Good morning, everyone, and welcome to Lowe's Companies Fourth Quarter 2016 Earnings Conference Call. This call is being recorded. [Operator Instructions] Also, supplemental reference slides are available on Lowe's' Investor Relations website within the investor packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. During this call, management will be using certain non-GAAP financial measures. The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures. Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission. Hosting today's conference will be Mr. Robert Niblock, Chairman, President and Chief Executive Officer; Mr. Mike McDermott, Chief Customer Officer; and Mr. Bob Hull, Chief Financial Officer. Joining during the Q&A session will be Mr. Rick Damron, Chief Operating Officer; Mr. Richard Maltsbarger, Chief Development Officer and President, International; and Mr. Marshall Croom, incoming Chief Financial Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

Good morning, and thanks for your interest in Lowe's. I'm pleased that we delivered a strong quarter with comparable sales growth of 5.1%, exceeding our expectations. Our comp growth was driven by a 4% increase in comp average ticket and a 1.1% increase in comp transactions. Our U.S. business achieved 5.1% comp for the quarter, with positive comps in all 14 regions. During the quarter, we delivered positive comps in 12 of 13 product categories. We drove strong holiday performance with our winter wonderland experience as well as compelling offers in appliances and tools. A favorable macro backdrop, our strength in omnichannel retailing and our project expertise drove demand across the quarter, with interior category outperformance in kitchens, appliances and rough plumbing and electrical and outdoor strength in lawn and garden and lumber and building materials. Our emphasis on providing better omnichannel experiences positions us well for continued success, enabling us to better connect with customers and provide the advice and assistance they count on when completing their home improvement projects, whether they choose to connect in the store, online, in their home or through our contact centers. We continue to see strength in our Project Specialist Interiors program, with strong double-digit comp growth this quarter. And we posted 25% comp growth on Lowes.com, driven by robust growth in both transactions and ticket, following our website redesign in Q2. This is a testament to the growing strength of our omnichannel platform. Pro customer sales were robust, with another quarter of comp growth well above the company average. We're proud of our success with the Pro customer and continue to make investments to expand our capabilities to better serve this important customer. We also drove continued strong performance in international markets, with double-digit comps in Mexico and mid-single-digit comps in Canada…

Thanks, Robert, and good morning, everyone. As Robert shared with you, we delivered a strong quarter, with positive comps across all regions in 12 of 13 product categories, growth driven by both average ticket and transactions. We leveraged our omnichannel platform, project expertise, customer experience design capabilities and enhanced digital marketing to deliver strong holiday performance. Our winter wonderland experience provided an inspirational holiday showroom where customers could see everything from artificial trees and poinsettias to indoor and outdoor decorations, providing cohesive decorating solutions for the holidays. We connected our compelling in-store display with digital assets, leveraging Pinterest, Facebook, Instagram and YouTube as well as a seamless shopping experience on Lowes.com. In addition to evolving our holiday experience, we've also continued to innovate with our product assortment and exclusives such as our Disney light day. The customer response to our winter wonderland experience was strong, driving comp sales increase of 8%. We also drove strong comps through our holiday events, with Black Friday representing our largest sales day in company history, both in-store and online. We expanded our events, capitalizing on customer excitement for the season with compelling offers in tools, holiday decor and appliances. Throughout the quarter, we captured project demand, leveraging our in-store experiences, in-home selling program, strong value proposition, enhanced online selling tools and improved marketing speed from our digital capabilities, driving gains in multiple categories. We recorded above-average comps in appliances, lawn and garden, kitchens, lumber and building materials and rough plumbing and electrical. We saw broad-based strength in both indoor and outdoor projects. We drove high single-digit comps in appliances, leveraging our investments in customer experience both in-store and online. In-store, our appliance suites showcasing coordinated appliances allow customers to visualize how their appliance purchase will look in a refreshed or remodeled kitchen. Online, we…

