Good morning, everyone, and welcome to Lowe's Companies Second Quarter 2024 Earnings Conference Call. My name is Rob, and I'll be your operator for today's call. As a reminder, this conference is being recorded. I'll now turn the call over to Kate Pearlman, Vice President of Investor Relations and Treasurer.

Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President, Stores; and Brandon Sink, our Executive Vice President and Chief Financial Officer. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer Bill Boltz, our Executive Vice President, Merchandising Joe McFarland, our Executive Vice President, Stores and Brandon Sink, 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 2024. 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 US GAAP can be found on the quarterly earnings section of our Investor Relations website. Now, I'll turn the call over to Marvin.

Thank you, Kate, and good morning, everyone, and thank you for joining us. Second quarter sales were $23.6 billion, with comparable sales down 5.1% from the same period last year. While we're pleased that we delivered positive comps in Pro and online sales, we continue to manage through softness in DIY demand. Although this remains a challenging industry backdrop for the homeowner, I'm pleased with our team's ability to effectively manage the business. This is reflected in our disciplined expense management across the company, along with continual progress on our perpetual productivity improvement, or PPI, initiatives. These efforts helped us respond to the pullback in DIY discretionary projects and unpredictable weather across the country to deliver better-than-expected flow-through, while improving the customer experience. Later in the call, Joe will provide more detail on our improved customer service results in Q2. We're also encouraged to see results from our ongoing investments in our Total Home strategy this quarter, allowing us to deliver mid-single-digit positive comps in Pro and 2.9% comparable sales growth online. This demonstrates the importance of these strategic investments and shows that our Total Home strategy is gaining traction even in this pressured macro environment. Our resilient small-to-medium Pro customers are responding to the way we've transformed our product and service offerings to meet their needs. Bill and Joe will provide more detail on our successful Pro initiatives later in the call. When it comes to online sales, we delivered growth across all three business areas, driven by continued improvement in conversion rates as customers responded to our compelling offers and to our new expanded same-day delivery options that are now available on multiple platforms. In Q2, we added Uber Eats to our list of delivery partners, which also includes DoorDash, Shipt and Instacart, in addition to our last-mile…

Thanks, Marvin, and good morning, everyone. Despite continuing softness in DIY discretionary demand, we're pleased that we delivered positive online comps and mid-single-digit positive Pro comps this quarter. We now have the right brands for Pros, the right inventory quantities and the right product assortments to meet the needs of this demanding customer. Our strong Pro performance in this challenging macro environment means that our efforts to transform the Pro customer experience are working. Now turning to our results in building products, where we delivered above-average comps in rough plumbing, electrical and millwork, and positive comps in building materials, driven by continued growth in Pro across all building materials subdivisions. Within rough plumbing, we also drove strong results in some hot weather categories, like air circulation and HVAC, and we continue to deliver strong results in water heaters. Just one warm weather example. We recently rolled out MRCOOL mini split air conditioners in 1,200 stores. These ductless systems are known for their advanced technology, energy efficiency and ease of insulation, which means our DIY customers can now install their own mini HVAC system without having to hire a professional installer. Now let's shift gears to home decor. We continue to see persistent pressure in bigger-ticket DIY discretionary projects in flooring and kitchen and bath, consistent with the trends that began in the third quarter of 2023. And we continue to lead the industry in appliances, and we are pleased with our overall performance where we delivered above-average comps and double-digit growth in Pro sales. When you put it all together, we have the whole package for custom shopping for new appliances. We have the widest assortment of the leading brands. We have a simple and seamless shopping experience, both in-store and online. And we have a best-in-class fulfillment solution with…

