Good morning, everyone, and welcome to Lowe's Companies' First Quarter 2017 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. Marshall Croom, Chief Financial Officer. Joining during the Q&A session will be Mr. Rick Damron, Chief Operating Officer; and Mr. Richard Maltsbarger, Chief Development Officer and President, International. 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. This quarter, we delivered comparable sales growth of 1.9%, driven by a 3.5% increase in average ticket, partially offset by a 1.5% decline in transactions stemming from weaker outdoor performance. We posted positive comps in 8 of 11 product categories, with one -- while one category was flat. A solid macro backdrop, combined with our project expertise, drove above-average performance in indoor project categories across the appliances, kitchens and flooring categories. We also continue to advance our sales to Pros customers, driving outperformance in rough plumbing and electrical, lumber building materials and tools and hardware. We drove 27% comp growth on Lowes.com and above-average comps in in-home sales, demonstrating the continued strength of our omnichannel foundation. Our ability to connect to customers in our stores, online, through our contact centers or in their homes ensures that we provide solutions to customers across the most relevant moments of their project journey. We're pleased with the progress we've made to enhance our product and service offering for the Pro customer, delivering another quarter of comps well above the company average. And we continue to expand our capabilities to better serve this growing customer group. Last week, we announced that we've entered into a definitive agreement to acquire Maintenance Supply Headquarters, a leading distributor of maintenance, repair and operations, or MRO, products to the multifamily housing industry in the Southeast, South Central and West. This is an important step in our strategy to deepen and broaden our relationship with Pro customers and better serve their needs. When combined with our November 2016 acquisition of Central Wholesalers, a prominent MRO distributor in the Mid-Atlantic and Northeast, this acquisition will substantially expand our ability to serve the multifamily housing industry as both the primary and secondary…

Thanks, Robert, and good morning, everyone. In the first quarter, we achieved positive comps in 12 of 14 regions and posted positive comps in 8 of 11 product categories, while one category was flat. We delivered a comp of 1.9% on top of 7.3% last year despite softer performance in outdoor categories, which gave rise to a modest decline in transactions. As you know, Lowe's has built a very strong seasonal business over the years, with approximately 35% of Q1 and 40% of Q2 sales historically driven by outdoor categories. Given the tough comparison to Q1 last year, we designed a spring strategy intended to balance indoor and outdoor projects. However, as the quarter unfolded, we found we weighted our messaging too heavily towards indoor categories. We made the appropriate adjustments to our messaging mid-quarter and saw a corresponding improvement in April. As we look to capitalize on strong demand for indoor projects and customers' continued desire to invest in their homes with our project inspiration and expertise and targeted promotions, we drove above-average comps in interior categories such as appliances, kitchens and flooring. Once again, we achieved strong comps in appliances, leveraging our investments in customer experience, both in-store and online. In-store, our appliance suites allow customers to visualize how their appliance purchase will look in their refreshed or remodeled kitchen. Online, we've enhanced the customer experience and presentation to make it easy for customers to select their products. Our omnichannel customer experience, together with leading brands, breadth of assortment, competitive pricing, knowledgeable sales specialists as well as delivery and haul away service, continues to drive our performance in appliances. Kitchens also benefited from our omnichannel customer experience. In order to provide a holistic project solution to a simple kitchen refresh or a full remodel, we display our kitchen…

Thanks, Mike, and good morning, everyone. Sales for the first quarter were $16.9 billion, an increase of 10.7%. Total customer transactions increased 6.4%, and total average ticket increased 4% to $70.79. Our transaction growth was aided by the addition of RONA. RONA sales were approximately $630 million or 4.2% of sales growth. As a reminder, RONA is not included on our comp calculations until the second quarter of this year. As a result of the calendar shift from the 53rd week of fiscal 2016, this year's first quarter included 1 less week of winter and 1 more week of spring than last year. While this had no impact on comp sales, it did benefit first quarter total sales by approximately $500 million, contributing 3.6% to sales growth. Comp sales were 1.9%, driven by an average ticket increase of 3.5%, partially offset by a transaction decline of 1.5%. Looking at monthly trends. Comps were positive 3.8% in February, negative 1.2% in March and a positive 4.0% in April. Lastly, new stores drove 100 basis points of comp growth -- or total growth, excuse me. Gross margin for the first quarter was 34.4% of sales and, as Mike mentioned, decreased 64 basis points from the first quarter of last year. We had a combined 35 basis points of impact from product mix and RONA combined. The remainder of the decline was primarily the result of promotional activity to match the intensity of the marketplace; inflation, primarily driven by lumber; and pricing investments in key product categories. SG&A for the quarter was 22.99% of sales, which deleveraged 73 basis points. The deleverage was driven by the comparison to an unrealized gain in last year's first quarter when we recorded $160 million associated with the foreign currency hedge we entered into in advance of…

[Operator Instructions] Our first question will come from the line of Michael Lasser with UBS.

