Good morning, everyone, and welcome to Lowe's Companies' Third Quarter 2019 Earnings Conference Call. This call is being recorded. [Operator Instructions] Also, supplemental reference materials 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 material 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. Marvin Ellison, President and Chief Executive Officer; Mr. Bill Boltz, Executive Vice President, Merchandising; Mr. Joe McFarland, Executive Vice President, Stores; and Mr. Dave Denton, Chief Financial Officer. I will now turn the program over to Mr. Ellison for opening remarks. Please go ahead, sir.

Good morning, everyone. For the quarter, total company comp sales grew 2.2%. Our U.S. home improvement comp was 3% despite low single-digit online growth and higher-than-expected lumber deflation. We saw consistent growth across the business, with all 3 U.S. divisions and all 15 U.S. geographic regions generating positive comps for the second consecutive quarter. These results reflect our continued progress on our transformation plan. 4 of our top 5 performing geographic regions were in the Western division, driven by strength in Pro, appliances, outdoor project category, improved in-stocks and customer service. And in addition to the West, geographic regions that outperformed the total company comp in the quarter were Nashville, Boston, Tampa and Houston. Commodity deflation exerted approximately 95 basis points of pressure on comp sales in the quarter. However, unit growth in impacted categories remained strong. Let me now take a moment and discuss what drove our success in Q3. Let's start with Pro. Our full focus on the pro continues to be a catalyst for our U.S. sales growth. And during the quarter, we continued to receive very positive customer feedback from pros experiencing firsthand what is new and different at Lowe's, and we're pleased with the pros' willingness to grow their business with us. Our Pro comps significantly outpaced DIY in the third quarter, and the pro customer is responding very positively to our investments in job-lot quantities, department supervisors and our improved in-store experience. The result of these investments in Pro not only delivered positive sales growth, they are also reflected in a 700 basis point improvement in our Pro customer service scores in the third quarter. Despite this early success, we're focused on the work ahead to better serve this very important customer. And later in the call, Joe will detail some of the strategic…

Thanks, Marvin, and good morning, everyone. We posted U.S. comparable sales growth of 3% in the third quarter as we continued to capitalize on robust customer demand, which drove strong traffic to our stores, along with improved in-store execution, which helped to convert that traffic into sales. We also had terrific execution over Labor Day, which drove record sales within our best-in-class appliance offering during the event. Turning to our merchandising department performance. We delivered above-average comps in appliances, decor, hardware, lawn and garden, millwork, paint, rough plumbing, electrical and tools. Lumber and building materials comps were positive but below the company average. Paint, which had been a serial underperformer for us, outperformed the company average again this quarter. As we continue to refine our paint business, we'll continue to work closely with our suppliers to introduce an improved Pro paint offering to better serve the repair/remodelers who need paint to complete a larger project, such as a kitchen or bathroom remodel. Previously, our decor department had performed below the company average for 12 of the last 13 quarters. However, in Q3, for the second consecutive quarter, decor performed above the company average with mid-single-digit comp growth led by strong double-digit comps in blinds and shades. Millwork is another merchandising department which had historically underperformed. In Q3, for the second consecutive quarter, millwork performed above the company average. Our improved comp performance in these departments is a clear indication that the implementation of our retail fundamentals is gaining traction. For the quarter, we also continued to drive strong comps in areas of historical strength for Lowe's. Tools led the merchandising department growth with a continued strong customer response to our CRAFTSMAN reset. We are proud to be the exclusive destination in the home center channel for this iconic brand, which…

