Good morning. I'm Greg Melich. I cover retail broadlines and hardlines here at Evercore ISI, and it's my great pleasure to have with us Dave Denton, who is the Chief Financial Officer of Lowe's. Dave's been there since late 2018, so about two and a half years. It probably feels more like 10 given everything that's gone on, Dave, and frankly, a lot of the progress you guys have made in terms of margin and share goals and sort of reinvigorating the business. A lot done in two and a half years, and excited to spend the next 30 minutes figuring out where we can go from here. Dave, welcome.
Hey, thanks for hosting us. I appreciate everybody's interest in Lowe's. We're on an interesting journey and an interesting time in the evolution of the company and really excited about where we are.
That's great. Let's start right there with, I guess, to get it on the table, the biggest question we get is, given the unprecedented surge in home improvement demand last year, how are you guys managing to, if you will, cycle the surge and handle what seems to be an inevitable two year comp decel? What sort of trends are you seeing? What things are stickiest from the consumer or from the pro to help keep this momentum going?
Yeah. Well, I think a couple things that are happening here is that as we've gone through the pandemic, a few things have really shifted the dynamics of, I would say, the home improvement industry. One, first and foremost, the home has just become such an integral asset to individuals because not only is it a place for dwelling now, it's a place for work in many cases, a place for school, a place for entertainment. Just the emphasis on the home has continued to elevate the housing market and at the same time, the utilization of the home day in and day out is elevated as well. Think about repairs and maintenance and all the effort that goes into maintaining that home in its current status has really been a nice tailwind to the industry.
By the way, I think a tailwind that's not going to dissipate for some period of time. I think this is a permanent shift. Then secondly, I do believe that consumers now are looking more to the omni-channel, I'm sure we'll talk about this later, method of engaging with retailers, and I think we've been very fortunate of leaning into that space. We continue to make sure that we've assorted our business appropriately. We've got really solid plans to continue to support the demand in the industry, and our service levels have been relatively high across our business. I think that has supported us as we've gone through Q1, very strong Q1, and we've said the trends going into Q2 also very solid, and that continues.
On that sort of 2Q trend or so, we definitely get the omni-channel, but just to circle back, we also saw a surge in lumber price inflation, a lot of supply chain challenges. How have you been able to keep up with that and stay in stock? Now that lumber's rolling over, is that something that sort of peaked year-over-year in the Q1 and now will ebb in terms of top-line support?
Yeah. Well, I think, obviously we've seen unprecedented increases in commodities, particularly lumber, over the last 12 - 18 months. Our anticipation and our plan was that that would decelerate throughout the back half of this year. Obviously, you can see it just as commodities. If you watch commodities, you see the lumber beginning to pull back a bit. Part of our plan is that that will come down through the year, so we'll put pressure on our top line. Again, consistent with our plan, it's essentially what we expected for the balance of the year. I think the question a little bit, the unknown is how rapidly that happens. It's certainly going to happen in 2021, but is it going to happen over a six week timeframe or over a five month timeframe?
Hard to predict that, but I would say that our merchants teaming up with our finance team, really working hard and diligently to make sure that we manage ourselves through that process. Again, I think we're focused to make sure that we have the right assortment in our stores and the right service in our stores to meet the demands of both the DIY as well as the pro customer.
Have you been able to get the inventory you need for spring and early summer?
Yeah, we were good. We were very good and fortunate from a spring perspective. We actually planned the buy and the delivery of the buy earlier than what we anticipated the prior year. While there might've been a little bit of delays, we actually had spring inventory well in advance of the season. We're really nicely positioned from there. I would say the supply chain just in general, not within Lowe's, but across the industry, across the U.S. and internationally is largely catching up. We have pockets of areas where either COVID-related or unique-related circumstances have caused some disruption, but nothing of any material levels at this point in time. We feel pretty good. We feel pretty good. I would say it's likely better in stock, but we're not out of stock. How's that?