Is your decision to make price investments in response to something that you're seeing in the marketplace? Or is it more proactive in an effort to regain some of the share that seems like you might be losing today?

Michael, throughout the quarter -- this is Mike McDermott. Throughout the quarter, we saw an opportunity to improve our DIY value perception. We feel good about our competitiveness, our assortments, our brand portfolio and the innovation we're bringing to market. We've had to adjust our marketing to more frequently include lower price point values that are already in place throughout our product offering to drive increased traffic.

So it seems like you're maybe making some changes in response to the markets. Are you seeing pressure from more of your big-box competitors? Or is it coming from the online channel?

I think we're seeing significant opportunity in both DIY and Pro as home improvement continues to do very well. As it relates to the competitors, there are many -- as you know, many competitors in the marketplace, and we've got to face them all.

Okay. And my follow-up question is on the outlook for the year. So the first quarter fell short of where you thought it was going to be. You're going to be a little bit more price-competitive. So to still achieve your prior expectations, is it that sales will come in better than what you previously thought? Or you're going to find other ways to offset some of the cost pressure -- some of the margin pressure you might feel from the price investments?

It's really the latter. We're looking at geography shift with the gross margin pressure we experienced in the first quarter. We're going to experience pressure for the year in total, and we're anticipating roughly 20 basis points. But we do expect to be able to offset that on the SG&A line as we're going to get some visibility and traction through our productivity efforts.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

Maybe a question for Mike on the marketing. I think over the summer or maybe postmortem from looking at last year, you talked about a little too much marketing geared towards the millennial. And then this quarter, we heard maybe you were more indoor-oriented. And maybe this quarter was just a tactical change in how the seasons and sales were playing out. How do you feel about the marketing plan the rest of the year? And I'm sure you want to avoid these type of missteps, if you'd characterize them that. And how do you do that?

Yes. I'll tell you, we continue, Simeon, to optimize our media and improve our flexibility and responsiveness to the market opportunity and the weather, ultimately driving improved productivity as we spend on the spend and as we continue to drive traffic. We tried to toggle in and out of weather opportunities throughout the quarter and found that we suboptimized. Our objective, obviously, is to better connect with our customers through more personalized messaging tailored to their specific needs, and we continue to build capabilities to do that. We'll also continue to look for the most effective and efficient ways to drive traffic and build our brand across all of our assets. So that continues to be something that we fine-tune over time.

Okay. And my follow-up is on RONA. Can you talk about when -- I think you said after Q2 that it comes into the comp base. Is there -- what kind of comp lift should we assume and then the timing and magnitude of synergies as they flow through?

Simeon, this is Marshall. I'll address the RONA question. Basically, it will come in towards the tail end of the second quarter, then we'll be able to roll that into our comp numbers for the company. So -- and once we do that, we've already baked that into our guidance for the year.

And this is also Richard. To play off of what Marshall said there, as well as the comp guidance, all of the synergies that we have for the year have also been baked into the guidance that was provided for the year.

Your next question comes from the line of Dan Binder with Jefferies.

This is Dolph on for Dan. Around the outperformance of the Pro category, are you able to quantify how much pass-through Pro grew? Or how many bps above the average Pro category Pro sales grew?

This is Robert. I will say, overall, the -- as Mike alluded to in his comments, we have been investing heavily in the Pro recently, certainly, with the addition of things like Marshalltown, SharkBite more recently and A. O. Smith as well as the other initiatives we've had over the past few years, the launch of LowesForPros.com [indiscernible]. So I will just say that we saw significant growth in the Pro customer more than 2x our overall comp. And then we take -- and as I said in my comments and highlighted the acquisition of Maintenance Supply Headquarters, the definitive agreement, and we'll get that acquisition closed. Combining that with Central, I think it's just going to give us opportunity to continue to perpetuate the great momentum that we had with the Pro customer. So really pleased with what the team delivered in the first quarter and also really excited about the opportunity that lies ahead as we continue to deepen our relationship, particularly as -- with the opportunity we see in the MRO business.

