Categories Consumer, Earnings Call Transcripts

Lowe’s Companies, Inc. (LOW) Q2 2021 Earnings Call Transcript

LOW Earnings Call - Final Transcript

Lowe’s Companies, Inc. (NYSE: LOW) Q2 2021 earnings call dated Aug. 18, 2021

Corporate Participants:

Kate Pearlman — Vice President of Investor Relations

Marvin R. Ellison — Chairman, 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 and Chief Financial Officer

Analysts:

Kate McShane — Goldman Sachs — Analyst

Simeon Gutman — Morgan Stanley — Analyst

Zachary Fadem — Wells Fargo — Analyst

Michael Lasser — UBS — Analyst

Christopher Horvers — J.P. Morgan — Analyst

Steven Zaccone — Citigroup — Analyst

Eric Bosshard — Cleveland Research — Analyst

Greg Melich — Evercore ISI — Analyst

Presentation:

Operator

Good morning, everyone, and welcome to Lowe’s Companies Second Quarter 2021 Earnings Conference Call. My name is Darryl, and I will be your operator for today’s call. [Operator Instructions] As a reminder, this conference is being recorded.

I will now turn the call 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, Chairman, 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 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’ll 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 in our investor relations website.

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

Marvin R. Ellison — Chairman, President and Chief Executive Officer

Thank you, Kate, and good morning everyone. I’d like to begin by taking a moment to extend my thoughts and prayers to those who are impacted by the ongoing pandemic as well as the many wildfires, and Lowe’s remain committed to the health and safety of our associates and customers, while supporting the communities in which we operate. The resilience of our customers and our associates is something that I admire on a daily basis.

Now turning to our results. We are very pleased with the performance for the second quarter. During the quarter, comparable sales declined 1.6% for the total company and 2.2% for the U.S.. And on a two-year basis, comp sales were positive 32% for the total company and for the U.S. Our outstanding two-year performance was driven by great execution of our Total Home strategy, which allowed us to win with both the Pro and DIY customers, while meeting the aggressive growth demands across Pro, Lowe’s.com, and our Installation Services business.

As anticipated during the quarter, we saw a decline in DIY demand versus last year as many families transitioned back to pre-COVID purchase patterns and weekend mobility after Memorial Day. But because of the agility of our Total Home strategy, we’re able to capitalize on Pro demand, driving growth of 21% this quarter and 49% on a two-year basis. This level of Pro growth would not have been possible without our intense focus on the Pro customer over the past 24 months. This intense Pro focus includes our U.S. stores reset project that we executed last year. This reset has allowed us to create a more intuitive store layout for the Pro, aligned across product adjacencies so Pros can quickly and easily locate all products they need for their jobs. And as a reminder, our core Pro customer is a small-to-medium size business owner. These customers shop frequently across the store impacting numerous product categories. And as we continue to capture more of their spend, we will continue to increase productivity across the top and bottom line of our stores. Later in the call, Bill will discuss how we will continue to expand our Pro product offerings and then Joe will discuss our enhanced online experience for the Pro.

We also delivered double-digit growth this quarter in our Installation Services. We continue to expand the products available for installation and we’re leveraging our enhanced e-commerce platform and our revamped business model to deliver a better customer experience. We expect our Installation Services business to continue to play an important role in our Total Home strategy as customers increasingly look to us to provide an end-to-end turnkey solution for their home project needs. And our Lowes.com sales grew 7% on top of 135% growth in the second quarter of 2020, which represents a 9% sales penetration this quarter and a two-year comp of 151%. Our enhanced omnichannel offering continues to resonate with our customers, who increasingly expect total flexibility in shopping, however, whenever and wherever they choose.

We’re also pleased with the performance of our Canadian business. In the second quarter, Canada delivered comp growth in line with the U.S. despite several COVID-related operating restrictions. We also continue to elevate our product offering, which is another pillar of our Total Home strategy as we help fulfill the aspirations of our customers to upgrade their homes in style, and we delivered strong positive comps across kitchen and bath, flooring, appliances and decor, on top of 20% growth in these categories last year. The 17% growth we experienced in ticket over $500 was a large part driven by these categories, reflecting continued consumer confidence in investing in their homes. This also reinforces to consumers’ confidence in Lowe’s as the right destination for their home decor needs.

And during the quarter, operating margin expanded approximately 80 basis points, leading to diluted earnings per share of $4.25, which is a 13% increase as compared to adjusted diluted earnings per share in the prior year. In the face of unprecedented lumber price volatility during the second quarter, our improved operating performance reflects the benefits of our new price management system along with our disciplined focus on perpetual productivity improvement or PPI. Bill and Joe will discuss both these initiatives in more detail later in the call.

I’d now like to take a moment to discuss a very important milestone in the company’s transformation. When I joined Lowe’s as CEO back in July of 2018, I discussed the importance of transforming and modernizing our supply chain. The foundation of this transformation is transitioning the company from a store-based delivery model to a market-based delivery model for big and bulky products. I’m pleased to announce that this quarter we completed the conversion of our Florida region to a market-based delivery model for appliances and other big and bulky items like grills, [Indecipherable] and select patio furniture. In this new delivery model, product flows from the bulk distribution centers to cross-dock terminals directly to customers’ homes, bypassing the stores altogether. This replaces a legacy store delivery model where we hold appliances and stock rooms and storage containers behind our stores and then leverage store-based trucks and associates to deliver these products to customers’ homes. To say this legacy process is inefficient would be an extreme understatement.