Thanks, Mike, and good morning, everyone. Sales for the fourth quarter were $15.8 billion, an increase of 19.2%. Total customer transactions grew 15.1%, and total average ticket increased 3.6% to $69.58. The transaction growth was aided by both the 53rd week and RONA. The extra week in the period added roughly $950 million in sales, contributing 7.1% to sales growth. RONA sales were approximately $825 million or 6.2% of sales growth. Comp sales were 5.1%, driven by an average ticket increase of 4% and transaction growth of 1.1%. The comp sales calculation included 14 weeks this year versus the comparable 14-week period. Looking at monthly trends. Comps were 4.7% in November, 6.3% in December and 4.2% in January. We estimate that weather positively impacted comp sales in the quarter by approximately 100 basis points. The majority of this came from serving customers in storm-impacted areas in the aftermath of Hurricane Matthew and the flooding in Louisiana. Lastly, new stores drove 80 basis points of growth. For the year, total sales were $65 billion, an increase of 10.1%, driven by comp sales of 4.2%, RONA contributing 3.8%, the 53rd week adding 1.6% and new stores. Gross margin for the fourth quarter was 34.1% of sales, which decreased 25 basis points from Q4 last year. Gross margin was negatively impacted by RONA due to both purchase accounting adjustments and the mix of business. In the quarter, these items negatively impacted gross margin by 25 basis points. SG&A for the quarter was 23.99% of sales, which leveraged 455 basis points. In last year's fourth quarter, we recorded a $530 million noncash impairment charge associated with the decision to exit our Australian joint venture. This year-over-year comparison drove 403 basis points of expense leverage. In Q4 2016, we experienced 59 basis points of benefits…

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

A question for Bob Hull, and wish you well, Bob. Something I asked at the Investor Day, thinking about the flow-through for 2017, I think the guidance was somewhere around 25 basis points for every point of comp above 1. I think the question then is the same now, what's driving it? I think it applies slightly higher incremental margins than what the business has been delivering. And so what's changing? And any other color on that?

Thanks, Simeon. So as we look at the outlook for 2017, on an adjusted basis, we're looking at 50 basis points of EBIT expansion. I commented that the impact of the full year RONA results versus 7 months in 2016 pressures us by 15 to 20. So if you take the midpoint of that, call it, 67 basis points with a 3.5% comp, the flow-through per point of comp above 1 is about 27 basis points. So we feel good about that. As I indicated, we're expecting flattish gross margin for the year, with all of the increase coming from expense leverage.

Okay. And then my follow-up, more of a near-term question, and no secret that Feb and March are tough compares. Seems like the business has good momentum through January. I know you don't normally comment on it. Curious if you have any thoughts, and I don't think tax returns are normally a factor for the segment, so just curious on sort of what you're seeing currently in the business.

Yes. So Simeon, Q1's off to a great start. We're ahead of plan. We're really excited about 2017.

Your next question will come from the line of Peter Benedict with Robert Baird.

I had a question kind of around the marketing plans for '17. I mean, I'm not sure you'll divulge too much, but just remind us, I think, marketing was kind of an issue last year, at least during the middle part of the year. How are you planning it -- to do that differently as we look through '17? That's my first question.

Peter, this is Mike McDermott. Look, we're excited to welcome Jocelyn Wong to the expanded role of Chief Marketing Officer. She's going to have responsibilities in 2017 for customer experience design, content strategy and development, customer relationship management and advertising and media across all of our U.S. home improvement businesses. So we think we've got the right collection of areas to focus on, and I'm confident that she and the team will continue to enhance our efforts to drive a more integrated and omnichannel approach, recognizing that we have a number of touch points to leverage with our customers to drive traffic. So you'll see us be very focused on connecting with customers with more personalized messages, really tailored to meet their specific needs. And we'll continue to reach out and leverage the advances that we've made in our assortment and our offering with the Pro customer. So we've got a lot of activity going on in marketing. I feel very, very good about our new campaign, and the team's really poised for success in '17.

That's helpful. And then maybe one for Bob. The hurricane and the flooding impacts, do you expect that to continue, Bob, through 2017? Or so anything you need to call out on that front?