Thanks, Bill, and good morning, everyone. Our initiatives to improve in-stock levels and provide a better customer service experience, along with our advances in serving the pro customer, contributed to our strong U.S. execution in the quarter. We continue to build upon the actions we've taken throughout the year to further improve associate engagement and simplify our store operations and saw compounding benefits from our work to date. Earlier this year, we deployed new mobile devices for our store associates called smartphones. The smartphone empowers our associates by giving them access to real-time data without having to step off the sales floor to access a terminal. Throughout the year, we've added functionality to the devices such as standard performance scorecards and the store walk application to drive a more efficient strategic store review process. These applications allow our store managers to optimize our store performance by evaluating productivity by department and by associate. In the third quarter, we continued to add new applications to our smart devices. During the quarter, we added a new pricing application that allows associates to update prices in the aisles and standardizes and simplifies the price update process such that any associate in our store can do it. The pricing application has already driven efficiencies of over 36,000 associate hours per week for the company. We'll complement this pricing application with new mobile printers, which will allow associates to print new price labels in the aisle, creating a complete mobile pricing solution. In this test, the mobile printing process has driven an additional 2 hours of efficiency per store per day, which will equate to efficiency of over 24,000 associate hours per week for the company. We plan to roll out mobile printing to the company in the first quarter of 2020. Our smart devices…

Thank you, Joe, and good morning, everyone. Before I review the underlying operating performance of the business, let me briefly discuss the pretax charges taken during the quarter, and importantly, our go-forward expectations related to the Canadian business. As Marvin outlined, we are taking decisive actions to set our Canadian business up for both long-term growth and improved profitability. As part of our strategic review, we evaluated certain assets for impairment, which resulted in $53 million of noncash pretax charges in the third quarter. In the fourth quarter, we plan to substantially complete the closing of 34 stores, liquidating the inventory in those locations and rationalizing the inventory in our remaining Canadian locations to support our banner simplification strategy. As a result of these actions, we expect to incur additional pretax operating costs and charges of between $175 million to $225 million in Q4 related to the Canadian restructuring. These charges will consist of inventory liquidation, accelerated depreciation and amortization, severance and other costs. These anticipated Q4 financial impacts are reflected in our 2019 GAAP business outlook and are excluded from our 2019 adjusted business outlook. I'll now turn to a review of our ongoing capital allocation program. In the first 9 months of 2019, we generated approximately $3.2 billion in free cash flow. And through a combination of both dividends and share repurchases, we've returned over $4.8 billion to our shareholders. In the third quarter alone, we paid $428 million in dividends, and our dividend payout ratio currently stands at 36% over the trailing 4 quarters. In Q3, we entered into a $397 million accelerated share repurchase agreement, retiring approximately 3.6 million shares. We also repurchased an additional 4.1 million shares in the open market for $438 million. This brings our year-to-date share repurchases to $3.6 billion with a…

[Operator Instructions] Our first question comes from the line of Christopher Horvers with JPMorgan.

Can you talk about the gross margin? Obviously, some nice rate upside there. How much did the pricing pressures that you saw earlier in the year impact the third quarter gross margin? It doesn't seem like it did besides the tariffs. And then how are you thinking about Q4 for gross margin? I think previously, you said flat. And I think the big question that we get from investors is longer term, how do you think about getting back to that high 32%, maybe 33% rate, especially as you lap through the pricing pressures in '20?

Chris, this is Marvin. I'll take the first part, then I'll let Dave and Bill add any additional color to your additional questions. Look, we feel really good about margin improvement. We talk a lot about the issues that impacted Q1, and we went through a lot of detail after Q1, providing the steps we were taking to kind of recover margin and just to create better visibility and better processes. That's been a cross-functional effort, and we actually are pleased with the results, but there's a lot more work to do. One of the key things that we're going to be launching before the end of this year is a new price management system. This will be for the very first time at Lowe's to have a consolidated depository of one view of all things cost, retail pricing and the impact of those changes. And that's going to be something we're going to put in place later this year. So we feel good about the trajectory. But I'll just remind you, as we think about out-years and we think about operating income, our real focus is going to be around trying to keep margin relatively flat and creating SG&A benefit in the future. And that's going to be the driver of our operating income growth in out-years. I'll let Dave provide more color to that, and Bill, any additional insight as well.

