Good morning, everyone, and welcome to Lowe's Companies Fourth Quarter 2015 Earnings Conference Call. This call is being recorded. [Operator Instructions] Also, supplemental reference Slides are available on Lowe's investor relations website within the investor packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non-GAAP financial measures. The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr. Robert Niblock, Chairman, President and Chief Executive Officer; Mr. Mike Jones, Chief Customer Officer; and Mr. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

Good morning, and thanks for your interest in Lowe's. We delivered another solid quarter, with comparable sales growth of 5.2%, which exceeded our expectations. Our efforts to drive traffic, which Mike will share in more detail, have resonated with customers, resulting in a 3.6% increase in comp transactions, along with a 1.6% increase in average ticket. Our U.S. Home Improvement business achieved 5.5% comps for the quarter, with all 14 regions generating positive comps. And our strong performance in Canada continues, with double-digit comps in local currency for the third year in a row. During the quarter, we generated positive comps in all 13 product categories. We capitalized on increased demand for exterior products as a result of warmer weather, with strength in lumber and building materials, outdoor power equipment, lawn and garden and millwork, while at the same time, driving strong mid-single-digit comps in interior project categories, such as paint and fashion fixtures. And as a result of our strong brand and service advantages, we continue to drive strong comps in appliances. Lastly, our Pro business performed above the company average as we continue to build deeper relationships with the Pro by enhancing our product and service offering to meet their unique needs. For the quarter, we drove 79 basis points of adjusted operating margin expansion and adjusted earnings per share of $0.59, a 28% increase over last year's fourth quarter. For the year, we delivered comparable sales growth of 4.8% and adjusted earnings per share of $3.29, a 21% increase over 2014. Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $562 million of stock under our share repurchase program and paid $257 million in dividends. For the year, we repurchased $3.8 billion of stock and paid $957 million in dividends. As…

Thanks, Rob, and good morning, everyone. As Robert shared with you, we delivered another solid quarter, with positive comps across all regions and product categories. We executed well in the fourth quarter, growing both average ticket and transaction. We drove traffic through our Black Friday event, which drove sales increases of 8% overall and 26% online, with compelling offers and special buys in tools, holiday decor, appliance and other traffic drivers, creating strong values for customers while remaining true to our strategic focus and core strength in home improvement. We drove increases in traffic for the quarter through competitive offers, enhanced online selling capabilities and improved marketing speed and flexibility from our digital capabilities, where we tested new concepts like deal of the day. We also rebalanced year-end promotions to take advantage of the extended outdoor selling season. Looking at product category performance, we recorded above average comps in lumber and building materials, appliances, lawn and garden and paint. We saw particular strength in outdoor project categories, led by lumber and building materials, lawn and garden, and to a lesser extent, outdoor power equipment and millwork, as customers took advantage of mild weather to complete exterior projects, such as roofs, fence and decks. In outdoor power equipment, we drove double-digit comps in off-season products, such as pressure washers, walk-behind and riding mowers. And in lawn and garden, we saw double-digit comps in soil, mulch and lawn care. Our new landscape lighting experience drove strong performance as well, bringing outdoor lighting projects to life by providing inspiration and making selection and installation easy for customers while offering new product technologies, like LED. We also achieved strong comps in appliances for yet another quarter, leveraging our investment in customer experience both in-store and online. In-store, our 17 appliance suites showcasing coordinate appliances…

Thanks, Mike, and good morning, everyone. Sales for the fourth quarter were $13.2 billion, a 5.6% increase over last year's fourth quarter. Total transactions increased by 4% and total average ticket increased 1.5% to $67.15. Comp sales were 5.2% for the quarter. As you heard from Mike, solid execution drove balanced performance in the quarter. Comp transactions increased 3.6% and comp average ticket increased 1.6%. Looking at monthly trends, comps were 2.8% in November, 7.3% in December and 5.3% in January. For the year, total sales were $59.1 billion, an increase of 5.1%, driven by comp sales of 4.8% and new stores. For 2015, comp average ticket increased 2.5%, and comp transactions increased 2.2%. Gross margin for the fourth quarter was 34.66% of sales, which is flat to last year. In the quarter, product cost deflation and value improvement aided gross margin, but were offset by pressure from the mix of products sold and promotions. For the year, gross margin of 34.82% of sales represented an increase of 3 basis points over 2014. In January, we made the decision to exit our joint venture in Australia. There is a process in the joint venture agreement for purposes of determining the value of our portion of the joint venture. We are working our way through that process and expect it to be completed in the next month or so. We recorded a $530 million non-cash impairment charge in the fourth quarter. The charge includes the cumulative impact of the strengthening U.S. dollar over the life of the investment. The valuation is based on our best estimate of our 1/3 interest in the joint venture. This valuation is subject to potential adjustment as additional information becomes available as we complete the process. For the quarter, the impairment charge impacted SG&A leverage and…