Okay. And if I could just ask one last question. I think you mentioned some deleverage on some credit cost. Can you give us an idea of where credit -- Lowe's card penetration is now? And does the deleverage of this quarter have you rethinking any terms or standards for that card?

I'll just say that our credit card penetration for the private-label brand is roughly 28%. So we've seen that steadily grow over time. So when you look at the overall portfolio, just keep in mind that we are coming off of historically low delinquency rates and loss rates. So we're beginning to see a little bit of inflection there and believe that our portfolio is performing relatively well versus others in the marketplace but something we will keep an eye on. You have to be sensitive to how you adjust those terms for your customers because we do see those as sales driver and a tool that they will want. And the use of revolving credit, we see, is a strength to the consumer as they spend in 2017.

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

You all talked about in 4Q a big focus on productivity in the business. I'm curious, as you look at 1Q and as you look out through the balance of the year, what ranks kind of first on the emphasis in that area looking at this quarter with gross margin and SG&A in sales? I'm just curious what's at the top of the list when you think about productivity as you define it. What's the metric that you're most focused on achieving or improving?

As we talked about on the fourth quarter call and at our Analyst Day in December, we are increasing our operating discipline and our focus on productivity across the business to driving core strength and a core mindset. The big thing we want to make sure that we get across is this laser focus on productivity doesn't deflect or detract from our efforts to continue to drive our customer-centric omnichannel strategic initiatives. In fact, we see them as complementary. We believe this will continue to allow us to invest and grow in those key areas as the consumer continues to shift. In the quarter, we really focused on 2 key areas. First, that was the rollout and the change of our store stacking models, which was in place to help us drive improved leadership across the store, improved training and oversight to drive a better customer experience across the store. And we also changed our management complement here at the CSC to drive a leaner organization to become more nimble and drive more speed on decision-making. So we're very pleased with how both those initiatives are going and how the organization has responded to those actions. As we think broader about productivity, we're really focused on a few key areas as we continue to move forward, some that are strict productivity initiatives, others, which we believe will have consumer experience impact as well. First, expanding our production offices will continue to be a focus as we look to expand that into our southern division during the second half of the year, which really improves the communication of [indiscernible] business, drives it into our contact centers from a store model, improving our communication and efficiency and connectivity to the customer during that complex install process. We're also optimizing our freight load from the distribution centers, Mike spoke about that earlier, as we look to optimize lanes and flow as well as how we flow the product to the customer as this is the single biggest utilization of nonselling labor in the stores. So the teams are continuing to focus on how to get more effective and more efficient there. Third, we continue to tap alternate delivery options. We have centralized delivery tests ongoing in 4 markets currently, both small, medium and large, to understand how do we optimize our delivery networks more effectively, more efficiently. And then we'll continue to leverage our indirect sourcing opportunity across the enterprise to get stronger. So the core aspects of productivity, we think, will continue to drive the organization and help us deliver against our targets for the second half of the year. And we're pleased with the outcomes that's been implemented today.

I guess just one follow-up. When you talk about the outcomes -- and great job in leveraging payroll and leveraging SG&A. Is that the scoreboard you're focused on? How are you balancing that relative to growing sales and sales productivity and market share? How are you thinking about balancing those 2?

Yes. Eric, the big things that we look at when we're looking at it from a store standpoint is a holistic measures of success from efficiency of process through our customer service metrics. So we're measuring our close rate performances, we're measuring our customer satisfaction scores, I would say, are the 2 dominant drivers of our overall measurement of success. And they will continue to measure it against the anticipated benefits that we have around that. So we're pleased with what we saw across both those attributes in the quarter. As a matter of fact, we saw increases in our overall customer satisfaction scores compared to Q1 2016. So really proud of the way the teams and fields have rallied around this and responded and continue to work to meet the needs of our customers in and out every day.

And Eric, this is Marshall. I'll just pile on just real briefly. The -- you were looking for ways to drive sales productivity. So anything, the process and capabilities that we need to deliver to drive better sales productivity as long as keeping an eye on our expenses, eliminating waste in order to more effective ways and to utilize our spend. So I hope that helps. And if I could just inject one clarification. Just received a note that the lease adjusted debt-to-EBITDAR is 2.27x. I think I said 12.27x. The rating agencies are on the line. Don't want to get them too excited. But it's 2.27x, and we anticipate getting to 2.21 by the end of the year.