Yes. I think, as Marvin indicated, obviously, it's been a team sport here of working between -- cross-functionally between finance and merchandising, making sure that, one, we understand the cost complement of the products that we're buying; two, that we're analyzing those effectively and kind of put -- and I'll say, working with our vendors to maximize the performance from either a value engineering perspective or from a cost complement perspective to drive our costs lower over time. Collectively, we've also been partnering with our vendors very aggressively to make sure that we can develop win-win scenarios that both drive the top line but also improve our margin performance in the near term. And then finally, I think one thing that's really come to life is, really, within the stores, we've made some very significant enhancements from a technology perspective at point of sale, which will allow us to be more effective in the promotions that we offer at point of sale, thus, improving our margin rate on those items.

Yes. I think, Dave, the only thing I would add to that is that in addition to that, I mentioned in my opening remarks around merchandising adjacencies and putting products together. The cross-merchandising program that Joe and I rolled out at the latter part of Q3 is now up and running in all of our stores. And that certainly helps, in addition to the promotional planning process that we put in place starting with Q2. That really puts more focused offers out there in front of the customer and less of these category-wide-type offers that we have run historically.

And so then as a follow-up, do you still expect, I think, gross margin rate flattish to the 31.5% last year? And then can you also talk about, on the e-commerce front, is that a transaction growth headwind? Because transactions did -- were up in the U.S., but it was sort of an easy compare. So any thoughts there as well.

Yes. So on the dot-com question, Chris, the short answer is yes. It did have a negative impact to overall transactions. We were very transparent last quarter that we have this business under repair. The good news is we have a very talented, very experienced team that have solved these problems before. It just takes time and sequencing. But in the short run, it did put some pressure on our transactions. We feel really good about our performance in our U.S. stores. And as I've noted in my prepared comments, I mean, we drove a 3% U.S. comp with no benefit from dot-com. If you just take a 15% to 20% dot-com growth for us, that puts that comp number north of 4% in the U.S. So we noted that benefit is coming in the future. But in the short run, we're going to kind of muscle through it. But we have a really good road map and a good plan in place, and we think that we'll be able to get this business growing again in the second half of next year. I'll let Dave talk about the margin rate.

Yes. And Chris, obviously, our objective is to recover from our gross margin downdraft in Q1. And I think we're making really nice progress against that. It's not our expectation that we could fully recover that here in 2019, but it's our expectation over the longer term to recover that downdraft that we experienced in Q1 and get back to a more stable environment in the long term.

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

So you're modeling sequential improvement in the comps in the fourth quarter. Can you discuss the puts and the takes into that forecast? And then related, the EPS, it's a little bit below -- the implied is a little below The Street. Can you clarify, is that the incremental store investment? And how does it compare to some of the underlying results of the business for the fourth quarter?

So Simeon, this is Marvin. I'll take the question regarding Q4. So as we've said, I mean, we feel really good about the overall business trends in the U.S. We feel great about our internal execution. Dave talked about the macro backdrop is solid. We look at discretionary purchases, things like average ticket above $500 was over 4% growth for us in the quarter. Consumer project demand is strong and there's excitement relative to the holiday season. So what I'm going to do is let Bill just provide a couple of key highlights on the merchandising side that gives us confidence in Q4. I'll let Joe also cover a couple of things in the store that also provides us with a degree of confidence we're going to be able to achieve our targeted sales number. Bill?

Yes. I think the piece for us for Q4 is the team has now had a full year to plan for Q4. So we've demonstrated throughout the entire year categories that have changed their trajectory from where they were a year ago, being able to plan for trim-a-tree and to be able to plan for the gift center and to be able to plan for these Pro deals that we've put out there for Black November, are all different from what we did a year ago. And we're seeing that pay off as it relates to change in direction in some of these key Pro-related businesses as well as DIY business.

Right. And then from a store standpoint, we're really excited about what's happening with -- inside of our Pro business as we continue into Q4. We're excited about the Pro loyalty launch we have [ coming ]. We're excited that as we continue to invite our pro customers in, that we're enjoying more share of their wallet, improved store execution, store layout. And I think we feel really confident in what we're doing for Q4.