[Operator Instructions] Our first question will come from the line of Simeon Gutman with Morgan Stanley.

Bob, just a quick follow-up on the progression of the flow-through for the year. I guess that we were under the impression there were some indirect cost that had come out in the middle part of this -- the last year, and that would still roll through the model in the first part of '16. And so why, I guess, isn't that the case? And then can you just put a little more color around a wide bonus in GM? I don't know if those were mentioned any part of the year, but what are the factors that are going to, I think, help you with flow-through in those areas?

So assuming -- there's a variety of factors that contribute to flow-through being a little bit heavier in the second half of the year. Gross margin really based on the mix of products, primarily, with a greater mix impact in the fourth quarter and the second half of the year than we did in the year as a whole, that's a primary difference, driving a little bit heavier gross margin expansion in the second half than the first half. For bonus, we came into the year expecting to leverage bonus roughly 10 basis points, ended up being flat as percent of sales for 2015 relative to 2014. A lot of that difference came in the fourth quarter on the strength of our sales performance. Our bonus programs are predicated on sales and earnings performance. And based on the strength of the sales results for the fourth quarter, we increased bonus accruals. As a result, we'll have the opportunity to leverage against that build in Q4 2015. Another smaller item, store environment, so just the timing of projects weighted more in the first half versus second half as we think about 2016 versus 2015. And the impact of the 53rd week, we have roughly $900 million of additional sales in the fourth quarter. That's going to drive roughly 15 basis points of higher EBIT in the second half of the year as a result of that. So those are the major factors giving rise to the difference in flow-through second half versus first quarter.

And to clarify, are there incremental indirect cost that could come during the year? And then I'll just ask my follow-up in case I get cut off. Just the volatility or the variability in the months in the quarter, November was weak, I think, but you mentioned Black Friday was good, I think. But November was a little weak, December was great against tough compares. Did anything explain that? Anything strategically? Does it sync up with promotions, et cetera?

As it relates to the second question, really tough weather first half of November, primarily in the Southeast. So as you think about our footprint, our Southeast orientation, that had an impact on the first half of November. After that, we saw much improved performance in the second half of November. As Mike indicated, we had very good Black Friday performance. As it relates to other indirect costs, we continue to work on our indirect spend, and would expect to see a leverage throughout 2016 from those efforts.

Your next question will come from the line of Michael Lasser with UBS.

It's about the promotional activity that you undertook during the quarter. Is that something that you had planned on doing? Or was it more in response to what you saw in the marketplace and then responded in kind?

Michael, this is Mike Jones. I'd say it like this, most of it was planned. We do make adjustments as we see the competitive activity in the marketplace. And we will, at times, move out of one form of promotion to another. One of the things that you saw us do was move from credit as a primary form of promotion in certain points in the quarter into other forms of motion. But the total activity level is exactly where we planned it to be. The execution towards that activity level, we can make adjustments within the quarter.

So just to trying to interpret what you're saying, Mike, you had planned to do some promotions in the fourth quarter, you were going to move away from offering extended terms of free financing towards more pricing and discounting. That's how it happened. And is that a right interpretation of how it unfolded?

I'd say a little different. We planned to do promotions within the quarter, we promoted to the level that we planned to promote to, and one of the adjustments that we made in the quarter was less financing and more towards discounts, is what we did in the quarter. So total level's exactly where we expected it to be, with some adjustments within the quarter on how we got there.