Thanks, Bill, and good morning, everyone. I'd like to start by recognizing our frontline associates. Their dedication to serving our customers is reflected in continued improvement in our customer satisfaction scores over last year. And while we continue to elevate the customer experience, we also managed staffing well in a dynamic environment and achieve greater payroll productivity. We achieved this improvement in customer service and productivity by continuing to shift associate time from non-customer-facing areas to focus on selling and assisting customers, which leads me to a question we often hear from our investors, namely, do our perpetual productivity improvement, or PPI, initiatives negatively impact our customer experience? Let me address that head on. We found that the opposite is true. For a number of years now, we've been working smarter with tech-enabled solutions that make our associates more productive while enhancing customer service at the same time. The new In-Store Mode on our mobile app is a great example. When customers enter our store, they can enable In-Store Mode using the Lowes.com app on their phone, providing them with a detailed product and location information to help them navigate the store with ease. In addition to being a tremendous customer resource, In-Store Mode also helps free up associates so they can spend more time selling and focusing on customers who need help. And we're already working on the next innovations to the In-Store Mode to further streamline the shopping experience. Our PPI initiatives are also enabling us to reduce returns, which are now at historic lows for our company. There are a number of factors driving these results. Beginning with the returns desk, associates are using our modern omnichannel system, which makes the process as easy as a quick scan with the system immediately accounting for return policies. Second,…

Thank you, Joe, and good morning, everyone. Beginning with our Q2 results, we generated GAAP diluted earnings per share of $4.17. In the quarter, we recognized a pre-tax gain of $43 million on deferred consideration associated with the 2022 sale of our Canadian retail business. Excluding this benefit, we delivered adjusted diluted earnings per share of $4.10. My comments from this point forward will include certain non-GAAP comparisons that exclude this benefit where applicable. Second quarter sales were $23.6 billion, with comparable sales down 5.1%. Comp sales were pressured by continued softness in DIY bigger-ticket projects, in line with our expectations. Also, unfavorable weather pressured sales in seasonal categories. Comparable average ticket was up 0.8%, helped by strength in Pro-heavy categories, as well as less average selling price pressure in appliances as we begin to cycle the normalization of promotions within the category. Comparable transactions declined 5.9%, with pressure from DIY project spend as well as lower seasonal transactions, partly offset by growth in Pro transactions. Our monthly comps were down 6.4% in May, 4.1% in June and 4.9% in July. Colder and wetter weather in May was quickly followed by intense heat across much of the country in June and July with both weather patterns pressuring outdoor spring activity. Gross margin was 33.5% in the second quarter, down 19 basis points from last year due to continuing supply chain investments, partly offset by lower transportation costs and ongoing PPI initiatives. Adjusted SG&A of 17.3% of sales delevered 87 basis points due to sales deleverage as well as the cycling of a favorable legal settlement. These impacts were partially offset by continued enterprise-wide PPI efforts and our quick pivot to manage expenses in line with sales that were adversely impacted by inconsistent weather trends. Adjusted operating margin rate of 14.4%…

Thank you. We are now ready for questions. [Operator Instructions] Our first question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Good morning, everyone. I have one question about top-line and then second about margin. So, the first question on the spread between DIY and Pro. I don't think we have that for every quarter, but call it, 15-point spread, it looks like the highest number in a long time, if that's fair. And it would imply you're taking share in Pro, but it looks like you're losing some in DIY. Is that fair? And then, if you look across geographies, how does the spread vary? Is it a function of the Pro spread? Is it a function of DIY? And then, what's causing that spread to vary, if so? Thanks.