Yes. And then, Simeon, just from a guide perspective, let me just kind of step back and just walk you -- what we've done. We've essentially taken the bottom of the range up $0.13 and the midpoint up $0.07 from a year perspective. Keep in mind that, that includes $0.02 to $0.03 that we're investing in Q4 to improve our performance from a long-term perspective. I think this is a really constructive investment that we're making that we identified late in the quarter, that we're incrementally investing in our store environment, both for the long term, but at the same time, managing the near-term financial objectives that we have as a company.

Okay. My follow-up is for Marvin. You've been in the seat now for over a year. Some ups, some downs. It seems like the skeletons should be out of the closet by now. You still have a few things, executing in stores, labor scheduling. It sounds like there's new Pro systems. So is that a fair statement? And did anything in your mind change about the potential margin upside? How do you think about it and the pace of margin over the next few years?

No. Look, I think when I look back at our initial assessment of the business, I would say the only thing that we probably underestimated the level of complexity was the e-commerce business. When we did our analyst and investor conference last December, we did not have our new online president onboard. So although we've spent a lot of time dissecting the business across multiple channels, the e-commerce business was still a little bit of a mystery for us, and that mystery unveiled itself during the holiday season when we had all the issues. And we've been digging ever since then. So there's been ups and downs, but we were very clear that this is a transformation. I mean we didn't make any bones about the fact that this is a company that had great potential, but it had been underinvestment in supply chain, IT and also leadership development. So if I had to take a snapshot of how I feel about where we are, I think we are right on track where we hope to be. And that is taking into account there have been a lot of uncertainties in the marketplace. Like tariffs is one that we did not anticipate that we've been managing as best we can. Overall, I feel great. I think that we have identified most of the "surprises" because we spent a lot of time really digging deep into the areas of the business that carry the most financial risk and the most financial benefit. And we feel like we've got a really good plan heading into the fourth quarter and 2020.

Our next question comes from the line of Karen Short with Barclays.

I was actually wondering if you could give a little bit more color on how the dot-com business impacted the U.S. comp. And then, I guess, looking to Q4, wondering if you could give a little color on how the total comp will be impacted by Canada because, obviously, these closed stores will be less -- you won't even have that headwind on the U.S. comp versus the total comp. So any color on both those would be great.

So look, I'll take -- Karen, I'll take the dot-com question. I'll let Dave take Canada. So if you think about the impact of dot-com to our business, it was basically a neutral impact. We grew dot-com by 3% for the quarter. We grew U.S. sales by 3%. So there was really no benefit. I would argue that there's not a brick-and-mortar retailer in the U.S. that is our size that had such limited growth in the dot-com business. Most U.S. retailers that announced their comp growth for the quarter, typically, will have a dot-com number that starts with a 20% growth, which is typical in this day and age. We're not there yet, but we know how to get there. And we're trying to take the right steps to fix the root cause of the issue. It's not difficult to grow dot-com sales. It's difficult to do it correctly, meaning -- and make money. And so rather than having a bunch of nonproductive promotions and other couponing events, we shut that down. And we basically said, how do we structure this business in the right way. We have a really good road map in place. I wanted to be really transparent in my prepared comments just to highlight some of the fundamental things we currently don't have in place that we will have in place in the second half of next year. But I see that as a glass half full. Again, our store productivity is strong. Anytime you can deliver 3% comp off the total benefit of your brick-and-mortar stores in this day and age is a very positive sign. But getting our dot-com and our omnichannel business going is a huge priority, and we think we can get that going as we enter into 2020. Now I'll let Dave talk about Canada.

Yes. Karen, as it relates to stores that will be closed in Canada, they will be considered non-comp. So they will not affect the comp cadence for Q4 for the company. And then I also just want to clarify. As you look at Q3, the $53 million noncash charge that we took is exclusively within SG&A within our GAAP numbers.

