Lowe’s Companies Inc (NYSE: LOW) Q1 2020 Earnings Call Transcript

Lowe’s Companies Inc (LOW) Q1 2020 earnings call dated May 20, 2020

Corporate Participants:

Kate Pearlman — Vice President of Investor Relations

Marvin R. Ellison — President and Chief Executive Officer

Joseph M. McFarland III — Executive Vice President, Stores

William P. Boltz — Executive Vice President, Merchandising

David M. Denton — Executive Vice President, Chief Financial Officer

Analysts:

Simeon Gutman — Morgan Stanley — Analyst

Michael Lasser — UBS — Analyst

Seth Sigman — Credit Suisse — Analyst

Greg Melich — Evercore ISI — Analyst

Eric Bosshard — Cleveland Research — Analyst

Kate McShane — Goldman Sachs — Analyst

Christopher Horvers — JPMorgan & Co. — Analyst

Presentation:

Operator

Good morning everyone and welcome to the Lowe’s Companies’ First Quarter 2020 Earnings Conference Call. My name is Michelle and I will be your operator for today’s call. As a reminder, this conference is being recorded.

I will now turn the call over to Kate Pearlman, Vice President of Investor Relations. Thank you. You may begin.

Kate Pearlman — Vice President of Investor Relations

Thank you, and good morning, everyone. Here with me today are Marvin Ellison, our President and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President Stores; and Dave Denton, our Executive Vice President and Chief Financial Officer.

I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on Lowe’s Investor Relations website. During this call, we will be making comments that are forward-looking, including our expectations for fiscal 2020. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the Risk Factors, MD&A and other sections of our Annual Report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP can be found in this morning’s press release and on our Investor Relations website.

With that, I’ll turn the call over to Marvin.

Marvin R. Ellison — President and Chief Executive Officer

Good morning, everyone. This is an unprecedented time as we all navigate the ongoing global economic social and health impacts of COVID-19. I’d like to start-out by extending my best wishes for the health and safety to you and to your family. Like most retailers, we began the first quarter focused on meeting our internal financial plan, while executing our Q1 retail strategy. However, due to the global health crisis caused by COVID-19, everything changed in late February. And we immediately pivoted by establishing a cross-functional COVID-19 task force, opening a company-wide Command Center and re-prioritizing our Q1 objective.

As a company, our focus shifted from running a business to achieve our financial plan to functioning as an essential retailer operating in a pandemic with three key priorities; first, creating a safe store environment for our associates and our customers; second, providing support for our community, including healthcare providers and first responders and third, financially, supporting our associates during this unprecedented time. As a result of these new priorities in the first quarter, we invested $340 million to support our associates, healthcare workers, first responders and community. In addition, we committed $50 million of charitable contribution for our communities to do our part in this time of need.

I’d like to begin by highlighting a few of the operational actions that we took in response to COVID-19. And later in the call, Joe will provide more details on these efforts. In early March, we shortened our store operating hours by closing three hours earlier, each day at 7:00 p.m, so we could increase third-party cleaning routines and restock shelves. During the hours that our stores were opened, we implemented several operational changes to ensure the safety of our associates and our customers. Including the garden centers, our stores averaged 144,000 square feet of space. To develop our social distancing safety procedures, our team took a strategic data-driven approach, tracking historical customer traffic patterns and identifying areas where customers tend to congregate.

Based on this analysis, we implemented additional safety and social distancing protocols in three distinct areas; point of sale checkout, outside garden and the paint desk. Our store team was so effective in implementing and executing the enhanced safety guidelines that our customer service scores improved 200 basis points year-over-year in the first quarter. This is truly an incredible accomplishment and a reflection of our commitment to customer service even in this unprecedented environment. Also to provide our valued associates with a much-deserved day off to spend with their families and their loved ones, we closed all stores and distribution centers on Easter Sunday. This decision negatively impacted sales and operating income, but it was absolutely the right thing to do for our associates.

We have a unique and a resilient business model that operates well when our communities need us most. While there’s a hurricane, flood, tornado or global health crisis, we are committed to being there for our customers. And I am pleased that over the past 18 months, we’ve established the agility to provide our customers with the essential products they need to keep their homes safe and functional and their businesses running. None of our success in the first quarter would have been possible without the outstanding commitment of our store associates working under unprecedented conditions. Our field leaders also distinguished themselves during the quarter. Division Presidents, Regional Vice Presidents, District Managers and Field Merchants abandoned their normal routines and spent time each week visiting stores to provide leadership support and guidance for our store managers and front-line leaders. As someone who started out their retail career as a $4.35 an hour part-time store associate, I understand the importance of seeing the leaders of the company out on the front-lines during the crisis.

Let me now turn to our first quarter results, which reflect the benefits of our retail fundamental strategy, the improvement in our overall execution and the strength of our home improvement business model. For the first quarter, we delivered strong sales growth with total company comp sales growing 11.2%. Our US home improvement comps was 12.3% due to strong demand from both DIY and pro customer. Overall demand strengthened as we moved through the quarter and net sales momentum has continued into the month of May. For the quarter, DIY comps slightly outpaced pro comp and the uptick in DIY demand was partly driven by the arrival of spring weather in many Western and Southern geographies, as well as a customer mindset that was heavily concentrated on the home.

We serve broad-based project activity, ranging from outdoor landscaping and other beautification projects to essential indoor, repair and maintenance work and long-deferred home projects to the to-do list that customers previously tackle given their busy schedule. Comp sales for pro were strong supported by our focus on retail fundamentals, including job lot quantities, more flexible delivery and the improved service model that we put in place in 2019. And as you would expect, we saw increased demand in COVID-related product, such as cleaning suppliers and appliances like refrigerators and freezers. Partly offsetting these gains were softness in heavy indoor installation categories such as kitchen and bath as customers were reluctant to invite people into their homes.