So Pete, we do expect some benefit in 2017. We do, however, expect that to wane as the year progresses, especially as we get closer to the activity in the second half of 2016.

Your next question will come from the line of Matt Fassler with Goldman Sachs.

Bob, Bob Hull, best of luck to you going forward. I know that at your analyst conference in December, you spoke about the effort to align costs, and that had followed a difficult third quarter on the expense line. I guess there have been 2 rounds of activity that we've essentially read about, one relating to some restructuring in the stores, a second more recently relating to some restructuring at headquarters. If you could just help frame some of that activity in the context of the plan that you set out in December, particularly with regard to how roles are changing in the stores and around the organization, how labor dollars are being reallocated and then how that flows into your financial outlook.

Yes. Matt, It's Robert Niblock. I'll start. Yes, as you're aware, we have announced some staffing changes over the last 30 days or so, both in the store and at the corporate office here. And as we see what's -- rapid shift that's changing in customer expectations and what they expect from retailers, our whole movement to be a customer-centric, omnichannel home improvement company, really dictating that we needed to allocate our resources differently so that we could better meet the needs of customers. It's something we have to continually do obviously to make sure we have our resources in the right places and -- so we can continue to meet their needs. From a store standpoint, yes, I think our new staffing model helps ensure us that we're optimally prepared for the upcoming spring selling season. The changes we've made in the store, we think, have really improved our leadership capabilities with an enhanced focus on training and really empowering our associates to deliver on an improved experience for the customers. We're really pleased with the receptivity we've seen and getting that done before -- ahead of the spring selling season. Here at the corporate office, the changes we just made at corporate headquarters are really designed to create more agile, efficient and customer-focused operating structure. We needed -- as we continue to migrate from being a single-channel retailer to an omnichannel home improvement company, we really need to step back and make sure that we have our resources aligned in the proper way so we can best take advantage of the opportunity that we see in front of us. And as we've talked for many quarters here, online, in-home, contact centers, those other things that are part of our omnichannel strategy are where we're seeing the highest growth. And we want to make sure we have our resources aligned behind that. So we're excited about it. It's always tough when you make those changes that impact people's lives, but I think it's the thing -- that it was the right thing to do to continue to move us forward and capitalize on the opportunity we see ahead of us.

Matt, related to the impact to our guidance provided at the analyst conference, they were incorporated in the outlook that we shared at that time.

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

Best of luck, Bob. It's been a pleasure all these years. Wanted to talk about the sort of outlook that you put out in December, specifically related to 2017. There's this big pause in the industry over the summer, but things have accelerated strongly. So 2 parts to the question. In retrospect, what do you think drove that pause? And then thinking about the -- what you were looking at when you put your Analyst Day outlook, did that affect your outlook? In other words, it doesn't appear like the -- it appears the backdrop has actually accelerated since then. So do you think that your outlook could prove conservative in that regard? I guess, better asked, did that summer pause actually impact how you put out forward guidance?

So Chris, we look at a number of factors, macroeconomic factors, our ongoing performance, input from vendor partners and other sources, trying to understand what's going on with the consumer, industry demand drivers, et cetera. So certainly, as we came out of the third quarter and saw trends in fourth quarter leading up to the December meeting, we're certainly aware of our performance, also mindful of actions we were taking to drive consumer demand, to drive productivity, et cetera. So what I would say as we talk about our outlook for the year is I feel really comfortable about our opportunity to hit the $4.64 for the year. It's going to happen differently than we planned it, but as far as getting the EPS, I think there's confidence with the team that, that figure's more than achievable.

So I guess it's not just from a top line perspective, that summer pause really impacted putting out the 3.5% comp guide.

No real impact, Chris.

Okay. And then one follow-up. Can you share with us -- I'm assuming you're going to report comparable weeks -- same-store sales for comparable weeks. Can you share with us what the comparable same-store sales would have been based on the week shift in 2016?

So our comparable sales calculation does use the comparable weeks. So week 53 of 2016 comped over week 1 of 2016, which is the comparable week for the period, which is consistent with how we've reported comps the prior 3 53-week years since I've been CFO.