Okay. And then just a follow-up. In terms of other initiatives as we look to 2020, obviously, you talked about the price management system in 4Q. But can you give us an update on some other big initiatives that we should be watching for in early 2020? I think the POS upgrade is still going to be happening. But just so that we can track anything that may -- we may need to be on the outlook for if there are any risks on execution.

Yes. So let me -- I'll talk about one, and I'll let Joe give you some thoughts on some really exciting initiatives in Pro. And I know Bill has a couple of really nice merchandising initiatives we're excited about. But when we think about our supply chain transformation, I mentioned in my comments that we have a $1.7 billion investment over 5 years we're committing to supply chain. And that is to totally transform our supply chain from a distribution network designed to get product from suppliers to stores, from suppliers to distribution centers, et cetera, to be more of an omnichannel center that's going to allow us to go from store-based delivery to market-based delivery. We're opening 2 new bulk distribution centers this year and 3 cross-dock terminals, which is really the foundational steps to helping us to build out the supply chain transformation. This will be significant for us because it's going to take enormous pressure off the stores from being a hub for all things delivery, but it's also going to give us the ability to deliver to customers' homes and pro's job sites with the same efficiency that we deliver to a store. That is something we are going to be constantly rolling out throughout the year, and we're excited about that. And relative to the price management system. We'll get that system in place by the end of this year. But then next year, in the first half, we're going to integrate into that system, the Boomerang Retail Analytics will be combined with that price management system. That's going to give us, for the first time, machine learning and AI kind of functionality around pricing and around scraping so that we can be a lot more dynamic. And the only other initiative I'll mention is that in the first half of next year, we should be fully on Google Cloud with our e-commerce platform. And again, we're moving from a decade-old platform to cloud, which is something that's going to give us much more agility. And I'll let Joe and Bill add any additional color.

Great. So we've talked a lot in the past about our Pro focus and really throughout all of 2019. We've really focused on the retail fundamentals, which we've talked about, things like Pro staffing, things like dedicated loaders, job-lot quantities, et cetera. And so we feel in 2019, we have largely made a great impact there. As we move forward into next year, we're really excited about, number one, for the Pro loyalty test that we launched in 3 markets in the third quarter. The pros' reaction to the Pro loyalty has really exceeded all expectations we've had for it. And we continue to listen to the pros. We continue to make adjustments. That's why we're in test mode. And we're excited that we'll fully roll out Pro loyalty nationwide in the first half of 2020. In addition, things like tool rental, we feel really good about testing the waters there. In the Pro business, that pro continues to give us more share of their wallet. And so really exciting in the pro space. I'll let Bill talk about some of the merchandising.

Yes. And just to close on the merchandising side, in addition to the cross-merchandising work that we're wrapping up and we wrapped up in Q3, we'll finish up at the end of Q4 in January, February and the [ wave-binding ] signage rollout in our stores, which allows the customer to navigate our stores easier. We'll also finish the refresh work that we started early last year, which will allow us to bring product categories and departments together to make it easier for the customer to shop and to give us the kind of holding power on our end caps and in our departments that we need, bringing product categories together. So really excited about all the work that the merchants have done to make our stores easier to shop.

Our next question comes from the line of Steve Forbes with Guggenheim Securities.

I wanted to focus on payroll leverage, right, given the commentary around the completion of the labor scheduling system rollout. So maybe just remind us, I guess, how that phased in throughout the year, right? How many regions were live, I guess, in the first half relative to the end of the third quarter? And then maybe discuss the expectations regarding payroll leverage in the fourth quarter and into 2020, right? Because I think it would seem to appear, right, there's sort of a chance or a potential, right, for payroll leverage to at least remain at the current run rate as we look out to 2020. So would just like to get your sort of thoughts and updates on that.