In total, we estimate that the net impact of COVID-related sales contributed approximately 850 basis points to our total company comp growth, which includes 80 basis points of cleaning products, 70 basis points of refrigerator and freezer sales and 700 basis points in acceleration of projects, primarily for the DIY customers.

As we move through the quarter, there was also a sharp uptick in sales on Lowes.com. As customers began to shop more and more online, our investments in online infrastructure and progress to-date with the Google cloud migration greatly improved site stability and allowed us to effectively handle the increased traffic. For the quarter Lowes.com sales were up 80% overall, with even stronger growth rates for our pro customers. Online penetration increased to 8% of total sales.

From a geographic perspective, we had broad-based growth with positive comps in all 15 geographic regions and all three US divisions. Regions that outperformed the total Company comps were Atlanta, Charlotte, Dallas, Houston, Nashville, Los Angeles, St. Louis, and Seattle. And once again, the West was our top-performing geographic division. The geographic footprint of our stores in the US also played a role in our strong sales performance in Q1. The COVID-19 crisis created less disruption in rural areas of the country where approximately one-quarter of our store base is located. Our rural stores outperformed the company comp in Q1 by over 250 basis points. Conversely, on average, our urban stores experienced more demand disruption from the COVID-19 crisis. Approximately 10% of our US store base is classified as urban and this subset of stores under-performed the company comp by more than 400 basis points.

In Canada, we posted negative comp sales as performance was adversely impacted by store closures and other regulatory related operating restrictions. We have initiatives in place to improve performance and remain confident in the long-term potential of our Canadian business. During the quarter, we shifted our marketing efforts by dramatically limiting our promotional messaging and instead highlighting our commitment to our communities and our appreciation for our front-line associates. In fact as the presenting sponsor on ESPN for the NFL Draft, which posted record setting viewership, we ran a campaign of spotlight and thank our sources and how they support their communities and the first responders in a time of crisis.

Although actions like closing on Easter, reducing promotions, closing stores two hours early each day and limiting customer access to key areas like paint and garden limited our sales in the quarter, they are a reflection of our culture and to the fundamental commitment to the safety of our sources and our customer. Our Q1 results also showed a while consumers were sheltering in place this quarter, they had an opportunity to rediscover Lowe’s both in-store and online and improvements we made in our business over the last 18 months allowed us to meet the customer demand.

I’m also pleased that during this time of high levels of unemployment in our country, Lowe’s has hired over 100,000 stores associates for the spring season. In addition, to this other retailers on operating safely in this exceptionally challenging environment, we shared our best practices with the Retail Industry Leaders Association. In fact, the only competitive threat we’re focused on right now is the COVID-19 virus. Although our current and future environment is unpredictable, I am confident in our ability to execute and continue to provide the essential products and services that our communities need.

And in closing, I am tremendously proud of our associates and would like to again express my heartfelt appreciation for their hard work and their dedication. And also want to thank our vendor partners for their great efforts to step up to the challenges that this pandemic as presented.

And with that, I will turn the call over to Joe to discuss the actions that we’ve taken to support our customers operate effectively and keep our sources safe.

Joseph M. McFarland III — Executive Vice President, Stores

Thanks, Marvin, and good morning, everyone. I’d like to begin by echoing Marvin’s appreciation for the tremendous work that our associates have done during this crisis across our stores and distribution network. As always, our highest priority is the health and safety of our associates and customers.

I’ll now take a moment to review the operational changes that we implemented this quarter in response to COVID-19. To begin with an immediate assessment of how to best facilitate social distancing in our operations and then quickly acted to implement the following, additional signage and floor markers, adding social distancing ambassadors to manage customer traffic flow, leveraging new technology available on handheld smart devices to monitor store traffic, helping store managers limit customers based on the store footprint in line with regulatory requirements and removing product from our stores to help free-up additional space for our customers, especially in high traffic areas.

As Marvin mentioned, on average our stores are 144,000 square feet in size, including the garden center. Therefore, we also deployed a data-driven process to implement additional safety measures in areas where customers tend to congregate, such as our point-of-sale registers, the garden center and the paint desks. For example, in our garden centers, we utilized our merchandising services teams or MSTs to remove shelving and product to encourage customers to spread out. And at the garden center entrants, we set up one-way traffic flows and limited the number of customers entering at any one-time. To ensure clean, safe operating environment, we implemented more stringent cleaning procedures, added more hours for our third-party cleaning service and closed our stores three hours early at 7:00 PM to allow for increased cleaning and restocking activities. We also determined at keeping our stores open until 7:00 PM, allowed for enough operating hours during the day to minimize concentrations of customer traffic. Lowe’s is one of the first retailers to install plexiglass shields at the point-of-sale areas in all stores. We also distributed gloves and masks to our associates to wear during their shifts.

As a reflection of our commitment to our associates, we provided them with additional financial assistance, totaling $290 million in incremental investment in the first quarter. We made two special payments to hourly associates to help with unexpected expenses, one in March and one in May, with each payment consisting of $300 for full-time and $150 for part-time and seasonal associates. And for the month of April, we instituted a temporary wage increase of $2 per hour for all hourly associates.

To further protect the health of our associates and those around them, we offered 14 days of emergency paid leave for all associates who needed it. And for those at higher risk for severe illness from COVID-19, we offered emergency paid leave of up to four weeks. And to show our support to our dedicated front-line managers, we have provided them with an additional two weeks of paid vacation to recharge and spend time with their families. We also extended telemedicine services to all associates and their families whether or not,they were enrolled in Lowe’s medical plans. And to do our part in protecting front-line medical workers and first responders, we committed $50 million of support to our communities this year, including approximately $10 million worth of essential protective products including N95 masks.

