Good morning, everyone, and welcome to Lowe's Companies First Quarter 2021 Earnings Conference Call. My name is Melissa, and I will be your operator for today's call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Kate Pearlman, Vice President of Investor Relations.

Thank you, and good morning, everyone. Here with me today are Marvin Ellison, our President and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President, Stores; and Dave Denton, our Executive Vice President and Chief Financial Officer. I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on Lowe's investor relations website. During this call, we will be making comments that are forward-looking, including our expectations for fiscal 2021. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we'll be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release in our investor relations website. With that, I'll turn the call over to Marvin.

Good morning, everyone. I'd like to begin by thanking our frontline associates for their continued hard work and commitment to the company. We would also like to extend our thoughts and prayers to our associates in India, who are grappling with an aggressive resurgence of COVID in the country. At Lowe's, we have associates in Bangalore, India in our digital, information technology and finance functions who played a key role in our transformation efforts over the past 2 years. To help our team in India safeguard their health, we sent personal protective equipment to our team members there. We've also made financial commitments to support nonprofit organizations in India that are working to respond to this humanitarian crisis. As we have moved into the second year of the pandemic, we remain focused on our #1 priority, which has always been protecting the health and safety of our associates and communities. And with that in mind, in Q1, we invested nearly $60 million in support of COVID safety protocols. Now turning to our results. Our outstanding performance continued this quarter with total company comparable sales growth of 25.9%. Our U.S. comps were 24.4% with broad-based growth across all geographic regions and divisions. In fact, for the quarter, comp sales for all 15 U.S. regions exceeded 18% and all U.S. divisions exceeded 20%. During the quarter, operating margin expanded 313 basis points on an adjusted basis, leading to diluted earnings per share of $3.21, which is an 81% increase on an adjusted basis over the prior year. Our outperformance in operating margin was supported by our continued transition to an everyday competitive price strategy as well as our disciplined pricing and product cost management strategies. Our improved operating margin also reflects the progress of our operational transformation driven by our perpetual productivity…

Thanks, Marvin, and good morning, everyone. We delivered U.S. comparable sales growth of 24.4% in the first quarter. Our compelling offerings, great values and improved in-stocks allowed us to capitalize on the continued strong demand for home improvement products. Consistent with recent trends, growth was broad-based across Pro and DIY customers, in store and online and across product categories. In fact, 13 of 15 merchandising departments generated comps over 15% and all merchandising departments were up more than 20% on a 2-year comp basis. As Marvin described, we were extremely pleased with how consumers responded to our SpringFest event. Similar to our approach to the winter holidays, we extended this event across 4 weeks to create a new sense of excitement and to prompt return trips, while also avoiding congestion in our stores. We offered 4 different weekly giveaways of garden-to-go kits that provided everything needed for a fun spring project, and also strengthen our customer connection through a required MyLowe's activation online. The success of this event was due to the great organizational alignment across our stores, marketing and merchant teams. Turning now to our top-performing categories. Lumber again delivered the highest comp driven by strong Pro demand and unprecedented inflation in the category. Over the past year, as lumber products have been in tight supply, our merchants have worked closely with our suppliers and successfully secured new sources and additional product to ensure that we can maintain a competitive in-stock position in the category. Strong in-stocks in this tight market have allowed us to continue to strengthen customer relationships, especially with the Pro. In addition to lumber, we delivered comps exceeding 30% in electrical, decor, kitchens and bath and seasonal and outdoor living. Our electrical category posted strong comps in the quarter driven by inflation in copper as…