Simeon, this is Marvin. I'll take the first part of that. I think what's difficult for us to determine in home improvement is where you're actually losing or gaining share specifically in the categories of DIY and Pro. I get the foundation of your question, but one thing we can confirm for sure is that our Pro business is growing, so we do believe that we're taking share just based on the maturation of the strategic initiatives that you heard from me, Joe and Bill. As we look at the DIY, the best way for me to explain and answer the question is our sales are much more concentrated in bigger-ticket DIY discretionary purchases. And when you look at big-ticket discretionary projects in the second quarter, the DIY demand was softest in those categories and in those projects. As you mentioned, we're still roughly approximately 75% DIY. So, any pullback in these big-ticket discretionary categories is really more of a disproportionate impact to us. So, I don't know that we're losing share in DIY as much as the dynamic of these big discretionary projects in the quarter affected us. And that's really the way we're looking at it. Now here's the good news. The good news is we feel great about our assortment from a merchandising perspective. We feel great about our pricing, our execution, our marketing. And we believe this is just a macro issue that we're dealing with relative to DIY big-ticket discretionary. So, when we look at Q2, even though it was a challenging economic environment, we feel great that we could grow mid-single-digit positive comp in Pro, we could deliver almost 3% growth online, and we're still managing through macro headwinds with DIY discretionary spend. So, we believe that when the DIY market inflect at some point in the future, we're in a perfect position to take overall market share in home improvement because of the strength we're seeing in Pro and online. So with that, I'll let Brandon take the second part of the question.

Yeah, Simeon, your question on geographic differences, really pretty consistent. Marvin mentioned the growth in Pro, that's driven by both transactions and ticket. But when we look across our geographic divisions, very consistent performance and taking share regionally consistently there. And then, on the DIY side, again, too, really no notable geographic differences outside of the hurricane impact that we saw around the July timeframe with Hurricane Beryl coming through the Houston geography. But other than that, really consistent.

Okay. And then, my follow-up on margin, it looks like in the second half, the conversion or the relationship between the comp and the margin, it looks a little weaker than maybe the first half. It doesn't look terrible given the comp, but it looks a little weaker. So, I want to ask if that's because of anything that Lowe's is doing differently, how you're managing your business, how you're making investments, or is it simply a function of those things? Brandon, you mentioned some of the lapse of incentive comp, and I think there was one other thing. So, is it internal or external?

Yeah, Simeon, it's really the latter. The updated full year operating margin outlook is very consistent when you look at it annually with our rule of thumb, 14 basis points of contraction on the downside for every point of comp decline. And as you mentioned, second half quarterly differences are driven mainly by the timing of the merch PPI initiatives as we turn through the callbacks and then what we're cycling over as it relates to prior-year incentive compensation. We called out last year $140 million of frontline bonuses that we paid in Q4. So, it's really a function of those two things. Gross margins for the year, as we've said consistently, we expect roughly flat for the full year, and that's what's embedded in the operating margin outlook.

Perfect. Thanks. Good luck.

Thank you.

Our next question is from the line of Steven Zaccone with Citi. Please proceed with your questions.

Hey, good morning. Thanks very much for taking my question. I wanted to follow up on just understanding the guidance cut as well, because it seems like the Pro business is kind of outperforming expectations. So, if you have to dig a little deeper into the DIY side of the business, maybe parse through some of the categories on home decor and hardlines, what's really the biggest change to your outlook? And given the fact that sales have been coming in a little bit weaker than expected for longer, does that temper your view on a potential recovery in DIY demand?

So, Steven, thank you for the question. I'll take the first part of it. Look, I think for us, when we think about our guidance change for the year, it really comes down to just being prudent and being cautious based on the macro environment and the overall customer sentiment specifically around big-ticket DIY discretionary spend. We're all aware that we have an environment of elevated interest rates and inflation. And because of that, the DIY customer is just on the sidelines, waiting for some form of an inflection to take place. So, we can't call when that's going to happen, but we felt based on what we saw in the second quarter that it was prudent just to take a cautious approach to our guidance for the second half. And really, that's what we decided to do. I'll let Brandon take the rest of your question.

