Aug 23, 2017
Executives
Robert Niblock - Chairman, President and CEO Rick Damron - COO Marshall Croom - CFO Richard Maltsbarger - Chief Development Officer and President, International Mike McDermott - Chief Customer Officer
Analysts
Peter Benedict - Robert Baird Joshua Siber - Morgan Stanley Christopher Horvers - JPMorgan Eric Bosshard - Cleveland Research Alan Rifkin - BTIG Seth Basham - Wedbush Securities Seth Sigman - Credit Suisse Mike Baker - Deutsche Bank Michael Goldsmith - UBS Matt Fassler - Goldman Sachs
Operator
Good morning, everyone, and welcome to Lowe’s Companies Second Quarter 2017 Earnings Conference Call. This call is being recorded.
[Operator Instructions] Also, supplemental reference slides are available on Lowe’s Investor Relations website within the Investor Packet. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the Company’s results and to be used as a reference document following the call.
During this call, management will be using certain non-GAAP financial measures. The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures.
Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management’s expectations and opinions reflected in those statements are subject to risks and the Company can give no assurance that they will prove to be correct.
Those risks are described in the Company’s earnings release and in its filings with the Securities and Exchange Commission. Hosting today’s conference will be Mr.
Robert Niblock, Chairman, President and Chief Executive Officer; Mr. Rick Damron, Chief Operating Officer; and Mr.
Marshall Croom, Chief Financial Officer. Joining during the Q&A session will be Mr.
Richard Maltsbarger, Chief Development Officer and President, International; and Mr. Mike McDermott, Chief Customer Officer.
I will now turn the program over to Mr. Niblock for opening remarks.
Please go ahead, sir
Robert Niblock
Good morning and thanks for your interest in Lowe’s. We delivered second quarter comparable sales growth of 4.5% driven by improved transaction growth of 0.9% and a 3.6% increase in average ticket.
We’re pleased with our improved top line performance versus Q1 and the acceleration of our comp growth through the quarter as we built momentum with successful holiday events and enhanced messaging, driving traffic improvement in the quarter with comp sales of 7.9% in July. Our U.S.
home improvement comp was 4.6% with broad based project demand across product categories and geographies. We achieved positive comps in 13 of 14 regions and in all product categories.
Appliances-led product category growth was high single digit comps, leveraging our investments in customer experience, both in store and online. We achieved strong comps in lawn and garden as we capitalize on seasonal demand.
We also continue to advance our pro business, driving out performance in rough plumbing & electrical, and lumber & building materials. While we’re pleased with our sequential comp growth through the quarter, we are disappointed with some aspects of our performance during the first half of the year.
In the first quarter, we identified an opportunity to drive more traffic with improved messaging and an optimized promotional strategy. We amplified our marketing messages in early June and we’re pleased with our traffic growth.
However, in the second quarter, comp growth was constrained as a result of disruption caused by changes to our store staffing model earlier in the year, which became more apparent with increased traffic. While we remain confident that the leadership model is right for our long-term growth, change brings certain short-term challenges.
I’m proud of the way our teams are responding diligently to respond to these challenges, filling open positions, learning new rolls and adapting to the new model. But we also recognize an opportunity to invest in incremental customer-facing hours to ensure that we’re proving an excellent customer experience in light of increased traffic.
We’re taking these decisive actions to ensure our results meet our expectations going forward. We continue to advance our omni-channel strategy, driving 43% comp growth on lowes.com this quarter.
A year ago, we upgraded our online shopping experience to make it easier for customers to find the products and information they are looking for. In fact, Internet Retailer recognized us with an Excellence Award for Web Redesign of the Year.
We will continue to make omni-channel investments to ensure we’re supporting customer needs and seamlessly connecting with them whenever, wherever and however they choose. During the quarter, we made further progress to enhance our product and service offering for the pro customer, delivering another quarter of comps above the Company average.
In addition, Central Wholesalers, last year, we further expanded our pro customer reach and share of wallet with the acquisition of Maintenance Supply Headquarters. These acquisitions are significant steps forward in our strategy to deepen and broaden our relationship with new and existing pro customers, enabling us to better serve the multifamily housing industry through expanded products and services.
Internationally, we delivered solid mid-single-digit comp growth in both, Canada and Mexico. We continue to make great progress with our RONA integration including the conversion of our first RONA big box store to a Lowe’s branded store where we combine the best of Lowe’s store experience, merchandising and brands with the best elements of RONA’s strong pro offerings to create a new, stronger Lowe’s for the Canadian market.
And we remained excited for successful execution of our ecommerce strategy, improved operating efficiencies and the further rollout of appliances across our national footprint in Canada. We continue to unlock the full value of the acquisition, which will culminate in over $1 billion of realized revenue and cost opportunities.
For the quarter, we delivered earnings per share of $1.68. These results included a $96 million gain from the sales of our interest in the Australian joint venture.
Adjusted earnings per share were $1.57, a 15% increase over last year’s adjusted earnings per share. Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $1.25 billion of stock under our share repurchase program and paid $299 million in dividends.
Turning to the economic landscape for the second half of the year. The home improvement industry should continue to see solid gains as consumer health remains strong and economic fundamentals continue to support solid spending growth.
Persisting job and income gains should continue to drive disposable income growth, and favorable revolving credit usage continues to hover near the highest rates of the current economic expansion, supplementing the spending power generated by stronger incomes. The outlook for housing remains bright as household formation in the first half of the year is encouraging and expected to continue amidst steady job gains.