The new market-based delivery model is already driving higher appliance sales, improved profitability, lower inventory, hire [Phonetic] on-time delivery rate and improved customer satisfaction. And we’re freeing up space in our stock rooms, which will enable us to expand our same day and next day Pro and DIY fulfillment capabilities in the near future. We plan to roll out the market-based delivery model across additional regions by the end of the year and then complete the rollout across the U.S. over the next 18 plus months. With this new delivery model, we’ll continue to drive sales, inventory turns and operating leverage through a technology-driven, simplified and customer centric process.

Before I close, I’d like to share my perspective on the home improvement market as well as Lowe’s opportunity to win in this market. The outlook for the home improvement industry remains very positive. Residential investment is expected to remain high due to historically low mortgage rates, while home prices continue to appreciate. We’re also pleased that we continue to see higher household formation trends and longer-term wallet share shift to the home. It’s also worth noting that any near-term pressures on housing turnover is not related to an economic downturn as typical. In fact, there is more housing demand and supply, resulting in home prices continuing to rise. And because of this, consumers have an increased confidence in repairing and remodeling their homes.

As a reminder, approximately two thirds of Lowe’s as annual sales are generated from repair and maintenance activity. Further, our research shows that it will take years for the supply of homes to meet the projected demand. This remains a very positive indicator for home improvement. In addition, the customers’ mindset regarding their home is very straightforward. As long as their home is increasing in value, they see upgrades and enhancements to their home as an investment and not an expense. Looking ahead, although the business environment remains uncertain, we are confident that our Total Home strategy provides us with the agility to operate with profitability in times of high and low customer mobility. And finally, I would like to extend my heartfelt appreciation to our frontline associates. As I travel the country on a weekly basis visiting stores, I’m continually inspired by the hard work and commitment of our associates to support our communities, while providing excellent customer service.

And with that, I will now turn the call over to Bill.

William P. Boltz — Executive Vice President, Merchandising

Thanks, Marvin, and good morning, everyone. U.S. comparable sales were down 2.2% in the second quarter, but up 32% on a two-year basis. We drove solid positive comps in our building products and home decor divisions. And while we delivered a terrific spring over the first half of the year, the pivot in consumer behavior after Memorial Day resulted in negative comps in our seasonal categories this quarter. However, growth was broad-based on a two-year basis with all product categories up more than 15% in that time frame.

In Building Products, we delivered double-digit comps in electrical and lumber, driven by strong Pro demand as well as high levels of inflation. And as Marvin mentioned, our merchandising and finance teams navigated through unprecedented lumber price volatility this quarter. Our enhanced pricing systems enabled us to effectively mitigate the impact on our product margins. Dave will provide more detail on the near-term impact of the lumber price decline on our margins and sales, but I am confident that our talented teams have the right pricing tools and processes to continue to manage through elevated levels of inflation and pricing volatility.

I’m also pleased with our performance in home decor as DIY customers continue to rely on Lowe’s for their home remodeling needs. By leveraging our Total Home strategy, we delivered positive comps across appliances, kitchens and bath, flooring and decor on top of over 20% growth in these categories last year. Capitalizing on our number one position in appliances, we delivered strong comps in the category this quarter, with particularly standout performance in washers and dryers as well as refrigerators and freezers. Countertops, kitchen cabinets and vanities were the strongest contributors to our kitchen and bath comps as our customers continue to appreciate the new on-trend, coordinated styles that are available in our own Allen and Roth brand.

Vinyl flooring was the top performing category within flooring driven by new and innovative WetProtect product from Pergo. It’s a leading brand in this category that is exclusive to Lowe’s and this product provides peace of mind to our customers with its guaranteed waterproof protection for both the flooring and sub floors. We also delivered a strong spring season in the first half of the year that kicked off with the launch of our new SpringFest event. We were very pleased that our customers took advantage of the strong product offerings to help make the most out of their outdoor living spaces. In this quarter, we delivered over 30% growth in battery-operated outdoor power equipment. Both our DIY and Pro customers are drawn to the convenience and the quality of the EGO, Kobalt, CRAFTSMAN and SKIL brands with their zero emission rechargeable equipment. And the addition of the EGO and SKIL brands only bolsters our number one position in outdoor power equipment. And they truly complement our other leading brands such as John Deere, Honda, Husqvarna, Aaron’s, and CRAFTSMAN.

We continue to add new brands and products to our lineup, especially for our Pro customer. This quarter, with the launch of FLEX power tools, we featured an in-store demo station for our new FLEX cordless power tools. This brand is exclusive to Lowe’s and delivers innovation to the power tool category, bringing more power and faster charging time than its competition. We also introduced the Mansfield brand across our bath department with drop in tubs, showers and toilets. Another exclusive in the home center space, Mansfield is a strong Pro brand and their products are made right here in the United States. And I’m excited to announce that we’ll be bringing more U.S. manufactured product to Lowe’s this fall with the launch of SPAX fasteners. SPAX is the market leader in multi-material construction screws. Their industry-leading innovation delivers some of the most advanced fasteners on the market. The addition of SPAX to the fastener program now rounds out the Pro assortment in this category that our Pro customers need. The addition of FLEX power tools, Mansfield plumbing products and SPAX fasteners continues to enhance our Pro brand arsenal, which already include strong Pro brands such as Simpson Strong-Tie, DEWALT, Bosch, Spyder, GRK, FastenMaster, ITW, Lufkin, Marshalltown, Swing, Eaton SharkBite, and Lesco.

As Marvin previously discussed, we delivered strong sales growth of 7% in a two-year growth of 151% on Lowe’s.com. This quarter, we enhanced our omnichannel customer experience with the launch of our virtual kitchen design, which enables customers to create their dream kitchen, allowing them to work on their project seamlessly between Lowe’s.com and the specialists on our virtual central design team. As part of our Total Home strategy, we are launching virtual search in our stores, which now allows a customer to hover their smartphone over a product and explore an endless aisle of similar items on Lowe’s.com. This is just one example of how we continue to integrate the online and the in-store shopping experiences.