Are there signs that the sector's becoming more promotional? Maybe as some struggle just with their survival, they're doing things to be more relevant? And so you're having to respond? Or is it just that -- the direction the world's heading?

I don't think so. I think where those are having challenges, the challenges are probably something other than just straight price. I think there are folks having some challenges around their format, and I'm not sure they're going to promote their way out of those kind of challenges. And so I would describe the market as very rational. When we go after where we target for share gains, we do it in a way that's rational. I think the majority of us do exactly that. So I don't see it becoming more promotional, I don't see -- I don't think I see anyone doing anything that's going to suggest that the market goes in a bad space as a result of people trying to survive. I just haven't seen that.

Michael, this is Robert. Also keep in mind, it's not just the promotional cadence that we executed in the quarter versus our plan, it also comes into play the success of those promotions. So for example, we didn't plan on appliances to be high single-digit comps for the quarter. There was opportunity there, obviously, as we've talked about in the past, that particularly in the fourth quarter, that's a category of merchandise that is, from a competitive standpoint, is something that gets promoted through the holidays. And we've had great receptivity, great success with the appliance offering, the suites that Mike talked about being in the store. So part of it is not only staying on the program but the success of what we saw, which drove some of that mix impact as well, so.

I'd like just to clarify. So the product promotions impact gross margin, so we called out the negative impact to gross margin based on the product promotions. The reduction in finance promotions hit SG&A. So roughly speaking, the EBIT impact of promotions in Q4 was about as planned. The complexion, as Mike described, between gross margin and SG&A was a bit different.

Your next question will come from the line of Chris Horvers with JPMorgan.

Couple of follow-up questions. So in January -- was there any benefit from the weather in January? I'm assuming the warm weather. Home Depot talked about it yesterday, that being mainly a December phenomenon. Was there a benefit from the big storm in January? Trying to get an understanding of what's real good indication of the underlying run rate of demand in the business. That was, like, a 5.3% in your guiding to a 4% for the year.

I'll start, Chris, and then I'll let Bob talk specifically about how things fell in January. Just kind of as we've said in our comments, if you think about the quarter, ending a year or what, but certainly, overall warmer weather for the majority of the quarter. That extended the season for the outdoor product categories, which is what we went through, your kind of lawn and garden, lumber and building material, those that we saw really strong. Outdoor power equipment, that we saw a really strong performance for. But then we had stuff like Hurricane Jonas hit -- I'm sorry, Superstorm Jonas hit, we were in really great shape with the products that customers needed at that point in time. So any time that you're selling snow throwers and ice melt and those things, you're not selling a lot of other stuff. But when the customer needs that product, being in supply of those products, which our merchants did a great job with having secured the access to the product, as Mike took you through our supply chain, did a great job of getting that product in the market where the customer needed it, where it was impactful for the customer to have that product. So all in all, there was a great execution in the quarter in taking advantage of the opportunity that was there. Bob, you want to talk specifically to the weather impact to January?

So as Robert said, with extreme weather, you selling the pack of products, but your traffic is basically done. You're not selling any of the exterior products. The weather impact for the quarter was largely contained to December, roughly 50 basis points impact for the quarter. But as I mentioned, most of that impact was felt in December.

And then so as a follow-up to that, the 5.3% in January, maybe thinking about that and then reflecting on the comp progression throughout the year and how you're thinking about the first quarter, first half versus second half.

So as we think about 2016, we see the 4 quarters in a relatively tight band. There's some movement up or down, but it's not substantial for the year. So as we think the 4%, it should be fairly consistent across the 4 quarters.

Understood. And then one follow-up, which is on the EBIT line. So we had modeled, I think, almost 20 basis points of bonus leverage so in the fourth quarter, and it sounds like that was flat. Was that basically the delta versus your model in terms of driving the leverage? And as you think about getting to the 25 to 30 basis points next year, it seems like sales upside results in less margin flow-through, as you saw in the fourth quarter. So I guess trying to reconcile those 2 things.

So the flow-through was impacted in the quarter and for the year by 2 factors, and we've talked about both. Bonus is one and the mix impact on gross margin is the second. If you roll it back, it would suggest, Chris, that those items combined for a 5 basis point flow-through impact on the year, which would get us into the 25 to 30 basis point range. We are comfortable with that -- with the guided range for 2016, it would also be in that 25 to 30 basis point range.