Home price appreciation should persist as housing demand continues to outpace supply. And mortgage rates drifting lower from their post-election levels should support home affordability in the near-term.
Our second quarter consumer sentiment survey underscored similar favorable trends. Consumer spending continued to have a favorable view of the national economy and their financial situation.
Over half of consumers believe their home value’s increasing and have strong expectations for continued appreciation resulting in strength in home improvement project intentions. Looking ahead, we’re focused on further strengthening our operating discipline and investing in capabilities that maximize value for customers and shareholders.
We will continue to leverage our new store leadership model and make necessary investments to customer-facing hours to further improve the customer experience. We’ll also enhance our marketing efforts and leverage promotions in key areas, to drive sales in what we believe is a supportive macroeconomic backdrop for home improvement.
We’re confident that these investments position us for future success. We’ll also continue to capitalize on our strengths in capturing project demand in the marketplace and further invest in specific actions required to better serve the needs of pro, DIY and DIFM customers.
We’re seeing positive customer response to our evolving omni-channel capabilities, intended to meet customers at every critical moment whether they choose to connect in the store, online, in their home, from their job site or through Lowe’s contact centers. Importantly, I would like to thank our more than 290,000 employees for their passion and commitment for serving customers.
Before I close, I want to stress that we are taking decisive action. The team is focused on executing plans we have in place to capitalize on our strong position in the market.
Thanks again for your interest. And with that, let me turn the call over to Rick.
Rick Damron
Thanks, Robert, and good morning, everyone. As Robert shared with you, we saw significant improvement in our 2Q comp sales as we drove increased to our stores and lowes.com.
We successfully leveraged holiday events designed to take advantage of spring and summer project demand with amplified marketing messages, compelling offers and an integrated omni-channel experience. In fact, we built momentum as we moved through the quarter, reflected in our significant traffic improvement in June and July.
Value perception was a thing we discussed in Q1. And I’m pleased to say that we made great strides this quarter.
We took a surgical approach to selecting the right products and price points to message in the right media channels, successfully highlighting Lowe’s everyday competitive pricing. In the second quarter, we achieved positive comps in 13 of 14 regions and posted positive comps in all product categories.
We delivered a 4.5% comp with balanced performance in both indoor and outdoor categories. As we capitalize on a supportive macroeconomic backdrop and customers’ continued desire to invest in their homes with our project inspiration and expertise, events and targeted promotions, we drove above average comps in categories such as appliances, lawn & garden, lumber & building materials, and rough plumbing & electrical.
We drove high single digit comps in appliances, leveraging our investments in customer experience, both in-store and online. We know that an omni-channel experience is critical for appliance customers as they gather information to give them confidence in their selection.
In store, we have invested in a best in class experience with an extensive product showroom and a broad selection of leading brands as well as expert associates who can provide valuable advice and appliance suites which allow customers to visualize how their appliance purchase will look in the refreshed or remodeled kitchen. And online, we’ve continued to invest to enhance the customer experience with improved product search, integrated and upgraded product videos, enhanced presentations like 360 degree previews, extended descriptions and specifications, and simplified groupings to make it easy for customers to fully research our extensive appliance options and make their selection with confidence.
Our omni-channel customer experience together with leading brands, breadth of assortment, competitive pricing, knowledgeable sales specialists, as well as service advantages of same or next day delivery, haul away and facilitation of repairs and maintenance continues to drive our performance in appliances. We capitalized on seasonal demand driving above average comps in law & garden with particular strength in live goods and lawn care as well as double digit comps in patio.
Once again, we saw continued strength from the pro customer with comps above the Company average. Pro demand drove solid comps in rough plumbing & electrical as we captured pro sales by improving our assortment with destination brands like SharkBite, the industry leader in plumbing services.
We continue to be excited about the effectiveness of destination brands in attracting pro customers. This strength is evident with the addition of A.
O. Smith, the leading brand of residential water heaters, which grow double digit comps in the category.
Pro demand also drove strong comps in lumber & building materials. In addition to our outstanding portfolio of brands, we’re also deepening and broadening our relationship with the pro customer across all categories with our strong value-proposition through our five ways to save, as well as our omni-channel offering through our growing pro services team and LowesForPros.com.
We continue to evolve our capabilities to better connect with the pro across channels and make it simpler for them to do business with Lowe’s. We’re seeing the pro engage more in the channels that best fit their unique needs whether that’s online with LowesForPros.com, at the market level with our Account Executive Pro Services or AEPs, at the store level with our dedicated team of specialists, or our growing national pro services team.
The addition of Maintenance Supply Headquarters complements our acquisition of Central Wholesalers, last year, and further expands our capabilities to service multifamily property management customers throughout the country with enhanced product and service offerings while strengthening our platform for future growth with this important customer. We continue to leverage targeted marketing as well as pro exclusive offers to grow our share of wallet with exiting pros while also generating new business.
We’re also driving increased awareness of our enhance Buy in Bulk program with new signage in-store, messaging on LowesForPros.com, and marketing campaigns to showcase the great values we provide for the pro. We remain focused on leveraging our omni-channel capabilities to help DIY and DIFM customers throughout their project journey.