And looking ahead, we are excited about the upcoming fall and winter holiday seasons as our customers will turn their attention to join their homes and outdoor living spaces as the weather cools. We are confident that our Total Home strategy will enable us to continue to elevate our product assortment and allow us to take market share across our DIY and Pro customers. We will also continue to leverage our new price management system to effectively manage our product margins with a disciplined approach to vendor cost management and a data-driven portfolio approach to pricing to further enhance and refine our everyday competitive price strategy. And before I close, I’d like to once again extend my appreciation to our vendor partners and our merchants for their commitment to serving 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. For the second quarter, we continued to drive improved execution in our stores with our associates laser-focused on serving customers and maintaining a safe store environment. In early August, in response to the surge of the Delta variant, we reinstated mask requirements for all of our associates regardless of the vaccination status. I’m appreciative that our associates are once again rising to the dynamic challenges presented by this pandemic.

I’m pleased to announce that for the sixth consecutive quarter,100% of our stores earned a Winning Together profit-sharing bonus, resulting in a $91 million expected payout to our frontline hourly associates. And because of their efforts, once again exceeded expectations. This represents an incremental $20 million over the target payment level. We are also very pleased that our PPI initiatives continue to gain traction, driving operating efficiency again this quarter as we leverage store payroll through operational process improvements and technology enhancements, reducing the amount of time our associates spent on tasking activities, so they can focus instead on serving the customer.

During the quarter, we maintained strong staffing levels despite isolated labor shortages in some areas of the country. We continue to enhance the labor scheduling system that we launched in 2019, which allows us to align our payroll hours with customer traffic patterns. It also enables us to respond rapidly and effectively to changing market conditions so that we can ensure that we continue to provide great customer service, while also driving operating leverage. This year, we’ve installed our homegrown self checkout solution in over 550 stores that did not have any self checkout capability for our customers. This Lowe’s design self checkout was built with the home improvement shopper in mind, featuring a simplified user interface, multiple ways of scan product and the ability to use Lowe’s military and credit card discounts. This new solution is already driving higher customer adoption rates and incremental payroll leverage. And with the digital signs fully rolled out across the lumber and appliances, we are not only driving labor savings but also enhanced product margins as we can now adjust prices more quickly to protect share and margins during periods of price volatility.

As previously discussed, our online penetration for the quarter was 9% and with approximately 60% of online orders picked up in the store, our dedicated in store fulfillment teams are an integral part of the Lowe’s omnichannel customer experience. We are continuing to leverage technology to improve efficiency and the customer experience where the customers get their orders in the front desk or through curbside or through their favorite option, our new pickup lockers.

Now let’s turn to our performance of the Pro customer. As discussed earlier, Pro continues to outpace DIY with pro comps of 21% for the quarter and 49% on a two-year basis. We continue to expand our digital connection with the Pro customers. We just completed the migration of Lowe’s for Pros to the cloud. This important step in our Pro business evolution enables enhanced features, faster update, improved site stability and more personalized offers for the Pro. One new feature is rapid reorder, which enables our Pro customers to quickly reorder items they frequently purchased through Lowe’s. We are focused on making the Pro shopping experience both online and in-store as easy and intuitive as possible. We’re also growing our Pro loyalty program as we look for innovative ways to expand our members-only benefits. Every day we are striving to demonstrate that Lowe’s is the new home for Pros. Looking ahead, I’m excited about the second half of the year as we leverage our Total Home strategy to build on the momentum in Pro and Installation Services, while also meeting the needs of the DIY customers, they continue to tackle interior and exterior projects to improve their homes.

Before I close, I would like to once again extend my appreciation to our frontline associates along with other executive and senior officers as well as merchants and field leaders. I’m out visiting stores on a weekly basis to ensure that we continue to engage with and support our frontline associates in this challenging operating environment. I’m incredibly proud of this team and their continued hard work and dedication.

With that, I’ll turn it over to Dave.

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

Thanks, Joe. And I’ll begin this morning with a few comments on the company’s strong capital allocation program. In the second quarter, we generated $2 billion in free cash flow, driven by continued strong operational execution and consumer demand. We returned $3.6 billion to our shareholders through a combination of both dividends and share repurchases. During the quarter, we paid $430 million in dividends at $0.60 per share and we announced a 33% dividend increase to $0.80 per share for the dividend paid on August 4th. Additionally, we repurchased 16.4 million shares for $3.1 billion and we have $13.6 billion remaining on our share repurchase authorization.

Capital expenditures totaled $385 million in the quarter as we invest in the business to support our strategic growth initiatives. We ended the quarter with $4.8 billion in cash and cash equivalents on the balance sheet, which remains extremely healthy. At quarter end, adjusted debt-to-EBITDA stands at 2.08 times, well below our long-term stated target of 2.75 times.

With that, now I’d like to turn to the income statement. In Q2, we generated diluted earnings per share of $4.25, an increase of 13% compared to adjusted diluted earnings per share last year. During the quarter, we drove improved operating leverage as we executed against numerous productivity initiatives across the company. My comments from this point forward will include approximations and comparisons to certain non-GAAP measures where applicable. Q2 sales were $27.6 billion with a comparable sales decline of 1.6%. Comparable average ticket increased 11.3%, driven by over 400 basis points of commodity inflation, mostly in lumber, as well as higher sales of appliances and installations. This was offset by comp transaction count declining 12.9% due to lower sales to DIY customers of smaller ticket items like cleaning products, paint, Mocha and live goods.

