frankly, I don't know how granular you can get, but what kind of impact do you expect as you start to expand the services and products for the PROs as you previously referenced?
Okay. I'll take the first part of that and then I'll let Greg jump in on the categories and products. Scott, we have been very pleased. As you know, we've been focused on the Pro extensively for now for about the past 18 months and looking at how we went to market and the opportunities or gaps that we saw that we needed to close to continue to gain share and be more relevant with the Pro. We've completely redesigned our operating model regarding the Pro this past year, which really took place in January and how we went to market from a service perspective with the Pro.
And Greg referenced that this morning as we talked about our in store specialists meeting the needs within the local market. Then we also redefined our account specialist in the market to really go after the larger MRO accounts and contractors within the market to give us the ability to meet them on their job sites or in their place of business. And then also we established our national accounts team, which focuses on those pros who deal with us across many states and many stores and make it much more simple for them to shop with us. The other components of that, that we've really took and really made sure that we continue to evaluate was the value proposition. As you know, we the Pro receives 5% value prop discount on anything on proprietary credit.
That continues to resonate well with the Pro as well as our quote to close program on very large orders. And then also the value that our contractor pack program provides, which is really purchasing bulk quantities within the store. So we think we've really addressed that with looking at how we went to market from a service standpoint, also providing great value every day to the Pro. And then quite frankly, we're extremely excited about the relaunch of blows for Pros, which will happen late Q1, early Q2 this year, which provides them much greater access to product as well as to purchase history and purchase information. So, Gary, I don't know if you want to talk a little bit about that.
Thanks, Rick. I think Rick really described very well the our ability to deliver in a sense the delivery system against expectations for the Pro. And so the key is that I want to talk about is what do we have to deliver? What's the content? So we spent if you go back in the last 2 years, we spent a significant amount of value improvement process improvements on looking at the categories that are extremely relevant and have a high penetration of pro sales, whether that's hardware tools, rough plumbing, rough electrical, power tool accessories, handheld power, hand tools, building materials.
And we've tried to make sure that from an as you know, we've also tried to make sure so we get our cost structure right, try to make sure from an inventory standpoint that we have the proper inventory. We've worked hard. We've been very overt about what we've been doing with inventory specifically focused on the categories. Earlier in 2013, we said we need even a greater focus on this. So we subdivided merchandising.
When Mike Jones came in, one of the first things he did within 3 months was subdivide the merchandising divisions and put a heavy focus on what we call the building and maintenance categories with a new GMM. That's provided the kind of longer term strategy and shorter term tactics that we think we need to meet the needs of the pro and to address all the attributes that's important for them. So we've got a very, very heavy focus on it right now. What's the proper offering for this discrete type of pro customer for this segment, whether it's an MRO customer, whether it's an R and R customer? And are we meeting those needs?
And we're using research. We're going back to the basic approach for the experience design even in building and maintenance and saying, okay, what are the experience attributes that are important for these sub segments? So armed with that, we're building longer term strategies to be important for that customer and shorter term taxes that we think can optimize this great category, this great business, one of the best businesses in Lowe's and one that we have a long, long history. And when Rick and I joined Lowe's, sales to PROs were 60% in terms of our sales mix. So we both are dedicated to seeing relevance in this category.
Excellent. Thanks a lot guys. Regina, we got time for one more question.
Our final question will come from the line of Peter Benedict with Robert Baird.
Hey, guys. A couple of questions here. First, a week or so ago you guys outlined your spring seasonal hiring plans. I think you said like 25,000 associates this year. That was down pretty materially from last year.
Just could you give us some color as to what drove the decrease?
Sure, Peter. This is Rick. As it relates to the announcement from last year, keep in mind some of the changes that we implemented last year. The weekday team that we hired was a component of that announcement last year or the 40,000 hires that we announced last year versus the 25,000 hires this year. As I said earlier, those positions moved from temporary or seasonal into regular part time positions throughout the year.
So when you look at that, we were able to maintain a much higher base of level of employees this year compared to the previous year, which frankly helps us from a training perspective and on boarding perspective. And we were able to carry those employees throughout the year versus having to go so heavily into the spring hiring process. We were able to continue to manage our full time part time mix to give us much greater flexibility and help us manage payroll in a during Q4, especially in the latter half when the weather really turned bad, gave us the ability to use that flexibility to continue leverage payroll, but also maintain our existing employee base. So we were carrying many more employees through the winter and then the addition of the weekday teams also helped us to be able to pull that number down.
Got it. That makes sense. And then just two quick ones for Bob. Bob, you mentioned that the reset expense for 2014 will be flat relative with 2013. Can you remind us and I apologize if you mentioned this already, how much reset expense was incurred in 2013?
And then on the depreciation line, obviously, D and A was down around 10% in the Q4 on a year over year basis. Can you help us understand what your outlook for 2014 assumes in terms of D and A on income statement? Thank you. Yes. So depreciation should be flattish from a dollar perspective, 2014 versus 2013, which should drive some modest leverage as percent of sales.
As we think about the reset expenses, we haven't broken out the specific aspect of resets. We've talked about, maintaining our stores, giving them the updates they need, whether that's the physical property or the updates to the products based on the customer experience that Greg described. So that's kind of embedded in our operating model going forward is basically part of maintenance CapEx, if you will. Okay, great. Thanks guys.
Thanks, Peter, and thanks for your continued interest in Loews. We look forward to speaking with you again when we report our Q1 2014 results on Wednesday, May 21. Have a great day.
Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining and you may now disconnect.