Good morning, everyone, and welcome to Lowe's Companies First Quarter 2016 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 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. Bob Hull, Chief Financial Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir. .

Good morning, and thanks for your interest in Lowe's. Comparable sales grew 7.3% in the first quarter, exceeding our expectations, driven by comp transaction growth of 5.1% and a 2.2% increase in average ticket. I'd like to thank our employees for their continued efforts in serving customers, which enabled our strong transaction growth.

The team's project expertise and commitment to customer service allowed us to capitalize on the strong home improvement demand in the quarter. Healthy macro fundamentals, favorable weather and our compelling offers drove demand, resulting in strength in indoor as well as outdoor projects.

In fact, we recorded positive comps in all 13 product categories, with particular strength in lumber and building materials, millwork, paint, lawn and garden and tools and hardware.

Our emphasis on providing better omni-channel experiences positioned us well, enabling us to connect with customers and provide the advice and assistance they count on when completing their home improvement projects, whether they choose to connect in the store, online, in their home or through our contact centers.

We're also pleased with the investments we've made to build deeper relationships with the Pro, as our Pro business performed well above the company average. The work we've done to enhance our product and service offering is allowing us to better serve this important customer segment, and we will continue to deepen those relationships. .

From a geographic perspective, our U.S. Home Improvement business achieved 7.5% comps for the quarter, with all 14 regions delivering positive comps, and we continued our strong performance in international markets, including double-digit comps in Canada in local currency. For the quarter, we generated 170 basis points of operating margin expansion.

Included in the quarter's results is a $160 million unrealized gain on a foreign currency hedge entered into in advance of our pending RONA acquisition. Including this benefit, we delivered earnings per share of $0.98, a 40% increase over last year's first quarter.

Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $1.2 billion of stock under our share repurchase program and paid $255 million in dividends. .

I'm also pleased with the progress of our previously announced acquisition of RONA. The transaction was approved by RONA's common shareholders in March. And last week, we received authorization from the Canadian regulatory agencies clearing the way for closing on the transaction this Friday.

The time is right to fortify our Canadian market presence to take advantage of the significant long-term potential we see. We expect to build on the recent progress our team in Canada has made and the positive results RONA has achieved over recent years as a result of their restructuring efforts. .

Turning to the economic landscape for the balance of the year. The outlook for the home improvement industry remains positive.

Persistent gains in the job market as well as disposable income growth is expected to outpace growth in the economy, should contribute to solid growth in consumer spending, and housing remains a bright spot with home sales and construction activity posting healthy gains to start the year, while home prices continue their steady upward trend.

As a result, the home improvement industry should continue to benefit from the solid consumer housing backdrop even as the benefit of favorable weather at the start of the year normalizes. And as we survey the consumer, we're seeing similar things.

Our most recent consumer sentiment survey revealed that favorable views around personal finances and home improvement spending are holding steady. Rising home prices are motivating homeowners to invest in their homes. Admittedly, that this trend will continue, as the survey reveal a significant increase in future home value expectations.

Likewise, we continue to see home improvement spending outpace overall spending as well as positive home improvement project intentions.

We will continue to focus on improving our product and service offering for the Pro customer and differentiate ourselves through better omni-channel customer experiences that make us the project authority in order to leverage the favorable home improvement backdrop.

Our strategic framework, along with efforts to improve our productivity and profitability, give us confidence in our business outlook for 2016. Thanks again for your interest. And with that, let me turn the call over to Rick. .

Thanks, Robert, and good morning, everyone. We executed well in the first quarter, growing both average ticket and transactions.

In addition to our successful Spring Black Friday events, we grow traffic through compelling offers designed to take advantage of early spring project demand, leveraging enhanced digital capabilities and improved marketing speed and flexibility to reach the spring customer earlier in the season.

And as Robert shared with you, we delivered positive comps across all regions and product categories, as we continue to capitalize on a favorable macro backdrop and consumers' increasing desire to invest in their homes.

These favorable trends in home improvement, coupled with our compelling product offering and strength in omni-channel retailing, contribute to a particularly strong performance in categories such as lumber and building materials, millwork, paint, lawn and garden and tools and hardware.

We achieved double-digit comps in lumber and building materials, driven by a continued surge in outdoor construction projects coupled with stronger demand from the Pro customer. Millwork also benefited from this dynamic as outdoor projects drove strong performance in windows and doors.

And as customers look to improve and enjoy their outdoor living space, the outdoor living experience we introduced in 2014 continued to pay dividends, deliver high single-digit comps in patio and outdoor fashions for yet another year.

We also continue to see robust attachment of accessories as the showroom feel and created style help customers envision and create their outdoor space.

Our targeted offers, in advance, designed to capitalize on early spring drove demand high single-digit comps in lawn and garden category with particular strength in garden pipelines, live goods, soil and mulch.