In Q2, we cycled over a period when consumer mobility was limited, so many of our customers we’re tackling smaller projects around their homes. Also in Q2 of this year, DIY customers pulled back on purchasing lumber and related attachments due to extremely elevated lumber prices in the quarter. Keep in mind that comp transactions increased 22.6% last year, which results in a two-year comp transaction count increase of 6.8%. As Marvin indicated, our investments in our Total Home strategy gave us the ability to pivot during the quarter and led to outperformance in many of our key growth areas, with Pro up 21%, online up 7%, Installation Services up 10%, and strong positive comps across DIY decor categories.

U.S. comp sales were down 2.2% in the quarter, but up 32% on a two-year basis. Our U.S. monthly comps were negative 6.4% in May, negative 1.8% in June, and a positive 2.6% in July. After Memorial Day, there was a noticeable increase in consumer mobility and consumers engaged in the opportunity to travel and spend in other discretionary categories. We saw our related decline in DIY customer traffic in our stores on the weekends, while weekday traffic remained strong.

Looking at U.S. comp growth on a two-year basis from 2019 to ’21, May sales increased 32.5%, June increased 32%, and July increased 31.5%. Gross margin was 33.8%. As expected, gross margin rate declined 30 basis points from last year, but was up 165 basis points as compared to Q2 of ’19. Product margin rate improved 40 basis points. Our teams effectively managed product cost and pricing this quarter despite unprecedented volatility in lumber prices. Our teams continue to minimize vendor cost increases driven by higher commodity prices and elevated industry transportation costs. Also higher credit revenue drove 30 basis points of benefit to gross margin this quarter. These benefits were offset by 20 basis points of pressure from shrink and live good damages from the extreme weather conditions in the west. Also 25 basis points of mix pressure related to lumber and 20 basis points from less favorable product mix and other categories. Supply chain costs also pressured margin by 35 basis points as we absorbed some elevated distribution costs and continue to expand our omnichannel capabilities. Our supply chain team continues to leverage our scale and carrier relationships to minimize the impact of these distribution cost experienced across the retail industry.

Now I’d like to spend just a moment discussing the near-term impact from the steep drop in lumber prices beginning in early July. Since that time, we’ve been selling many of our lumber products at compressed margins because we had previously purchased these products at higher cost. However, we expect that by the end of August we will have substantially sold through these higher cost inventory layers and despite these short-term pressures, we are still expecting that our gross margin rate to be up slightly for the full year versus last year.

SG&A at 17% of sales levered a 135 basis points versus LY, driven primarily by lower COVID-related costs. We incurred $25 million of COVID-related expenses in the quarter as compared to $430 million of COVID-related expenses last year. The $405 million reduction in these expenses generated a 145 basis points of SG&A leverage. These benefits were offset by 20 basis points of pressure from higher overall employee health care costs. Operating profit was $4.2 billion, an increase of 6% over LY. Operating margins of 15.3% of sales for the quarter was up 80 basis points to the prior year. This improvement was generated by improved SG&A leverage, partially offset by lower gross margin. The effective tax rate was 24.4% and it was in line with prior year.

At the end of the quarter, inventory was $17.3 billion, down $1.1 billion from Q1 and in line with seasonal trends. This reflects an increase of $3.5 billion from Q2 of 2020 when our in-stock positions were pressured due to elevated demand levels and COVID-related supply disruption. Current inventory includes a year-over-year increase of $665 million related to inflation, the majority of which is attributable to lumber.

Now before I close, let me comment on our current trends and how we are planning the business for the second half of this year. Clearly, we continue to manage our business in a very fluid environment with the Delta variant trends injecting new uncertainty into the forecast. However, given our strong first half performance, Lowe’s is clearly tracking well ahead of our robust market scenario that we shared with investors back in December of 2020. Our outlook assumes that the home improvement market will moderate somewhat in the second half given lower levels of commodity inflation and a continued increase in consumer mobility driven by return to work and school. We are expecting Lowe’s mix adjusted market demand to be essentially flat for the full year. This relevant market view reflects Lowe’s higher DIY mix and lower online penetration.

Now in this revised scenario, we expect Lowe’s to deliver sales of approximately $92 billion for the year, representing two-year comparable sales growth of approximately 30%. Month-to-date, August U.S. comp sales trends are materially consistent with July’s performance levels on a two-year comparable basis. As expected, we are already seeing a several hundred basis point improvement in comp transaction count over the Q2 levels, partially driven by increased unit sales of DIY lumber and related attachments, as DIY customers who were sitting on the sidelines reengaged after lumber prices dropped.

Importantly, we expect gross margin rate to be up slightly versus the prior year as we leverage our pricing and promotional strategies to mitigate the impacts of product and transportation cost inflation. With elevated sales levels projected and our current productivity efforts taking hold, we are now raising our outlook for operating income margin to 12.2% for the full year. We are expecting a 10 basis point negative impact from elevated cost inflation. Furthermore, we are tracking well ahead of our operating plans. And as such, we now expect to incur higher than planned incentive compensation resulting in 20 basis points of pressure. Together, these expenses represent 30 basis points of operating margin deleverage relative to the $92 billion revenue outlook. Without these off-setting expenses, we will be expecting an operating income margin of 12.5% for the full year.

When I consider outlook for the business for the remainder of this year, I’m very pleased that we are now expected to deliver approximately 145 basis points of operating margin improvement over 2020. This reflects a disciplined focus on driving productivity and operational excellence across the organization. We are planning for capital expenditures of $2 billion for the year. Furthermore, we expect to execute a minimum of $9 billion in share repurchases. In closing, we are operating in a great sector expected to benefit from the secular tailwinds over the next several years. We are investing in the business and our Total Home strategy to drive long-term growth so that we continue to outperform the market and drive meaningful long-term shareholder value.