And as online demand increased, smart devices allowed associates to buy online, pickup at store and parcel shipping orders more efficiently. In fact, this quarter, we rolled out curbside pickup in a matter of days. This rapid response would not have been possible with the technology we deployed in 2019. Our new customer-centric scheduling system and scheduling effectiveness tools also allowed us to monitor store traffic versus associates availability and deliver customized tiered sets of priorities for stores based on their capacity level. As we look forward, we remain committed to our retail fundamental strategy and investing for future growth.

In closing, I’m incredibly proud of how our associates responded and adapted to this challenging environment. They served our customers and communities in a time of tremendous need and we remain committed to supporting them as our most valuable asset. I’m really pleased to announce that 100% of our stores earned their winning together profit-sharing bonuses this quarter, totaling $87 million. Based on stronger than expected store performance, this represents an incremental $24 million payment to our front-line associates above the target payment level.

Thank you. And I will now turn the call over to Bill.

William P. Boltz — Executive Vice President, Merchandising

Thanks, Joe, and good morning everyone. As Marvin mentioned, we posted US home improvement comparable sales growth of 12.3% in the first quarter driven by outperformance in essential DIY and pro categories. 14 of 15 merchandising departments generated positive comps with weakness limited to installation heavy product in kitchens and bath. We saw very strong COVID-related demand for essential cleaning products along with other home necessities such as refrigerators, freezers, and DIY home repair products. As customers are isolated in their homes this quarter, they engaged in a variety of projects, which drove double-digit comps in core spring-related categories, paint and other critical repair and maintenance categories. During the quarter, we posted double-digit comps in lumber, which benefited from strong unit demand from both Pro and DIY customers, but continues to be driven by our improved investments in job lot quantities.

Core pro categories also performed well with double-digit comps in rough plumbing, hardware and tools. Within rough plumbing, we delivered double-digit growth in pipe and fittings as our expansion of job lot quantities in this area continues to pay-off along with growth in other essential categories like air filtration, pumps, and water filtration. Our hardware business benefited from the strength in fasteners and our general hardware categories, supported by the addition of pro brands like FastenMaster, GRK and Power Pro One, as these product categories are the critical project completers for both the Pro and the DIY customer.

In tools, we continue to see a strong customer response to our CRAFTSMAN program, but we also saw strength from the launch of our new Kobalt XTR 24-Volt Power Tool platform, as both the heavy DIY and Pro customer are quickly recognizing the quality and performance of this great product. Within our key Pro tool brands such as DEWALT, the number one power tool brand in the industry. We continue to see nice growth across all segments and we are pleased with the results we are seeing through the addition of our exclusive DEWALT 12-Volt compact line of power tools.

Lastly, we continue to showcase new and innovative tool products from Bosch, Lufkin, Spyder and Metabo HPT, along with Kobalt to build on the strength of our tools business. These brands combined with our investment in job lot quantities and our improved Pro service model are driving new customer trial and increasing our share of wallet with our existing Pro customers.

As Marvin and Joe indicated, the progress we made on our strategic initiatives in 2019 positioned us to execute well this quarter. For example, having our merchants in place for the entire year allowed us to fully plan for the spring season and respond to the rapidly changing operating requirements we are currently facing. I’m also proud of our vendor partnerships and our recent brand introductions, both of which have allowed us to better meet the customer demand. I’d like to take a moment to mention just a few of the suppliers, who made an extraordinary effort to keep our stores well-stocked this quarter, despite their own challenging operating environments.

Within our building products categories, some of our suppliers that deserve a special shout-out are Charlotte Pipe, ECMD, SharkBite and Idaho Forest Group. In home decor, 3M, Manati [Phonetic] and Samsung were true standouts and in our hardlines business, Hillman, Bonnie, Oldcastle and MTD products went above and beyond in their responsiveness. And finally, I’d be remiss if I didn’t give a big thank you to the efforts put forth by Zep cleaning products, Safety Zone and Medline as these three suppliers went above and beyond to provide us with hand sanitizer and gloves for our front-line associates.

Turning back to our associates, our field merchandising teams played a critical role in helping our stores adjust to the changing environment along with being on the ground to respond to 10 tornadoes and two earthquakes that impacted parts of the US during the quarter. And our merchandising Service Teams or MST also went above and beyond as they were ready to do whatever was needed during the quarter to help our stores respond to significant increases in demand. This quarter our MSTs were key in our ability to quickly reconfigure our stores to support social distancing. The support of these teams is invaluable because they are the boots on the ground, focused on taking the time consuming tasks off the shoulders of our red vest associates.

And looking ahead, we continue to make investments to drive future growth. And in the second quarter, we are excited about our roll-out of Simpson Strong-Tie framing hardware and fasteners. These trusted Pro products will be available in stores nationwide with an expanded assortment on Lowe’s.com, helping pros to fulfill all their hardware needs in one place, saving them time and money. And spring has now arrived across the country, we will continue to leverage our position as the number one destination for outdoor power equipment in the US with our leading brands such as John Deere, Honda, Husqvarna, Ariens and CRAFTSMAN to provide customers with an outstanding selection of products, to help them complete their outdoor projects. At the same time, we’re proud to offer our customers the top two brands in grilling, Weber and Char-Broil.

As we’ve discussed previously, we remain focused on completing our Google cloud migration in the second quarter to ensure that we build a strong infrastructure for Lowe’s.com and the teams are working quickly to add capabilities to Lowe’s.com over the next three quarters that will further enhance the customer experience and to continue to grow sales on this digital platform.