Yeah, Steven, this is Brandon. Just a little more context on the guide. As we mentioned in the prepared remarks, first half really largely in line with our expectations when you exclude the weather impacts that we experienced. And as we looked into the second half, just as Marvin just said, we still continue to see a very cautious consumer home improvement backdrop that remains challenged. And for those reasons, we decided to make an adjustment to the guide, and it does capture ongoing both DIY and Pro trends. And we're continuing to manage through the DIY challenges in the big-ticket discretionary, but we are still seeing strength, especially in the small to medium Pro, and that's reflected. Just as a reminder, we're cycling a pretty big DIY pullback, which started in Q3 of last year, again, as it relates to the big-ticket discretionary. So, the breakdown as it relates to comp, we are expecting, just like we've seen here in the first half, roughly flat average ticket in the second half as the Pro growth is offsetting some appliance pricing pressure that we're seeing. And then, we expect to see the transactions as the offset. That's where the pressure is at, and we continue to expect that to be challenged as the homeowners less engaged with home improvement activity in the second half. So that's a little bit more of a breakdown as it relates to second half guide.

That's helpful. Thanks for that extra color. I have a brief follow-up just on pricing. There's been focus on pricing and the risk of promotions impacting the industry if demand stays weak. You actually saw ticket growth in the quarter, but do you see that as a risk at all, just pricing and promotions kind of trickling into the industry if demand stays weak?

Yes, Steven, this is Bill. So, we actually see our -- the promotional activity remaining relatively stable. When you get around certain events, Memorial Day, July 4, et cetera, you've got offers that are out there that are seasonally relevant. And we try to make sure that we're out there meeting the consumer at that time as well. And so, when you look at Q3, we've got Labor Day in front of us. So, we're going to be out there making sure that we've got seasonally relevant offers that are out there for that time as we shift gears into the fall season. But from a promotional activity, we're relatively stable. And we're seeing on the appliance side that we're back to more of a normal activity as it relates to how the appliance industry is going to market. So, nothing really out of the norm.

And Steven, this is Brandon. I would just reinforce that the ticket increase is not a function of pricing so much as it's just the strength that we're seeing in the Pro business, which is lifting ticket, and then, as Bill mentioned, the cycling of the promo environment in appliances. Broadly speaking, as it relates to pricing environment, really largely stable here over the last couple of years. There's always pockets of activity that we see, but the ticket has been -- and the pricing environment has been largely consistent since 2022. And the industry continues to be disciplined and rational. So, for those reasons, we expect the ticket to continue to hold as we look across the second half of the year.

Okay. Thanks for the detail. Best of luck in the second half.

Thanks, Steven.

The next question is from the line of Christopher Horvers with JPMorgan. Please proceed with your questions.

Thanks, and good morning. So first, a clarification. To confirm, you expect 3Q and 4Q comps to be basically the same or sequentially improving over the year? Related to that, how much do you think weather actually was a headwind to comp in the second quarter? And any comment on where you are trending quarter-to-date relative to the updated expectations?

So, Chris, first part of your question, the comps are relatively evenly split when you look at Q3 and Q4 as it relates to what's embedded in the guide. And then, the question on weather impact, and in particular, as it impacted our DIY seasonal business, so we did see unfavorable weather in Q2. It pressured sales, cold and wet weather in May, followed by the intense heat that we saw in June and July. Just as a reminder, we are cycling over a strong seasonal performance last year Q2. We saw that especially in live goods and smaller outdoor projects. And outside of just seasonal, the intense weather also impacted other outdoor, call it, non-seasonal projects like exterior paint and decking. And then, the last thing I'll call out, we did see pressure in big-ticket discretionary seasonal categories like patio and grills, but that was largely expected as we've been managing those seasonal buys down to more recent trends that we've seen. So that was the pressure. That was mainly where we saw the deceleration in comps from -- as we moved from June to July. And then, I would say, as it relates to your question on August, very much playing out through here the first two-plus weeks very much in line with what we've guided to Q3.

Understood. And then, in terms of the gross margin outlook, so it would seem like you're basically expecting gross margin to be down again perhaps more significantly in the third quarter as we -- is that fair? And then, as you think about the flow of the vendor clawbacks, this would imply that really the clawbacks are starting in the fourth quarter and then will sort of continue in the first half of 2025. Thanks very much.