With that, we are now ready for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first questions come from the line of Kate McShane with Goldman Sachs. Please proceed with your questions.

Kate McShane — Goldman Sachs — Analyst

Hi, good morning. Thanks for taking our question. Just given the changes in the Pro with all the brand additions you’ve made and the changes you’ve made to the store plus the change we’ve seen in terms of sales mix towards the Pro, can we assume that the sales mix for Pro for Lowe’s is higher than the 20% to 25% you quoted in the past? And how did the Pro comp of 21% compared to your plan for the quarter.

Marvin R. Ellison — Chairman, President and Chief Executive Officer

Hey Kate, this is Marvin, I’ll take the question. I would say that the Pro outperformed our original plan. We knew that we would see a greater shift to Pro versus DIY based on what we saw in the first quarter. But the 21% comp and the 49% two-year comp is something that exceeded our original expectations. Having said that, if you take a look at our Pro penetration from 2018 to today is roughly a 300 basis points improvement. But as our total sales continues to grow, the overall Pro penetration still hovers around 25%.

Kate McShane — Goldman Sachs — Analyst

Okay. Thank you very much. And just with regards to gross margin as a follow-up question, it seems that your guidance for gross margin being up slightly for the year implies that gross margins can be flat to up in the back half. Is there any way to delineate what Q3 looks like versus Q4?

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

Kate, its Dave. Probably not going to give that level of granularity. I would say what is important, you have it exactly right. We do expect gross margin in the back half to be up slightly and certainly up for the full year.

Kate McShane — Goldman Sachs — Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.

Simeon Gutman — Morgan Stanley — Analyst

Hey, good morning, everyone. Thanks for the question. My first question, its a little theoretical on actually ’22, and I know you haven’t given guidance on that yet. The question is, if the business grows next year, if the industry grows next year, is there any cost pressure that we’re seeing from this environment that could preclude margins from growing in a sales growth environment? And then alternatively if sales are flat or decline slightly, are there enough levers in the transformation of this business to allow margins to grow? And I’m just trying to understand what sort of open buttons and Flex and how you think about managing the business going into next year?

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

Hey, Simeon, this is Dave. Maybe I’ll start. I’m sure Marvin will maybe chime in here a bit as well. It clearly, as we sit here today, we had a objective to get to 12%. Now just with the strength of the business, seeing line of sight to above 12% at this juncture. Clearly we have aspirations and targets to get to 13% and we’re still tracking nicely to those — to that objective. As we said, we are experiencing cost pressures from an industry perspective. Our model and what we put into the business and invest in the business allows us to be flexible and pivot such that in periods when sales are flat or sales are going up slightly, we can actually lever the business. So, it’s our expectation that we would continue to make progress as we continue to march to that longer-term goal of 13%.

Marvin R. Ellison — Chairman, President and Chief Executive Officer

Simeon, this is Marvin. The only point I’ll add is we’re very pleased that over the last three years we’ve been able to put systems and organizational structures in place that really supports Dave’s point of the agility we have. If you go back to first quarter of 2019 when we had the cost and price issues, we had no internal mechanisms to manage that effectively. We’ve now rolled out a new modern price management system are Bill Boltz, Dave Denton and the merchants and finance team have created cost mitigation teams that work on a daily basis, helping us to manage costs, retail, and making the right decisions that first we’ll think about the customer and how we can deliver value on an ongoing basis. So in summary, we now have levers that we can pull that we didn’t have in the past. And so Dave’s point is exactly correct. We think we can manage this effectively today and in the future.

Simeon Gutman — Morgan Stanley — Analyst

And then maybe the related follow-up. In thinking about the composition of the different margins, the gross margin and the SG&A, I know — I think conceptually the growth shouldn’t really be going up much, but within the transformation there are certain things that are targeted on the gross margin line, like some of the supply chain initiatives that should lower and take some cost out of the business. So is the principal still the same where growth is still sort of range bound and SG&A leverage is how the margin expansion should come from here.?

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

Yeah, Simeon, that is correct. Keep in mind that we’re making really nice progress from a product margin perspective. We continue to expand in that area. At the same time, we’re investing in supply chain and as we invest in supply chain that essentially dilutes gross margin, but it relieves us of SG&A in the store. So therefore the flow-through is very productive on the bottom line. But again, you have a geography shift as cost move up in the gross margin, but out of SG&A.

Simeon Gutman — Morgan Stanley — Analyst

Okay, that’s helpful. Thanks, guys. Good luck.

Operator

Thank you. Our next questions come from the line of Zach Fadem with Wells Fargo. Please proceed with your questions.

Zachary Fadem — Wells Fargo — Analyst

Hey, good morning. So within the context of your 12.2% EBIT margin outlook, could you parse out the impact from the productivity enhancements you’ve been making across the business, things like market-based delivery, labor scheduling, digital signage, etc.? And as we think about the back half of the year, should we expect these benefits to widen or are there any offsets from incremental investment like resets, etc.?

Joseph M. McFarland — Executive Vice President, Stores

There is no incremental projects that we’re putting on our plate at this point in time for the balance of the year. I think the playbook that we launched at the beginning of the year continues to hold true because we are making the right investments in our business and we don’t see a need to change that. Having said that, if you look at the back half of the year, we are making investments in supply chain. As Marvin indicated, we now have launched Florida. We’re going to roll it out into other markets for the balance of the year. So that’s putting some pressure on us as we plan, but you’re going to see SG&A leverage come through as we continue to invest in productivity. It’s going to drive performance and we’re going to overlap COVID-related expenses that are non-recurring in the back half of this year, both of which is really driving SG&A productivity.