In closing, we remain committed to the work ahead to serve our customers and our communities as they navigate the public health challenge of COVID -19 while building capabilities to serve them even better in the future.

Thank you. And I’ll now turn the call over to Dave.

David M. Denton — Executive Vice President, Chief Financial Officer

Thank you, Bill, and good morning, everyone. I’ll begin this morning by reviewing the liquidity actions that we took during the quarter and provide an update on our capital allocation priorities.

Given the uncertain economic outlook, we decided to bolster our liquidity to plan for any unforeseen disruptions. In Q1, we raised $4 billion in senior notes and increase the capacity of our revolving credit facility by $770 million. After repaying $500 million of senior notes due in April of 2020, we now have $6 billion of cash and cash equivalents on the balance sheet as well as $3 billion in undrawn capacity on our revolving credit facility, which can be made available for any unanticipated needs and liquidity. We believe that we have more than adequate liquidity to manage through any of the potential scenarios that we could be facing. During the quarter, we also decided to halt our share repurchases program. Furthermore, we do not anticipate doing any more share repurchases this year beyond what we executed in the quarter. In Q1, we repurchased 9.6 million shares for $947 million at an average price of $98.45 per share. We remain committed to returning capital to shareholders through our dividend program. And as always, we look for ways to drive shareholder value over the long-term.

Also consistent with our capital allocation framework, we are continuing to prioritize investments in the business for future growth. In the quarter, capital expenditures totaled $328 million and we are still planning for a total of $1.6 billion in capital expenditures through this year. In certain cases, we have re-prioritized some capital project to focus on the near-term need to improve our omnichannel capabilities, but our expectations for the total spend in 2020 remains unchanged.

I’ll now turn to review of our operating performance beginning with the income statement. In Q1, we generated GAAP diluted earnings per share of $1.76 per share compared to $1.31 in the first quarter of LY, an increase of 35%. In the quarter, there was a very modest impact on operating income related to the previously announced Canadian restructuring.

My comments from this point forward will include certain Non-GAAP comparisons where applicable. In Q1, we delivered adjusted diluted earnings per share of $1.77, an increase of 45% compared to the prior year. These results exceeded our expectations largely due to stronger than expected sales and gross margin rate, particularly in the latter half of the quarter. Sales for the first quarter were $19.7 billion, an increase of 11.2% on a comparable basis versus the prior year period. With total average ticket growth of 9.7%, our transactions grew by 1.2%.

US comp sales were up 12.3% in the quarter and we were encouraged to see strength in our performance across both DIY and Pro customers and across all geographies. Our US monthly comps increased as we moved through the quarter, with 5.1% in February, 8.9% in March and 20.4% in April. February’s financial performance was largely in line with our expectations, but beginning in March, we saw sales impacted by COVID related prep activities and customers working on long-delayed projects as they sheltered in place. Also Lowes.com sales ticked up meaningfully in March as more customers increasingly utilized online shopping options. Sales continue to accelerate into April with a large step-up mid-month. Lowes.com sales also increased significantly with comps of over 150% in a month while our installed sales declined approximately 50%, as many customers were unwilling to allow installation work in their homes. The strong broad-based trends that we saw in April have continued into May with strength across both DIY and Pro and across nearly all merchandising categories and all geographies. For May month to-date, US comp sales have been trending at or above April results with strong double-digit comps across all geographic regions.

Gross margin was 33.1% of sales in the first quarter, an increase of 164 basis points compared to Q1 of LY. Gross margin rate improved 110 basis points, driven both by the actions that we took last year to lower product cost and improve our pricing and promotional performance, as well as a 40 basis point benefit from lower promotional activities throughout the quarter. As Marvin mentioned, the Company pulled back on promotional marketing in an effort to limit non-essential traffic, given the stay at home orders across the nation. Gross margin also benefited from approximately 55 basis points related to favorable product mix.

SG&A for Q1 was 21.3% of sales, an improvement of 45 basis points over the prior year. This included $320 million of COVID-related expenses incurred during the quarter with $275 million in financial assistance to our front-line associates, approximately $35 million related to cleaning and other pandemic related operating expenses and approximately $10 million in charitable contributions. While the $320 million of COVID-related expenses resulted in SG&A deleverage of 160 basis points, the impact was more than offset by payroll leverage of 105 basis points driven by higher sales and improved store efficiencies, advertising leverage of 40 basis points and employee insurance leverage of 25 basis points.

Adjusted operating income margin increased 208 basis points to 10.16% of sales. Note that COVID-related expenses are not excluded from our adjusted results. The effective tax rate was 25.1% compared to 16.6% last year. The prior year quarter benefited from the change in approach related to the exit of our Mexico operations. The adjusted effective tax rate was 25% above the prior year rate of 22.9%. At $14.3 billion, inventory is slightly lower than the prior year level.

Now before I close, let me address our 2020 business outlook. Despite our solid performance this quarter and strong sales momentum continuing into May, we are withdrawing our prior guidance for the full year 2020 sales, operating income and earnings per share. In this unprecedented operating environment, we, like other companies, have limited visibility into future business trends, which result in an unusually wide range of potential outcomes for our 2020 financial performance. However, going forward, we would like to provide additional transparency regarding our performance. So it is my expectation that we’ll be giving more frequent periodic updates on our results throughout the second quarter.

In closing, we remain confident about the future of our business and our ability to continue to drive sustainable long-term shareholder value. Finally, I’d like to extend my appreciation to the associates at Lowe’s across the world who have risen to meet the challenges of this global health crisis.

Operator, we are now ready for questions.

