Well, good morning. Thank you all for joining us. So, my name is Brian Nagel. I'm a senior equity research analyst here at Oppenheimer covering consumer growth and e-commerce. So, this is a continuation of our 26th annual Oppenheimer Consumer Growth and E-commerce Conference. And again, we very much appreciate you all tuning in this morning. So, I'm very pleased to have with us Lowe's and two of the company's senior executives, CEO Marvin Ellison and CFO Brandon Sink. Gentlemen, thank you for joining us.
Good to be with you, Brian.
We've done this event many years now. So again, I thank you for always representing well here at our conference. Thank you.
We're going to structure this as an informal fireside chat with me asking questions from the Lowe's team answering those questions. To the extent that there are questions from the audience, just send them through the chat. I'll be happy to work them into our conversation. So guys, I thought we'd start — there's obviously a lot to talk about specifically with Lowe's, but I thought we maybe just start given kind of the state of the world. Just your views on the consumer backdrop, what you're seeing out there, and how the consumer backdrop is impacting Lowe's at this point.
Yeah. So Brian, always great to be with you. I think from my perspective, we gave our guidance earlier this year. Nothing's really changed since our initial view of how we thought the year would play out. So the consumer is about where we thought they would be. Let me just kind of remind you of who our core customer is. A core customer is a homeowner with an average household income north of $100,000. They have gainful employment, they receive wage increases, they have record equity in their home, they have money in the bank. Overall we describe it as a consumer with a really strong personal balance sheet and this consumer is resilient. However, within that, sentiment remains low particularly when it comes to discretionary big ticket, and that is where we're seeing the hesitation in the consumer's ability or willingness to spend. The good news is, as I said earlier, this is a healthy consumer, but the broader macro is giving them a bit of hesitation. And as a reminder, our business is predominantly the do-it-yourself DIY customer. Even within this really difficult consumer sentiment based on the broader macro, we still feel really good about our ability to perform and take market share. As a reminder, we've had four consecutive quarters of positive comps. We've taken market share even in this really difficult housing market. I don't need to give you all the housing metrics. You know them as well as I do. For us, we're in that old simple adage of controlling what we control. We're focused on making sure that we're offering value, product, innovation, service. We're committed to doing all the things we need to do to make sure that the customer feels as though when they walk in our stores or they go online that they're getting a great environment that's going to serve them very specifically. And our mission statement is making sure that we're solving problems and fulfilling dreams for the home. We're really focused on that. We don't see any major deviation from what we thought we would see. Having said that, we're really encouraged because we believe that all the foundational things that we've done relative to supply chain, product innovation, service model, and all of those things, including the acquisitions we've made, is really going to set us up really well when the inflection happens in the housing market. We don't know when that's going to be. We know what has to happen. Right now we're focused on taking share in the short run but preparing this business to operate really well when that inflection happens.
So Marvin, as you think about the macro environment, I think I probably know the answer to this question, but is there a variable you're watching the most for that sort of macro unlock? Obviously rates, what impact that lower rates could have on the overall housing market, but then also gas prices — obviously a lot of volatility lately — but if we got some type of sustained moderation in gas prices, how much could that be a macro unlock for Lowe's?
No, look, it's a good question and it's a timely question. Specific for us, if you think about the consumer that I just described, gas prices alone does not prevent this consumer from shopping. But when you combine elevated gas prices and the strong visibility around overall gas prices, you combine that with the broader uncertainty in the macro, then that consumer becomes a bit cautious. And you've seen some of the consumer sentiment data from the University of Michigan. It's at some of the lowest levels they've ever measured. And I think that is a causality of all of those factors, gas prices and broader uncertainty in the macros. So when we take a step back, we believe that mortgage rates coming down is obviously the big macro unlock that we're looking for. None of us can call when that's going to happen, but we know all the indicators that's going to drive that mortgage decision down. It's going to be core inflation coming down, and for us, gas prices and having some level of decision on what's happening in the Middle East obviously will play a huge role into that. We think that when that starts to happen, with getting some clarity on what's going to happen relative to global oil prices and gas prices coming down, and then seeing some of the core inflation data starting to head in the right direction, then we believe that we're going to see hopefully mortgage rates start to follow. As recent as today, there's an article in the Wall Street Journal talking about the supply demand imbalance in housing and how you have certain geographic markets in the country that have been really difficult to build homes because of restrictions, how those restrictions are starting to loosen up because we're truly at a supply demand imbalance where something has to happen in the short run. There are some estimates up to five million homes needed just to meet current demand. Not to mention, analysts are basically forecasting that the number is closer to 12 million over the next five years of homes needed just to meet demand. So we believe that although the short run is challenging based on all the economic factors we've talked about, we're in an environment where we're going to see a gradual improvement in home improvement based on the improvement in housing. And the question we ask ourselves is: have we built a right-to-win strategy? Have we made the right investments? Have we made the right acquisitions that's going to position us to really take share and grow this business when that inflection starts to occur? And we think we've put ourselves in the right position. In the meantime, we're going to do what we've always done. We're going to control expenses. We're going to continue to invest in our business. We're going to continue to invest in our associates. We're going to continue to offer great value, innovation, and a great environment for our customers to shop. And we think if we do that, we'll continue to take market share, run this business well, and we're going to keep our fingers crossed that we're going to see brighter days ahead in the macro that we'll be able to take advantage of.