Marvin R. Ellison — Chairman, President and Chief Executive Officer

In fact, this is Marvin. The only thing I’ll add is, Joe mentioned in his prepared comments our rollout of our proprietarily developed self checkout and how that’s not only creating a better customer experience, its also helping us to leverage payroll expense the correct way by implementing technology that reduces manual labor spend. And we talked about our PPI initiatives where we have a long list of technology enhancements that the Joe is working with Seemantini, our Chief Information Officer, thus allowing us to improve productivity, improve the customer experience and reduce tasking hours, and all of that is part of the equation of us now tracking toward our 13% operating income long-term target.

Zachary Fadem — Wells Fargo — Analyst

Got it. And then you called out some reluctance or elasticity in the first half of the year given the rise in lumber and building material prices. So with pricing now starting to come in a bit and July, August comps inflected positive, could you talk about whether you think projects were delayed at all in the first half and to what extent this could be a driver of re-acceleration in the second half?

Marvin R. Ellison — Chairman, President and Chief Executive Officer

I’ll let Joe take that and let him just talk specifically about what we’re hearing from our Pro customers about their book of business and also as we look at our Installation Services business, what we see in our own pipeline.

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

So, Michael [Phonetic] a couple of things. First starting with the services. We definitely believe in the project business of this install business and when you look, there were definitely categories delayed, things primarily outdoor projects, fencing, decking as you looked at the peak in lumber prices we found where customers were not willing to continue to invest based on the price. At the same time, we mentioned in the prepared remarks, the strength in kitchen and bath. Our interior categories really outperformed in the second quarter, delivering over 20% comp. So as we look at the shift from exterior to interior, we look at the focus of the Total Home. We look at our focus on the Pro business. We migrated to the Google Cloud, we rolled out Pro loyalty, and we continue to add enhanced features. We’re seeing great response from the customers from services standpoint, also the pros, from Lowe’s being the new home for Pros.

Zachary Fadem — Wells Fargo — Analyst

Got it. Appreciate the time guys.

Operator

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

Michael Lasser — UBS — Analyst

Good morning. Thanks a lot for taking my question. Marvin, the general perception is that the DIY market is going to slow considerably and Lowe’s will be disproportionately negatively impacted by that given the mix of business. How is that’ll be wrong?

Marvin R. Ellison — Chairman, President and Chief Executive Officer

Well, I’m not saying that is wrong. I think that also may consider that we’re not going to improve our Pro business. So as I mentioned in my prepared comments, we’ve been working diligently for 24 months to really have a solid Pro business. One of the reasons why we delivered a 32% two-year comp is because 49% of our Pro comp drove that in that two-year basis. So if you look at in isolation, Michael, that probably is a true statement but is a dynamic business. Dynamic in the nature that we’re improving our Pro business, reflected by the results. Dynamic in the nature that we’re going to continue to take market share with the DIY customer, with the things that we’re launching in the core, how we’re enhancing the Allen and Roth brand. We just acquired Stainmaster as a brand that we’re going to expand. So I think that the dynamic nature of DIY and our growth in Pro I think we’ll put that Synopsys into question.

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

Yeah. Hey, Michael, this is Dave. Just don’t forget that what has happened here over the last 18 months is a re-emphasis back on the home and what you’re seeing is despite the fact that the market is open — or the U.S. market is opening up, you’re still seeing a large contingent of work from home, school from home, utilizing the home for other activities other than just dwelling. So I believe that over time there is a secular trend and tailwind of this industry, both from a Pro and from a DIY perspective. I assume demand will mitigate a little bit, but it’s not going to — it’s not going to fall off the floor either.

Michael Lasser — UBS — Analyst

Got it. Super helpful. My follow-up question is can you quantify the comp and margin lift that you’ve seen in Florida and you mentioned that you’re going to roll this out to other markets through the rest of the year. How quickly can you have this up and running across the country, across all of your market?

Marvin R. Ellison — Chairman, President and Chief Executive Officer

I mentioned in the prepared comments we’re looking at in 18 plus rollout cycle because we want to ensure that we do it efficiently and there is a significant amount of change management, change management from a process standpoint for our sources and change management in putting new systems and sort of we can basically create virtual inventory and not have inventory on hand to sale, which is exactly what a market-based delivery model is. We’re very pleased with what we’re seeing in Florida. We’re pleased with the inventory reduction, the lift in sales, the productivity, the expense reduction. But we’re a big company and we want to make sure as the old saying goes to go slow, to go fast, so we can do this officially. But we’re excited about the possibilities. And as I said, this is the foundation of our supply chain transformation, and Don Price, in our lead supply chain joining operations team deserve a lot of credit along with IT for allowing us to have the success in Florida that we’re now confident that we can roll this out to the whole company.

Michael Lasser — UBS — Analyst

Very helpful. Thank you so much and good bye.

Operator

Thank you. Our next question coming 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. Can you talk, just to check our math. So it seems like you’re 1% to 2% comp quarter-to-date, is that right? And can you talk about what you’re seeing on the Pro versus DIY trend? Some of the schools have gone back maybe in the south. Are you seeing more of a focus on the home and expect that sort of the DIY business can can hold in as people get back in their homes?

Marvin R. Ellison — Chairman, President and Chief Executive Officer

Hey, Chris. As you can respect, we want to — we don’t want to get too granular on our inter-quarter data. We thought it was prudent to share August trends just based on the unique nature of our business environment. But if you go back to Dave’s comments, we compare August month-to-date to July on a two-year comp basis. So that’s how we’re looking at the business. We think with the extraordinary business results we saw in 2020, the best way for us to measure our business is to look at it on a two-year basis.