Questions and Answers:

Operator

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

Simeon Gutman — Morgan Stanley — Analyst

Thanks. Good morning, everyone. My first question is on sustainability of comps. I know it’s an impossible question to really answer and you’re not going to provide much guidance, but from a planning perspective, right, there is a surge right now. Your inventory position looks pretty reasonable. So what are your expectations, if you can share how you’re thinking about the surge and then leveling off? And then what should be a recession theoretically now and into the back half of the year?

Marvin R. Ellison — President and Chief Executive Officer

This is Marvin. I’ll take the first part and I’ll let Dave take the second piece. You’re right. This is a very unique and unprecedented environment that we’re in. But what we can tell you is that we had very strong sales in April. And as Dave mentioned in his prepared comments, that momentum has continued into May. That includes triple-digit comps in Lowe’s.com that also transitioned from April into May. We don’t anticipate we’re going to see negative comps, but we do anticipate that we’re going to see sales start to moderate at some point in the latter part of this quarter and in the back half of the year. What’s interesting about this environment is that this is not a housing recession. You go back to 2008-2009, you are in housing recession and so the home Improvement business was directly impacted. This is obviously different and we’re seeing still sustained strength from our homeowners, because they’re sheltering in place and they’re finding those projects around the house.

Having said that, like every other company out there, we have very limited visibility to what’s going to happen in the out-months and out-quarters, but we do feel as though even in this unprecedented environment, we have a really good execution plan and we think the results in Q1 reflected this.

I’ll let Dave add any additional.

David M. Denton — Executive Vice President, Chief Financial Officer

Yeah. Simeon, I just add kind of a couple of points. One, real-time, we’re tactically responding and managing to the increased demand for consumers for these essential products that you’re seeing in our stores. So one, real-time we’re working on that.

Secondly, importantly, we’re still running our long-term playbook. We’re making investments to-date and drive long-term shareholder value in the out-years. So we have not deviated from that playbook.

And three, we have developed a variety of I guess plans that can allow us to flex both from a merchandising perspective to lean into more non-discretionary type items over the back half if required. And secondly, we enabled with all the tools we put in place operationally to be able to flex our labor and operating expense profile to manage in a slightly softer demand environment.

Simeon Gutman — Morgan Stanley — Analyst

Okay. And then my follow up is there — I doubt with plus 20 type of comp, it sounds like that’s what you’re running. Anything in DIY yellow flag, and it sounds like the Pro is also pacing the DIY customer at the moment. Can you talk about anything you’re hearing as far as the type of job and if their pipeline or backlog is starting to refill up?

Marvin R. Ellison — President and Chief Executive Officer

Well, I think what’s interesting is the strength remains in DIY, but for us, the Pro customer remains healthy and that customer has transitioned primarily to outside project. Also as a reminder, our Pro customer is the smaller what we call it a pickup truck Pro. That Pro was less impacted in this worst downturn than the larger more industrial Pro. So even though Pro was not as robust as DIY, our Pro growth is still really strong in the quarter and that strength continues and their pipeline is more delayed and not canceled and now you’re starting to see those jobs pick up.

Another interesting data point is in the states that are beginning to re-open, we are seeing our stores outperform the total company comp in those locations, which to us is a data point, but it’s a glimmer of hope that we’re able to sustain our performance even when there is a broader competitive landscape out there. But again, Simeon, there is a lot we don’t know, there is a lot of uncertainty. But as Dave said, we have a lot of levers that we can pull from an expense management perspective and Bill Boltz and Joe McFarland have really detailed playbooks from the 2008-2009 period when we had to transition in our old life to a more repair maintenance type of strategy. We know how to do that. So if that is a requirement, we have a very experienced team of merchants and operators that could make that pivot.

Simeon Gutman — Morgan Stanley — Analyst

Great. Thanks. Good luck.

Operator

Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Michael Lasser — UBS — Analyst

Good morning. Thanks a lot for taking my question. Marvin, I know you’re not expecting negative comps, but should we look at that 850 basis points of COVID-related sales are simply pulling forward demand from future periods. And if that’s the case, why wouldn’t comps go negative?

Marvin R. Ellison — President and Chief Executive Officer

Well, Mark, we don’t see this pull forward, because these were projects that were on the customers’ to-do list that they simply didn’t have time to get to. I mean, as a reminder, I mean we are in the central retail business and two-thirds of what we sell is non-discretionary. And what we saw a lot of customers coming in and fixing things that they had just delayed. So we don’t see it as a pull forward at all. Look, we’re blessed to be open. We’re very thankful that we’re open, but this is what I question the most challenging environment any of us I’ve ever worked in and when we look at what the customers are buying, we look at the sustainability of it, we don’t see what occurred in Q1, we don’t see what occurred in April as a pull forward, we see it as a unique demand shift based on the competitive landscape and based on customers sheltering in place.

Michael Lasser — UBS — Analyst

Understood. And then a quick two-parter for Dave. First part is, if we strip out the benefit in the gross margin you saw from favorable mix and from advertising less promotions, it looks like you still haven’t recouped everything that you lost in the first quarter of last year. At what point, will you be able to recoup everything that you lost in the gross margin or is it just going to be structurally lower?

And your commentary around share repurchases indicated that you’re not going to do it for this year. What happens if there is a V-shape recovery or the business continues to perform very well, under what conditions will you resume the share repurchases? Thank you very much.

David M. Denton — Executive Vice President, Chief Financial Officer

Yeah. Hi, Michael. Listen, it’s our expectations that we would recover by the end of the year, our gross margin to the baseline rate that we’ve talked about, that was our prior guidance. And we’re largely working on that day-in and day-out. I’d say there is a combined team between really merchandising and finance, focused against that effort. And I’m actually really pleased with the progress we made and we continue to push forward. So I feel like we’re in really good stead there and we’re kind of making the right investments to improve our performance.