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

I just want to follow up on the sales performance in the quarter being a little bit lighter than you expected. Can you just clarify, do you think that was driven by some seasonal factors? Or was there more of a share loss component here, and that's why you're making some of the promotional changes?

Seth, I'll -- this is Rob Niblock. I'll start. As we look at the quarter, and as we indicated, there were certainly some weather challenges that impacted our seasonal performance. As you know, seasonal is a big category for us. We had strong comps that were going up against last year from a seasonal standpoint. So as Mike indicated, part of what was done with the heavy reliance on seasonal was to try and pursue some opportunity that we saw in indoor categories. As we toggled between those 2, we recognized that we probably had some opportunity to continue to improve our messaging around seasonal categories, value driving and traffic driving items. So Mike and his team started making those necessary adjustments. But when you look at -- for the -- when we look at the quarter, with -- as we look at it on balance, even with weather challenges, we were only slightly below our plan for the quarter. So all in all, considering weather, we ended up with a good performance against our plan. And as we said, we're making adjustments to continue to capitalize on the opportunity that we see in the market.

Got it. And then the regions and the categories that did underperform in the quarter, did you see signs of improvement late in the quarter in April? And if you could just give us a general sense of how you're feeling about May because it does seem like there's some confidence that the business is going to reaccelerate.

We did see the most significant pressure in our lawn and garden and seasonal and outdoor living businesses. From a lawn and garden perspective, we saw some inconsistent performance throughout the quarter really aligned with that weather that Robert just talked about, leading to a slightly negative comp. We weren't able to offset the underperformance in live goods with some of the positive performance in other areas in that division. But certainly, as weather has improved, we have seen improvement there as well as in our seasonal and outdoor living categories, particularly in patio. So as time moves on and weather stabilizes, we are seeing improvement in those categories.

From a geographical standpoint, we had negative comp performance in 2 regions, our Boston or our most Northeast region, primarily driven to the changes in weather from last year. We saw the biggest impact there. And then in our St. Louis region, which we saw with the significant flooding events that took place during the quarter. So both those regions, as Mike said, these -- the product categories have performed better. Those regions have also improved from a performance standpoint as well.

And this is Marshall. I'll just say that from March to April, we like that trajectory. So thus far in May, we're pleased with what we're seeing.

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

I want to dig a bit deeper into the promotional and pricing actions. If you could just reiterate, were these focused in seasonal, where you were seeing some of the challenges? Were they focused in some historically promotional categories like appliances? And where else might you have undertaken them? Or were they pretty much directly connected to some of the changes in marketing? Or should we think about these as 2 separate efforts?

Matt, this is Mike. I would tell you that some of the select pricing investments that we made were really tied to seasonal products, and we executed those mid-quarter. And we certainly saw some improvement, as I just mentioned. The other area of focus has been an investment in special order products, really, across our digital assortment, supporting our omnichannel to engage customers, both Pro and DIY, as they build out their projects and leverage our extended line design through our digital properties. So they are the areas of most significant focus in regard to those investments.

And just to think for a second about that seasonal business. You spoke about the weather, which, clearly, was an impediment. So was this an effort to try to overcome that impact? Or were you simply saying, "Hey, whatever it takes," whether or not -- or did you feel like there's more of a share issue in that category for you?

It was really designed to -- with the market adjustments we made to try and capitalize on seasonal traffic, recognizing that both in the first in the second quarter, seasonal traffic is a significant driver of the traffic that engages with the portfolio. So that's why we did it to really complement the marketing adjustment and revert on the traffic.

And to the extent that the full year gross margin outlook seems to be better than what you showed in Q1, presumably a little bit less of a drag from RONA as you cycle the acquisition, but would you expect some of those investments in pricing and promotion to subside?

Yes. For the remainder of the year, Matt, we expect to partially offset the impact of some of those promotions and pricing investments. We have cost improvements from our line review process as well as refining that promotional strategy and eliminating the less-effective promotions as the year unfolds as well as fine-tuning our pricing actions based on the results that we're seeing. As you know, we constantly adjust our approach to optimize gross margin, making sure we deliver value to our customers while balancing the traffic and tick the equation. So that process is managed daily, and we do think we'll see improvement.

Your next question comes from the line of Dennis McGill with Zelman & Associates.

