Categories Consumer, Earnings Call Transcripts

Lowe’s Companies Inc (LOW) Q1 2021 Earnings Call Transcript

LOW Earnings Call - Final Transcript

Lowe’s Companies Inc  (NYSE: LOW) Q1 2021 earnings call dated May. 19, 2021.

Corporate Participants:

Kate Pearlman — Vice President of Investor Relations

Marvin R. Ellison — President and Chief Executive Officer

William P. Boltz — Executive Vice President, Merchandising

Joseph M. Mcfarland — Executive Vice President, Stores

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

Analysts:

Simeon Gutman — Morgan Stanley — Analyst

Elizabeth Lane Suzuki — Bank of America Merrill Lynch — Analyst

Michael Baker — D.A. Davidson Companies — Analyst

Christopher Horvers — J.P. Morgan — Analyst

Charles Grom — Gordon Haskett Capital Corporation — Analyst

Scott Mushkin — R5 Capital — Analyst

Brian Nagel — Oppenheimer & Co. — Analyst

Steven Forbes — Guggenheim Securities — Analyst

Presentation:

Operator

Good morning, everyone and welcome to Lowe’s Companies’ First Quarter 2021 Earnings Conference Call. My name is Melissa and I will be your operator for today’s call. [Operator Instructions]. I would now like to turn the conference over to Kate Pearlman, Vice President of Investor Relations.

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 a 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 2021. 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 U.S. 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. I’d like to begin by thanking our frontline associates for their continued hard work and commitment to the Company. We would also like to extend our thoughts and prayers to our sources in India, who are grappling with an aggressive resurgence of COVID in their country.

At Lowe’s, we have our sources in Bangalore, India, in our digital information technology and finance functions, who played a key role in our transformation efforts over the past two years. To help our team in India safeguard their health, we’ve sent personal protective equipment to our team members there. We’ve also made financial commitments to support non-profit organizations in India that are working to respond to this humanitarian crisis.

As we’ve moved into the second year of the pandemic, we remain focused on our number one priority, which has always been protecting the health and safety of our associates and communities. And with that in mind, in Q1 we invested nearly $60 million in support of COVID safety protocols.

Now turning to our results. Our outstanding performance continued this quarter with total Company comparable sales growth of 25.9%. Our U.S. comps were 24.4%, with broad-based growth across all geographic regions and divisions. In fact, for the quarter, comp sales for all 15 U.S. regions exceeded 80% and our U.S. divisions exceeded 20%.

During the quarter, operating margin expanded 313 basis points on an adjusted basis, leading to diluted earnings per share of $3.21, which is an 81% increase on an adjusted basis over the prior year. Our outperformance in operating margin was supported by our continued transition to an everyday competitive price strategy as well as our disciplined pricing and product cost management strategies.

Our improved operating margin also reflects the progress of our operational transformation driven by our perpetual productivity initiatives or PPI. Bill will discuss our everyday competitive price strategy, pricing and product cost management and Joe will provide details on our PPI initiatives later in the call.

On Lowes.com, sales grew 36.5% on top of 80% growth in the first quarter of 2020 which represents a 9% sales penetration this quarter and a two-year comp of 146%. With customer demand for an integrated omnichannel shopping experience only increasing, we continue to invest in our omnichannel capabilities. Pro comps outpaced DIY comps with over 30% comps in the quarter. Although this has been a two year journey, I’m very pleased with the progress that we made with our Pro customer.

We began by addressing the basics, ensuring that we were carrying the brands and product that Pros need in the job lot quantities, and also provided the excellent service this busy customer expects. And now we’ve shifted to the more strategic phase of growth in the Pro by resetting the layout of our stores with the Pro in mind and deepening our relationship with the Pro through a loyalty program that provides them with members only benefits.

Joe will discuss more about the specific initiatives that we’re undertaking to serve the Pro both online and in store later in the call. The small and medium sized Pro is our target customer. This customer is a frequent shopper who purchases products in multiple departments, which drives increased productivity throughout the store. And I’m confident that we have a compelling growth opportunity as we continue to improve our engagement with this highly valued customer.

In addition to the strength in Pro, we delivered over 60% comps along with significant increase in customer satisfaction in our installation services business. We’ve overhauled this business and improved the service offering by consolidating our provider network and implementing industry-leading technology. And although all of us are looking forward to a post COVID world, our research tells us that the importance of the home will remain elevated for many years to come.

And given the increased importance of the home, this quarter we launched SpringFest, our new reimagined approach to the season. Our campaign provided inspiration for home projects, so our customers could transport themselves to the destination of their choice without ever leaving the sanctuary of home. In a moment, Bill will discuss the outstanding results that we were able to generate from this re-imagination of spring.

Now turning to Canada. We delivered comp growth that outpaced the U.S. despite several COVID related operating restrictions. I’d like to thank the new Canadian leadership team for all of their hard work, as well as the front-line associates in Canada for their resilience and commitment to continuing to serve our customers in this challenging operating environment.

This quarter we also announced the acquisition of STAINMASTER brand, which is the most recognized and trusted carpet brand on the market today. With this acquisition, we are building on our decade long exclusive position as the only national home-improvement retailer to carry STAINMASTER carpet. This is an important step in our Total Home strategy as we seek to elevate our product assortment and provide consumers with the products and brands they trust for every project across the entire home. We see great potential to extend the STAINMASTER brand in other product areas where we can continue to leverage its high performance characteristics.