And then secondly from a share repurchase perspective, listen, we’ll wait and see. I think the good news is at the moment, our cash flow is very robust, very strong, we’ve shored up our balance sheet from a liquidity perspective. Let’s just kind of watch and see just given the dynamic nature of this market and see where we stand and we’ll watch it carefully as we go through the balance of this year.

Michael Lasser — UBS — Analyst

Thank you very much and good luck.

Marvin R. Ellison — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Seth Sigman with Credit Suisse. Please proceed with your question.

Seth Sigman — Credit Suisse — Analyst

Hey, guys. Good morning. Thanks for taking the question. I want to talk a little bit on SG&A. Obviously, very good leverage in the quarter, you discussed an incremental cost obviously, but you had some offsets. I’m just wondering, if you can elaborate on some of those positive offsets in the quarter. How sustainable are those as you look into the second quarter? And then just regarding the $320 million of incremental costs, how should we be thinking about that bucket as well? Thanks.

Marvin R. Ellison — President and Chief Executive Officer

So Seth, I’ll take the first part and then hand it over to Joe McFarland. I think the key to our ability to have the leverage performance was the new scheduling in labor management system. Timing is everything and our associates have been incredibly heroic during this time, but the ability to make sure we could look at the demands of the business by location, by department of the store to schedule effectively was in large parts.

I’ll let Joe McFarland talk about what we were able to benefit from the labor scheduling system in addition to some other expense related initiatives that they drove in operations.

Joseph M. McFarland III — Executive Vice President, Stores

Yeah. Thanks, Seth. This is Joe. So as we’ve been working on 60-40, again that is to shift our labor productivity from tasking to selling. We are well on our way in our 60-40 transition. And so if you think about things that Marvin mentioned, the customer-centric schedule, we were able to really dial-in our associate staffing based on departments that we’re lifting, reallocate labor in the areas of the store that we’re suffering and also the smartphones, the ability for — the associates to be able to sustain a 150% comps in dot-com in the month of April and 80% for the quarter would not have been doable if we’ve not done things like our Pick app in the smartphone applications that really allowed the associates to set up curbside delivery. And so Seth, there are a number of things throughout the quarter, the operational initiatives that we continued to stay focused on, our centralized receiving, so a lot of things allowed us to gain that leverage.

David M. Denton — Executive Vice President, Chief Financial Officer

Yeah. Seth, I’ll just add — give a shout out to all the ops team to really be very focused and really drive a lot of efficiencies this quarter. However, there will be additional costs that we will incur as the new operating model goes forward. We incurred incremental costs for cleaning, we put in social distancing ambassadors in our stores to manage the queues and flow through from a traffic perspective. So some of those costs which we incurred about $35 million in the first quarter are probably ongoing for the balance of this year.

Seth Sigman — Credit Suisse — Analyst

And what about the $275 million, how much of that is ongoing past the first quarter?

Marvin R. Ellison — President and Chief Executive Officer

So Seth, I mean, our goal is to take care of our associates. I mean, we are really proud that in Q1, we invested roughly $340 million in our associates and our customers and communities. We’re going to continue to make sure that we take care of our associates as this pandemic continues to drive a unique environment in our stores. Like anything else, it’s difficult for us to project when that’s going to be, but as an example, we paid out $80 million in special payments in the month of March, $2 wage increase for all the associates in the month of April, another $80 million plus in special payments for the month of May. Joe talked about the winning together payment that we’re going to make over and above the target for the month of June. And so we’ve looked at the needs of our associate and we’ll make the appropriate decision based on what we think is in their best interest.

Seth Sigman — Credit Suisse — Analyst

Okay. Thank you for that. Just a follow-up here on that May quarter to-date trend, are you seeing the composition of growth change at all between DIY and Pro and are you seeing a pick up in some of those weaker installation heavy categories like kitchen and bath, any signs that those are starting to improve more as the restrictions are using here? Thank you.

Marvin R. Ellison — President and Chief Executive Officer

So I’ll take the first part and let Joe talk about the installed piece. The short answer is yes. DIY remains very, very strong. Pro is improving. And remember, what I said because our Pro is that smaller pickup truck Pro, that Pro tends to be less impacted by macroeconomic factors. And so that Pro was healthy, but they’re getting even more healthy as the weeks and days progresses throughout the year. And as I mentioned, and states that are reopening, we see strength in our business, but we also see strength in these urban store locations. You remember, I mentioned in the first quarter, our remote stores dramatically outperformed urban stores by almost 650 basis points. We’re starting to see those urban markets start to improve as well and so as Dave mentioned, as a broad geographic positive double-digit performance that we’re seeing.

And Joe can talk a little bit about the installed piece.

Joseph M. McFarland III — Executive Vice President, Stores

Yeah. So from the installed piece, Marvin mentioned that our installed heavy-related categories for the quarter were significantly down as referenced in negative comps in kitchen and bath. As we have progressed through the quarter and looked week by week, we have a really robust dashboard that we look at that includes things like future leads. And so on the exterior installation projects, we’re really seeing that business come back very, very quickly. So we’re very pleased there. We are making progress on the interior projects, but that will be slow and I will be tempered as our consumers feel more and more comfortable allowing our pros in their home and our installers in their home.

Seth Sigman — Credit Suisse — Analyst

Okay. Thanks, guys. Best of luck.

Operator

Thank you. Our next question comes from the line of Greg Melich with Evercore ISI. Please proceed with your question.