This quarter we drove 43% comp growth on lowes.com, driven by our events as well as continued strong customer response to the investments we made to enhance our online shopping experience, such as optimized functionality and display for touch screen devices to support a better mobile experience, improved product and content recommendations, refined search algorithms, improved click to chat capabilities, larger product images, optimized assortments, informed by digital online reviews and expanded product views including video content. We’re also leveraging our MyLowe’s platform to drive brand loyalty.
Our simplified military recognition program allows active duty personnel and veterans to register through MyLowe’s and receive 10% off purchases every day. We’re also offering free parcel shipping exclusively for MyLowe’s members.
Our interior and exterior project specialists are another critical element of our omni-channel strategy and a differentiated capability in capturing and servicing project demand for the DIFM customer who needs a bit more help, navigating their project. We’re advancing our omni-channel experience, making it even easier for customers to engage with our in-home project specialists and request services on lowes.com.
And we’re working to centralize our process for providing installation quotes, allowing for greater efficiency and consistency. We’re rolling out this capability in the flowing category over the course of the year with all U.S.
markets online by Q1 2018. As Robert discussed, comp growth improved sequentially through the quarter but was concerning as a result of the disruption caused by our changes to our store leadership model earlier in the year.
Those changes streamlined management to provide better leadership and accountability. Specifically, we reduced the number of assistant store managers and eliminated the department manager role and created the service and support managers in an effort to increase store’s focus on training and empowering associates to deliver an improved customer experience.
We are confident that the leadership model is the right one for our long-term growth. To more fully capitalize on our strong traffic trends and ensure we’re delivering an excellent customer experience, we’re investing in hours at the customer service associate level.
As we look forward to the second half of 2017, we’re excited by our new floor tile reset, which showcases leading style options, simplifies the shopping experience, and helps the customer visualize how their new floor will look in their home. We’re also proud to announce the launch of Scott Living indoor furniture, with fully coordinated collections from Drew and Jonathan Scott of HGTV’s Property Brothers available on lowes.com.
Our digital showroom features coordinated looks and design tips, helping customers envision their newly decorated place. We will continue to focus on optimizing our digital marketing efforts to deliver customized messaging and compelling content to the right customer at the right time, driving improved engagement and increased sales.
While we’ve already seen positive results from these efforts, media optimization is an ongoing process. Thank you for your interest in Lowe’s.
And I’ll now turn the call over to Marshall.
Marshall Croom
Thanks, Rick, and good morning, everyone. Sales for the second quarter increased 6.8% to $19.5 billion, supported by total customer transaction growth of 3.1% and average total ticket growth of 3.5% to $71.40.
RONA sales were approximately $1 billion or 3% of sales growth. As a result of the calendar shift from the 53rd week in fiscal 2016, this year’s second quarter included one less week of spring and one more week of summer than last year.
While this had no impact on comp sales, it did decrease second quarter total sales growth by approximately $285 million or 1.7%. Comp sales were 4.5% for the quarter, driven by an average ticket increase of 3.6%, and improved transaction growth of 0.9%.
RONA was included in the comp calculation for the first time in the month of July. Looking at the monthly comp trends, comps grew 0.6% in May, 5.3% in June and 7.9% in July.
As Robert and Rick indicated, we were pleased with our improved top line performance versus Q1 and the acceleration of our comp growth through the quarter as we built momentum with successful holiday events and enhanced messaging, driving traffic improvement in both June and July. During the quarter, we continued to capitalize on market opportunity, as we opened four new stores in the U.S.
which drove 80 basis points of growth. Gross margin for the second quarter was 34.21% to sales, a decrease of 23 basis points from the second quarter of last year.
The decline was primarily the result of promotional activity and excessive benefits from value improvement and 10 basis points of inflation. SG&A for the quarter was 20.16% of sales which leveraged 101 basis points.
In last year’s second quarter, we recorded an $84 million loss on the settlement of a foreign currency hedge entered into in advance of the RONA acquisition. This provided 46 basis points of leverage this year.
An additional 49 basis points of leverage is driven by $96 million gain from the sale of our interest in Australian joint venture. Also, we drove 20 basis points of favorable leverage, primarily as a result of our new store leadership model.
Somewhat offsetting these items was 10 basis points of deleverage in advertising, as a result of our efforts to amplify the consumer messaging. Depreciation and amortization for the quarter was $357 million, which leveraged 20 basis points.
Operating income increased 98 basis points to 12.2% of sales. The comparison to the prior year loss in the foreign currency hedge possibly impacted operating income by 46 basis points and the gain from the sale of our interest in Australian joint venture also positively impacted operating income by 49 basis points.
Interest expense for the quarter was $159 million, which leveraged 10 basis points. Effective tax rate for the quarter was 36.2% compared to 38.1% in the second quarter of fiscal 2016.
The year-over-year change in our effective tax rate is primarily the result of the gains in the sale of our interest in the Australian joint venture. The gain represents the proceeds in excess of book value but did not result in tax expense in the quarter due to a reduction of previously established deferred tax valuation allowances.
Earnings per share on a GAAP basis was 1.68% for the quarter. The gain from the sale of our interest in Australian joint venture increased EPS by approximately $0.11 for the quarter.
Adjusted earnings per share was a $1.57, a 14.6% increase over last year’s adjusted earnings per share of $1.37. Turning to the balance sheet.