I don't want to put words in your mouth, but if we go back to the back half last year, there was probably phases where you could say, "Wow, if we had had more inventory, sales could have been 500 basis points better," or something like that. It doesn't feel like maybe there's something left there, but it might be 100 basis points. Would that be a fair way to put it?
I think that's a fair way. I don't know about the math on the numbers there, but I think we're better in stock today in key categories than we were six months ago.
Yeah.
I think we're in pretty good shape from that perspective.
Maybe to transition a little bit, still on top line, but sort of focusing, deepening a little more deeper on these initiatives. I know you did a reset of the store, getting more pro product up front. Could you sort of give us an update on those initiatives, the key few ones that you had this year to position yourself for the recovery we're seeing?
First and foremost, we did do a fairly large reset within our stores last year, making sure that our adjacencies across the store platform were appropriate, and that we had the right depth of A and B velocity items within our assortment. I think that really with a focus largely in the pro to make sure it is easier for that pro to get in and shop the categories and get out in a rapid fashion. I think with the whole focus of improving service, and I call it shopability in our stores. Largely behind us, we have a few more stores left to do. Seeing nice momentum in the categories that we touched, that is going to build over time. Secondly, I would say, we are on this journey to improve our omni-channel experience. We leaned into it heavily in 2020.
We're now kind of optimizing that as we platform the site. We're making our buy online, pick up in store and curbside programs much more effective and customer service focused. We're expanding our assortment online to make our assortment align with the needs of our customers, big focus in that area. We've essentially doubled our online business over the last 18 - 24 months. Just the momentum there is pretty staggering, and we continue to lean into that. I think the third area, or maybe two more areas, the third area that we are focused against is the pro business. Again, kind of fixing the service model, feel like we've made nice progress there.
The next push is making sure that we have the right loyalty program, the right CRM tool, such that we can really identify that pro, engage that pro in a personalized manner, and lean into that pro customer to be able to drive greater share of wallet over time. Then finally, as you know, we've been investing in our supply chain. We currently have a very inefficient, I guess, process in which we deliver bulky items to consumers' homes. What we're trying to do is really out of all of our stores. What we've done is kind of working to move all that up one node in the supply chain and build out a market delivery program. We have it up and running in one region today and making nice progress there. Nice progress. We have a lot of work to do there.
If that works, what you're doing in that one market, and I'll throw out Houston because for some reason that was in my head, but if you don't want to say it, don't. How long would it take to sort of roll that out, and would it be appropriate to roll it out nationwide as the decisions go?
It wouldn't be a big bang. We would roll it out kind of market by market by market. It is probably a 24 - 36 months kind of rollout. What we're trying to do is make that one market, I'll say, battle hardened, such that we can just easily replicate it across the U.S. and just working out all the kinks. I think we're on a really nice path at this point in time. By the end of this year, we'll likely have three markets up and going.
Got it. Then maybe once you get those three markets, then you can get an idea. This is something that if you did it would take more than one year to roll out. Is that?
Without a doubt. I think the challenge is not so much, there's a little bit of challenge of making sure you get the right facility assets in place. Importantly, there's kind of a change management training program that goes along with our store associates on the front lines. That, we want to make sure we get that right.
Got it. Of all the things you listed, there are a lot of places I'd love to follow up, but I guess I would start with the DIY and the pro one, because I think one of the big questions we've gotten all this year, and frankly, starting after COVID is, how do we cycle the DIY surge last year, and when does the pro come back and sort of make up the difference? I think your paint partner talked about how their consumer brands business actually was a little softer than they thought through the Q2 . Could you sort of update us on how you're transitioning in that DIY to pro trade-off?
Yeah. I'd say a couple of things. One, around that point specifically is our paint business is performing exactly as we planned it. I think our partner might have had different planning assumptions, but we actually planned our business thinking and knowing that, or at least anticipating the fact that DIY demand would soften and pro demand would likely accelerate. We're actually seeing that dynamic play out in our business. We feel really good about where we stand. I would say in totality, as we said, coming out of the call in Q1, our sales performance and the market performance is actually exceeding our expectations. The demand has grown above and beyond what we call the robust market scenario that we laid out for investors back at our investor update in December.