Greg Melich — Evercore ISI — Analyst

Hi, thanks. I have a follow-up for Dave and then on strategy, Marvin, I had one. Dave, just the $340 million that you did or $320 million on COVID, is any of that accrual that something that basically might get paid out later this year like extra vacation or was that basically costs in the quarter? And then Marvin, I had a follow-up.

David M. Denton — Executive Vice President, Chief Financial Officer

It’s largely costs in the quarter. There is always some accruals based on when things actually get paid, but largely this is expenses that are incurred in Q1.

Greg Melich — Evercore ISI — Analyst

Perfect. And it sounds like you’re comfortable with the leverage ratio falls from 2.7 down to 2, if results are strong, you wanted to be more conservative on the balance sheet?

David M. Denton — Executive Vice President, Chief Financial Officer

That’s correct. If you look at our leverage ratio as we sit today, we’re probably a little bit over 2.8 at this point in time, but if you net the cash that we have on our balance sheet, we’re well below that. And I think just given the unprecedented environment we’re operating in, we’re just going to be conservative here for a while until we kind of see how this plays out for the balance of the year.

Greg Melich — Evercore ISI — Analyst

Makes total sense. And Marvin, you’re talking about the digital surge and also how it’s happening by geography and by even customer. Could you give us some more about the changes and improvements you’re making in the multi-channel experience and just any metrics around the customers that are using it that might be new or now behaving differently or more frequently since they use Lowes.com.

Marvin R. Ellison — President and Chief Executive Officer

Well, what I can tell you, Greg, is that we’re just pleased that the work that we put into stabilizing and modernizing Lowes.com starting to pay dividends. As we mentioned the last couple of calls back last year, the entire dot-com site was on a decade-old platform. And so we’re in a process of transition that to Google Cloud will be complete this quarter, but that allowed us to take on the demand and what we’re seeing is that customers simply want to shop the way that they choose to. And in the past, we couldn’t accommodate that. Joe mentioned his prepared comments, when we started to get requests from customers for curbside, we put that up and going in three days. I mean, this time last year, it would’ve been impossible to do that because we don’t have the infrastructure. Bill Boltz and the merchant team has also done a really nice job of adding additional SKUs.

And I’ll let Bill talk about some the work the merchants have done that has allowed us to drive the dot-com business and some of the future work that we have in place to drive dot-com for the balance of the year.

William P. Boltz — Executive Vice President, Merchandising

Yeah. This is Bill. So just a lot of work from the online team as well as the core merchants to get relevant SKUs online, relevant categories of product in addition to being able to support the operations work that goes on inside the store. But along that, as I mentioned in my opening comments, the capabilities that the team is continuing to work on to enhance delivery operations, to schedule deliveries, to be able to ship from any of our locations, all of that we’re continuing to go and to be put in place through the balance of the year. So just lots of improvement and that will continue to go on in Lowes.com.

Marvin R. Ellison — President and Chief Executive Officer

And Greg, the other point I make, I mean, I would say roughly 90% of our dot-com sales are fulfilled or picked up at a store. And for us that’s significant because any time the customer can pick it up at a store that helps us to defer the cost of operating in that platform. The good news is Lowes.com will only get better for the balance of the year. And as I mentioned, we’re triple-digit growth in April, we’re triple-digit growth month-to-date, and we can sustain that and we’re having improved functionality for the customer each and every week and that’s something that we’re excited about the future.

Greg Melich — Evercore ISI — Analyst

Great job, guys. Good luck.

Marvin R. Ellison — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research. Please proceed with your question.

Eric Bosshard — Cleveland Research — Analyst

Two things. First of all, in terms of online, the pick-up in-store fulfilled at store, I know you said that fulfilled from the store, but how much of this is getting delivered in the mail and how much of it is getting picked up at the store? Could you just give us what that number was in the quarter?

Joseph M. McFarland III — Executive Vice President, Stores

Yeah. So Greg, it’s Joe. So just over 60% of our orders are picked-up in-store and then the incremental is fulfilled primarily through store.

Eric Bosshard — Cleveland Research — Analyst

Okay. And then secondly in terms of the promotion and merchandising strategy for 2Q. I guess a question for Bill, the strategy around promotions and events for Memorial Day and 4th of July, how are you planning on that? And then, curious as you look back to how you manage to bring Black Friday, the reduced effort to drive traffic, did you end-up seeing or how material was the negative impact on sales from that and then bridge that to how you think about Memorial Day and July 4th, as well?

Marvin R. Ellison — President and Chief Executive Officer

Hey Eric, this is Marvin. I’ll take the spring Black Friday and I’ll let Bill talk about Memorial Day and Q2. So when we look at spring Black Friday, we received minimal incremental sales benefit from the event. Due to the distribution process of print media, we were unsuccessful in pulling the tap from distribution. But when we look at all other forms of media, all other traffic drive and mechanisms for the event was pulled. So from that, the sales were minimal. And let me make sure just for the broader audience, I define how we look at print media. Print is the least effective marketing medium that we have and total sales contribution generated by print for Lowe’s is 0.7%.

So I know there was a lot of discussion that spring Black Friday was a benefit to us in the quarter. But as I said, it was incrementally minimal at best. In addition to that, we closed for Easter and we were forecasting Easter to be a plus $200 million day. And when Dave Denton, Joe McFarland and Bill Boltz and I sat down and made that decision to close, we had no idea at that time how we will make the sales up, but we felt like it was in the best interest of our associates and their families to give them a day off and we would just take the financial hit for lack of a better term for that decision, but we felt like that it was simply culturally the right thing to do. So when we take then close to Easter, when we take pulling all other traffic driving mechanisms for spring Black Friday, both events turned into a negative environment from a sales perspective for us. So that kind of summarizes Easter and spring Black Friday.