So Steve, this is Marvin. I'll kick it off, and then I'll let Joe provide some additional insight. I think as you look at the out-years, it's just a very basic philosophy. And what we're trying to do is we're trying to shift payroll from a task to service in the stores. Our first analysis when Joe arrived and started to look at the business is that we had a vast majority of our payroll in the store was doing something other than serving customers or driving sales. And so Joe's team built out a 3-year kind of project plan to shift that to be a more service-oriented store environment, and the way you do that is with technology. And so what you're going to see in the out-years is the investment in technology, a reduction in total hours but an addition of selling hours. And that's one of the reasons why Joe gave this really interesting statistic that in third quarter, we leveraged payroll, but we improved service across all categories: Pro, do-it-yourself customers in all types of surveys, internal and external. And that gives us really good comfortable feeling that the technology implementations are working and that we're putting the payroll in the right location. So that's the out-years. I'll let Joe kind of talk about what we've done so far this year.

Yes. I'll give you a quick snapshot just for the third quarter. And I mentioned some of things in my prepared remarks. As Marvin said, when we first arrived and evaluated the percent of payroll being spent on service versus task, it was completely inverted. So we've assembled a terrific team in our store operations group. We're ahead of schedule as far as moving the needle to more rebalance with customer-facing versus tasking. And so just in the third quarter alone, we talked about the new scheduling system. So I'll remind you, the first quarter of this year, we rolled out to one region, the customer-centric schedules to make sure we listened to the associates, validated the customers and to make sure that the changes we were making were beneficial. In the second quarter, we launched that to 3 additional regions across our Northern division, more seasonal. We wanted to kind of pressure test our spring and our hiring. And so in the third quarter, we have successfully rolled this out to every region. 100% of the stores in the U.S. are on customer-centric scheduling as of the first day of the fourth quarter. In addition, in the third quarter, we took action on things like our one-task team. We expanded the one-task team, centralizing tasks in just over 1,000 stores. In addition, we took action on things like our in-store assembler moving to third-party outsourcing, our janitor, our new pricing apps. So there's a laundry list of initiatives that we continue to execute against that, and at the end of the day, making sure that we're doing the things that the customers expect and notice and that the associates appreciate.

But maybe just a quick follow-up for Dave, right, modeling purposes here. If you can, right, provide a little more detail around the breakdown of that $175 million to $225 million of cost into the various buckets. I don't know if you can split it between gross margin and SG&A at least, or the 3 buckets that you mentioned.

Yes. Listen, I will come back at the end of the year and end of the quarter and give a detailed reconciliation of that so you'll be able to have that from a modeling perspective. Keep in mind that all of this was non-GAAP. But I would look at this as -- certainly within Q4, I would say, over 50% of those costs are due to inventory liquidation. And therefore, they would hit within the gross margin level versus the remainder kind of at the SG&A level. It's probably the best way to think about it.

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

I wanted to follow up on the cadence of the quarter and whether there were any seasonal elements to call out. Obviously, you were lapping hurricanes. I don't know if the extended season was a good guy and offset that. I also think there was a shift in the start of Black Friday. So anything you would call out there, and in general, how you feel about exiting the quarter?

Yes. This is Dave. Yes. Listen, we feel very solid about our plans for Q4 from a sales perspective. There was a little bit of, I guess, weather benefit as we cycled into Q3, probably in the neighborhood of 50 basis points. We also did run Black Friday week one week earlier. So that had a very nominal, probably 10 basis point impact on us. So as you cycle into Q4, that would give you some confidence that as we cycle into Q4, the sales improvement, from a comparison perspective, looks pretty good.

Okay. And then just in terms of the restructuring in Canada. Can you just help us better understand what wasn't working there? And then if there's a way to quantify by the drag that Canada has had on margins this year or over the course of a 12-month period, just so we could sort of understand the opportunity into next year, I think that would be helpful.