This acquisition also expands our private brand portfolio, joining the family of private brands including Allen+Roth, Kobalt and Project Source. We’re focused on expanding our private brand penetration with a balanced brand strategy that includes a powerful, national brand portfolio that appeals to both Pro and DIY customers. At the same time, we will offer a select number of high-value private brands, building consumer loyalty for these products.

Our results in the first quarter continue to give me confidence that we’re making the right investments to accelerate our market share gains through our Total Home strategy by enhancing our investments in Pro, online, installation services, localization and elevating our product assortment. These initiatives will allow us to drive sustainable growth as we deliver a total home solution for our Pro and our DIY customers.

Before I close, I’d like to once again extend my appreciation to our frontline associates. In the first quarter, I had an opportunity to visit stores in nine of our 15 geographic regions. As I observed our associates hard at work, serving customers through very challenging circumstances, my respect and admiration continues to grow. In recognition of these efforts, we decided to close our stores and distribution centers on Easter Sunday for the second year in a row to give our sources a much-deserved day off to spend with their families and loved ones.

And I’m also pleased to announce that for the fifth consecutive quarter, 100% of our stores earned a Winning Together profit sharing bonus, a record $152 million payout to our frontline hourly associates. This represents an incremental $70 million above the target level. While the near-term macro outlook remains uncertain, we’re confident that we will continue to outperform the market driving both market share gains and improved operating efficiency. Our two-year plus journey to transform Lowe’s has given us improved operating capabilities and a technology infrastructure that’s dramatically enhanced, which in turn makes us more agile and able to respond quickly to any potential changes in the business environment.

And with that, I’ll turn the call over to Bill.

William P. Boltz — Executive Vice President, Merchandising

Thanks Marvin, and good morning everyone. We delivered U.S. comparable sales growth of 24.4% in the first quarter. Our compelling offerings, great values and improved in stocks allowed us to capitalize on the continued strong demand for home improvement products. Consistent with recent trends, growth was broad based across Pro and DIY customers, in store and online and across product categories. In fact, 13 of 15 merchandising departments generated comps over 15%, and all merchandising departments were up more than 20% on a two-year comp basis.

As Marvin described, we were extremely pleased with how consumers responded to our SpringFest event. Similar to our approach to the winter holidays, we extended this event across four weeks to create a new sense of excitement and to prompt return trips while also avoiding congestion in our stores. We offered four different weekly giveaways of Garden-to-Go kits that provided everything needed for a fund spring project, and also strengthened our customer connection through a required [Phonetic] MyLowe’s activation online.

The success of this event was due to the great organizational alignment across our stores, marketing and merchant teams. Turning now to our top-performing categories, lumber again delivered the highest comp driven by strong Pro demand in unprecedented inflation in the category. Over the past year, as lumber products have been in tight supply, our merchants have worked closely with our suppliers and successfully secured new sources in additional product to ensure that we can maintain a competitive in-stock position in the category. Strong in-stocks in this tight market have allowed us to continue to strengthen customer relationships, especially with the Pro.

In addition to lumber, we delivered comps exceeding 30% in electrical, decor, kitchens and bath and seasonal and outdoor living. Our electrical category posted strong comps in the quarter driven by inflation in copper as well as solid demand from the robust repair remodel market. In support of our Total Home market share acceleration strategy, we drove strong engagement with our customers as reflected by increased sales in decor and kitchens and bath. The strong sales in our decor category were driven by great performance in Home Accents as we continue to elevate our product assortments, especially with our recently refreshed Allen+Roth brand.

In fact, this quarter, our merchant teams launched new spring collections that span across the broad array of product categories through a lifestyle point of view with inspirational on trend designs that gives our customers the confidence they need to decorate their homes in style. Our kitchens and bath department outperformed in the quarter as homeowners continued to enhance their living spaces and economic stimulus supported bigger ticket projects.

Finally, seasonal and outdoor living benefited from the early demand in patio and grills as homeowners embraced the arrival of spring. We also saw strong sales in the newly launched battery powered EGO and SKIL brands as consumers are attracted to the convenience and the quality of their zero emission, rechargeable outdoor power equipment. In fact, during the quarter, EGO delivered some of their largest weekly sales results in the history of their brand.

The addition of EGO and SKIL has only strengthened our number one position in outdoor power equipment and truly complements the leading brands we carry such as John Deere, Honda, Husqvarna, Aaron’s and CRAFTSMAN. And during the quarter, we continued to see strong demand for our other powerhouse brands like Weber and Char-Broil which remain the top two brands in outdoor grilling.

We were excited to add new brands to our arsenal including the exclusive launch of Flex cordless power tools. The Flex brand is known by the most discerning builders, contractors and trade professionals and this new lineup of power tools offers the latest innovation, more power and faster charging than the competition. We are also excited to bring the Lesco brand of fertilizer to Lowe’s this spring, a brand that is trusted by landscape pros and knowledgeable homeowners alike.

The addition of Flex power tools and Lesco fertilizer further complements our powerful Pro brand lineup, which already includes Simpson Strong-Tie, Dewalt, Spyder, Bosch, Eaton and SharkBite. As Marvin mentioned, we delivered strong sales growth of 36.5% and a two-year growth of 146% on Lowes.com. We continued to enhance the online customer experience with improved search and navigation functionality that allows consumers to easily shop for products across categories.

Additionally, we continue to see strong download rates of our mobile app, as we are working to enhance our customer loyalty through a great mobile experience. As Marvin mentioned, we delivered a solid improvement in our product margins this quarter driven by disciplined vendor cost management, improved and enhanced pricing systems and our continued transition to a more relevant everyday competitive price strategy that is complemented by targeted, seasonally relevant promotions.