Cash and cash equivalents at the end of the quarter was $1.7 billion. Inventory at $11.4 billion decreased $803 million or 7.6% versus the second quarter of last year, was primarily driven by appliances to support sales growth as well as timing associated with seasonal builds.
Inventory turnover was four times, an increase of 11 basis points from the second quarter of last year. Asset turnover decreased 8 basis points to 1.86.
Accounts payable of $8.6 billion represented a $953 million increase or 12.4% over the second quarter of last year due to the timing of purchases and terms improvement. At the end of the second quarter, lease adjusted debt to EBITDAR was 2.21 times.
Return on invested capital was 17%. The net impact of the gain from the sale of our interest in Australian joint venture and prior year charges negatively impacted ROIC by 153 basis points.
Now looking at the statement of cash flows. We generated strong operating and free cash flow in the quarter of $5.1 billion and $4.6 billion, respectively.
As we allocate capital, we are focused on investments that align with our strategic priorities to expand our home improvement reach, develop capabilities to anticipate and support customer needs, and generate profitable growth and substantial returns. Our recent acquisition of Maintenance Supply Headquarters demonstrates how we’ve made strategic investments to further grow our pro business by expanding our ability to serve the multifamily housing industry.
The transaction is expected to be slightly accretive to earnings this year. After strategic investments, we look to return excess cash to shareholders.
In the quarter, we paid $299 million in dividends and in May we entered into a $500 million accelerated share repurchase agreement, which settled in the quarter for approximately 6.4 million shares. We also repurchased approximately 9.4 million shares for $750 million through the open market.
In total, we repurchased $1.2 billion of stock in the quarter; we have approximately $2.6 billion remaining under share repurchase authorization. Looking ahead, I’d like to address several of the items detailed in Lowe’s business outlook.
First, as we’ve discussed, we were pleased with the acceleration of our comp growth in the quarter, the result of our amplified marketing messages, compelling offers and integrated omni-channel experience; the incremental investments we’ve made in these areas are paying off and we’ll continue those investments into the second half of 2017. Second, as Robert and Rick shared, we’ve also made the decision to reinvest in incremental customer-facing hours in the second half.
We believe this will allow us to more fully capitalize on our strong traffic trends and ensure we’re delivering an excellent customer experience. Finally, we’re seeing incremental pressure from our private label credit card program due to increase in program costs driven by higher losses, as well as casualty claims due to increased workers’ compensation costs.
We still expect the total sales increase of approximately 5%, driven by a number of factors. First, we’re forecasting comp sales increase of approximately 3.5%; second, the RONA acquisition drives about 2% growth; also, we plan to open 25 stores, which represent approximately 1% sales growth.
Keep in mind, total sales growth will be reduced by roughly 1.5% related to the comparison of 52 weeks in 2017 versus 53 weeks in 2016. However, on a GAAP basis, we are anticipating an operating margin increase of 80 to 100 basis points as a result of the investments and incremental expense pressures that are just described.
Remember, a full year of RONA results versus roughly seven months last year will pressure operating margin by an estimated 15 to 20 basis points for 2017. Effective tax rate is expected to be 36.9% this year.
For the year, on a GAAP basis, we are now expecting earnings per share of $4.20 to $4.30. Please refer to Page 13 and our supplemental reference slide for summary of adjustments, as you compare 2017 to 2016.
We are forecasting cash flows from operations to be approximately $5.9 billion, capital expenditures of approximately $1.4 billion. This results in estimated free cash flow of approximately $4.5 billion for 2017.
Our guidance does assume approximately $3.5 billion in share repurchases for 2017. Regina, we’re now ready for questions.
Operator
[Operator Instructions] Our first question will come from the line of Peter Benedict with Robert Baird. Please go ahead.
Peter Benedict
Thanks for taking the question. First, just on the store labor hour investment.
Is that full time or part time, is that weekend, weekday? Help us little bit more about what you’re going to be adding there.
Rick Damron
Sure, Peter. This is Rick.
We are primarily focused on adding the incremental labor to the weekend timeframes, as well as high traffic area timelines during the week. The effort is to continue to retain our seasonal labor from our spring hires as those still have significant knowledge, and we’re simply retaining those, whereas historically we’ll be moving down from a staff and labor standpoint into the fall from the peaks of summer.
Peter Benedict
Okay. That’s helpful.
And then, as you guys think -- I know back in the December meeting kind of the three-year plan that was laid out, had some benchmarks, 25 basis points of flow-through, around 50% OpEx growth as a percentage of the sales growth. Obviously, 2017 numbers aren’t meeting those objectives.
What -- curious, kind of do we need to rethink kind of the longer term out little bit here, maybe assume a little bit more OpEx or less flow-through, is that how we should be thinking about it, just curious your thoughts here?
Marshall Croom
Peter, this is Marshall. We are maintaining our targets that we previously communicated back in December.
Obviously, this year, won’t hit those targets. But, productivity is still alive and well and is actually helping us offset the incremental investments we are making this year.
We know we’ve got more runway to go as we move forward. So, the investments we are making from staffing, again we’re leaning into it to take advantage of the increased traffic, leaning into optimized promotions and knowing that we’ve got opportunities to utilize price optimization tools, continuing value improvement efforts and continuing to evaluate promotional effectiveness.
That’s a longer term. We’ve got other productivity majors for optimizing labor, leveraging fixed costs, reducing indirect spend, lower depreciation and enhancing profitability in Canada.