Thanks, Bill, and good morning, everyone. In the first quarter, our associates were laser-focused on providing excellent customer service, supporting a safe store environment and delivering record sales volumes. As Marvin mentioned, 100% of our stores earned Winning Together profit-sharing bonus, a record $152 million payout to our frontline hourly associates. I would like to thank our associates for their continued dedication in providing world-class customer service. As Marvin mentioned, our focus on perpetual productivity improvement or our PPI initiative continued to yield results during this quarter as we leverage store payroll by using technology to reduce tasking hours, improve customer service and increase sales productivity. For example, we rolled out digital signs first in appliances, and most recently, in our lumber department. These signs cut down on associate tasking labor and they also support better product margin performance as we can now more rapidly implement price changes in line with the market. We are also leveraging an improved freight flow app, creating a fully digital process that gives our associates better line of sight to when products will arrive at our stores. The app which was developed in-house, even help store associates to prioritize the incoming merchandise so they can quickly and efficiently position the product on the sales floor for our customers. And we launched secure mobile checkout, which we are using to improve speed of service in high-traffic areas inside the store and on the exterior of the store in areas such as outside lawn and garden and under the Pro canopy. This checkout app developed in-house is allowing us to take care of customers from scanning items, tendering payment and printing or e-mailing receipts before they even join the line. Our customers are delighted with the solution, especially on busy weekends. We are also driving productivity…

Thank you, Joe. I'll begin this morning with a few comments on the company's robust capital allocation program. In Q1, we generated $4 billion in free cash flow driven by improved operational execution and continued strong consumer demand. We returned $3.5 billion to our shareholders through both a combination of dividends and share repurchases. During the quarter, we paid $440 million in dividends at $0.60 per share. We also repurchased 16.8 million shares for $3.1 billion at an average price of approximately $182 a share. We have approximately $17 billion remaining on our share repurchase authorization. Capital expenditures totaled $461 million in the quarter as we invest in our strategic initiatives to drive the business and to support our growth. We ended the quarter with $6.7 billion of cash and cash equivalents on the balance sheet, which includes proceeds from our $2 billion notes offering in March. In addition, we entered into a $1 billion term loan facility in April, which remains undrawn. Our balance sheet remains extremely healthy with adjusted debt to EBITDAR at 2.07x at the end of the quarter, well below our long-term target of 2.75x. Now turning to the income statement. In Q1, we generated diluted earnings per share of $3.21, an increase of 81% compared to adjusted diluted earnings per share last year. This growth was due to strong sales growth, improved gross margin rate and SG&A leverage as a result of a strong execution across many facets of our business. Please note that in the prior year quarter, there was a very modest impact on diluted earnings per share related to the Canadian restructuring effort. My comments from this point forward will include approximations when appropriate and comparisons to certain non-GAAP measures where applicable. Strong sales growth was driven by several factors, including: a…

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

My first question is, can you provide an update on where Pro penetration can move to over time and maybe some level of growth that you expect going forward? And I'm asking because I think part of the margin story is getting higher sales per foot, and I think Pro seems to be a big opportunity there. So curious, I don't know, Marvin or Dave, if you can just update us on that area.

Simeon, this is Marvin. We purposely have not set a target for Pro penetration. As I mentioned in my prepared comments, we really started focusing on the basics. And now we're elevating to a more strategic phase in Pro. We also stated a while back that we estimate our Pro penetration today as between 20% and 25%. Now having said that, based on my history in this business, in the space, in Joe's history and experience in this space, we can see over time our Pro penetration getting between 30% and 35%. And we think that's the trajectory that we're currently on, but we have purposely not set a target because I've learned in the past when you set a target then you can oftentimes hit the target, but you do it at the expense of running a good business, and we're just really focused on serving the customer right now.

Okay. Fair enough. Can I ask you a macro question to whoever? And I wanted to ask, there is this school of thought that this industry, this home improvement industry, is a mid-single-digit grower, right, that did 4 or 5x that over the last 4 quarters. And so that school of thought says, hey, this industry needs to digest this growth. We may not grow going forward maybe in '22 or it may be flattish at best. And the other side is that people have spent more on their homes, there's more invested capital, so there's more maintenance repair and that we could sort of comp it. And then maybe there's a housing cycle on top of this. Curious where you shake out and what's your best guess or what some of the debates you're having on this topic are.