Yeah, Chris. So, not down. We are expecting it to be up both in Q3 and Q4 of this year, but again, on the year, roughly flat. And I'll mention just a couple of the pushes and pulls. We continue to make the supply chain investments nearly complete with the rollout of market delivery, investments we're making in early innings on Pro fulfillment, and then, as you mentioned, the merchant supply chain PPI initiatives. The clawback is going to continue to benefit. And it really starts to accelerate in Q3, Q4. And as you mentioned, turning into '25, there's a lagged effect there just with how that turns through inventory. Transportation cost continues to be a good guy for us as we leverage our scale. And then, credit and shrink, expect those to be roughly flat for the full year, and a great job by the teams managing pressures in those two lines. So, you're seeing that largely those things played out here in Q2 with the progression that we saw nicely from Q1 to Q2. And those same things roughly play out for the full year.

Thank you. Have a great Labor Day.

Thanks, Chris.

Our next question is from the line of Scot Ciccarelli with Truist Securities. Please proceed with your question.

Good morning, guys. I guess a high-level question on your earnings algo. This will be basically the third year of negative comps. I guess, theoretically, if comps were to stay negative in '25, is there a point where deleverage actually accelerates because of the fixed cost nature of your model?

Yeah. I would say, Scot, we expect our kind of rule of thumb in the algorithm. We expect that, that still holds. And it's directional, and it applies mainly to the fiscal year. We still see plus 10 basis points on the upside for every incremental point of comp and then 15 basis points on the downside. That's what's reflected in our full year guide. And we're working really hard to kind of stay consistent with that. It's not a natural output with all the work we've been doing across the portfolio with PPI. And then, you referenced our overall roadmap. We'll talk more about 2025 in December, but really the framework still holds. Everything we've been driving from a PPI standpoint, offsetting investments we're making in gross margin. On the SG&A side, same thing, investing or offsetting investments that we're making in wages, inflationary pressures, strategic investments. And it really comes down to the fixed cost leverage and our ability to grow top-line, but when we do that, we believe we stay consistent with that framework, and we can see the expansion.

Helpful. And then, just a quick follow-up. Did additional changes to incentive comp had a significant impact on second quarter and your back half outlook? In other words, is that something we have to kind of consider as we think about '25 earnings outlook?

Very consistent. The only thing from an incentive compensation standpoint is what I referred to with the noise in Q4 on the $140 million discretionary payout in Q4, but largely consistent there. Nothing that would need to change or be factored in.

Great. Thanks a lot, guys.

Our next questions are from the line of Kate McShane with Goldman Sachs. Please proceed with your questions.

Hi, good morning. Thanks for taking our question. We were wondering if you could speak to how you're managing your inventory levels. I know inventory was down on a dollar basis in the quarter, but how are you thinking about inventory in the context of maybe a slightly more cautious demand environment in the second half as well as possibly having to manage a higher ocean freight environment?

Yeah, Kate, really pleased with the ability of the team to manage inventory. We continue to manage it with the sales trends that we're seeing, as inventory declined faster than sales, inventories down 3.3% year-over-year. We remain focused on making the investments in Pro depth and brands to support and accelerate the Pro growth that we've talked about. We feel like we're in a great position on in-stock levels. And then, from a seasonal inventory standpoint, also in a good spot as we've managed the seasonal bias to the trends we're seeing. And I think you also mentioned freight rates. From a transportation standpoint, we continue to see lower transportation costs as we've leveraged our sale to drive the lower rates that we've seen with our carriers, mostly insulated from that because we have contract pricing. And we see those favorable rates kind of extending through the first part of 2025. So, we expect the favorability that we've seen in Q2 to kind of extend through the remainder of the year, and that's baked in our gross margin guide.