Robert Niblock
Peter, this is Robert. And as Marshall outlined, we’re still holding to our three-year guidelines that we gave you last year and productivity is still a key focus that we’re working on.
We’ve seen actually a lot of benefits from our productivity efforts. As we’ve outlined, part of those is part of what Mike McDermott and his team did is amplifying and improving our marketing message, particularly and look at opportunities in the digital space.
We saw great results from that, including the improved traffic performance we saw in the stores. We think we’ve got a better opportunity to capitalize on that.
So, what Rick and his team are doing is saying let’s hold the labor that we normally would have been pulling back on, see if can do a better job of capitalizing on that and see if we can drive incremental sales to the process. So, that’s what we are doing.
We are reinvesting some of the benefits of productivity in what we feel is a strong macro environment.
Operator
Your next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Joshua Siber
Hey, this is Joshua Siber on for Simeon. On gross margins, what’s going to enable you to make numbers in the back half, because it looks like gross is expected to be up, just curious your thoughts there?
Mike McDermott
Yes. This is Mike McDermott.
Obviously, as we communicated at the end of the first quarter, we needed to focus on improving our value perception and making sure we were amplifying our marketing reach with our customers. We did that by leaning hard into changing our echo points and communicating critical values to customers.
We are also continuing to improve our competitiveness, both on in-stock as well as special order items, and that’s putting some level of pressure on gross margin. We’ve got optimization efforts in place working closely with our vendors to make sure we are improving our first cost, as well as pricing tactics making sure that from a head core tail perspective, we are competitive on head items where require and we are working hard on pricing in tail items to make sure we are harvesting profitability to offset that investment.
So again, a lot of work underway and the merchandising team, the balance, the improvement of value perception with our cost position.
Joshua Siber
Okay. And then, the long-term EBIT margin guidance of 11.2, it’s a pretty substantial expansion from what’s expected to be in 2017.
So, how do investors gain confidence in that margin opportunity? And do you think this happens in the back half or in 2018?
Robert Niblock
Again, just recognizing that these are three year targets; so won’t be all accomplished in 2017. So, they will be baked into productivity opportunities we have moving forward, again leveraging the traffic driver with marketing optimization, again focusing on optimizing labor.
As we move forward, that will continue to be an ongoing discipline. So, even with the reinvestment in back half of the year, we’ll still leverage payroll in 2017.
And again, excited about the other opportunities we have from a productivity standpoint to drive towards that 11.2% EBIT growth, the target that we set. So, obviously, very exciting with what we have in the pro space with the Maintenance Supply Headquarters, an opportunity to grow and expand that footprint, leverage back into our existing store base.
Operator
Your next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead.
Christopher Horvers
Thanks and good morning. Just curious how would you think about the shift of the spring business in 2017 between the first quarter and the second quarter.
And to play devil’s advocate, we’ve heard others such as Tractor Supply and Scott’s [ph] talk about a very strong July. So, what gives you the confidence that July strength is actually driven by your actions versus the weather working with you that month against the backdrop of what’s been a pretty tough year otherwise?
Mike McDermott
This is Mike McDermott. I can lay some foundation there.
Actually feel good as we take a look at our July, performance was very well-balanced across categories and we certainly enjoyed positive performance across all products and outside and inside indoor categories. So, it was not all isolated to just seasonal in the June and July timeframe.
At the same -- to that same message, we did enjoy an extended Spring, particularly our lawn & garden business did perform above the average, and the team took full advantage of those weather conditions to really highlight the quality of our products, the merchants and the growers did a fantastic job on quality of lot of goods, and we feel really good about our performance of our private label Sta-Green fertilizers, seed and soil products. So, innovation as well as market events served as well.
Christopher Horvers
And can you talk about your view on share in pro and DIY? Obviously, you are stepping up advertising dollars.
It sounds like dollar spent, not necessarily promotional level and you’re also stepping up the commitment on the labor hours. So, is there something that you’re seeing on the share side in either pro or DIY that is causing to step up these investments?
Mike McDermott
We continue to see both, macro environment opportunities as well as favorability in both pro and DIY markets. Pro outcomes are average again this quarter.
So, we continue to feel good about that. We see an opportunity to continue to expand our penetration in that category.
Pro represents about 30% of our sales and about 50% of the home improvement market. So, again, a lot of the investments we’re making and the actions we’re taking we think will yield fruit.
From DIY perspective, we saw nice advancements in our DIY product categories, again both interior and exterior, giving us positive momentum going into the back half.
Operator
Your next question comes from the line of Eric Bosshard with Cleveland Research. Please go ahead.
Eric Bosshard
Good morning. Two things.
First of all, curious as you think about the investments that you’ve outlined today, what do you expect or where you expect the payback from that to show up? It’s the first thing, I’d be curious.
Robert Niblock
Eric, I’ll start. As we said, as you saw from the comp trajectory in the quarter, May was not had anticipated by the time we got through the month in our Memorial Day performance.
Our incremental investments in marketing and the enhanced focus on digital had not been fully kicked by then. As we saw that kick in and we saw the incremental traffic that we’re driving into the stores, we were very pleased obviously with the trajectory through the quarter.
But recognize that we probably had an opportunity to have -- provide a better customer experience and even better capitalize on the trend. So, our belief is that we’ll hold on to these labor hours that we’ve got people that are trained in the stores that Rick and his team have trained.