Your next question comes from the line of Peter Benedict with Baird.

Just a question kind on the spring upcoming. I mean, how does the warmer winter kind of set you up for the spring? Have you guys made any adjustments in terms of the timings of your sets? How you're approaching the spring business?

Peter, it's Mike Jones. Simply would suggest from an inventory perspective, I talked earlier to having brought in inventory a little sooner to be sure that we're prepared for the spring. But we're also looking at category performance so that we can take advantage of what we think is going to be some upside with the way -- we've made some adjustments to how we're doing our resets in terms of outdoor patio and some of those categories. So yes, we're ready for the spring. We think it could be a good spring for us, and we want to be there to take advantage of it. And you saw us do that on the other side of the fall as well, taking -- carrying some of the fall lines longer into the year to take advantage of what looked like a longer fall season.

Peter, this is Rick. I'd also add to that, just from a inventory perspective, Bob talked about the impact of Chinese New Year and the timing of that and the impact that had on inventory layers for the quarter. So majority of that product is spring-related. So we have that in our systems, it's in our DCs and being loaded into the stores. So we feel good, both from a stacking perspective as we plan the quarter, as well as the flow of inventory that will -- we won't have or we won't see any significant gaps if the weather continues to hold as is or accelerate into an early spring.

Okay. That's helpful. And then just on the big-ticket comps, they were solid, 6.6%, those transactions above $500. But they did slow a little bit or decelerate from the third quarter. Just curious, given what's going on in the stock market, some of these energy markets, just curious if you're seeing anything kind of when you peel back the onion, any kind of wealth effect impacts on some higher-ticket project demand. Again, it doesn't look like it's impacting the overall business, but anything in particular you can point out there? Either regionally or what have you.

We're not -- Peter, our business continues to be driven by income and housing. So really solid progress on the number of jobs added throughout 2015, as well as late in the year, as we started to see some real wage appreciation. As it relates to housing, continued solid turnover through 2015, as well as mid [indiscernible] with the oil price depreciation. So all of those factors continued to drive demand for home improvement, and we see similar factors going into 2016.

Your next question comes from the line of Greg Melich with Evercore ISI.

A couple of questions. I want to start with deflation, what you're seeing in lumber and copper in the quarter and what the outlook do you think is into this year.

So those 2 items, lumber and copper, they only impacted Q4 by 35 basis points. We expect roughly similar impact in Q1, but the impact dissipates as we progress through 2016.

Okay, great. And then second, I just wanted to make sure I got the CapEx cash flow buyback tied together correctly. It looks like you'll be generating $3.5 billion of free cash flow but buying back $3.5 billion of stock, and that's excluding the acquisition or anything you might get from the Australian joint venture. So if we get the deal in Canada done early, should we expect that $3.5 billion to be less? Or does that $3.5 billion sort of factor in that, that expense is kind of out there? And I guess, why CapEx ticked up this year to $1.5 billions.

So regarding CapEx. The higher number of store openings is the biggest driver for CapEx. There was some timing of projects, a couple stores slipped from '15 to '16, as well as some other projects, which moved about $100 million from 2015 to 2016. Adjusting for that, we basically compare $1.4 billion in '16 to $1.3 billion in '15. Bear in mind that the '15 number includes roughly $200 million associated with the purchase of the Target DC and leases. Specific to the buyback and cash flow generation, you are correct that it excludes both the RONA transaction and any funds received from the joint venture. However, even if the transaction goes through in the middle of the year, we do not expect that the $3.5 million (sic) [ $3.5 billion ] share repurchase would be reduced.

Okay, great. And then online growth, I think Mike, you mentioned up 26%, but that was around Black Friday. Do you have a number for the whole quarter?

Yes. Greg, this is Rick. For the quarter, the online business was up 26% in total. So that was the quarter number.

Okay, got it. And what percent of sales now?

3% of total sales.

Your next question comes from the line of Seth Sigman with Crédit Suisse.