All of these initiatives are part of our ongoing merchandising excellence strategy. We will continue to leverage and refine these capabilities as we deliver strong, everyday values to our consumers while we continue to manage our product margins by taking a data driven, portfolio approach to pricing.

Our Total Home strategy will continue to allow us to expand and elevate our product and brand assortments and take market share. Before I close, I want to thank our vendor partners and our merchants for their continued focus on taking care of our stores and our customers. Thank you, and I’ll now turn the call over to Joe.

Joseph M. Mcfarland — Executive Vice President, Stores

Thanks, Bill and good morning everyone. In the first quarter, our associates were laser focused on providing excellent customer service supporting a safe store environment and delivering record sales volumes. As Marvin mentioned, 100% of our stores earned a Winning Together profit sharing bonus, a record $152 million payout to our frontline hourly associates. I would like to thank our associates for their continued dedication in providing world-class customer service.

As Marvin mentioned, our focus on perpetual productivity improvement or our PPI initiative continued to yield results during this quarter as we leveraged store payroll by using technology to reduce tasking hours, improve customer service and increase sales productivity. For example, we rolled out digital signs first in appliances and most recently in our lumber department. These signs cut down on associate tasking labor, and they also support better product margin performance as we can now more rapidly implement price changes in line with the market.

We are also leveraging an improved freight flow app creating a fully digital process that gives our associates better line of sight to when products will arrive at our stores. The app, which was developed in-house, even helped store associates to prioritize the incoming merchandise, so they can quickly and efficiently position the product on the sales floor for our customers. And we launched secure mobile checkout which we’re using to improve speed of service in high traffic areas inside the store and on the exterior of the store in areas such as outside lawn and garden and under the Pro canopy. This checkout app developed in-house is allowing us to take care of customers from scanning items, tendering payment and printing or emailing receipts before they even join a line. Our customers are delighted with the solution, especially on busy weekends.

We are also driving productivity in our in-store fulfillment. This quarter we expanded our contact-less shopping options by completing the rollout of BOPIS lockers to 100% of our U.S. stores in April. Customers really enjoy these touch-less, easy to use lockers. In fact, this has already become the highest rated store fulfillment options. Having BOPIS lockers in 100% of our U.S. stores will allow us to expand our omnichannel capabilities, further improve customer satisfaction and limit customer congestion at our service desk.

Turning to our Pros. As Marvin mentioned, Pro outpaced DIY in the quarter with over 30% comps. We continue to gain momentum with the Pro through our improved in-stock inventory levels, our enhanced service offerings and our new Pro loyalty program. Our Pro sales associates have also begin to leverage our new CRM platform to proactively engage with our Pro customers and sell the entire project to them.

Our most compelling growth opportunity with the Pro is expanding the share of wallet with our existing customers. Our new CRM platform as well as the redesigned store layout that aligns product adjacencies enable us to more effectively serve their needs for the entire project across all of their jobs. And we continue to enhance the shopping experience for our Pro customers, small to medium-sized businesses who are always pressed for time.

We are launching a tailored shopping experience created specifically for Pros to ensure that the time they spend away from their job site is efficient and productive. We are introducing new convenience products at checkout and services like dedicated Pro trailer parking and phone charging stations, all designed to help add value to each trip the Pros take, thus cutting down on the number of staffs they make throughout the day.

We’re also enhancing their online experiences with the ongoing migration of Lowe’s for Pros to the cloud. This will give our Pro customers access to incremental options that our DIY customers already have on Lowes.com and it will allow us to more quickly add new Pro only features in the future, including a personalized app experience.

Both in-store and online, we continue to demonstrate that Lowe’s is on a mission to be the new home for Pros. As Marvin mentioned, we are seeing terrific momentum in our installation business with over 60% comps this quarter. As a reminder, just two years ago, this was a money-losing business with poor customer satisfaction. Although we are lapping Q1’20 results that were pressured by COVID, we are very pleased with the overall execution and trajectory of this business.

In closing, I could not be more pleased with the improvements we are making in our stores as reflected in our strong net promoter scores, in a recent third party study. Our executive officers, senior officers, merchants and field leaders are out visiting stores on a weekly basis to ensure that we are listening to and supporting our frontline associates. This remains a very difficult environment to operate retail stores in and I could not be prouder of the accomplishments of this team and their commitment and hard work from our frontline associates.

With that, I’ll turn it over to Dave.

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

Thank you, Joe. I’ll begin this morning with a few comments on the Company’s robust capital allocation program. In Q1, we generated $4 billion in free cash flow, driven by improved operational execution and continued strong consumer demand. We returned $3.5 billion to our shareholders through both a combination of dividends and share repurchases. During the quarter we paid $440 million in dividends at $0.60 per share. We also repurchased 16.8 million shares for $3.1 billion at an average price of approximately $182 a share. We have approximately $17 billion remaining on our share repurchase authorization.

Capital expenditures totaled $461 million in the quarter as we invest in our strategic initiatives to drive the business and to support our growth. We ended the quarter with $6.7 billion of cash and cash equivalents on the balance sheet, which includes proceeds from our $2 billion notes offering in March. In addition, we entered into a $1 billion term loan facility in April, which remains undrawn.

Our balance sheet remains extremely healthy with adjusted debt-to-EBITDAR at 2.07 times at the end of the quarter, well below our long-term target of 2.75 times. Now turning to the income statement, in Q1, we generated diluted earnings per share of $3.21, an increase of 81% compared to adjusted diluted earnings per share last year. This growth was due to strong sales growth, improved gross margin rate and SG&A leverage as a result of strong execution across many facets of our business.