Okay. So there's no -- we can look at what you reported as comps last year as the right comparable when we're putting our estimates together?

The 14-week period was compared against the comparable 14-week period. So yes, the comps as reported are what they are.

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

Bob, best of luck. Robert, I wanted to ask about the increasing focus on productivity. Your SG&A per foot stands around $70. There's obviously a lot of moving pieces in there. But what do you see as the optimal level of SG&A per square foot? Is there a way to size the aggregate opportunity from your productivity measures? And how do you harvest that opportunity on enhancing the culture to ensure that you have the necessary level of in-store execution?

Yes. Well, Michael, I don't think we really measure it that way. What I can tell you is that as we've gone through and looked at, as I said earlier, the evolution, as we've gone from a single-channel retailer to an omnichannel home improvement company, we certainly had made changes along the way as the way that we have reallocated the resources. But when you look at the continual shift that you see taking place in the customer and the way that they want to interact with us, you realize that we need to continue to evolve. So if you think about it, you're sitting back with an organizational structure today that has evolved over time, not the one that we would have designed from scratch if you were starting out as an omnichannel company. So as we continue to see that evolution, we said we really need to step back and say, okay, where do resources need to be allocated at the corporate office? We took out some spans and layers to make us a more agile, nimble organization from a corporate office standpoint so that hopefully, we can better respond to opportunities, better respond to the stores and our other channels after they've taken care of the customer on a daily basis and then also did some hard look at our management structure in the stores to say, how can we ensure that we're managed -- that we're organized in the right way to make sure that, from a leadership standpoint, we're leading people in a way that's going to provide a better experience. So it was really more driven -- from that standpoint, we look at productivity more as, how do we take dollars and reinvest them in the areas that will drive better performance? So yes, there's obviously -- through that process, there's a cost savings impact as well. But it's also, if we get them aligned appropriately, then we think we'll drive better performance, which leads to the productivity leap.

Okay. And my follow-up question is on the average comp ticket growth during the quarter of 400 basis points, driven by the 9% increase in the transactions above $500. Presumably, that was helped by the growth, the above-average growth in appliances and kitchen. Was there something from an execution standpoint that you did better that contributed to the growth? Or do you think that it was just growth from the marketplace?

So you're right. It was strength of our kitchen and appliance business in the quarter, Michael, that drove that. Also, the above-average Pro performance is a driver for growth in average ticket. Certainly, as we take a look at our own execution, we strive to do better every day as the items that Mike described in his comments were all items of focus for the quarter to allow us to take advantage of demand and serve customers.

Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

Robert Iannarone on for Scot. So just 2 quick ones. Given some of the volatility you guys have experienced over the -- in the top line over the course of the year, what gives you confidence in your comp outlook of 3.5% for the year? And have you seen any changes to trend in the Northeast specifically, I think, where Pro was a little bit weaker last quarter?

Yes, this is Robert. We did see a continued improvement in the North in our performance there. So I think, certainly, some of the actions that the team has taken to better resonate with the customer has certainly started to take traction. So we're pleased with the improvement in performance that we saw there. As we look at 2017, we look at -- if you look at whether it's the underlying macro fundamentals that are out there, still seeing a very healthy housing market, whether it's from a turnover standpoint, whether it's from an appreciation of standpoint on housing, incomes continuing to rise as we spoke about employment continuing to improve. All of those things, I think, set up home improvement to see -- to continue to gain shares as a percentage of share of wallet in 2017. We've seen that trend for the past few years. I think it sets us up well for this year. And then on top of that, we've actually -- behind or postelection, we've actually seen, from our Consumer Sentiment Survey, a really strong increase in homeowners' intention to invest in their home and start a project over the next 6 months, as we talk about. So if you look at just the underlying factors, some of the momentum that we saw coming out of our quarterly Consumer Sentiment Survey sets us up that -- we think that it sets us up well that a 3.5% comp should be achievable as we look out to 2017.

And just one follow-up. Can you guys give us any idea of what the productivity and cost savings are on more of a run rate basis from some of the recent changes you made last quarter and you've talked about incurring this quarter?