Well, maybe I'll start. Just as you can well imagine, just given the performance that we've articulated over the first 3 quarters of this year, the Canadian business from a top line perspective has struggled. It's fair to also understand and model that it is performing from an operating profit perspective below the company average. So it certainly is dragging us down, and certainly dragging us down more if you were to include the charges. So even without the charges, our -- the performance is lower than the company average. With that, I'll turn it to Marvin.

Yes. So look, Seth, the only thing I will add is we have great associates in Canada. We just gave them a very complex business model that inhibited their ability to serve customers well. We're operating 5 banners, all with legacy systems, all with different back-end systems. And our initial integration process was wholly complex. It made it very difficult to create synergies from a marketing, merchandising, sourcing perspective and even in IT systems infrastructure. So part of what we're doing here, in addition to closing underperforming stores, is ensure that we are just simplifying the businesses model so we can give the customers a great experience and give our associates a more simplified operational process to manage. And we think the decisions that we announced today is going to put us in a really good position to do just that. So we look forward to coming back in our February call to provide some degree of color around 2020 and our expectation in Canada and how we think these restructuring actions that we announced today is going to really put us in a position for long-term growth.

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

I had 2 questions. I just wanted to follow up on the progress on gross margin. I understand it's improved sequentially from the first quarter. But Dave, I want to make sure I get the numbers right. If last year, the re-baselined gross margin was 32.9%, and this year, we're sort of down 40 or 50 bps on a like-for-like once you add back last year's inventory charge, are we thinking about that right?

Yes. So maybe I'll give you just kind of a few numbers to help you model this out. If you look at our gross margin performance, we're -- have improvements of about 150-some-odd basis points. We're overlapping the clearance event from last year, which gives kind of a tailwind, if you will, of about 170 basis points. We did have pressure from both tariff at 40 basis points, supply chain at 20 and shrink at 20. So if you think about it, we have a 90 basis point improvement just in gross margin rate. Then you add on top of that improvements from a product mix perspective.

Got it. That's super helpful. And then maybe just a follow-up on Canada a bit. If we think about the charges in total, the $250 million, what do you guys expect the payback for that to be? Do we get that back in terms of profit in the next 12 months? Does it take 3 years? How quick do these changes really take effect in the business?

Well, obviously, these changes are going to take effect pretty quickly. But the way we've modeled this is clearly over a multiple-year period, at which we looked at the cash flows of the business and the net present value of that. So obviously, this is a tough decision to make, but is the right decision to make economically, and we look at that over a multiyear period.

And last and just transitioning to the business a bit. I want to make sure I got the guidance right on the comp. Understanding that the Canadian stores come out of the comp. If I use the full year guide where it is, the fourth quarter comp should accelerate to about 4% -- or 3.5% or 4% to make up. Am I missing something there or that's the sort of trend that you're seeing so far into November?

No. Your math is correct.

And are we in November running at that kind of rate?

Listen, we are about to approach one of our biggest weeks in the year, quite frankly, as we enter into Black Friday. So it's probably a little too early to comment on the quarter. I will say that we feel very strong about the programs we have in place and the things that we're executing at store level to drive our performance.

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

So if we triangulate your progress in a couple of ways, one, looking at the U.S.-only stacks on a 2-, 3-, 4-year basis, they did decelerate from the second quarter to the third quarter. And if we look at the spread, U.S.-only business compared to your biggest competitor, it did reverse this quarter, recognizing that a big piece of that is the performance of the respective dot-com businesses. Why do you think on those measures the business did take a bit of a step back this quarter versus last quarter?

Michael, it's a fair question. My only answer is that we feel really good about our U.S. business. And to be quite honest, we don't spend a ton of time thinking about our performance versus -- our competitor versus our performance versus our internal expectations. And relative to our expectations, we were where we thought we should be based on business investments based over year-over-year overlaps. I mean, remember, Q3 last year was a really interesting quarter. We took a lot of actions around store closures, inventory liquidations. And so the year-over-year compares are really tricky. And so we appropriately planned the business for Q3 at a certain level. And in the U.S., we feel really good about exactly where we landed. And as we mentioned, we actually exceeded our expectations relative to operating income. So we feel good about the business. We feel good about our trends. And we have a repair plan to fix dot-com. We're not trying to rush a quick fix. We're going to fix it foundationally. And we think that's going to give us long-term growth potential, and we feel good about the steps we've taken to end the year strong as well.