Please note that in the prior year quarter, there was a very modest impact on diluted earnings per share related to the Canadian restructuring effort. My comments from this point forward will include approximations when appropriate and comparisons to certain non-GAAP measures where applicable. Strong sales growth was driven by several factors including a continued consumer-focused on the home, a favorable weather backdrop across the country, commodity inflation, especially within the lumber category, consumer support from the March government stimulus package, and our improved execution, as we continue to elevate our product and service offerings.

Q1 sales were $24.4 billion driven by a comparable sales increase of 25.9%. This was a result of a balanced contribution for both ticket and transactions as comparable average store ticket grew 14.1% and transaction count grew 11.8% with strong repeat rates from both new and existing customers. While a little difficult to measure, we estimate that the March government stimulus checks drove 300 basis points of growth. While commodity inflation benefited comps by 460 basis points in the quarter.

Lumber and other commodity prices remained at elevated levels versus last year. U.S. comp sales were up 24.4% in the quarter. Consistent with our results from the past few quarters, growth was well balanced across DIY and Pro customers selling channels, geographies and nearly all merchandise departments.

Our U.S. comps were 24% in February, 35.9% in March and 13.9% in April. February comps were negatively impacted by the harsh winter storms that hit Texas and several other states, while March were positively impacted by storm recovery and the third round of stimulus. Additionally, we began cycling last year’s COVID related spikes in demand in the second half of April and those more difficult comparisons impacted April comps.

Looking at U.S. comp growth on a two-year basis from 2019 to ’21, February sales increased 30.3%, March increased 48.1% and April increased 37.1%. Gross margin was 33.29%, up 19 basis points from last year and up 183 basis points as compared to Q1 of ’19. Product margin rate improved 165 basis points. As Bill mentioned, our teams effectively leveraged our merchandising excellence strategy to manage product cost and retail pricing throughout the quarter.

While we are seeing inflation in some product categories, our merchants worked to diligently mitigate and minimize vendor cost increases. Additionally, our supply chain team leveraged our scale and carrier relationships to minimize distribution cost pressures experienced throughout the retail sector.

On the pricing side, our shift to an everyday competitive price strategy continued to benefit our margins in Q1 as we leverage enhanced pricing tools to improve margin across the array of products that we sell. We began to see improving trends from our increased focus on shrink control this quarter, with shrink improving sequentially from Q4 of 2020, however results pressured gross margin by 15 basis points versus last year.

We expect that our shrink performance will continue to improve as we move throughout the year. These benefits to product margin rate were partially offset by 90 basis points of pressure from product mix shifts due to lumber inflation and a less favorable product mix; 20 basis points of pressure from supply chain costs as we continue to invest in our omnichannel capabilities and 20 basis points of pressure from credit revenue.

SG&A of 18.4% levered 288 basis points compared to adjusted SG&A in LY driven primarily by lower COVID related cost as well as operating cost leverage resulting from strong sales and our ongoing productivity from our PPI initiative. As anticipated, we incurred nearly $60 million of COVID related expenses as compared to approximately $320 million of COVID-related expenses last year.

The $260 million reduction in these expenses generated 140 basis points of SG&A leverage. Additionally, strong sales that are focused on efficiency and productivity allowed us to generate leverage of a 100 basis points in operating salaries; 35 basis points in occupancy expense; and 5 basis points in advertising. Our operating profit was $3.2 billion, an increase of 63% over LY. Operating margins of 13.3% of sales for the quarter was up 317 basis points to the prior year, driven by both improved operating leverage and improved gross margin rate.

The effective tax rate was 23.5%, the tax rate was slightly lower than expected, primarily due to a tax benefit related to the vesting of certain employee stock options. We continue to build up our inventory levels throughout the quarter to meet the sustained high levels of customer demand, while improving our in-stock position.

At quarter-end, inventory was $18.4 billion, up $2.2 billion from Q4 levels, in line with seasonal patterns. This reflects an increase of $4.1 billion from Q1 of 2020 when inventory levels were pressured due to unexpected spikes in demand, as well as COVID related supply disruptions. Of note, this includes a year-over-year increase of $780 million related specifically to inflation.

Now before I close, let me comment on our current trends and how we are planning our business for the balance of 2021. Our year-to-date results are tracking ahead of the robust market scenario that we covered in our December investor update, the underlying drivers of home improvement demand, appeared to be more resilient and stable than we originally forecasted. Those factors build our confidence in our ability to deliver strong results on top of an exceptional year in 2020, including 12% operating margins and flat gross margin rates for the year.

We remain confident that our Total Home strategy will enable us to capture market share. We are very encouraged by our performance in Q1 including our strong sales volume, even as we begin to cycle last year’s mid-April surge in demand. Month-to-date, May U.S. comp sales trends are materially consistent with April performance levels on a two-year comparable basis. Looking forward, year-over-year comparisons remain difficult throughout the remainder of the year.

Also, we continue to see COVID restrictions in some areas across Canada. As markets reopen, we are closely monitoring consumer behavior anticipating a potential modest shift in spending away from the home. We remain agile and ready to respond to whatever environment we face this year with our focus on gaining market share throughout 2021 while improving operating margins.

With regards to our quarterly performance, please note that we are cycling particularly high gross margin levels in Q2 of LY. In the prior quarter, there was an industry-wide pullback in promotions and a more favorable product mix. As a result, we currently anticipate a moderate decline in gross margin rates in Q2. Despite this moderate year-over-year decline, our gross margin rate is expected to expand nicely over pre-pandemic 2019 levels.