Yes. Simeon, it's a good question. I'll take the first part. I'll let Dave provide any financial perspective. But I mean we're very excited and we're very bullish on the home improvement industry in general. If you look at the macro factors that really impact this business and have historically impacted this business as things like low mortgage rates, rising home prices, the age of housing stock, improved household formation trends and also strong consumer balance sheets, I mean all of those specific macro factors are pointed in the right direction for us. In addition to that, when there's home price appreciation, that actually benefits home improvement. It may not benefit the overall housing market, but when consumers decide to stay in their existing home and make investments in upgrading the home, that correlates to really strong home improvement sales. And as the housing stock continues to age, we're in a repair and maintenance business, that's a significant part of what we do. So when we look at home improvement, we see really robust year-over-year growth potential relative to the macro. And then if we look at just the things that we control. I mean we've been very transparent that there have been many strategic mistakes made in this business over the past 5-plus years. And so we have what we believe is enormous upside in revenue and operating income by continuing to invest in really smart, strategic initiatives that we think will drive the business forward. And we think Q1 reflects our ability to do that with our gross margin and operating and comp performance. I'll let Dave add any additional comments if he has them.

Yes. Simeon, the only other thing that I would add is that obviously, over the next several years, we anticipated that the millennial customer would begin to migrate into the home ownership position. I think what has happened through COVID is that macro trend has probably accelerated. So probably given the industry segment a bit more tailwinds as we think about the next several years.

Our next question comes from the line of Liz Suzuki with Bank of America.

So if sales are running above the robust market scenario, do you think the sales upside could be reinvested into additional initiatives and to gaining market share and deepening the competitive moat? Or should we think about there potentially being upside to the 12% operating margin that was discussed in that robust demand scenario?

Liz, this is Dave. I'll start with that question there. I think what you're looking at here is we have a very specific investment thesis really as we launched it in 2020 and into '21. And I think if you look at the thesis that we have and all the priorities that we have, I think we feel like we're very well positioned making the right investments to grow our business long term, improve our operating performance. I do think we're also very focused on the fact that we can't really predict the macro in the back half of this year, but we are very committed to doing 2 things: one is we're going to grow market share this year; and two, we're going to improve our operating margin performance. And we do expect that to be -- if the market holds up with a robust or above robust, around 12% operating margin, and that's our focus for this year.

Great. And just one quick follow-up which is, which [ are ] the 2 categories comped below 15%? And what was the 2-year growth there?

Yes. Liz, this is Bill. So all categories achieved the plus-20% draw on a 2-year basis, but the 2 categories below the company were paint and our hardware business, driven largely because of everybody painting last year during the pandemic. And then the hardware business driven by safety and masks and some of that business that spiked last year in the quarter.

Our next question comes from the line of Michael Baker with D.A. Davidson.

Okay. A couple -- and hate to be short-term focused here, but the -- first of all, April did fall off versus March on a 2-year basis a little bit. Do you think that's because of the stimulus that occurred in March? And then playing that forward, if we take that 2-year trend into May and for the rest of the quarter, you should be about flat in the second quarter. Is that a fair way to think about the expectations for the quarter?

Yes. I'll -- First, as you look at, I guess, our performance by month through the quarter, if you look at it on a 2-year stack basis, yes, March was somewhat inflated if you think about tech, the recovery from the storm in Texas and other states as well as stimulus hitting that period. So I think we feel very good about kind of how we ended the quarter and the trends as we cycle into May from a sales perspective. And I think, listen, we're not giving guidance for the quarter. We continue to be focused specifically on making sure that we have great service. We have -- that we're in stock in the right categories, and we're supporting our consumers across our marketplace. And I feel like we're gaining momentum as we think about our business, both in 2020 and here as we cycle into '21.

And Michael, this is Marvin. The only point I'll add to that is we were up against a 20.4% comp in the month of April in the U.S., and we comped almost 14% on top of that. So we feel really good about that. That exceeded our expectations, we think exceeded our internal plans. And it also demonstrates to us that even going up against some of the spike demand from last year, we still can perform at a high level. So we actually felt great about our performance in April. But it demonstrates when you're up against significant surge in demand, you're going to see sales comp pressure, and that's to be expected.

Yes. Sure. Okay, that makes sense. And to follow up and not to ask a tough question, particularly on a 25% comp against a 12% actually, really, really incredible and strong. But you talked about market share gains -- a simple look at the growth of the market using the NAICS sales in building material, garden equipment and supply stores, that did grow a little bit faster than you did this quarter. So I wonder how you think about what market are you looking at? Or what number you're looking out to underpin your market share, gain comments for the quarter and the year?