Just to clarify a couple of those statements earlier. Can you specify which categories were negative in the quarter? And then also, any impact from Easter as you had estimated on the monthly comps margin in April?

Yes, I can talk to the categories with negative comp. They were the lawn and garden category and seasonal and outdoor living categories.

And on the Easter shift, Dennis, it was a negative 0.5% in March versus the 1.2% I stated earlier. And then it was 3.2% on an adjusted basis for the Easter shift in April versus the 4% that I highlighted earlier.

Okay. And then can you also clarify, when you talked about the Canadian pressure in the quarter, I think that was on the core business. But more broadly, can you just talk about what RONA is comping at today just to give us a sense on what that would -- how that it is impacting the comp when it does come in?

Dennis, this is Robert. As this comps, as you know, that we mentioned -- or as I mentioned in my comments, are for the legacy Lowe's business that we have in Canada. The RONA business that we acquired, as Marshall said, it won't roll into comps until late in the second quarter.

Yes, I understand it's not in the comp base, but can you give us a sense of what it is comping at today?

Go ahead, Rich.

So this is Richard Maltsbarger. The current RONA business is comping at the expectations that we had for Q1, with the exception very similar to what we're seeing in the U.S. to the pressures that Robert mentioned in his remarks regarding the unseasonable late spring snowfall that we experienced, especially across Québec.

And those expectations were consistent with the domestic business? Or plus or minus?

They're consistent with the domestic business.

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

So I wanted to get your thoughts. I've been asking some companies this. As you look at the business, do you think compares really matter from a same-store sales perspective as you think about the cadence of the quarters for the year? In other words, at this point in the cycle, outside of the weather variability that obviously shifts demand, is your comp trend, the comp trend? Or do you look at the next 2 quarters and think there were specific items that impacted the business last year that would suggest we should think more about comp stacks versus the overall trend in the industry?

Well, certainly, Chris, when we look at comps, as we said, first quarter of this year, we were going up against tougher compares from a year ago. And that's why I think we had previously indicated on our fourth quarter call that we expected the best comps in our second and third quarter of the year were rolling up against our weakest compares. If you take the combination of being up against the tougher compares, weather challenges and how they hit in the quarter, you make a good point that you have to kind of look and bring all those factors to bear when you look at the performance. And as we said, overall, when we look at the business in the first quarter even with the weather, we delivered sales that were just slightly below our plan. And with the actions that Mike and his team were taking, I think we have good line to being able to recover that top line as well as being able to continue to mitigate some of the margin impact we had for the first quarter when we get past the acquisition -- the anniversary of the RONA acquisition and those things.

Understood. And then 2 quick follow-ups. First, on Maintenance Supply Headquarters. Is that -- have you included that in the outlook? I know it hasn't closed quite yet, but is that included in the outlook? And if it's not, can -- or either way, can you give us some understanding on how that might impact gross margin and SG&A when it comes in? Will we see any impact at all? Or is it just too small relative to the total?

Yes. I would say, one, it's still a pending acquisition. We haven't received final regulatory approval for that. We did not bake that into our guidance.

And so once we get through the acquisition, then we would roll any impact that we see from that into our guidance the first time we update after the acquisition.

Okay. But you -- in the -- you mentioned that you do expect it will be accretive this year. Any indication on what it might be?

Yes. We do expect it to be slightly accretive this year.

Your final question will come from the line of Greg Melich with Evercore ISI.

I want to follow up on 2 things. One, housekeeping. What was inflation in the comp? I think you mentioned the gross margin, but not the comp.

Yes. We had about 50 basis point, again, primarily driven by a lumber in the first quarter.

Great. And then it sounds like -- don't want to put words in your mouth. The comp trend through the quarter, that 450 bps deceleration from February into March and then coming back in April, that, that change was entirely traffic-driven and the ticket was pretty steady. Is that a fair assumption?

Yes, it is.

Great. And then finally, maybe just to help frame it a little bit as we think about flow through the rest of the year. Credit profits, remind us, that shows up entirely in SG&A? Or does some of it show up in gross margin? And could you remind us roughly how much of SG&A is a profit share from the credit card?

Well, I will disclose that it does show up in SG&A, so the whole program, income and cost flow through below the margin line. But it is in our operating margin.

So the costs are in gross margin, but the profits or the lack thereof...

No, no, no. Greg, the entire program runs through our SG&A line.

And as always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our second quarter results on Wednesday, August 23. Have a great day.

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