And Kate, this is Marvin. One thing we don't talk a lot about is how we've converted our regional distribution centers to be more of a flow-through of product versus stocking a product. If you go back to six years ago, these RDCs were basically the traditional hub-and-spoke distribution centers that basically held and stored inventory and replenished stores. And that really put a lot of pressure on turns and overall inventory position. But over the years, the team has converted that to being majority flow. So, we're just becoming more of a cross-dock type of environment, and we have a very small percent of the inventory being stocked. That will continue to evolve over time. And as Brandon noted, we continue to make investments and finalize our build-out of our market delivery. That also puts us in a great position to continue to be the industry leader in appliances without having to hold that inventory the way we did years ago in the back of every store. So, there are cost of things that we're working on that's going to give us the ability to improve our insight position, but also improve our turns at the same time.

Thank you.

Our next question is from the line of Robby Ohmes with Bank of America. Please proceed with your questions.

Thanks for taking my question. Really just two quick questions. Just on the back half and just going forward from here, the PPI initiatives have been amazing on the expense side. How much room is left? At what point do you get to diminishing returns on that in terms of managing expenses? And when we look at the back half, is it really more incentive comp and bonus comparisons that support SG&A being lower than it might otherwise be versus PPI initiatives?

Robby, this is Brandon. So, you mentioned PPI, we're really proud of the progress that we've made with PPI and broader expense management. We're offsetting over $500 million in associate wages, inflationary pressures and strategic investments that we're making here. In 2024, the roadmap covers all aspects of the company stores, merchandising, supply chain, technology, our back-office expense infrastructure. You heard Joe and Bill kind of reference a number of things going on there. And I would say we have great alignment across the organization to continue to maintain that discipline. And as Joe mentioned, increasingly able to enhance our customer experience while also driving productivity with tech-driven solutions. So, I'll toss to Marvin. Anything else you want to add there?

Yeah. I'm going to just let Joe and Bill talk a little bit about PPI. To Brandon's point, I mean, we are incredibly pleased with the progress that we've made. Initially, our productivity improvement initiatives were focused almost exclusively on store operations. And now, we've created a culture where every functional area is driving their own PPI initiatives to not only drive improvements in the business and productivity, but also just driving overall efficiencies. So, I'm going to let Joe talk a bit about operations, and then Bill will talk about merchandising and what we're going to be seeing not only in the back half of the year, but going forward. So, Joe, we'll start with you.

Robby, thanks for the question. And while we've made a lot of progress, we're only in the middle innings of the productivity journey, a lot of runway still in front of us. I've talked about things in the past, front-end transformation. We're not even 50% through our front-end transformation. This is not only focused on the operations side, but also the sales side. And so, we worked hand-in-hand. Things like our activity-based labor model that we continue to invest in, we've continued to refine the advanced labor management tools that we're using today. And also, the MST program that has added 30,000-plus associates to the sales force. And so, as the teams continue to work together, we continue to see a lot of runway ahead, streamlining the back-end processes are still in front of us and a lot more to go. And so, I'll toss it over to Bill for...

Yeah. Thanks, Joe. Robby, on the merch side, I hit a couple of them in my prepared remarks. We're working on costs with suppliers as an ongoing process, and the merchants do that on a daily basis through product line reviews, business reviews. But assortment productivity is part of what we do on a weekly basis and making sure that we've got the right stuff in the stores and online. I hit on retail media network, that's part of what we're doing as well, making sure that working with our vendor partners to look at different options in regards to how we put marketing strategies together, our private brand work that we've been doing over the last six years to focus on opportunities of where we can put private brands into our assortments. Those opportunities to put those products into our assortment typically come with a higher margin. And so, that offers that opportunity to put a better performing product in the assortment. So, those are just a few examples on the merch side.

That sounds great. Thanks so much guys.

Thanks, Robby.

Our next question is from the line of David Bellinger with Mizuho Securities. Please proceed with your questions.

Hey, good morning. Thanks for taking the question. So again, good continued progress on the Pro, up mid-single digits. What's the next iteration for your Pro customer? Are there additional levers we can see take shape, maybe more brands, loyalty, working upstream with somewhat larger Pros? And does Lowe's do anything today in terms of trade credit with the Pro customer base?