As we get into the fall, we will continue to monitor that as Mike and his team worked even further, optimized our marketing message. And we have to see that translate into better experience; continue to drive better in-store experience and better sales trajectory.
We put a lot of effort into our online experience here over the past year or so is highlighted with the 43% growth in the quarter. We think there is an opportunity to improve our in-store experience as we head into the fall of the year and we hope then that resonates in the capturing additional sales from the traffic that the marketing team is driving into our stores.
Eric Bosshard
So, does that -- as you look at -- you affirm the full year comp guidance of 3.5, does this investment, should we believe or expect that this could create upside to that sales guidance, if you get paid back from this or is this more defensive of defending your ability to just get to that original target.
Robert Niblock
I think that we’re still early in the process. Obviously, we’re excited about the trends that we’re seeing but we’re investing because one, first of all, first and foremost to deliver our guidance for the year because we’ve been slightly short of that for the first half of the year.
So, it’s to make up this shortfall. And to the extent that we execute well, hope there is some upside with those numbers, but we’ve not baked that in.
Eric Bosshard
And then, secondly, in terms of the point of emphasis, I guess we came into the year hearing the productivity focus, the 11.2 margin target and seeing you making decisions have seen more of profitability. Now, it sounds like there is a little bit of a shift to balance more of driving sales and sales growth, even Marshall’s comments to -- the comments regarding price optimization and even labor optimization while labor is being invested here.
I guess the central goal, Robert, is the focus improving the sales growth or is the focus improving profitability?
Robert Niblock
I think it is both. So, I indicated, Eric, we’ve had actually great success from our productivity efforts.
We’ve still got lot more work to do there. But we said all along that productivity is not just about cutting cost, it’s also investing back into areas that matter most to the customers.
So, what we think as we said with -- we knew we had an opportunity to improve our marketing as we had news tools and we continued to better optimize that for teams working to even to get better leverage out of our marketing spend. We saw an opportunity there.
We’re pleased with the -- like I said, the online performance, the traffic we’re driving into our stores and we think there is an opportunity to even capitalize further on that. So, it’s partially using that productivity savings to invest in a better experience and capture share in what we think is a robust market, placing with that.
And we think it allows us to achieve those three years targets that we laid out.
Operator
Your next question comes from the line of Alan Rifkin with BTIG. Please go ahead.
Alan Rifkin
Thank you very much. Robert, you said that the second quarter comps were disrupted by the store staffing that you’ve outlined.
Can we infer from the sharp acceleration in your July comp that you think those issues are largely behind you? And if so, why then is your comp and revenue guidance for the back half of the year not been lifted?
Thank you.
Robert Niblock
I’ll start and then ask others to jump in, Alan. But, certainly, as we indicated, we do think there was some disruption from the model.
The further we get away from the change, obviously, people are getting settled into their new roles. We’ve talked about some of the attrition with some of the prior department managers and then their pushing in into permanent roles has actually gone faster than we had originally budgeted.
So, we knew there was some disruption. But, the further we move away from the change, people are getting settled into their new roles.
I’m pleased the way the team is responding. As we indicated, we’re little bit behind where we anticipated and we laid out our guidance for the year, thus the revisions in guidance.
But more than anything, the work that we’ve done, as I’ve said in -- from a marketing standpoint, so sharpen our messages and the enhanced efforts. We are seeing the great performance online, and we’re also seeing better traffic trends coming into our stores.
So, we’re using that as an opportunity. If you think about the changes that we’ve made from a management standpoint, getting the right management structure in store, it allows us to put more associate customer-facing hours on the floor of store, to take advantage of that opportunity.
So, we think that’s going to drive additional sales, but we don’t want to get ahead of ourselves from a guidance standpoint.
Rick Damron
Alan, I would say that we’re making investments, as Robert said, to capitalize on our traffic growth and better leverage the long-term benefits of the model that we have in place. The reality is our omni-channel environment requires us to continue to evaluate how we are meeting the needs of our customers, and that will continue to drive change, both in how we meet those needs; it requires us to be perpetually learning, training, ideating and getting better every single day.
And I think those changes are beginning to pay off, and it shows in our June and July performance. Our teams remain extremely focused on serving the customer.
Their dedication to serving the customers is second to none. And I’m extremely proud of what they’ve done and how they’ve led through that change throughout the year.
And we’ll continue to make sure that we support them with resources and the training and the tools they need to be able to meet the needs of our customers every day, in this environment.
Alan Rifkin
Okay. Thank you.
And then, a follow-up if I may, with respect to appliances. You guys continue to put up terrific comps with high single digit gains in this quarter.
Obviously with the recent news about Sears and Amazon, are there any changes contemplated in terms of marketing within this category? Thanks.
Mike McDermott
Alan, this is Mike McDermott. Well, certainly, we don’t take our number one position on appliances or continued growth in market share and the category for granted.
We’ve made significant investments over time to be the number one player. And our customers continue to tell us that our focus on omni-channel engagement and experience is what they expect and what they desire.
So, we are very, very focused on continuing our leadership from selection through enjoyment, through the service proposition all the way through the retirement and making sure that our displays, our well-trained associates, our expansive brand and innovation portfolio continue to make the difference. Now, in the second quarter, we grew at three times the market in the appliance business.
Operations team added inventory to make sure we could take advantage of the opportunity. Rick and his team increased staffing.