And Brian, I would just add, I'm really pleased with the ability of our team to kind of weather what I'll call multiple inflationary cycles over the last six plus years. So that's from Trump tariffs first administration 2018, we had the COVID supply chain shocks, we had the tariffs last year and now sort of maneuvering through fuel prices, geopolitical situation this year, able to continue to deliver results, expand margins. And I think for us, especially with this environment with a customer that's seeking out and responding to value, really leaning into offers, whether it's free shipping, whether it's free same day, a number of different things that we're doing to drive transactions and stay relevant. So we've been able to do all those things in multiple cycles and we'll continue to do that no matter what the macro scenario that's put in front of us.
That's very helpful. So Marvin, I want to focus more on Lowe's now and just say a little big picture. I've followed your company and your sector for a very long time now. You've been at the head of Lowe's for almost a decade now, and you've done a fantastic job of really repositioning the business. So the question I want to ask is: you look at what's been done under your tenure as CEO at Lowe's, maybe talk about some of the big wins there, but just as importantly, what's still — where's the opportunity still alive from your standpoint in the repositioning of the company?
No, it's a great question. Let me start with where we were in 2018 when I joined the company. I describe it simply as a company with a great balance sheet with a brand that had been tarnished because of just poor execution and decision-making relative to how we serve customers. As you think about the things that we've done — the redesigning of our IT infrastructure, and I'd argue right now with the leadership of our IT team that we have one of the most innovative and most effective IT infrastructures, AI implementation, and all of the elements of IT both store customer-facing and associate-facing of any retailer in the country. We redesigned our supply chain. We're able to totally update and innovate our product assortment. And most importantly, we addressed the service-related issues that really were impacting us. And we're just pleased when you look at all the recognition we've received, whether it's J.D. Power, whether it's Fortune, just recognizing the fact that the brand has recovered and that we are now viewed as one of the best operating retailers in the world. But when I think about the opportunity, the opportunity for us is greater in front of us than what's been behind us. Because as I've described, we're in the new industrial revolution with what's happening with AI and overall advancements in technology. And I think we can do a couple of things. Number one, we can continue to grow our omnichannel and our online business. We delivered a 15.5% comp in the past quarter and we think there's a lot more in front of us. And we're excited about the introduction of our marketplace, the first product marketplace of any home improvement retailer in the US. We're in the early stages, but what we're seeing is incredibly exciting. So we know that there's incredible upside there. We're really excited about all the innovation we're putting in place that's allowing our associates to operate more productively and giving our customers an easier place to shop. And that's primarily driven by technology. And I'll cite our AI agent and our AI companion tool, Milo. When customers use this AI assistant online, they're able to convert at triple the rate of customers that don't use it. When our associates use it in the store, we have 200 basis points of customer service improvement. We're getting roughly 2 million questions a month when you combine customers and associates. So this is an iterative system that's learning and we know the future is incredibly bright for us because we can make our associates more productive, we can take friction out for our customers, and we think that's just going to unlock incredible opportunities for us. We're excited about our pro strategy. We have made great progress. When I started back in 2018, our pro penetration was somewhere around 18%. Right now we're approaching 40%. And that is not including the acquisitions we've made with FBM and ADG. And when you think about the fact that we launched Pro Extended Aisle, which in essence opens up an incredible marketplace of suppliers, of value, price, and quantities to every single pro desk, we think the upside potential there is incredible. Not to mention the partnerships with ADG and FBM opens up a $250 billion total addressable market in residential construction where, as I said earlier, we think that the growth opportunity is still in front of us. And last but not least, I'm just really excited about our ability to be a positive contributor to our communities. We announced through our foundation that we're committing $250 million to create 250,000 skilled trades positions. We're at a critical juncture in this country with the need to have more skilled trades individuals, whether it's getting a plumber, an electrician, available to show up to your home, or whether it's the skilled trades needed to build out this data center infrastructure that we're going to need for the future technology. So I could go on and on, but I think Brian, we're doing two things now. We've created a business that can operate brick-and-mortar and digital to serve our small to medium pros and our DIY customers. In addition to that, we built out a business now that will give us the ability to have an interior solution — everything from drywall to flooring, cabinets, countertops, appliances, and so on and so forth for new construction, for multi and single family. We never had this opportunity in the history of this company and that growth potential has yet to materialize but we know it's out there. So those are the things that are yet to be done and we're excited about our future.
That's very helpful. So before we dive before we tackle some of the key points more individually, let me ask a bigger question. As investors watching this continued — I keep on using the word repositioning — but improving health of the Lowe's model, what are the key metrics we should be watching from here? If you take that all together, with the technology and other initiatives here, how should we be thinking about where the slack still is within the business model from a financial standpoint?