Hey, David, thank you for the question. I think, first, if we could take a step back and think about what we've done thus far, and one of the things that we identified from the very beginning of this transformation was the fact that we needed a very consistent and coherent approach to how we serve the core customer. And really it started with service levels in the store because regardless of what level of fulfillment and fulfillment capabilities you have in home improvement, your stores will still be an incredibly important part of the fill-in project nature need for the Pro customer. And so, our service levels were subpar at best. And so, Joe and team have done an incredible job of elevating those standards. And then, we had to get our product assortment right. We had customers who no longer shopped with us because there were brands that they were loyal to that literally had stopped selling to Lowe's. And so, Bill and his team has done an equally incredible job of bringing those brands back to us. Bill noted in his prepared comments just the success of our relationship with Klein Tools. And Klein was one of those customers that when we arrived was no longer doing business with Lowe's. And it remains the number one brand for electrical and HVAC Pros. And then, we have to get committed to our inventory levels. We talk a lot about job lot quantities, but we had to do that in a way that we gave Pros confidence and also in a way that we would not leave our stores vulnerable for large purchases that we could replenish quickly. And so, after we established those foundational things, we knew that the next step was creating stickiness where you would give…

Thanks, Marvin. That's very helpful. And then, I also want to ask on the rural store performance. I'm not sure if you called that out in the prepared remarks. Just any change in trend there? And then secondly, there's been some mention of faster delivery times, one-day, two-day shipping to those markets from a major e-commerce player. How should we think about any potential impact for the more rural Lowe's store base, just given that development?

Well, the great thing about our gig network and the work that we've done online is that we're serving all customers and giving them ability to get same-day, next-day fulfillment across all of our partners. We feel really good about what's happening in our rural markets. They performed to our expectations. We are piloting a lot of unique and different initiatives in some of these stores. And you could argue that we're pressure testing some of these locations to see what works and what does not work. One thing I will tell you is that we're still very excited about what we're doing with our workwear initiative, specifically with Carhartt. We're excited with what we're seeing with our pet food and pet initiative overall, and what we're seeing with just the ATV and other activities our rural customers participate in. But we're pleased with our rural performance. We're pleased that we're able to take this digital gig platform and serve customers in both urban, suburban and rural areas. And we're just continuing to build on that. And we'll provide more context when we get together in December, but we think rural is going to be a significant part of our growth strategy.

Got it. Thank you very much.

Our next question is from the line of Zach Fadem with Wells Fargo. Please proceed with your questions.

Hey, good morning. If we assume the Fed starts easing in the next couple of months, what level of rate cut or rate level do you think is the right level to start stimulating demand in the category again? And is there anything in your history that would suggest a faster recovery one way or the other in Pro or DIY side?

Zach, this is Brandon. As it relates to the interest rate environment, so for us, it's difficult to know at what absolute interest rate level we're going to see our consumers fully engage or how long the demand will lag the actual rate cuts that we're seeing. We absolutely, as we sit here today, see pent-up demand in the business, but on the flip side, when we look at consumer sentiment, that continues to remain weak. We are hopeful that the lower rates, the drops that we're seeing, are going to have a dual impact of, one, relieving pressure on consumers, and then secondly, driving the existing home sales activity. But the reality is when we look at the lock-in effect, the majority of homeowners are still at 4%. Mortgage rates are less. So, even if we do see some level of decrease that we do believe there still may be a reluctance to engage. So, we're staying close to it beyond the rates. Marvin reiterated the primary drivers of our business, and that's been consistent. So, we're balancing rate activity with some broader recovery that we see across some of these other metrics that we track very closely.

Got it. And -- thanks, Brandon. And I don't want to front-run the Analyst Day too much, but you have talked about a long-term margin for this business of about 14.5%. Given where we are today and the changes that have occurred since you first provided that outlook, curious if it's still the right way to think about the business long term. And what level of top-line and near-term recovery do you think we need to see to reach that level?