Our landscape lighting experience was also a success, helping customers visualize their outdoor living -- lighting projects and making selection and installation easy, while offering innovative technologies like LED. This project strip extended to inside the home as well as we also strong -- saw strong performance in interior project categories. .

Within fashion fixtures, we leveraged our customer experience design capabilities to optimize our recent lighting resets, showcasing an expanded collection of lighting styles, finishes and brands available both in-store and online, including the introduction of Kichler and Koesell [ph] lighting, both Home Channel exclusives.

Along with Progress Lighting, we now offer the top 3 lighting brands in the industry, providing our customers with an exceptional array of options and styles.

We combined our extended product offering with a simplified presentation, designs with the needs of the customer in mind, grouping lighting fixtures by style and collection to provide a cohesive decorating solution and simplify selection. Customers have responded well, driving double-digit comps in interior decor lighting and chandeliers.

And we're now extending this approach to ceiling trends to leverage our relationship with Hunter Fans as well as our private-label brand and sourcing capabilities. We saw mid-single-digit comps in appliances, flooring and kitchens, further demonstrating the consumers' continued willingness to engage in interior projects.

Paint performed above the company average, driven by strength in both interior and exterior projects. Our paint lineup, which showcases Valspar, Sherwin-Williams and PPG/Olympic, provides customers with a full suite of top brands they trust for the paint projects.

Tools and hardware also benefited from the increased project activity from both DIY and Pro customers.

We were able to capitalize on this demand by improving our tool brand assortment with exclusives like Hitachi and Bostitch, the #1 and #2 brands in pneumatics and the extension of brands like Bon [ph] along with our extensive private-label line of Kobalt tools.

Whether working on indoor or outdoor projects, our omni-channel capabilities help customers achieve great results. Customers can engage with our associates in-store for expert advice, our content on lowe's.com for inspiration, our contact center for ongoing support, or our project specialists who work with them in their homes.

On lowes.com, we have upgraded our online shopping experience with enhanced product content and search functionality, improved additional tools such as 360-degree product views, improved video content and the continued expansion of click-to-check capabilities to better support the customers' digital experience.

As a result, we continue to see positive customer response and very strong growth in our online channel. Our exterior and interior project specialists, dealing with customers in their homes to design, plan and complete their home improvement projects, represent another critical element of our omni-channel strategy.

Our exterior project specialists are available across all of U.S. home improvement stores, and we're expanding our interior project specialist program reaching all U.S. stores by the end of this year. Our in-home sales program continues to outperform with above-average comp growth again this quarter.

Our expertise in project inspiration, project design and project execution are setting us apart as the project authority in home improvement at a time when the consumer continues to demonstrate a willingness to take on home improvement projects. .

We continue to strengthen our Pro business, driving comps well above the company average by further advancing our product and service offering to better serve the Pro customer.

Beyond improvements in our tools offering, we have also strengthened our portfolio of Pro focus brands with the addition of GAF roofing, Owens Corning insulation, LENOX HVAC and Masonite entry and their interior doors.

We continue to play feedback from Pro customers, our outside sales team and store employees, while working closely with our field-based merchandising managers to identify local market opportunities and brands to further optimize our offering for the Pro. We have also advanced our omni-channel resources for the Pro.

We continue to utilize feedback from our Pro customers and Pro services team to enhance the features and functionality of our LowesForPros.com site that we relaunched last year, making it easy for Pros to manage multiple properties and quickly purchase items nationwide.

Thus far, we have been pleased with the program rollout given the positive customer response and early results, which have exceeded our expectations. Another critical element of our omni-channel offering for the Pro customer is our account executive Pro services or AEPs.

AEPs work with larger regional customers to help them order and replenish products across multiple geographies and locations. Our AEPs are a key component of our strategy to grow our business with larger Pro customers.

We currently have over 180 Pro outside representatives in the field and have experienced great success with the program with continued strong growth in AEP comp sales. Building on this success, we will continue to grow the program, adding additional AEPs to continue capturing market opportunity with large Pro customers.

We are also reaching out to the Pros through targeted marketing and special events such as credit events, bonus days and Spring Pro Appreciation days to drive awareness and generate new business. We have been pleased with these results in driving both incremental purchases with existing Pro customers and building relationships with new customers.

Our work to strengthen our portfolio of brands as well as expand our omni-channel offering through our growing Pro services team and our relaunch of LowesForPros.com are part of our broader commitment to build on a strong foundation with the Pro.

This foundation includes dedicated service in our stores, inventory depth aligned with the needs of the Pro, including a 5% off everyday loyalty program for Pros using Lowe's proprietary credit as well as reduced delivery rates. In addition to our efforts to drive top line growth, we continue to focus on driving productivity and profitability.

For the quarter, gross margin contracted as strong performance in lower margin category, such as lumber and building materials, led to a negative mix impact.