First, a question on the long-term guidance, the 11% EBIT margin goal. I know you said you would update us at some point, but just as we look at the numbers, it seems to imply a similar margin improvement in '17 as '16. But of course, '16 has that extra week. So on a 52-52-week basis, it implies an acceleration. How should we be thinking about that at this point?

So still on target for the 11% in 2017. Our guidance would suggest roughly the same level of EBIT improvement in '17 versus '16, so you're correct on that. Regarding the 53rd week, while it is an extra week, it's essentially one of our lowest, if not the lowest, volume sales week of the year, so it's not a terribly productive sales week. It has some impact on the second half of the year, as I mentioned, but the EBIT impact is only about 3 basis points for the year. So little impact in '15 going into -- excuse me, in '16 going into '17.

Okay, got it. And then a question on the Pro side of the business. You mentioned that was performing above the company average. That seems to be a change versus the last couple quarters, at least. Can you elaborate on that trend? Do you think that's an industry trend or something specific that's resonating? And then I guess, on the other side of that, does it imply any major change in the trend for the DIY side of the business?

This is Robert. I'll start and then I'll let the other guys jump in. Yes, I think part of what we signaled was, given the favorable weather that we had during the quarter, that I think that also helped drive some strength in the Pro business, when you think about the ability for a lot of the project categories that we talked about, for them to continue to work and implement. And on top of that, a lot of the other initiatives that we've put in place, such as LowesForPros.com, the incremental resources that we put in place after, that is resonating with the consumers. So I think part of it is kind of an industry macro that the weather setup had allowed for incremental opportunity in those product categories, which drove some of that business. Then on top of that, some of the specific stuff that -- and resources we've put behind our Pro initiative and becoming more relevant with that Pro customer.

Yes. This is Rick. And I'll agree with Robert, weather had an impact on the Pro when we look at the categories and performance, particularly through the months of December. But I think it also continues to resonate in how the way the Pro continues to respond to our initiatives, both from a brand perspective, as the merchants continue to work the operations team to make sure that we have the relevant brands that the Pros are responding to. And then also, with our continued focus on making sure that, both from a service standpoint and a value standpoint, that we remain relevant to the marketplace in what we're doing there. So they continue to respond well to the brands. The outside sales organization that Mike commented earlier of 160 people, adding another 35 into that organization, continues to perform extremely well and resonate with the customer, particularly on our large MRO accounts and our national accounts, as we continue to see those grow. And the -- our core programs, of our 5 Ways to Save for the Pro customer, continues to resonate really well. So we think we'll continue to build upon the solid foundation that we put in place over the last couple of years.

Your next question comes from the line of Eric Bosshard with Cleveland Research.

Curious if you could talk a little bit about your thoughts on market share with both the DIY customer and Pro customer, how you'd evaluate the performance in '15 and how you think about how that might performance -- how that performance might compare in 2016.

I'll start, Eric. Obviously, we think that as we look at the market share data that you can get out there, that our performance in 2015 exceeded the growth in the markets. We feel good about our performance, it exceeded our own plan and expectations. I think the team did a good job of capitalizing on opportunity that presented itself in the market. For example, appliances and how we -- the amount of business we did in appliances consistently throughout the year. As we look forward to what the market looks like in 2016, the initiatives we have in place, I still believe that we feel good at some of the changes that have taken place in the marketplace, that we feel good that we'll continue to, with our initiatives, gain share in 2016 as well.

Eric, specific to the numbers for the calendar fourth quarter, makes 4.44 [ph] was up 4.6%. Our comparable growth is up 5.1%. We know that's not a precise measure of the industry, but directionally, we feel like we're growing a little bit ahead of share. As we think about 2016, we do some work with some partners to try to estimate what the expected growth rate is for our industry, and that would suggest roughly a 4% growth rate for 2016, which sits right on top of our comp with other -- with new stores that should get us an opportunity to take share in '16.

I guess specifically, I had a follow-up on the Pro side, the investments you're making there, especially in the outside selling efforts. Curious if you think that allows for a notable improvement in your market share performance with the Pro. Or is 2015 reflective of what that growth rate or what that market share performance is going to continue to look like.