Investments in pricing, vendor cost management and our everyday competitive promotional strategy have been driving improvements in our gross margin performance over the past two years. As I stated earlier, we continue to expect to deliver flat gross margin rates for 2021. Further, we expect the business to generate robust levels of free cash flow. We plan to invest $2 billion in capex this year to drive future growth and returns. As we continued our disciplined approach to capital allocation with $9 billion in planned share repurchases this year, while also supporting our dividend.

In closing, we are very excited about the momentum in our business and our ability to deliver significant shareholder value over the long term. With that, 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

Hey, good morning everyone. My first question is, can you provide an update on where Pro penetration can move to over time and maybe some level of growth that you expect going forward? And I’m asking because I think part of the margin story is getting higher sales per foot, and I think Pro seems to be a big opportunity there. So curious, I don’t know, Marvin or Dave, if you can just update us on that area.

Marvin R. Ellison — President and Chief Executive Officer

Hey Simeon, this is — it’s Marvin. We purposely have not set a target for Pro penetration. As I mentioned in my prepared comments, we really started focusing on the basics, and now we are elevating to a more strategic phase in Pro. We also stated a while back that we estimate our Pro penetration today is between 20% and 25%.

Now having said that, based on my history in this business in this space and Joe’s history and experience in this space, we can see over time our Pro penetration getting between 30% and 35%, and we think that’s the trajectory that we’re currently on. But we have purposely not set a target because I’ve learned in the past when you set a target, then you can oftentimes hit the target, but you do it at the expense of running a good business and we’re just really focused on serving the customer right now.

Simeon Gutman — Morgan Stanley — Analyst

Okay. Fair enough. Can I ask you a macro question to whoever, and I wanted to ask, there is the school of thought that this industry, this home improvement industry is a mid single-digit grower, right, that did 4x or 5x that over the last four quarters. And so that school of thought says, hey, this industry needs to digest this growth, we may not grow going forward maybe in ’22 or maybe flattish at best. And the other side is that people have spent more on their homes, there is more invested capital, so there is more maintenance, repair and that we could sort of comp. And then maybe there is a housing cycle on top of this. Curious where you shake out and what’s your best guess or what’s some of the debates you’re having on this topic are.

Marvin R. Ellison — President and Chief Executive Officer

Simeon, it’s a good question, I’ll take the first part, I’ll let Dave provide any financial perspective. But I mean we are — we’re very excited and we’re very bullish on the home improvement industry in general. If you look at the macro factors that really impact this business and have historically impacted this business is things like low mortgage rates, rising home prices, the age of housing stock, improved household formation trends and also strong consumer balance sheets.

I mean all of those specific macro factors are pointed in the right direction for us. In addition to that, when there is home price appreciation that actually benefits home improvement, it may not benefit the overall housing market, but when consumers decide to stay in their existing home and make investments in upgrading their home, that correlates to really strong home improvement sales. And as the housing stock continues to age, we’re in a repair and maintenance business, that’s a significant part of what we do.

So when we look at home improvement, we see really a robust year-over-year growth potential relative to the macro. And then if we look at just the things that we control, I mean, we’ve been very transparent that there have been many strategic mistakes made in this business over the past five plus years.

And so, we have what we believe is enormous upside in revenue and operating income by continuing to invest in really smart strategic initiatives that we think will drive the business forward and we think Q1 reflects our ability to do that with our gross margin and operating income performance.

I’ll let Dave add any additional comments if he has them.

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

Hey Simeon, and the only other thing that I would add is that obviously over the next several years we anticipated that the millennial customer would begin to migrate into the home ownership position. I think what has happened through COVID is that, that macro trend has probably accelerated, so probably given the industry segment, a bit more tailwind as we think about the next several years.

Simeon Gutman — Morgan Stanley — Analyst

Okay, thank you. Good luck.

Operator

Thank you. Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.

Elizabeth Lane Suzuki — Bank of America Merrill Lynch — Analyst

Great, thank you. So [Phonetic], if sales are running above the robust market scenario, do you think the sales upside could be reinvested into additional initiatives aimed at gaining market share and deepening the competitive moat or should we think about there potentially being upside to the 12% operating margin that was discussed in that robust demand scenario?

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

Hey Liz, this is Dave, I’ll start with that question there. I think what you’re looking at here is we have a very specific investment thesis, really as we launched in 2020 and into ’21 and I think if you look at the thesis that we have and all the priorities that we have, I think we feel like we’re very well positioned making the right investments to grow our business long-term, improve our operating performance.

I do think we’re also very focused on the fact that we can’t really predict the macro in the back half of this year, but we are very committed to doing two things, one is we are going to grow market share this year, and two, we’re going to improve our operating margin performance. And we do expect that to be, if the market holds up at robust or above robust around 12% operating margin. And that’s our focus for this year.

Elizabeth Lane Suzuki — Bank of America Merrill Lynch — Analyst

Great. And just one quick follow-up, which is — which is the two categories comped below 15%? And what was the two year growth there?

William P. Boltz — Executive Vice President, Merchandising

Yeah. Liz, this is Bill. So all categories achieved plus 20% on a two-year basis, but the two categories below the Company were paint and our hardware business driven largely because of everybody painting last year during the pandemic, and then the hardware business driven by safety and masks, and some of that business that spiked last year in the quarter.

Elizabeth Lane Suzuki — Bank of America Merrill Lynch — Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Michael Baker — D.A. Davidson Companies — Analyst

Okay, thanks. A couple and I hate to be short term focused here, but the first of all, April did fall off versus March on a two-year basis a little bit. Do you think that’s because of the stimulus that occurred in March? And then playing that forward, if we take that two-year trend into May, and for the rest of the quarter, it should be about flat in the second quarter, is that a fair way to think about the expectations for the quarter?