We continue to see really strong momentum kind of across our business, knowing that pro would likely recover and lean in more aggressively in 2021 versus DIY.
Remind me, the robust scenario was like a negative two comp for the year. Was that?
Correct.
Maybe circling back to omni-channel. You're changing the whole platform of the business last year. Could you help us understand a little bit more about what that's really allowing you to do to win more customers and to get digital not just eight percent of sales, but 10 or 12 or whatever?
Yeah. Keep in mind that probably when I joined the company back in 2018, our digital penetration, online penetration is probably around five percent . We're probably closer to 10% now. We've almost doubled that penetration. Largely is what we've done is stabilize the platform versus first and foremost. Greg, you remember the kind of the bad days back in 2018 when once the volume got to a certain level, the Lowe's website would actually shut down and have issues. We're actually running above those peak levels when the website would shut down pretty consistently now every single day. Our online uptime is extremely high. We're really excited about what's happened there.
Secondly, we're really now leaning into the ability to make that interface and that engagement with the consumer almost seamless to make it easy to shop, working to improve our, we call it, collections to make sure that it's easy. If you're going to buy a patio set, that you can buy the whole set in totality versus going out and picking out each item individually. We're just on this journey, if you will, to modernize our program. At the same time, our assortment online has been pretty anemic. Now we're going back with our merchants and filling out the assortment. If you look at just our penetration today, we lag our biggest competitor pretty significantly. While we made a lot of progress, the opportunity for continued growth in that channel is pretty significant and one of the drivers that we see going forward.
Right. You're at a point now where you can show inventory visibility at the store level. I'm trying to think of some of the other metrics. You can show a different price for delivery. Some of the other constraints that were there, those are all lifted?
We're largely on a journey to fix all those. I would say we're not 100% done. We continue to work on those. I think the idea here is to make sure that as a consumer, that if you place an order online, you can actually track that order from time of placement to time of delivery and be able to really manage, if you will, that order. That's an infrastructure that Lowe's historically hadn't in place, and we're building that today. We're actually going back and making sure that we're breaking apart kind of our delivery cost from pricing so that our price visibility and our price competitiveness online is a lot more transparent.
I want to make sure we spend time on margins and returns and profitability, but we're getting to the halfway point. Let me, I guess, finish it with sales. Maybe early on in the pandemic, there was some talk about the flight to the suburbs or more rural areas, and how would that impact store performance? I'd just love to hear from you to sort of level set us now. Are you seeing your rural stores do better than more urban stores? Are there any other shifts in terms of consumer behavior? Like, is housing turnover mattering more or less than home prices when you look at some of the regional data?
Interesting. If you look regionally, for the most part, Greg, you're seeing pretty consistent performance across our business. I put a little asterisk by it, adjusted a bit for weather. Obviously, when you see the North, the South have had a big storm that interrupts consumers' kind of mobility, if you will. You're seeing some implication from that perspective. If you look fairly consistently across our business, urban stores and rural stores are performing quite well and pretty similar. I think back right when the pandemic hit, we saw our rural stores kind of elevate and maybe our urban stores lag a little bit. I think that's kind of normalized at this point in time.
On the regional side, it's really just weather. Anything else on customer demographics, whether it's millennials or first time buyers, any sort of other behavior changes you see there?
I do think what you're seeing now a little bit, Greg, is that whole millennial population, we knew they were going to get in the home market, but I think that the expectation was that was going to be largely in five, eight, 10 years from now. I think what you've now seen is that shift in demand has actually probably been pulled forward. I think you're seeing that population now get itself more engaged in home, suburban, rural locations than what we originally planned. I think, again, back to these, I'll say tailwinds over the long term, that's probably a tailwind that's here for multiple years.
If you look at the other side of it to get that supply on the market, are you seeing the more baby boomers as they enter retirement stay in place and try and fix their home up?