And looking in the rear-view mirror, I’ll let Bill talk about Q2.

William P. Boltz — Executive Vice President, Merchandising

Yeah. Hi, Eric. In regards to the pricing strategy, as we’ve shared with you before, our intention has always been to change the pricing strategy at Lowe’s and get to be more of an everyday competitive price program and so that we really started a year ago, it continues into 2020. So as we look at Memorial Day, Memorial Day can be very consistent in how we operated in Q1. And as we get into the back half of Q2, with July 4th and Father’s Day, we’ll get again trying to implement the pieces in the place that the pricing strategy more of a normal cadence from being relevant for dad and being relevant for the holiday on July 4th. So that’s how we’re going to approach the quarter.

Marvin R. Ellison — President and Chief Executive Officer

And Eric, the last point I’ll make it, and I think Dave will close with a comment is, I mean, at the end of the day, we want to be a value-oriented retailer, but we don’t want to be promotional. I think that’s what — just the point that Bill has said from his very first day here. So you may not see us using traffic-driving media to get incremental footsteps in the store in this unique environment that we’re operating in, but when the customers come in, we want them to see a value on the shelf, because if there is a time that you ever needed a value for customers, this is one of those times. But we will be very cognizant and conscious of not driving traffic in an environment where that may put people at risk, something that we’re going to balance really well.

Dave?

David M. Denton — Executive Vice President, Chief Financial Officer

Yeah. And to Marvin’s point, obviously, there is a lot of value in our stores, the items that we sell. And if you just look in the rear-view mirror and you look at the number of items that we promoted this year versus the number of items that we sold on promotion last year were down about 24%.

Eric Bosshard — Cleveland Research — Analyst

Okay. That’s helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Kate McShane — Goldman Sachs — Analyst

Hi, good morning. Thanks for taking my question. I just wondered with regards to customer acquisition, do you have an idea of how any newly acquired customers broke down between DIY and Pro during the first quarter? And have you seen repeat purchasing from these customers?

Marvin R. Ellison — President and Chief Executive Officer

Kate, this is Marvin. That’s really good question. What I will tell you is that this was such a unique quarter and we were so focused on first and foremost, making sure that we were looking into the health and safety of our associates and our customers, that is not a data set that we spent a ton of time looking at. Candidly, as I said in my prepared comments, the moment we started to address the challenges of COVID-19 for our associates and customers, we became less focused on the financial performance of the company and became more focused on trying to provide the essential products that our customers and communities needed. I’m sure we can get that data and we can probably share and I’m sure the Investor Relations team can get it for you, but we were just so focused on just trying to run this business, serve our customer, serve our communities and keep our associates safe. There are a lot of data sets we didn’t pay a lot of attention to this quarter.

Kate McShane — Goldman Sachs — Analyst

Okay. And just as a follow-up and unrelated. I realized comps are very, very strong, but are you still seeing the stronger trend in the better and best categories versus the good categories and have there any signs of trade down by the Pro?

Marvin R. Ellison — President and Chief Executive Officer

No. Average ticket remains strong. We have seen no trade down. Our customers’ segment has been surprisingly resilient. And as I stated earlier, customers have rediscovered Lowe’s. We know that for a fact, but again, patterns have been strong. They have been very consistent and we’re continuing, as you can imagine to track it on a day-by-day, hour-by-hour basis, so we can make the necessary adjustment.

Kate McShane — Goldman Sachs — Analyst

Thank you.

David M. Denton — Executive Vice President, Chief Financial Officer

Michelle, we’re going to take one more question, please.

Operator

Thank you. Our final question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Christopher Horvers — JPMorgan & Co. — Analyst

Thanks. Good morning. So two margin questions. First, Dave, on the gross margin, up 150 year-over-year. When you think about the lower promotions and the mix benefit, how did the underlying expansion play out relative to your plan?

And then in an environment hypothetically, where the category goes flat or let’s say down low-single digits in the back half of the year, because the recession lingers longer. How do you think about SG&A dollar growth or payroll deleverage in that sort of environment, given the strong flexibility that you’ve shown over the past 18 months? Thank you.

David M. Denton — Executive Vice President, Chief Financial Officer

Sure. So I’ll take gross margin and I’ll flip to Joe talk a bit about SG&A. I think obviously from a gross margin perspective, in my prepared comments, we made really nice progress. I think maybe the best way to look at it is in February. So when we entered the year, we were actively running our playbook, we had worked between finance and merchandising to improve our cost complement and partner more deeply with vendors to manage our promotional cadence more effectively. And I think we’re largely hitting our plan if not, probably a little bit in advance of our plan is we went into February. Obviously, we got turbocharged a bit from a gross margin expansion perspective due to COVID in the back half of the quarter. But I feel like the underlying elements that we put in place are driving really solid performance there. We still have work to do, we’re not done. This is a marathon, not a sprint. But I think we have the right pieces together to play out and improve our margin performance both in the short-term, but the long term.

And maybe I’ll flip it to Joe to talk a bit about SG&A.

Joseph M. McFarland III — Executive Vice President, Stores

Yeah. Thanks, Chris. So from an SG&A standpoint, the team did a really nice job in Q1. Obviously, as Dave had mentioned. And as we look forward with the continued strong sales, we have a rule of thumb based on sales outperformance and payroll leverage. But in addition, the hard work that the ops team has done, putting new engineered labor standards in, the labor engine that the team built, the mix between ticket and transactions and we’re very confident in our ability to continue to leverage on SG&A.

Marvin R. Ellison — President and Chief Executive Officer

Great. Thank you very much for calling in today in and talking about Lowe’s. Please stay safe and healthy.

Operator

[Operator Closing Remarks]