William P. Boltz — Executive Vice President, Merchandising

Yeah. First as you look at, I guess our performance by months through the quarter, if you look at it on a two-year stack basis, yes, March was somewhat inflated, if you think about the tech [Phonetic] recovery from the storm in Texas and other states as well as stimulus hitting in that period. So I think we feel very good about kind of how we’ve ended the quarter and the trends as we cycle into May from a sales perspective.

And I think, listen, we’re not giving guidance for the quarter, we continue to be focused specifically on making sure that we have great service, we have — we’re in stocks in the right categories, and we’re supporting our consumers across our marketplace and I feel like we’re gaining momentum as we think about our business both in 2020 and here as we cycle into ’21.

Marvin R. Ellison — President and Chief Executive Officer

And Michael, this is Marvin. The only point I’ll add to that is we were up against a 20.4% comp in the month of April in the U.S. and we comp almost 14% on top of that. So we feel really good about that. That exceeded our expectations, it exceeded our internal plans, and it also demonstrate to us that even going up against some of the spike demand from last year, we still can perform at a high level. So we actually felt great about our performance in April. But it demonstrates when you’re up against significant surge in demand, you’re going to see sales comp pressure, and that’s to be expected.

Michael Baker — D.A. Davidson Companies — Analyst

Yes, sure. Okay that makes sense. And to follow up and not ask a tough question, particularly on a 25% comp against a 12% last year, really incredible and strong, but you talked about market share gains, a simple look at the growth of the market using the NAICS sales in building material, garden equipment and supply source, that did grow a little bit faster than you did this quarter. So I wonder how you think about what market are you looking at or what numbers you’re looking at to underpin your market share gain comments for the quarter and the year?

Marvin R. Ellison — President and Chief Executive Officer

Michael, coming from someone who has worked in a couple of different retail formats, I’ve always said that home improvement has probably the most suspect market share data on a short-term basis of any retail segment. So, to be quite candid, when we look at the amount of growth we delivered in the sales revenue to regenerate it and we look at it on a one year or two-year comp basis, we can’t quarrel [Phonetic] about losing market share. We’re really focused on a broader market and we’ve said consistently that in this COVID environment and this is going to be current and post COVID, the retailers there are most capitalized and can make investments in omnichannel and omnichannel fulfillment and creating different channels for customers to shop and can lean into technology, and can also leverage the supply base, as our merchants and supply chain were able to do over the past quarter.

We’ll win and we’ll take broader market share. And we believe that we did that and so we feel very, very comfortable where our market share position in performance and with our prospects in the rest of the year.

Michael Baker — D.A. Davidson Companies — Analyst

Yeah, fair enough. I appreciate the time. Thank you.

Operator

Thank you. Our next question comes from the line of Christopher Horvers with J.P. Morgan. Please proceed with your question.

Christopher Horvers — J.P. Morgan — Analyst

Thanks, good morning everybody. So a couple of questions. My first question is on the product margin benefits that you’re seeing on the pricing side, should these accelerate over the year given that some of this — the learning build sort to say in the systems and to what extent is it more sensitive to sort of highly seasonal and mark down from quarters like a 2Q and a 4Q versus the third quarter?

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

Yeah. Listen, I think — this is Dave. We’ve made a lot of investments from a product, cost management and pricing perspective, infrastructure here at Lowe’s and we feel very confident between the merchant and finance team on kind of managing that. It is not necessarily seasonally related. This is really about managing our everyday pricing cost in a more effective manner over time.

I do think that we’re still in the early stages of this journey, as we think about the next several years to improve our performance here. Clearly, at the moment, we’re — as we said in our prepared remarks, there are some inflation pressures in our business that we’re managing through. I do believe that we have — we’ll continue to invest in these tools and technologies to enable us to improve our margin performance over the long — longer term.

Now keep in mind, Chris, I just want to go back to what we said of our long-term financial algorithm here is really to maintain kind of flattish gross margins over time with the fact that we would improve product margin, but we’ll reinvest some of that product margin in the supply chain to drive performance and growth over the long term.

Christopher Horvers — J.P. Morgan — Analyst

Got it. Understood. [Speech Overlap] And then in terms of as a follow-up on the 12% margin question, if you do end up beating that minus 2% sales outlook, I guess why wouldn’t you be above the 12%? Is there an offset perhaps bonus and employee incentives, is it a headwind from lumber inflation that creates a rate headwind that more than offsets the natural leverage of beating the robust scenario sales guide.

William P. Boltz — Executive Vice President, Merchandising

Yeah. Hey, Chris. I just wanted to get ourselves focused. Listen, first and foremost, we’ve said about the fact that we’re [Indecipherable] gaining some market share we’ve got to improve operating margin performance here and we’ll try to get to our 12% in the short term here. Beyond 12%, we have objectives and we believe we can expand it further, but let’s at least get to our 12% margin first, and so we’re just kind of laser-focused on making sure that we’re delivering upon our commitments from that perspective.

Marvin R. Ellison — President and Chief Executive Officer

Hey. And Chris, this is Marvin. You can appreciate the challenge we have looking at the overall macro outlook for the business with all the dynamics occurring in the marketplace. The good news is, is the better the macro perform, the better we’ll perform. We feel great about the things that we control, and some of the tools and some of the processes, we put in place and some of the decisions of the leadership team are really paying dividends. And as David said, a couple of times already today, we were committed to outperforming the broader market, and improving operating margin. And if the macro improves significantly above the robust scenario, then our business will perform equally as well, and that’s how we’re approaching it.