Michael, coming from someone who has worked in a couple of different retail formats, I've always said that home improvement has probably the most suspect market share data on a short-term basis of any retail segment. So to be quite candid, when we look at the amount of growth we delivered in the sales revenue that we generated and we look at it on a 1-year or 2-year comp basis, we can't [ quabble ] about losing market share. We're really focused on the broader market. And we've said consistently that in this COVID environment, and this is going to be current and post-COVID, the retailers that are: most capitalized and can make investments in omnichannel and omnichannel fulfillment; and creating different channels with customers to shop; and can lean into technology; and can also leverage the supply base as our merchants and supply chain were able to do over the past quarter will win and will take broader market share. And we believe that we did that. And so we feel very, very comfortable with our market share position and performance and with our prospects for the rest of the year.

Our next question comes from the line of Christopher Horvers with JPMorgan.

So a couple of questions. My first question is on the product margin benefits that you're seeing on the pricing side. Should these accelerate over the year, given that some of this -- the learning builds somewhat -- sort to, say, in the systems? And to what extent is it more sensitive to sort of highly seasonal and markdown-prone quarters, like a 2Q and a 4Q versus the third quarter?

Yes. Listen, I think -- this is Dave. We've had -- we've made a lot of investments from a product cost management and pricing perspective infrastructure here at Lowe's and feel very confident between the merchant and finance team on kind of managing that. It is not necessarily seasonally related. This is really about managing our everyday price and cost in a more effective manner overtime. I do think that we're still in the early stages of this journey as we think about the next several years to improve our performance here. Clearly, at the moment, we're -- as we said in our prepared remarks, there are some inflation pressures in our business that we're managing through. I do believe that we have -- we're continuing to invest in these tools and technologies to enable us to improve our margin performance over the longer term. Now keep in mind, Chris, I just want to go back to what we said of our long-term financial algorithm here is really to maintain kind of flattish gross margins over time with the fact that we would improve the product margin, but we'll reinvest some of that product margin in the supply chain to drive performance and growth over the long term.

Got it. Understood. And then in terms of -- as a follow-up on the 12% margin question, if you do end up beating that minus 2% sales outlook, I guess, why wouldn't you be above a 12%? Is there an offset, perhaps bonus and employee incentives? Is it a headwind from lumber inflation that creates a rate headwind that more than offsets the natural leverage of beating the robust scenario sales guide?

Yes. Chris, I just want to get ourselves focused. Listen, first and foremost, we've said about the fact that we've got to gain some market share. We've got to improve operating margin performance here, and we're trying to get to our 12% in the short term here. Beyond 12%, we have objectives and we believe we can expand it further, but let's at least get to our 12% margin first. And so we're just kind of laser-focused on making sure that we're delivering upon our commitments from that perspective.

And Chris, this is Marvin. You can appreciate the challenge we have, looking at the overall macro outlook for the business with all the dynamics occurring in the marketplace. The good news is, is the better the macro performs, the better we'll perform. We feel great about the things that we control and some of the tools and some of the processes we put in place and some of the decisions of the leadership team are really paying dividends. And as David said a couple of times already today, we're committed to outperforming the broader market and improving operating margin. And if the macro improves significantly above the robust scenario then our business will perform equally as well. And that's how we're approaching it.

Our next question comes from the line of Chuck Grom with Gordon Haskett.

You guys spoke about the big increase in lumber pricing. Depot said the same thing yesterday. Curious what you're seeing on the demand side and unit velocity over the past few months.

I will -- I'll start it off. What I can tell you is we're just really pleased that the merchants were able to create such strong supply relationships that we could keep up with demand in an unprecedented environment of unit demand. So I'll let Bill talk about units and how we're performing and kind of how we feel about the rest of the year.

Yes. Chuck, I think, to echo Marvin, I think demand continues to remain strong and all the preparation that was done coming off of last year has certainly enabled us to fulfill that demand going forward. All the work that's being done right now is to maintain that as we go through the rest of the year and continue to manage the needs of the Pro customer, make sure that we can take care of them first. I mean that's really what we're focused on in that job lot quantity and making sure that we're right by market, and that's been the focus of the team.