And my follow-up, Marvin, is in the prepared remarks, there was a comment that customers will -- the pro customers' willingness to grow their business with us despite a noticeable increase in competitive promotion. So can you provide more detail on that? Who and where are you seeing those higher promotions from? And is there a case where as Lowe's becomes more successful and as Lowe's become -- makes more progress, the overall environment is just going to become more promotional, more competitive because of that success?

No. Look, I think we are very well prepared for a more competitive marketplace. The comments were specifically driven based on a -- one of our large competitors getting really aggressive discounting, large projects going through a bid-room process. This is invisible to the general public. But for large customers with purchases over a certain volume threshold, you can submit that for additional discount from a commodity pricing perspective. And there was more discounting in that area over a consistent period of time than I've seen in my 14 years in this business. It is neither here nor there. We just continue to compete. And we want to just run our strategy, which is something that we're going to continue to do. But we want to highlight that, that competitive cadence dramatically changed in Q3, and we're going to be prepared to see what happens in Q4.

Our final question comes from the line of Zack Fadem with Wells Fargo.

Could you talk about your Black Friday and Cyber Monday offering, specifically online? And just given the re-platforming on the site, should we expect a temporary acceleration in dot-com sales for the seasonal uptick in demand around the holiday? Or do you expect similar growth versus Q3?

So look, I'll give you some comments on dot-com. I'll let Bill just give you some of the really exciting deals we have. For dot-com, I mean, we had a pretty underwhelming performance last holiday season, and so we are expecting to have better performance within that holiday period, but that holiday period does not define the entire quarter. We don't have an expectation that we're going to see dramatic dot-com growth in Q4 relative to what we've seen in the last 2 quarters. However, we do expect to have more stability and better performance during the Black Friday period. The only caveat to that is we gave a lot of product away online last year. We're not going to give it away this year. We had a lot of site-wide promotions that didn't make any sense, didn't provide any value to the customers. Well, it gave a lot of value to the customers, no value to the shareholders and to the company from a profit perspective. So we're going to be appropriately aggressive online, but we're going to be aggressive with the standpoint of running a really good business model, but we're not expecting robust dot-com growth in Q4, no different than what we've seen in the last couple of quarters. And I'll let Bill highlight some of the exciting things we're going to be selling in the stores.

Yes. So we're super excited about what's going on for Black Friday. But as you know, it starts with really Black November, and so we're able to do a number of deals and special values out there for the pro that ran for Black November. We kicked off the appliance event for Black November. And then with the team having roughly a year to be able to plan this year's Black Friday, we've got just some super doorbusters for Black Friday day. We've got, as I said in my prepared remarks, a chance for lucky customers to win a trip to the Super Bowl. And so we've got just a lot of excitement that's going to drive folks to the Lowe's door on Friday. So we're excited about what we're doing.

Got it. And then on the repair and remodel overall environment, curious to hear your thoughts on the latest round of data points, particularly with existing home sales improving. And curious how you think about just overall category demand and whether you have any expectation of improvement as we enter 2020.

So look, Zack, we feel great about the macro. All of the macro indicators that are important for our business are pointed in the right direction: consumer confidence, unemployment is low, home prices continue to appreciate, wages continue to strengthen and interest rates have continued to be low to moderate. So we feel really positive about all the macro indicators. There's nothing on the horizon that gives us any pause. And so that goes to our confidence going into Q4, and we hope that when we provide our guidance for 2020, we'll have the same confidence looking in that time period as well.

We have reached the end of our question-and-answer session and the conclusion of today's call. Thank you for your participation. You may now disconnect your lines, and have a wonderful day.