Now having said that, we feel great about the trends that we’re seeing across Pro and DIY. We believe that for the balance of the year the Pro customer will outperform DIY just based on the year-over-year overlaps. But as Dave said, we’re equally confident that the DIY will continue to invest in their home because of home price appreciation, because of the age of housing stock and because of the simple nature that as you’re home increase in value you have more confidence to invest. So we feel great about our performance. We feel so much in strong support that we raise our outlook on the top and bottom line and that reflects that we have a pretty good line of sight to how the rest of the year should play out.

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

Yeah, I understand, one additional comment. Your question specifically on South and performance. In the second quarter, we are very pleased with Southern division’s performance from a Pro standpoint.

Christopher Horvers — J.P. Morgan — Analyst

Got it. Yeah, the two-year CAGAR sequentially was very strong. Following up on the gross margin side, so you did go slightly above the prior guidance. So is the pricing sophistication and maybe credit driving that improved outlook? And just a foot back to that 10 basis points, it sound like lumber pressure that would all accrue, that’s a annual impact and that’s basically all going to impact the third quarter.

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

Well, I think what we said is we’re now at the moment experiencing margin pressure in lumber and that’s can cycle through here by the end of August. We feel good about that. We continue to invest and focus on both our cost management and our pricing ecosystem here at Lowe’s. And I think between the merchant and finance team, we have a really good analytical process that we’re driving performance in those areas and we have now really good line of sight to seeing gross margins up this year despite the fact that we are making investments in supply chain that is compressing margin from a cost perspective.

Christopher Horvers — J.P. Morgan — Analyst

Got it. Thanks very much. Good luck.

Operator

Thank you. Our next questions come from the line of Steven Zaccone with Citigroup. Please proceed with your questions.

Steven Zaccone — Citigroup — Analyst

Great. Thanks for taking my question. I wanted to focus on the Pro side of the business since you’re having outperformance thus far in 2021. Can you talk a bit about market share performance, maybe how you feel relative to the competition thus far?

Marvin R. Ellison — Chairman, President and Chief Executive Officer

Steve, I would say, as I have said in previous calls that home improvement market share data is suspect at best because the data set is not great. As we look at our growth in Pro, anytime you grow the business, 49% on a two-year basis, you can assume you’re pretty confident you’re taking market share, and we think that that market share is coming from a host of competitors both small and large. I think is also reflective that Lowe’s has not had a coherent Pro strategy in past 10 years and I think Joe McFarland and his team along with Bill Boltz and the merchants have done a really nice job of getting us line of Pro. What I’d like to do is I just want Bill to take a moment and talk about some of the Pro brands that we’ve been able to add and brands that are on top that we think will continue to allow us to take share in this business.

William P. Boltz — Executive Vice President, Merchandising

Yeah, thanks, Marvin. So Steve, in my prepared remarks, I mentioned we’re getting ready this quarter to round out our fastener program with the launch of SPAX, just a great Pro brand in the Fastener segment, already complementing other brands that the merchants have brought in with the likes of GRK, FastenMaster, Power Pro One. And then across other parts of our business, we announced Mansfield, that’s a strong Pro brand in the plumbing space. We’ve had success getting Honda to join the Lowe’s family, which is a big deal for us. Another great Pro brand Lesco fertilizers that we talked about in the first quarter, and then we’ve had just real good success of getting other brands like Marshalltown, ITW, Lufkin. I named a bunch of them and we’re just — we’re fortunate that these brands have recognized the value of what we’re doing at Lowe’s with the Pro strategy and recognize that it’s an opportunity for them to grow as well.

Steven Zaccone — Citigroup — Analyst

Great, thanks. Just a follow-up on the e-com side of the business since you’re still seeing some growth there on top of this trend last year. What are the priorities to continue to drive growth there this year? And I guess longer-term, where do you think penetration could fall for that side of the business?

William P. Boltz — Executive Vice President, Merchandising

So Steve, this is Bill. So on the Lowe’s.com side, obviously continuing to enhance product assortments, continuing to make sure that content is enriched in all of the kind of the basic fundamentals are key to continuing to build this out. But as we said in our prepared remarks, we’ve had new enhancements that we’ve been able to leverage, the kitchen design program, virtual search. But we’ve also, as Joe mentioned, migrated the Lowe’s for Pros over to the cloud. We moved all of Lowe’s.com to the cloud few months back. All of those initiatives are helping making it easier and faster to make enhancements to the Lowe’s.com business on a weekly basis. And then the merchant teams are continuing to look at ways in which we test new products and test new brands and doing different things. So working with our brand advocates to make sure that we’re putting the right stuff out there in front of the customer, the recommended products that go with a product that you can buy the whole project. So just a lot of great things going on with the Lowe’s.com team, and they continue to bring enhancements on a weekly basis to make sure that we’re relevant and we see this is a nice opportunity for us over the next three plus years to continue to grow our business.

Marvin R. Ellison — Chairman, President and Chief Executive Officer

And on the penetration question, we’re probably in the year around 10% and we are purposely not trying to set penetration targets, we really find to be more customer-centric and create an environment for customers to shop anyway they choose. We talk about omnichannel, that’s an overused term lately. But in essence, we just want to give the customer choice to shop in-store, online pickup up in a locker, curbside, in-store, ship from store and just provide a multitude of options and would like to penetration kind of land where it lands.

Steven Zaccone — Citigroup — Analyst

Very helpful. Thanks guys.

Operator

Thank you. Our next questions come from the line of Eric Bosshard with Cleveland Research. Please proceed with your questions. Good morning. Thank you. two things. First of all, the lumber gross margin impact on the year is likely worse than what you initially anticipated. Can you talk a bit about what’s better on the other side of that? And within this, could you also address the promotional investment in 2Q and 2H and what you’re doing there and how that’s having an influence on gross margin as well?