That's great to hear. So just a follow-up would be just on the installation business, you talked about a 6% comp in the quarter. I guess I'm curious like what penetration of the business is that today? How big can you grow that? And then also just from a profitability perspective, how it compares to the rest of the business?

Yes. Chuck, that business is in the mid-single digits penetration for our business. And we do think we have a big runway here. As Joe indicated in his prepared remarks, is that business was something that really wasn't invested in historically and was something that we had a really, I'd say, poor service model historically and was not the best from an operating performance perspective financially. I think we've now turned that business around and have a really nice foundation as we think about growing it. So I'll ask Joe to give a couple of comments on it.

Yes. Thanks, Dave. I'll just make a few comments. You heard in my prepared remarks the performance, very, very pleased that we've attracted industry veterans that really understand the complexities of being inside the home, and especially in the COVID environment, in all the platforms that we have been focused on, the consolidation of installers across the country, and remaining laser-focused on the programs that we really want to drive, and that's all under the same umbrella as our Total Home strategy. So we're very pleased with the team's efforts. I'm very pleased with all of our installer partners across the country and looking forward to a great continued momentum here.

Our next question comes from the line of Scott Mushkin with R5 Capital.

So I had a little long-term strategic question when you guys think about your business into 2022. As you look at your strategic priorities, what do you think drives incremental growth for Lowe's, kind of company specific? What are your top 3 type of things as you look out over the next 18 months?

Scott, this is Marvin. I think it goes directly to our total home market acceleration strategy where we talk about continuing to invest in online, which is really more omnichannel focused, making sure that we're investing in our installation services business and also improving our overall performance with the Pro. As I mentioned in my prepared comments, I mean all of our customer segments are really important, and we are focused more intently on being a customer-focused business. The Pro adds a different dimension because of the frequency of how the Pros shop and also how the Pro shops throughout the entire store. And one of the strategic mistakes made in the past here is not understanding that customer and understanding the economic value of that customer. So we're going to continue to stay really focused on that customer. But I would say those 3 things, omnichannel, ensuring that we can continue to have a really robust and seamless installation service business and focusing on the Pro are 3 of our priorities. But the whole Total Home strategy encompasses what we're going to be leaning into for the next couple of years.

That's great. And then just like looking out at the back half of this year, are you guys seeing any signs that this very high level of inflation is crimping demand at all? Or is that not something you're seeing?

We're not seeing it. I'll give you thoughts. I'll let Dave give a more financial perspective. I mean we feel really good about this business and this business model. As I look at home improvement as an overall retail sector, I just think that even though we're all just totally fatigued, both mentally, physically with the pandemic, and there's nothing that we can say positive about operating through with all the health and safety issues that we've all dealt with both business and personal, when you look at the macro for home improvement, it's a very positive backdrop. And as we look at forward-looking quarters and into next year, even with the inflation we're seeing in certain areas, specifically lumber and copper, we just don't believe that that's going to create an impediment for growth or significant headwinds for this business sector. I'll let Dave add any other comments.

Yes. The only thing I would add is -- just to reconfirm what Marvin said, we see no slowdown in demand at this point in time across our business and our categories. And I think if you speak to our Pro customers, we're hearing from them that they, one, are very busy at the moment, and two, have extremely long backlogs at this point in time. So I think this demand will continue for some period of time.

Our next question comes from the line of Brian Nagel with Oppenheimer & Co.

Congrats on a nice quarter. The first question I wanted to ask, you've talked a lot about the various scenarios for 2021 and the operating margin and market share opportunities for Lowe's. How do you look at expense levers? I think you may have talked about this a bit in your prepared comments, but how do we think about the expense levers to the extent that sales proved choppier through the balance of 2021?

Yes. So obviously -- this is Dave. Obviously, the biggest expense lever we have is how we manage operating salaries across our business and probably labor a little bit in the supply chain. I think what we've done is we've -- we have invested in tools, in processes to really allow us to effectively manage that labor component and really adjust it based on demand that we're seeing from a profile perspective. With that, I'll turn it over to Joe.