Christopher Horvers — J.P. Morgan — Analyst

Understood. Best of luck guys.

Marvin R. Ellison — President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Charles Grom — Gordon Haskett Capital Corporation — Analyst

Hey, good morning, great quarter. You guys spoke about the big increase in lumber pricing, Depot said the same thing yesterday, curious what you’re seeing on the demand side and unit velocity over the past few months?

Marvin R. Ellison — President and Chief Executive Officer

Hey, I will — I’ll start it off. What I can tell you is, we’re just really pleased that the merchants were able to create such strong supplier relationships that we could keep up with demand in an unprecedented environment of unit demand. So I’ll let Bill talk about units and how we’re performing and kind of how we feel about the rest of the year.

William P. Boltz — Executive Vice President, Merchandising

Yeah, Chuck, I think to echo Marvin, I think demand continues to remain strong, all the preparation that was done coming off of last year has certainly enabled us to fulfill that demand going forward. All the work that’s being done right now is to maintain that as we go through the rest of the year and continue to manage the needs of the Pro customer, make sure that we can take care of them first. I mean, that’s really what we’re focused on in that job lot quantity and making sure that we’re right by market, and that’s been the focus of the team.

Charles Grom — Gordon Haskett Capital Corporation — Analyst

That’s great to hear. [Speech Overlap] And just a follow-up would be just on the installation business, you talked about a 6% comp in the quarter. I guess I’m curious like what penetration of the business is that today? How big can you grow that? And then also just from a profitability perspective, how it compares to the rest of the business?

William P. Boltz — Executive Vice President, Merchandising

Yeah, Chuck. That business is in the mid single digits penetration for our business and we do think we have a big runway here. As Joe indicated in his prepared remarks is that business was something that really wasn’t invested in historically and was something that we had really, I’d say poor service model historically and was not the best from an operating performance perspective, financially. I think we’ve now turned that business around, and have a really nice foundation, as we think about growing it. So I’ll ask Joe to give a couple of comments on it.

Joseph M. Mcfarland — Executive Vice President, Stores

Yeah. Thanks Dave. I’ll just make a few comments. You heard in my prepared remarks the performance very, very pleased, we’ve attracted industry veterans that really understand the complexities of being inside the home and especially in a COVID environment, all the new platforms that we have been focused on, the consolidation of installers across the country and remaining laser-focused on the programs that we really want to drive, and that’s all under the same umbrella as our Total Home strategy. So we’re very pleased with the team’s efforts and very pleased with all of our installer partners across the country and looking forward to a great continuing momentum here.

Charles Grom — Gordon Haskett Capital Corporation — Analyst

Great, thank you.

Operator

Thank you. Our next question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question.

Scott Mushkin — R5 Capital — Analyst

Hey guys, thanks for taking my questions. So, I had a long-term — long-term strategic question, when you guys think about your business into 2022. As you look at your strategic priorities, what do you think drives incremental growth for Lowe’s, kind of Company-specific? What are your top three type of things as you look out over the next 18 months? Thanks.

Marvin R. Ellison — President and Chief Executive Officer

Scott, this is Marvin. I think it goes directly to our Total Home market acceleration strategy where we talk about continuing to invest in online, which is really more omnichannel focused, making sure that we’re investing in our installation services business and also improving our overall performance with the Pro.

As I mentioned in my prepared comments, I mean, all of our customer segments are really important, and we are focused more intently on being a customer focus business. The Pro adds a different dimension because of the frequency of how the Pro would shop and also how the Pro shops throughout the entire store. And one of the strategic mistakes made in the past here is not understanding that customer and understand the economic value of that customer.

So, we’re going to continue to stay really focused on that customer. But I would say, those three things, omnichannel ensuring that we can continue to have a really robust and seamless installation service business and focusing on the Pro, are three of our priorities. But the whole Total Home strategy encompasses what we’re going to be leaning into for the next couple of years.

Scott Mushkin — R5 Capital — Analyst

That’s great. And then just like looking out at the back half of this year, are you guys seeing any signs that there is — this very high level of inflation is crimping demand at all or is that not something you’re seeing?

Marvin R. Ellison — President and Chief Executive Officer

We’re not seeing it. I’ll give you a thought. I’ll let Dave give a more financial perspective. I mean, we feel really good about this business and this business model. As I look at home improvement as an overall retail sector, I just think that even though we’re all just totally fatigued both mentally and physically with the pandemic and there is nothing that we can say positive about operating through with all the health and safety issues that we’ve all dealt with both business and personal, when you look at the macro for home improvement, it’s a very positive backdrop.

And as we look at forward-looking quarters and into next year, even with the inflation we’re seeing in certain areas, specifically lumber and copper, we just don’t believe that that’s going to create an impediment for growth or significant headwinds for this business sector. I’ll let Dave add any other comments.

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

The only thing I would add is — I’ll just reconfirm what Marvin said, we see no slowdown in demand at this point in time across our business and our categories. And I think if you speak to our Pro customers, we’re hearing from them that they won, are very busy at the moment and too have extremely long backlogs at this point in time.

So I think this demand will continue for some period of time.

Scott Mushkin — R5 Capital — Analyst

Thanks guys. Appreciate it.

Operator

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer & Company. Please proceed with your question.

Brian Nagel — Oppenheimer & Co. — Analyst

Hi, good morning. Congrats on a nice quarter. The first question I wanted to ask, you’ve talked a lot about the various scenarios for 2021 and the operating margin and market share opportunities for Lowe’s. How do you look at expense levers? I think you may have talked about this a bit in your prepared comments, but how do we think about the expense levers to the extent that sales proved choppier through the balance of 2021?