We added delivery drivers and we continued to take advantage of the market by providing great experiences. So, from a marketing perspective, we’re going to continue to lean in this category as we have and make sure that digitally we’ve got great content online, fantastic navigation and obviously we’re going maintain our competitive posture from price perspective.
So, I feel good about the appliance business, good about continuing to grow our number one position.
Operator
Your next question comes from the line of Seth Basham with Wedbush Securities. Please go ahead.
Seth Basham
Thanks a lot and good morning. My question is around conversion.
I know you guys have been able to track conversion pretty well historically. Can you give us a sense of what the trends have been like lately?
That’ll be helpful in framing some of the changes you’re making.
Rick Damron
Yes, glad to. As we look and we talked about the increased traffic that our marketing efforts we’re driving into the stores.
We saw an opportunity to continue to improve our conversion. Conversion is something that quite frankly we always want more of, no matter where we are, we always want more.
And we’re working, our store operators are working efficiently in making sure that our people in the stores and our associates in the stores that times are there, the customers are there, that we’re merchandised correctly and that we’re executing the fundamental basics of the business inside the box. I’m certainly pleased with the progress they’re making and the efforts they’re taking, and we see that as an opportunity, plus the investment in labor into the back half of the year to ensure that we continue to make sure that we meet the needs of the customers when they come in.
So, we feel good with where we are. We still know there’s opportunity for us to continue to get better.
And we’re making the investments necessary for us to be able to do that with the teams.
Robert Niblock
The other thing I’d add to that from a dotcom perspective, we saw balanced improvement and strength actually in traffic, conversion and ticket across all product categories. So, as it relates to the omni-channel experience, we really look at conversion, both in-store and online.
And to Rick’s points, we’ll continue to invest there to make sure that it improves.
Seth Basham
That’s helpful. And just I understand for the back half of the year the primary improvement in sales trends that you’re expecting is coming from conversions as opposed to improvements in traffic, right?
Robert Niblock
We actually -- we anticipate a more balanced view of transactions and tickets as we move into the back half of the year versus the first half.
Operator
Your next question comes from the line of Seth Sigman with Credit Suisse. Please go ahead.
Seth Sigman
Thanks, good morning. I wanted to just clarify on the updated EPS guidance for the year.
So, there’s no change in sales. Is the change just SG&A or did you guys lower the gross margin expectation also?
I think at one point you were expecting it to be flat for the year.
Marshall Croom
Yes. As we updated in our guidance, we’re expecting about 10 more basis points of incremental gross margin pressure, driven by some of the actions that we’re taking, leaning into the amplified marketing that we’re doing that’s helping drive the traffic.
So, that’s putting pressure on gross margin line for the year. So, it actually improved about 20 basis points of drag to about 30 basis points, to get above that from the year standpoint.
Seth Sigman
Okay, understood. And so, as a follow-up on the pricing strategy.
It feels like the discussion around promotional activity, value perception, even marketing has escalated quite a bit over the last few quarters. Can you help us understand that trend a little bit better?
What is causing that? What are you seeing in the marketplace perhaps?
And how should we think about that in the context of what’s been a pretty stable EDLP type of strategy in the space over time? Thanks.
Mike McDermott
This is Mike McDermott, again. We certainly saw an opportunity in the first quarter to get more competitive as it relates to our promotional strategies, specifically around holidays.
So, obviously, that was seen in our value perception metrics, leaned in there, matched the competitive intensity of the marketplace in some of the select categories where we saw some expansion of aggressiveness. But, for the most part, as we go into the back half of the year, our focus is really exposing the values that we already have in our plan.
So, some of that is going to be -- some of that margin pressure is going to be mix oriented but we feel good about our position. We got to focus on optimization to make sure that we’re making the right investments, but a big focus on the micro environment strength and our ability to jump and take advantage of that.
Operator
Our next question comes from the line of Mike Baker with Deutsche Bank. Please go ahead.
Mike Baker
I just want to clarify a little bit this quarter what happens. You said you’re below plan, year-to-date, and it seems like that sales are on plan.
Correct me if I’m wrong. So, is it that the gross margins were below year-to-date or expenses are above plan year-to-date?
And if it is the expenses, what I’m trying to reconcile is, it sounds like you didn’t have enough labor earlier in the quarter, I suppose in May, to drive sales. So, I’m just trying to figure out how expenses overran, is it really just because you ramped up so much in June and July?
Robert Niblock
Mike, this is Robert. We started off in Q1, we indicated that we were behind, we missed our sales plan we felt we’d make up over the next couple of quarters.
So, we’re still in the process of working towards that. As I said, we did, as we talked about in our first quarter call, Mike indicated we have an opportunity to, one, enhance our marketing message, things like making sure we’re highlighting the price points to lower end of the -- the price point at the appropriate time; as well as we also saw opportunity to invest more in digital, and that’s part of what drove our online performance.
We had great payroll leverage in the second quarter. We think there is an opportunity to invest part of that to capitalize on the traffic that the marketing team is driving in.
And then, from a SG&A standpoint, I’ll let Marshall talk about, when you talk about some of the onetime drivers, some specific things that were above what we planned in the quarter and for the back half of the year.
Marshall Croom
While we leveraged retail operating hours, we did have the incremental advertising spend and a couple of other items I alluded to, some of the pressure we’ve seen in the back half with casualty claims, workers’ claims and costs there. We saw little bit of that in the second quarter.