Yeah. We'll hold off on getting too much into that detail. I think the punchline, Zach, is the framework still holds. It is -- as we look relative to what we talked about in December of '22, I think the degree of step back now that we've seen in '23 and now that what we're seeing in '24 is a little bit worse than our original expectations. But we're not going to call the turn or the inflection point. We do believe there's a lot of pent-up demand. We do have a lot of confidence in the medium- to long-term drivers. When we do get back to kind of that mid-single-digit recovery in comp that we've traditionally seen in home improvement, we believe we can outpace that with the initiatives that we have in place. And the degree and the timing of the expansion on operating margin, again, is going to be contingent on the pace in which that top-line recovers.

Got it. Thanks for the time.

Yeah. Rob, we have time for one more question.

Yes, sir. Our final question comes from Brian Nagel with Oppenheimer.

Hi, good morning. Thanks for taking my question. So my first question, I guess a bit of a follow-up to that -- the prior question was on rate. So, I'm going to go to a different direction. I mean, look, I think you as an operator, we as investors, are waiting for a more accommodative rate environment to underpin better demand within home improvement. So, the question is, as you look at your business, we've seen this malaise continuing to take hold, maybe even intensify over the past several quarters. Where are the incremental risks? Where could the business actually get weaker here before we get that rate relief, if you will?

Brian, this is Brandon. Look, mortgage rates, obviously, coming down. We expect that to continue to come down further as we turn into '25, but we look at consumer sentiment, existing home sales, housing affordability, those are still concerns. We continue to see pressure there. Consumers are still showing a preference for services versus goods, especially in home improvement. An improvement in these macro trends, we should see and drive sustained increase in discretionary projects in DIY traffic. So, particularly, in the bigger-ticket categories, which is what we're watching for, that's the inflection that we expect. But in terms of the timing and our ability to call that, that's what's unclear to us at this point.

So Brian, this is Marvin. I'll take another angle at your question. And so for us, obviously, we don't have a crystal ball to call the inflection when that will happen nor to Brandon's earlier comments, can we pinpoint what rate environment we have to be in before it starts to positively inflect this DIY discretionary pullback for big ticket. But what we're trying to do is in this headwind environment that we're in is just continuing to leverage our great balance sheet, to invest in technology and innovation, to make sure we continue to execute our Total Home strategy, which is allowing us to pick up share in Pro, improve our online business, continue to build out a technology platform for our home installation business, which was incredibly neglected from a technology standpoint for many, many years, because we know that when the inflection happens and the DIY return, we want to be perfectly positioned to really take share, not just in DIY, but also across all the other elements that I talked about. So, rather than sitting back and waiting, we're aggressively working in this downturn leveraging our balance sheet to do these aggressive investments and position ourselves. So, when it happens, whenever the macro inflection occurs, we just want to be ready to take advantage of it, and we think we will be. And so, we're just fortunate that we have the ability to continue to be aggressive in all of those areas and just preparing for the eventual time when the market will open back up again, and we're going to be prepared when it does.

That's very helpful. I appreciate it. And my quick follow-up, I guess this is more for you, Brandon, but just with respect to the commentary around Q3, so the comps in Q2 were down, call it, 5%. You talked about a 200 basis point improvement. So -- and I think in response to someone else's question, you said you're basically [right there now] (ph). So, does that mean the business is running at a negative 3%? Is that the math?

So look, I will rescue Brandon from that question and answer for him. We tend not to be that precise with current monthly trends. The best way for me and us to answer that question, Brian, and I appreciate the question, is when we look at our current business trends, they are reflective of guidance we gave, understanding that our business will fluctuate throughout the quarter. And so, we're not going to give a specific comp percent other than to say we feel confident that our current trends reflect the guidance we gave. And I think that's probably the best efficient way to ask it.

Appreciate it. Thanks, Marvin. Thank you.

No, thanks for the question.

Thank you all for joining us today. We look forward to speaking with you on our third quarter earnings call in November.

This concludes the Lowe's second quarter 2024 earnings call. You may now disconnect.