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

Yeah. So obviously — this is Dave. Obviously, the biggest expense level we have is how we manage operating salaries across our business and probably labor a little bit in the supply chain. I think what we’ve done is we have invested in tools and processes to really allow us to effectively manage that labor component, and really adjust it based on demand that we’re seeing from a profile perspective. With that, I’ll turn it over to Joe.

Joseph M. Mcfarland — Executive Vice President, Stores

Brian, thanks for the question. And I’d really point out the three major points of the PPI initiative that we talk about. First is the investment in technology to reduce the tasking hours and we’ve been doing that very effectively. Secondly is the improvement in customer service, with those changes, and then finally, the overall sales productivity and sales per square foot productivity of the stores.

I think as we’ve given some examples, the digital signs and appliances, digital signs in lumber, the investments we are making in the Pro area, the investments we’ve made on the front end. And so I think the overall investment thesis that we have in driving this PPI really speaks to choppy times or good times that we have to leverage the business.

Brian Nagel — Oppenheimer & Co. — Analyst

Got it. That’s very helpful. And my follow-up question with regard to sales, clearly, through Q1 and then given the commentary with regard to May, I mean, sales have stayed very, very strong and were rather broad based. But as you look at your business, on kind of a market by market basis, are you seeing any difference in sales trends in regions of the country or markets of the country that have opened up faster, presumably consumers are getting back to what — their normal lives quicker?

William P. Boltz — Executive Vice President, Merchandising

Brian, it’s been — when we talk about broad base, it’s more consistently broad based in anytime I can remember in my career. I mean, we have 15 geographic regions and three divisions. And as I had said in my prepared comments, I mean, all of our regions were in north of 18%, all divisions north of 20%. And when we look at top 40 markets or look at our top metropolitan areas, it is just surprisingly strong and consistent with very few outliers in the negative.

And so that points to us, that there are just good, underlying financial metrics and balance sheet, positive aspects for customers that is showing up in how they spend in our business. It also demonstrates that we’re running a more consistent business. But the short answer is, we’re not seeing any negative outliers.

When we look at customer mobility with — and even when we were seeing COVID spikes around the country and vaccination rates, we still didn’t see any major differences in overall revenue performance in those pockets of the country. So we feel good about that. And it points to what we believe will be very positive signs for the rest of the year, and that’s what we’re hoping and praying for.

Brian Nagel — Oppenheimer & Co. — Analyst

Right. Appreciate all the color. Thank you.

Kate Pearlman — Vice President of Investor Relations

We’re going to take one more question, please.

Operator

Thank you. Our final question this morning comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.

Steven Forbes — Guggenheim Securities — Analyst

Good morning, and thanks for taking the question. I wanted to focus on the Pro. You mentioned 30% sales growth in the Pro, but curious if you could sort of remind us or speak to the contributions from existing versus new customer growth. And if there’s any sort of quarterly variation in the Pro sales penetration rate that we should be cognizant of, as we work our way through 2021.

Marvin R. Ellison — President and Chief Executive Officer

Steve, the results from Pro equally balanced between new and existing customers. As Joe mentioned in his prepared comments, the key for us will be just continuing to get a larger percent of a wallet of our existing customers. If we didn’t attract one new customer, and we were able to get a greater percent of spend from existing customer that would solve our Pro penetration for the next two plus years.

So that tells you that our greatest opportunity is just getting our existing customers to buy more, but at the same time, with the loyalty program that Joe and his team launched, we’re seeing incredible growth in new customers and we’re seeing also customers be very attracted to our new credit program. And that’s a great sign for us to see the acquisition of new customers.

Joe, I don’t know if there is any other point you would make.

Joseph M. Mcfarland — Executive Vice President, Stores

Yeah. Thanks, Marvin. The only thing I would add, we started our journey in the Pro over two years ago, we talked a lot about the basics, the price service, the right brands. And now we’re focused on that strategic phase of the Pro growth, so — things like building out our Pro loyalty database, the new CRM, the redesigned store layout, the tailored shopping experience. So we believe that we have attracted a lot of new customers, we’re growing the wallet of our existing customers.

And again, I’m very pleased with the Pro team, their focus and everything that, that team has accomplished in the last two years.

Steven Forbes — Guggenheim Securities — Analyst

Thank you. And then just a quick follow-up, regarding Pro wallet share based on the CRM data that you have. Any sort of color or current data that you can share as it relates to the wallet share right or trip share of the small and medium sized Pro customer that you’re focused on?

Marvin R. Ellison — President and Chief Executive Officer

Steve, we’re not going to publicly share a lot of that detail. Obviously, we’re tracking it, but for competitive reasons, we typically don’t share it externally. What I can tell you is that we’ve been pleased with the launch of loyalty and CRM, both programs are exceeding expectations. We had some delays, or I’d say pauses in the rollout due to COVID and we’re now leaning into it.

We are excited about the amount of data that we’re collecting, and we’re more excited about the feedback from our customers on how they feel about the visibility of what they’re buying, how they’re buying it, and just the overall connectivity. So we look forward at some point in the future to sharing more details. But for now, I mean, we’re not going to share a lot externally other than to say we feel great about the progress we’re making in the trajectory of the business specifically with that customer.

Steven Forbes — Guggenheim Securities — Analyst

Thank you.

Marvin R. Ellison — President and Chief Executive Officer

Thanks.

Operator

[Operator Closing Remarks].

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