Eric, this is Mike Jones. We think there's potential for it to continue. If you look at some of the brands that we've brought back in fashion lighting with Kichler, progress lighting in Korzel [ph], that's a 3-brand approach. This approach is a Home Channel exclusive, you won't find these brands at any other Home Channel. And if you look at our strength in fashion lighting through this past quarter, we were up double digits. Paint, above the company average, with Sherwin-Williams now bringing on Infinity [indiscernible] and Olympian. Again, another 3-brand approach. You won't find this particular approach at any other home channel. And with the addition of Cabot to couple with Olympic as the knockout punch, #1 and #2, you won't find that at any home channel as well, that's going to let us continue to drive share gains in paint. If you look at our approach in pneumatics, with Hitachi pneumatics, coupled with Stanley Bostitch, that's the #1 and #2 pneumatic brand in the U.S., you won't find that at any other home channel. I can go through our portfolio of brands that we bought back and an exclusive set we have and [indiscernible] fantastic job. We think that positions us to continue to build more relevance with the Pro. And when you couple that with the other initiatives that we have, we think we got runway. And we've talked before about GAF coming back, Owens Corning insulation [indiscernible] exclusive, we talked about Goldblatt coming back. I mean, we've got a portfolio of brands that we brought back to Lowe's that we think position us for share gains, to Robert's point, both with Pro and with DIYs. So we're comfortable about how we're positioned going into 2016. The team's done a fantastic job of bringing back brands. We think we continue to build towards being the project authority in home improvement. We're very comfortable with how we're positioned.

Yes. Eric, this is Rick. The only thing I would add to that, again, is the introduction of LowesForPros.com in the second half of the year, just getting its legs under. As we continue to gain traction from that initiative, I think it sets us up well to continue to gain share from the MRO customer, as we continue to get traction with LowesForPros.

Our final question will come from the line of Matthew Fassler with Goldman Sachs.

I have 2 questions. The first relates to big-ticket, and this was your category disclosure. One category you cited as being a bit softer is kitchen, which I know is kind of a traditional big-ticket, project-oriented category. My sense is that world had, had some momentum for you. So anything in particular holding you back? And any macro reading you would take from performance in that category.

This is Mike Jones. No, we don't think it's anything macro, just the kitchens were largely challenged by some pull-forward due to October promotions. We had some reset activity in the kitchen as well. Today, we talked about those credit promotions, it also impacted the kitchen. So we don't think there's anything macro there.

Got it. And then the second question. As we think about bonuses and incentive compensation, it sounded like what really happened was that the sales beat by a greater degree than the earnings, and the way the incentives are structured, that essentially worked against you and sort of dug the earnings hole just a little bit deeper. As you think about the incentive structure for the stores and the way you pay out bonuses, is there any thought being given to reworking those in a way that they're more profit- or gross-profit-driven? I understand that the store-level associate can't necessarily think about the earnings for the enterprise. But in a way that incentivize sort of the best kind of business that you can do.

The -- Matt, this is Robert. I think yes, you obviously hit one of the items that put a little pressure on the quarter, and that was the sales growth rate versus the earnings growth rate, if you want to call that. And what I'll to tell you is that every year, we looked at a set of competition programs all the way across the organization, and try and set us up for what we think is going to drive the right response across the organization to take care of the customer and drive the business. And this has been an evolution that we've been on all the way back from when we were just single channel and everything, the incentive compensations were heavily focused to what took place in the 4 walls of that store, to really now today, being an omnichannel organization, where a store manager is not only compensated on what happens inside their store but also what happens in their market as well. So it's an evolution we're gone through as we're going from single channel to multichannel to now omnichannel. But that's part of what Rick and his team do every year, is look at the incentive compensation structure and make sure that it's appropriately aligned. We're very happy with the behaviors that it's driving, but it is something, as we continue to evolve, the other parts of our business become bigger parts of the total sales, it is something to look at to make sure that we're driving the right behavior of keeping the customer in the center and always focus on what's best for the customer. That's our job, and we'll be doing that, so. Well, great. Thanks. And as always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our first quarter results on Wednesday, May 18. Have a great day.

Ladies and gentlemen, this concludes your conference for today. Thank you all for joining. And you may now disconnect.