Brian, thanks for the question. And I will point out the 3 major points of the PPI initiative that we talk about. First is the investment in technology to reduce the tasking hours. We've been doing that very effectively. Secondly is the improvement in customer service with those changes. And then finally, the overall sales productivity and sales per square foot productivity at the stores. And I think we've given some examples: the digital signs in appliances; digital signs in lumber; the investments we're making in the Pro area; the investments we've made on the front end. And so I think the overall investment thesis that we have in driving this PPI really speaks to choppy times or good times that we have to leverage the business.

Got it. That's very helpful. And my follow-up question, with regard to sales, clearly, for Q1, then given the commentary with regard to May, I mean, sales have stayed very, very strong, rather broad-based. But as you look at your business on kind of a market-by-market basis, are you seeing any difference in sales trends in regions of the country, markets of the country, that have opened up faster, where, presumably, consumers are getting back to what -- to their normal lives quicker?

Brian, it's been -- when we talk about broad-based, it's more consistently broad-based than any time I can remember in my career. I mean we have 15 geographic regions and 3 divisions. And as I had said in my prepared comments, I mean all of our regions were in north of 18%, all divisions north of 20%. And when we look at top 40 markets or look at our top metropolitan areas, it is just surprisingly strong and consistent, with very few outliers in the negative. And so that points to us that there are just good underlying financial metrics and balance sheet positive aspects for customers that is showing up in how they spend in our business. It also demonstrates that we're running a more consistent business. But the short answer is we're not seeing any negative outliers. When we look at customer mobility with -- and even when we were seeing COVID spikes around the country and vaccination rates, we still didn't see any major differences in overall revenue performance in those pockets of the country. So we feel good about that. And it points to what we believe will be very positive signs for the rest of the year, and that's what we're hoping and praying for.

Our final question this morning comes from the line of Steven Forbes with Guggenheim Securities.

I wanted to focus on the Pro. You mentioned 30% sales growth in the Pro. But curious if you could sort of remind us or speak to the contributions from existing versus new customer growth. And if there's any sort of quarterly variation in the Pro sales penetration rate that we should be cognizant of as we work our way through 2021.

Steve, the results from Pro equally balanced between new and existing customers. As Joe mentioned in his prepared comments, the key for us will be just continuing to get a larger percent of wallet of our existing customers. If we didn't attract one new customer and we were able to get a greater percent of spend from existing customers, that would solve our Pro penetration for the next 2-plus years. So that tells you that our greatest opportunity is just getting our existing customers to buy more. But at the same time, with the loyalty program that Joe and his team launched, we're seeing incredible growth in new customers, and we're seeing also customers be very attracted to our new credit program, and that's a great sign for us to see the acquisition of new customers. Joe, I don't know if there's any other points you would make.

Yes. Thanks, Marvin. The only thing I would add, we started our journey in the Pro over 2 years ago. We talked a lot about the basics, the price service, the right brands. And now we're focused on that strategic phase of the Pro growth. So things like building out our Pro loyalty database, the new CRM, the redesigned store layout and the tailored shopping experience. So we believe that we have attracted a lot of new customers. We're growing the wallet of our existing customers. And again, I'm very pleased with the Pro team, their focus and everything that, that team has accomplished in the last 2 years.

And then just a quick follow-up, right, regarding Pro wallet share based on the CRM data that you have, right? Any sort of color or current data that you can share as it relates to the wallet share, right, or trip share of the small- and medium-sized Pro customer that you're focused on?

Steve, we're not going to publicly share a lot of that detail. Obviously, we're tracking it. But for competitive reasons, we typically don't share it externally. What I can tell you is that we've been pleased with the launch of loyalty and CRM, both programs are exceeding expectations. We had some delays, or, I'd say, pauses in the rollout due to COVID, we're now leaning into it. We are excited about the amount of data that we're collecting, and we're more excited about the feedback from our customers on how they feel about the visibility of what they're buying, how they're buying it and just the overall connectivity. So we look forward at some point in the future to sharing more details. But for now, I mean, we're not going to share a lot externally other than to say we feel great about the progress we're making in the trajectory of the business, specifically with that customer.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.