Yeah. No, I think you're actually right. I think you're going to see those baby boomers largely age in place. I think with that focus is making sure that we have the right assortment to support that aging in place. We actually have a program from a merchandising perspective to lean in to make sure that we support people as they reconfigure their home with that focus going forward.
Got it. Sort of an aside, it seems like with what happened with a lot of nursing homes, I imagine there could be a million-plus households that want to stick around in the house.
That's correct. As you know, across the nation, the supply of homes is pretty limited.
It's not like you can just trade up into a different home. A lot of times you're like, okay, I need to take what my existing infrastructure and make it better. That really leans into the home improvement sector as opposed to just the general housing market.
Got it. For our last 10 minutes, let's sort of turn to the margins, profitability, cash flow, lots of things I know are close to your heart. I would start maybe near term. Last year there were a lot of extra costs, related to COVID, particularly on labor, supporting employees, all made a lot of sense. I know that early in the year there was a number, I want to say it was roughly $900 million of the extra costs you might get back. Does that still feel right, or is the market shifting enough that that needs to be less or more?
No, I think that is right. I think we're very focused, Greg, on when we leaned in and put in, I'll say, incremental costs in the business last year, areas that are not needed, we had planned to pull that cost out, and I think we are very diligent and focused on getting the cost out. Nothing has changed in our mind from that perspective, from that standpoint.
Maybe to position that within the 12% margin goal that you hit and basically raised it to 13%, in terms of progressing towards that, how do you feel about the ability to flow through the demand? Are there other things that could constrain that?
No, I don't know if there's things that can constrain it. Obviously, we're very focused on first achieving our 12%, and then once kind of we tick that off our to do list, is ultimately drive ourselves to 13%. Keep in mind, Greg, what we are doing is we are making investments, and I point mostly to supply chain, that when you make investments in supply chain, the first few periods of those investments, you're not operating those assets at full capacity. They obviously are dilutive. As we feather those investments in, we're working from that 12% ultimately to that 13%. There'll be some both tailwinds and headwinds as we think about moving along that path. Again, we have a very solid financial plan longer term to deliver against those programs.
Maybe to think about that, I know your, I think, CapEx now closer to $2 billion, a little higher than it was. Does that $2 billion, how should we think about that number going forward? Does it grow as a percentage of sales? Could it run higher if you decide to roll out these market operations that you talked about, for a few years? How are you thinking about that?
I would say, over kind of the short-term planning horizon here, I think $2 billion is about the number on an annual basis. I don't think you should see it go up or down pretty dramatically. Obviously, Lowe's has been a little bit in a, I'll say, catch-up phase to get ourselves modernized. At some point in time, we will catch up, but we probably got a couple of years left to get that kind of behind us. Just to be clear, is that we're not necessarily capital constrained, Greg, on programs and efforts. I think we have a very thoughtful, planful program that's going to deliver over the next several years. We're not thinking about pulling forward big investments into this year or into next year because, again, it's not an issue of capital, it's an issue of bandwidth.
I think we have the right level of initiatives and the right amount of initiatives that we can manage very successfully. I think adding more to that probably doesn't make a lot of sense right now for us.
If the constraint, clearly you're not capital, given the strong cash flow, I guess, what do you do with the very strong free cash flow in the meantime, as you balance how to deploy it?
Yeah, I think that we're really fortunate in the fact that this business throws off a ton of free cash. Very focused on improving our shareholder returns from that perspective. Again, we're going to invest in the business at the appropriate level. We're kind of on this march to support our dividend. At the same time, any excess cash above and beyond what we invest in the business, supporting kind of a 35% payout ratio.
think about that as cash available to support share repurchases in this business. I think we've demonstrated the fact that we've leaned into that. I think it's a great way to reward our shareholders and drive a lot of value. You should expect us to continue that march.
I know it's a volatile environment, so you're not alone in running cash-heavy over the last 12 months. You have that EBITDA target of 2.75. Has that changed? How long are you comfortable running under that, just given that EBITDA is a lot higher than it was 18 months ago?