And also, it’s been competitive in marketplace from client standpoint, put pressure on delivering fleet. But, the bigger drivers are back half or leaning into the marketing message, reinvest in that and to try to capture more of the sales that we’re seeing coming through to offset some of those back half pressures.
Mike Baker
Okay, make sense. As a follow-up, you did slightly lowered store count outlook for the year.
What’s behind that and how is that playing to the guidance?
Marshall Croom
So, we came in with a plan, I think roughly 35 stores. We since have gone through and scrubbed and evaluated certain locations, and some of them we decided not to open at this time or will defer until later point in time.
Robert Niblock
Yes, we have an approximate number, Mike. We had a couple that is led into 2018.
We’ve got a couple of sites that we chose not to move forward with. So, we won’t hit the updated guidance on that, but didn’t make any change to our sales guidance.
Mike Baker
So, were those big box stores Canada, or just supply, just curious what -- which ones are sliding.
Richard Maltsbarger
So, this is Richard. It was a relative mix, primarily within the Canadian market in our Orchard operation, it’s where we decided to either postpone and/or observe some of the changes that we are making before we proceed, or as Robert said, we have taken few sites where we made different decisions than approved those estimated last fall.
Operator
The next question comes from the line of Michael Lasser with UBS. Please go ahead.
Michael Goldsmith
Good morning. It’s Michael Goldsmith on for Michael Lasser.
Thanks a lot for taking our questions. The flooring category has been in line or above the Company average recently, but this quarter was a bit soft there.
Are there any specific callouts to explain the underperformance of this category?
Robert Niblock
Yes. Flooring continues to be an important category for us.
We’re certainly positive in the category, actually posted very strong performance in carpet, vinyl, and laminate flooring, but some opportunity in floor tile as well as hardwood. We’re in the middle of a significant reset in the floor tile category.
It’s obviously becoming more and more important as customers lean into the new and innovative styles. But, we have sales disruption as we ramp down our existing assortment.
That reset should be complete by the end of the month and we anticipate to be back on growth trajectory above average on the other side of that reset.
Michael Goldsmith
That’s helpful. And then, with regards to the incremental labor being put in the stores.
Is this broad-based or is it focused on specific category?
Rick Damron
We’re looking at it from a perspective of analyzing the data as we look at our marketing plans, as we move into the second half of the year. We’re investing those against those categories, but we are putting the additional weight from the marketing investments that we are making.
So it will be lower -- most of it will be spent into those categories.
Operator
Our final question comes from the line of Matt Fassler with Goldman Sachs. Please go ahead.
Matt Fassler
Good morning and thanks a lot for squeezing me in. My first question relates to juxtaposing the recent results and the guide for this year against your reiterated long-term guidance.
So, your productivity initiatives have been underway for a period of time. The profit growth and the margin trajectory that you’re generating in absolute terms are quite solid.
Is it possible that looking for the kind of incremental margins that the guide, the long-term guide calls for is ambitious in an environment where you need to invest? In omni-channel, you’re facing wage pressure, not many retailers are putting up operating leverage, just as we think about the appropriate forecasting context for 2018 and beyond.
Marshall Croom
Matt, this is Marshall. At this point in time, we’re comfortable with reconfirming the guidance, as we lean into the back half of some of these incremental investments.
Again, we have better line of sight to not only productivity efforts that we are driving this year, but in 2018 and 2019 above and beyond that and also looking at what we’re leveraging from 2017 into 2018 and 2019 from the capability builds, how we are leveraging pro, continuing to take a look at our office staffing complement, trying to match labor to track traffic that we’re seeing and fixed costs, indirect spend as mentioned earlier. So, again, at this time, we’re comfortable with these longer term targets and productivity at this point in time.
If we have better line of sight to revise, we’ll provide that in upcoming call.
Matt Fassler
Thanks for that. And then -- sorry.
Robert Niblock
Matt, this is Robert. I would just say, also keep in mind that we’ve made quite a few changes this year, both with our store labor model that will settle in over time, as they settle into their new roles, the incremental lifts from a marketing standpoint as we continue to refine and get better at that.
I think there’s opportunity for additional leverage against those things as we settle into the new cadence there. And then, keep in mind that Marshall took you through some onetime items, the IBNR and other stuff that he talked about and credit losses, we think moderate -- those things don’t necessarily repeat as we get into the next two years or that three year guidance.
Matt Fassler
Thanks for that Robert. And then by way of my follow-up, just a couple of cleanup items on the P&L and on the guide.
The impact of the Canada on the different line items this quarter and also if there’s any -- what kind of buybacks embedded in the guidance? And that’s all I have.
Thank you.
Marshall Croom
Basically for the year, we spoke to 15 to 20 basis points impact on operating margin advantage for Canada.
Matt Fassler
And what about the quarter, because I think you’ve given that out in prior quarters?
Marshall Croom
It’s roughly about 20 basis points for the quarter.
Matt Fassler
Thank you.
Marshall Croom
And then, share repurchase, again, we’ll target $3.5 billion this year, in 2017.
Robert Niblock
Thanks. And as always, thanks for your continued interest in Lowe’s.
We’ll look forward to speaking with you again when we report our third quarter results on Tuesday, November 21st. Have a great day.
Operator
Ladies and gentlemen, this concludes today’s call. Thank you all for joining.
You may now disconnect.