So as we talked about in addressing Matt's question, the productivity savings were contemplated in the model we put together at December Analyst Conference and consistent as the outlook today. What I would say is, if you think about prior EBIT expansion prior [indiscernible] to expectations, there is a component of gross margin in there. We've taken that out, and the entirety of the flow-through in EBIT expansion is driven by expense leverage. So it's embedded in our SG&A outlook for the year going forward.

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

First, congrats, Bob, and thanks for all the help over the years. And Marshall, welcome back to the jungle. That's the only way I can put it. So I have 2 questions. One is, what was commodity inflation in the fourth quarter? And if you look at your guidance for this year, what do you have factored in? Then I have a follow-up on Pro and ticket.

So in the fourth quarter, Greg, we actually had modest deflation. We had building material deflation of 25 basis points driven by roofing installation, which offset the, call it, 15 basis points of inflation in lumber. For 2017, there's only very modest inflation contemplated for the year.

Modest would be something less than 20 or 30 bps?

Less than 20.

Okay. And on ticket, I saw that the -- it was up 9% for the larger tickets. Could you help us understand a little bit more as to how much of that would have been, say, driven by appliances versus really building the Pro basket and driving Pro?

Greg, really don't have a de-composition of that 9% growth in front of me. It is all of the above, right? It is the strength of the performance of those categories, and it's the tactics we have been taking over the number of years to better serve Pro customers that are driving the 9% growth.

Great. I guess so to follow up on Pro, just do you have a credit penetration number for private-label cards?

The private-label card penetration was 28.7%, up about 20 basis points versus the same period last year.

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

Two things I'm curious on. One, the 35-store opens, I understand the emphasis and the opportunity with omnichannel. But the 35 number, can you just remind us what you're spending and the focus and the expected payback from that? And then secondly, would love to understand what you felt you did differently in appliances, which underperformed in 3Q and was a much stronger performer in 4Q.

I'll take the first part and let Mike address the second part. So as we think about the 35-store openings, that's roughly 9 U.S. big-box stores, 10 stores in Canada, a few in Mexico and 14 Orchard locations. So there are varying formats in varying geographies. As we think about the spend for new stores, that is roughly $400 million in 2017. As we think about return hurdles, we've got risk-adjusted return hurdles for all of our investments, including real estate. We do expect the portfolio of stores to more than exceed those hurdles going forward.

Eric, this is Mike McDermott. On the product side of appliances, obviously, the fourth quarter's a significantly promotional quarter. We made some adjustments in both our traditional and digital advertising approach to make sure that we were engaging customers in an exciting way. We continue to see benefit from our Lowes.com replatform that we did mid-2016. And certainly, our associates in the store are providing the right level of experience for our customers, have been great. Credible vendor partnerships, great values, innovative products and just incredible performance by our supply chain team to make sure that we were in stock in this critical season, really driving significantly positive performance in the laundry [ph] businesses as a result of some of those buys and the ability to move that inventory where it was needed.

Great. And then if I could just add one more, there was a reference earlier on incentive comp. I'm curious in terms of what happened with store-level incentive comp in 4Q and what the expectations in strategy is in that area moving forward.

So Eric, if you recall, we had fairly substantial deleverage in the fourth quarter of last year based on the strength of performance, which really impacted our annual accruals. So we had significant deleverage Q4 last year, which, as we planned 2016, that was expected. While we had really good performance this year, it didn't compare to what we saw last year. Therefore, the rate of change was less, giving rise to expense leverage in the incentive comp area Q4 '16. Going forward, we've got a variety of plans that incent the store management and store associates to serve customers every day to ensure we help meet their needs, omni needs, going forward. So no real change in how we're thinking about incenting the folks that are on the front lines, interfacing with our customers every day.

Our final question will come from the line of Keith Hughes with SunTrust.

Our question has already been answered. Thank you.

Thank you. Okay, thanks, and as always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our first quarter 2017 results on Wednesday, May 24. Thanks, and have a great day.

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