Yeah. Listen, I think 2.75 is the right target for us, and my expectation is that over the next several periods, we're going to get back to that level. Having said that, we are in a really unique, volatile period of time just in coming out of this pandemic. I'd probably been a little bit conservative in making sure that we probably are underneath that level at this point in time.
Kind of once everything's opened up, stabilized, and everything's kind of, I'll say, back to a "more normalized environment," you should start seeing us kind of getting back into that levels.
As to more directly, how much cash do you need to carry just to run?
Yeah. We're probably sitting, I think, roughly around $6 billion. We need to carry much less than that. We could probably operate in the one - two level easily, because a lot of that's cash in transit to some degree.
Yeah.
We have a lot of cash that's available to us at the moment. Secondly, just thinking about getting our debt levels back to that 2.7x avails ourselves with a lot of additional cash that we can use to put to good work to drive shareholder value.
Well, on that, you mentioned the dividend payout ratio of 35% and sort of making sure that keeps moving forward. When you say moving forward, is it basically keeping it with the earnings growth of 35%? Is the inclination that maybe that should be 50? Is 35 more likely to go to 50 or go back to 25, I guess?
No, I would say that 35 is more likely to stay roughly at 35 and just progress as earnings progress. At the same time, any extra cash, I think a better use at this point in time is in the share repurchase game.
Got it. That's your own plan for that, it sounds like.
We're going to lean into about $9 billion this year.
I keep saying $9 billion at a minimum. Because, again, we're still below our adjusted EBITDA target at this point.
Maybe just a bit on working capital. Again, such an unprecedented area. Obviously, if you want in-stocks, that's important.
Yes.
How do you think about that when you're doing this equation? We always want inventory turns to be faster, but do you think that maybe did we get a little too focused on optimizing inventory turns going into this pandemic?
I think the short answer to that is no, we did not. The reason why I say that is we were just trying to catch up from an inventory perspective as demand accelerated through the pandemic. Now the question is, let's make sure that our inventory levels are appropriate. We're back in stock in key categories and key items, but not get ourselves over our skis and have excess inventory in areas that aren't turning as rapidly. We're still on the, I'll say, a little bit of the catch-up level at this point in time. We're not yet at the level of quote unquote, "optimizing.
Got it. Well, look, we have our last couple minutes, so I'm sure I forgot something. I could keep talking forever, Dave, as what we've gone through, you've been there two and a half years now. Stepping back a little bit, what are you most excited about in terms of where you're getting traction? Is there anything that I didn't ask, we didn't bring up or talk about that you want to make sure that we all took away today?
No, I think you hit on the big thing. I do think that one is we've really stabilized the business model, and I feel really strongly and really proud about that. Secondly, I think about the opportunities over the next several years is really leaning into our pro business, making that a more meaningful portion of our customer set. Secondly is making sure that our omni-channel environment is robust and appropriate. I think that's also a nice tailwind as we think about the next several years of growth in this business. You touched on it. This business throws off a ton of cash, and the objective here is let's make sure we take that cash and drive to improve return on invested capital and really enhance the value of our shareholders. That's kind of job one from my perspective.
We have a lot of tools at our disposal to do that more effectively over time.
Well, that's great. It sounds like in terms of the restructuring activities, I know I probably should have mentioned earlier, are you sort of done with the store closures and other areas that you were exiting? Those boxes have all sort of been ticked. Is there any last-
They've all been checked.
Got it.
Largely all that's behind us. Obviously, we move a store, relocate a store here and there, wherever once in a while, but nothing of significance. Yeah.
There's no other M&A or new type of store format you want to roll out or geographic region that's-
No. Maybe, Greg, there's always a little fill-in activity here and there, but nothing of any significance. Yep.
All right. Well, Dave, I really appreciate the time. We're coming up on our half hour, so thank you everybody for watching and look forward to hearing from you again, I guess, in just a few weeks when we get the whole quarter.
That's right. Well, thanks again, Greg. Thanks for hosting us and again, thanks to everybody who are interested in Lowe's.
Thanks, Dave.
Thank you.