Yeah, so I think Brian, for us it's ongoing growth and the ability to take share. We're operating in a challenged environment. Our guidance suggested kind of flat home improvement this year. I think that's what we continue to see. We expect 100 basis points on top of that. And I think if you start to look even beyond 2026, that ability to take share in multiple environments — that's mainly what we're looking at. Brian, Marvin just cited growth that we're seeing within the pro. We continue to look at pro penetration. We're taking share in our retail box with small to medium. We've now opened up more diversified customer with the larger pro that we can access through the FBM and ADG model. So excited about a potential new revenue profit pool that we can generate there that'll create profit dollars and ongoing earnings. So those really are the numbers that I'm looking at. Brian, I think bottom line, we're going to continue to drive productivity. We've cited a billion dollars for 2026. That's split roughly half between margin and SG&A. We're well on track to achieve that this year. We're also managing some new pressure points as it relates to fuel. So we're trying to figure out how much we can accelerate there. Confident that we can deliver our margins. So really just looking forward beyond 2026, I think it's that revenue growth, the ability to take share, and the ability to deliver incremental margins even in a pressured macro that we have a lot of confidence in. And then if we can get some benefit from housing policy from the administration, whether it's pin-up demand from HELOCs, whether it's tax incentives, some of these near-term drivers for us that just creates incremental upside beyond what we're tracking and what we're expecting to deliver here in 2026.
So Marvin, on the pro business — you mentioned something already, but let's talk about how Lowe's is looking at that continued growth in the pro both within the store, how you serve pros there, but then maybe more importantly with these acquisitions you made, the ongoing development. Can you just talk about the ongoing development of the pro business for those?
Yeah, and I think that's the right way to describe it, Brian, is the ongoing development and evolution of it. Again, I'll just repeat what I said earlier. If you go back in time, we were roughly 18% penetration and we really didn't have a focus or a strategy. So the first thing we did is we decided that we're going to focus on the small to medium pro customer in our stores because we felt we could serve that customer well and that's a $250 billion total addressable market, just that segment of pro. So it's a very lucrative and very fragmented segment. Over the course of the past seven plus years, we've invested to improve our service model. We've invested in inventory to ensure that we have the quantities needed for pros to come in and feel confident they can buy what they need. We've been very focused on making sure we're price competitive in commodity type items. We had lots of work to do with our brands. The previous management team had walked away from national brands and pros, as you know, are very brand loyal. So we made investments. Today we are the largest seller of DeWalt product and DeWalt remains the number one power tool brand for pros. And we reintroduced brands like Klein Tools that are kind of the key brand for electricians and HVAC professionals. And we started to fix the fulfillment issues. We were very hit and miss and we made investments. We put technology in place. So those are the foundational things that we did. Those things have allowed us to take that penetration from about 18% — again, now we're approaching 40%. So then we took a step back and we said, okay, we can address the small to medium pro in the store, but how do we address the more plan span and the larger complex pro? So we're doing really two things. The first thing is I mentioned this Pro Extended Aisle, which is basically — think about it as a product marketplace for pros. We've added a number of suppliers. So if a customer comes in and they want to get a truckload of drywall or they want to get a truckload of electrical wire, the ability to do that now at the right quantity, price, and selection is all digital and we can do it seamlessly. And in most cases those suppliers not only will provide us product, they'll deliver to the job site. We're continuing to roll this out and we've been extremely pleased with the results we've seen. And then we decided to ask the question as we look at housing and we look at the shortages we've discussed in single family and multifamily housing and we know that there has to be a cycle of rebuilding to occur — we wanted to know how could we play a role in this. And we decided to make those acquisitions of ADG and FBM. And we did this in a very surgical way rather than going out and throwing out a big net and saying we're going to try to be all things to all segments of this plan pro span. We said let's focus on the interior of the space because we felt Lowe's could complement that well and we felt like the profit opportunity there is better for us. So when you think about ADG which does cabinets, countertops, and floors, and FBM that does drywall, steel framing, and insulation primarily — if you combine those capabilities and those product categories with what we do on the interior specifically in areas like appliances, fixtures, etc., we are now building a capability that we can have an interior solution for single and multifamily builders current and in the future. So that is the evolution. This opens us up not only to a $250 billion small to medium pro, now we have a $250 billion total addressable market in this interior space for single and multifamily that we've never had an opportunity to grow revenue. So we're excited about the future and we are excited about the continuing evolution. And I didn't mention the value of our loyalty program and how we're seeing incredible valuable learnings and stickiness from those pro customers engaged in our loyalty program. So again, the building blocks in place and now we're continuing to build on top of those foundational things.
Yeah. And Brian, I would just add as it relates to ADG and FBM, we know that residential construction's been pressured, but really pleased with kind of six plus months the momentum that we've had as it relates to the integration efforts. Extremely successful with driving out cost procurement with steel, with insulation, with drywall, and then Marvin mentioned just as it relates to the ADG model, the ability to start bundling appliances, introducing private brands. Stainmaster is an example in terms of what we can now offer through builders. And then as it relates to FBM, ability to give our larger pros access to the capabilities that FBM offers. And then on the flip side, starting to open up our host of complementary products to FBM customers. Making momentum on all of those fronts and sort of outpacing what we expected in terms of synergy realization here in year one. So really pleased with that.