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

Eric, this is Dave. Obviously, it was hard to predict how gross margin was going to pay to play out specifically for lumber this year. So obviously, we are experiencing some pressure at this point in time. I would say what we’ve done is taking a portfolio approach across our business and making sure that we’re managing gross margin holistically such that we can deliver upon the objectives and the commitments we have from an investor perspective. So the offsets to that are fairly comprehensive across the portfolio of products. And I’d say from a promotional standpoint, I’ll ask Bill to comment on this, but we want to make sure that we’re relevant on key holidays and Tier 1 events, but we’re not nearly as broad and or as deep from a promotional standpoint as we would have been back in 2019.

William P. Boltz — Executive Vice President, Merchandising

Yeah, Dave, and Eric, I think, I’d add. We’ve talked about this in the past. We’ve been on this march for an everyday competitive pricing strategy and we wanted to make sure that when we got here we wanted to unwind this high low strategy that had been in place across a lot of categories. So when you think about pressure from lumber, how does it get offset elsewhere. It gets offset elsewhere by not having some of these categories on a heavy promotional drug. And so we know that we can compete every day on a competitive pricing basis and that’s the work that the team has been doing, and then you put all the efforts that we’ve talked about with the pricing, the cost team, the finance team, collaboration with the merchants, in addition to our field merchants and our field leaders out in the field, we’re on this march now for opportunities local to do different things and to enhance margins that way. So from an event standpoint, very typical events in Q2 with Memorial Day, Father’s Day July 4th, and a kind of a more normal event approach. And as we look at the back half of the year, similar trends as we look at the — we look at the second half, so noting crazy.

Eric Bosshard — Cleveland Research — Analyst

Great. And then just one follow-up. The sales guidance for the second half implies some degree of moderation from 2Q or July-August, and there’s lots of ways to look at the numbers, encouraged by the operating margin move up, but the sales guide still seems a little bit conservative. How would you characterize the sales guidance? And is there something else we should be thinking within what that considers?

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

Hey, Eric, this is Dave. I don’t think you should read on that too much. I think at the end of the day we’re just operating a very fluid environment. We just want to make sure that we have line of sight to what we’re going to deliver for the full year. Yes, typically sales do moderate in the back half of the year. I think we’ve just taken a realistic appropriate approach to thinking about how our back half is going to play out and this is how we’re planning it.

Marvin R. Ellison — Chairman, President and Chief Executive Officer

Hey, Eric, this is Marvin. The point I’ll add to that is you can appreciate that this is a really unique environment and a very difficult environment to forecast and you have quite a few retailers that’s not even given any guidance at all or outlook on the second half of the year because of that we wanted to be as transparent as possible, but we also wanted to be slightly conservative because there’s so much fluid activity happening in this environment, we felt that it was prudent to be conservative but also we’ve got it was equally prudent to be as transparent as possible on how we’re seeing the business. But today’s point, don’t read too much into that.

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

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

Operator

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

Greg Melich — Evercore ISI — Analyst

Hey, thanks. I’d like to start just to make sure I got the inflation number right. The 400 bps, was that just lumber or was that inflation that we can compare to the average ticket growth of 10%?

Marvin R. Ellison — Chairman, President and Chief Executive Officer

It was everything, but it was primarily focused on lumber though, is predominantly lumber.

Greg Melich — Evercore ISI — Analyst

Got it. So it’s probably lumber commodities, but that’s not like there’s another 200 bps there that would have been rest of box inflation?

Marvin R. Ellison — Chairman, President and Chief Executive Officer

That’s correct.

Greg Melich — Evercore ISI — Analyst

Got it. And then the follow-up was — it was really, Marvin, you spoke in the prepared comments and there are several questions along the way on the marketplace rollout for big and bulky. Could you help describe what that means in practical terms to both the DIY and the Pro business, so in that what it does to opex and capex for the next 18 plus months as you’re rolling it out?

Marvin R. Ellison — Chairman, President and Chief Executive Officer

Yeah, you know we talked early on in the supply chain transformation that we’re going to be making a $1.7 billion investment over a four-year span. This whole market delivery transformation is included in that overall supply chain transformation. So we’re not increasing any capital spend to achieve this or to roll this out over the next 18 plus months. But really what this means, it just gives us the ability to create a more efficient modern delivery process. So as an example, in the markets today where we don’t have market delivery. When you come in to buy an appliance, the associate is going to sell you an appliance based on the in-stock that they have in their store or in a storage container. If its not physically within their eyesight, they will not sell that appliance. And let’s say you do sell it, then you will literally have to call the customer via telephone to arrange a delivery schedule time. So imagine in 2021 that you don’t have the ability to go online and create a virtual schedule for delivery. So all of that is being shifted and transform to a more modern delivery model. So we keep the inventory centrally, so we got inventory reduction. We have less damage. Joe and team are using less SG&A in the stores to move things around, load things up drive trucks, and more importantly it gives us the ability to hold inventory centrally to create, in some cases same day, next day delivery options for customers in a model that we just can’t replicate without having this fully rolled out. So we’re very excited about it. This is just one of the many steps in our supply chain transformation. But this is a foundational step. And again, we’re going to get this done. We just want to be prudent and not get over our skis and overburden the company from a change management standpoint, but we couldn’t be more excited about what we’re seeing in Florida.

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

And listen, Greg, to Marvin point. This is a really innovative approach to kind of how we’re going to market from a supply chain perspective. But as we roll this out, to your point, we do experience some compression because as we ramp these up, the first few months we’re not at full capacity and so we experienced some margin headwinds as we get up to speed, but that is all contemplated in our 12.2% guide in our objective to get to 13% as well. So this is consistent with that narrative over the long term.

Greg Melich — Evercore ISI — Analyst

That’s great. Good job and great. Thanks, guys.

Operator

[Operator Closing Remarks]

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