And while we plan targeted promotions to capitalize on strong spring demand, the participation rate in those offers exceeded our expectations, which, together with markdowns associated with reset activity, led to a negative rate impact.

Our stores once again effectively managed payroll hours on very strong comp sales growth, driving payroll expense leverage. They drove this leverage while achieving continued strong customer satisfaction scores. As you can see, we had a strong first quarter.

We continue to make progress on our initiatives to drive top line growth and are focused on improving productivity and profitability. We look forward to sharing further progress with you over the course of the year. Thank you for your interest in Lowe's, and I will now turn the call over to Bob. .

Thanks, Rick, and good morning, everyone. Sales for the first quarter were $15.2 billion, an increase of 7.8%. Total transaction count increased 5.5% and average ticket increased 2.2% to $68.08. Comp sales increased 7.3%, driven by comp trends -- transaction decreased 5.1% and average ticket growth of 2.2%.

Looking at monthly trends, comps were 8.3% in February, 9.1% in March and 4.9% in April. Comps were stronger earlier in the quarter, as we capitalized on favorable weather to drive above-plan comps. April sales were consistent with our plan coming into the quarter.

Gross margin for the first quarter was 35.04% of sales, a decrease of 43 basis points from last year. The decrease in gross margin as a percent of sales was due to rate pressure as well as the mix of products sold. The rate pressure related to targeted promotions and markdowns associated with reset activity.

SG&A was 22.28% of sales, which leveraged 188 basis points. In anticipation of the RONA acquisition, we entered into a foreign currency hedge to lock in the purchase price in U.S. dollars. In the quarter, we recorded a $160 million unrealized gain, driving 105 basis points of expense leverage.

Also, store payroll leveraged 13 basis points as we continue to optimize our staffing model. Utilities leveraged 11 basis points as a result of warmer weather relative to last year. Lastly, there were numerous other expenses that leveraged between 5 and 10 basis points in Q1.

Depreciation for the quarter was $357 million, which is 2.34% of sales and leveraged 25 basis points compared to last year's first quarter as a result of higher sales and assets becoming fully depreciated. Earnings before interest and taxes increased 170 basis points to 10.42% of sales.

The unrealized gain on the FX hedge accounts for 105 basis points of the increase versus last year. Interest expense at $156 million for the quarter delevered 8 basis points to last year as total debt increased $4.1 billion versus the first quarter of 2015. We issued $3.3 billion of unsecured bonds in April.

The transaction consisted of 3-, 10- and 30-year issuances with a weighted average interest rate of 2.72%. The proceeds will fund the RONA acquisition as well as refines current year maturities. Effective tax rate for the quarter was 38.2%. Earnings per share of $0.98 for the quarter represents a 40% increase over last year's $0.70.

The $0.98 includes $0.11 related to the FX hedge gain. We exceeded our earnings plan for the quarter even without the gain. .

Now to a few items on the balance sheet, starting with assets. Cash and cash equivalents at the end of the quarter were $4.6 billion. The higher cash balance is a result of the April bond deal. Our inventory -- first quarter inventory balance of $11.1 billion, increased $441 million, or 4.2% over the same period last year.

Inventory turnover was 3.83x, an increase of 5 basis points over Q1 2015. .

Moving on to the liability section of the balance sheet. Accounts payable, $8.8 billion, increased $798 million, or 10% over Q1 last year. The increase in accounts payable is due to the timing of purchases in the quarter versus last year and a 3-day improvement in days payable outstanding.

At the end of the first quarter, lease adjusted debt to EBITDAR was 2.45x. The higher target leverage was the result of the April bond deal. We expect to be back in line with our 2.25x target within 1 year of the RONA transaction closing. .

Return on invested capital increased 64 basis points for the quarter to 14.98%. The net impact of the non-cash impairment charge recognized in the fourth quarter related to the exit of our joint venture in Australia and FX hedge gain this quarter reduced ROIC by 145 basis points. .

Now looking at the statement of cash flows. Operating cash flow was $3.2 billion. Capital expenditures were $208 million, resulting in free cash flow of $3 billion. Free cash flow was $766 million, or 34.1% over the same period last year. In February, we entered into a $500 million accelerated share repurchase agreement.

We expect to receive approximately 6.8 billion shares, but the ultimate number of shares will be determined upon the completion of the program in the second quarter. We also repurchased approximately 9.7 million shares for $700 million through the open market. In total, we repurchased $1.2 billion in the quarter.

We have approximately $2.4 billion remaining on our share repurchase authorization. The remaining $53 million of share repurchases showed on the statement of cash flows relates to the shares withheld from employees to satisfy statutory tax withholding liabilities. .

Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook. First, as a reminder, fiscal 2016 will include an extra week in the fourth quarter for a total of 14 weeks and 53 weeks for the year. We estimate that the 53rd week will aid total sales by approximately 1.5% and earnings per share by $0.05 to $0.06.

Second, while we have received shareholder approval and authorization from regulatory agencies, we have not closed on the RONA acquisition. As a result, our outlook excludes the impact of this transaction.

Finally, while we did outperform our Q1 sales and earnings plan, we continue to think about spring within the context of the first half of the year. We are confident in our plans and hope to sustain a momentum, but we are in the middle of the spring season and believe it's prudent to maintain our previously provided outlook.

Now let's get into that outlook. As Robert noted, the forecast for home improvement industry remains positive. For 2016, we expect total sales to increase of approximately 6%, driven by a comp sales increase of 4%, the impact of the 53rd week and the opening of approximately 45 stores, which includes 20 offshore locations and 12 stores in Canada.

For ease of modeling, the EBIT growth rate excludes the impact of last year's Australian joint venture impairment charge and this year's FX hedge gain. We are anticipating an EBIT increase of 80 to 90 basis points. The effective tax rate is expected to be 38.1%.

For the year, on a GAAP basis, we expect earnings per share of approximately $4.11 with the incremental $0.11 from our prior guide coming from the FX hedge gain. We are forecasting cash flows from operations to be approximately $5.4 billion. Our capital plans for 2016 is approximately $1.5 billion.

This results in estimated free cash flow of $3.9 billion for 2016. Our guidance assumes approximately $3.5 billion in share repurchases for 2016. The share repurchase assumption is not expected to be affected by the RONA acquisition. Regina, we are now ready for questions. .

[Operator Instructions] Our first question will come from the line of Scot Ciccarelli with RBC Capital Markets. .

I hate to kind of lead with a short-term factor like weather, but, Bob, is there any estimate you guys have in terms of what kind of impact the weather had on the comp in the quarter in total? And by any chance, would you have, let's call it, a monthly cadence kind of on a weather-adjusted basis month by month?.

Scot, so we estimate that weather impacted Q1 performance by roughly 150 basis points. As I mentioned in my comments, that impact was more pronounced first part of the quarter. I don't have the 150 basis points dissected by month at this time. .

Okay, and then just -- I appreciate that. And then just on the margin, you mentioned a couple of different things impacting it, from the promotions to mix.

Can you give us any color regarding the relative size of the impact of each of those factors?.

Scot, the 3 factors that we mentioned, the mix of products sold, the recent activity target promotions, each had roughly 15 basis points impact. .

So roughly even. Thanks a lot guys. I will pass the torch. .

Your next question will come from the line of Simeon Gutman with Morgan Stanley. .

So first, I guess, a follow-up to Scot's first question regarding the 150 basis points, Bob, you answered on the seasonal impact.

Can you talk about how much -- or the weather impact, how much that could've been from projects that were -- got started earlier versus outdoor seasonal products that sold through?.

As I mentioned in my comments, Simeon, we think about spring is more the first half event. We don't spend a lot of time trying to dissect what might have sloshed between quarters. So certainly, the mild winter weather enabled exterior projects.

We saw that show up in some of the categories that Rick mentioned did outperform, but the ultimate impact will be determined at the completion of the second quarter when we review our spring results. .

Got it. Okay.

And then thinking through gross margin, are you able to share with us the difference in product margin in some of those category, seasonal lumber and building materials? And should we see the gross margin bounce back to that -- to some extent in the second quarter reflecting the product mix?.

So what I would say is the lion's share of the mix impact related to lumber and building materials. So if the demand for those categories remain strong, we could have additional mix pressure in the second -- or the remainder of the year. However, we would also generate additional sales from that demand.

In addition, the other 2 items, the targeted promotions and the reset activity are largely Q1 events, and we don't expect a lot of residual impact beyond Q1 for those items. .

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

Two questions. One is about the guidance and the fact that it was a good strong start to the year and if we keep that 4% comp guidance, my math, it implies that the rest the year, we're going to be running like 3% or 3.5%.

Is that what you're seeing now, especially given, if I remember correctly, May is actually an easier comp than April was a year ago? Then I have a follow-up. .

Greg, this is Robert. I'll start and then I'll turn it over to Bob. I think just as we've done the past few years, generally coming out of the first quarter, we've not changed our guidance for the year. So we're following a cadence very similar to what we've done in the past. We think it's too early in the year to be changing our guidance.

I think this is very consistent with what you've seen the past few years, whether we've started off with a robust, hot first quarter or first quarter that was, let's say, weather challenges we had a couple years ago. But Bob, if you'd like to... .

Yes, a couple things, I'll redirect my comments. First, we felt good about April, April was on plan. Second, we hope to sustain a momentum that we're seeing. So Rick started about our plans to remain confident in our ability to execute. There's nothing to suggest that we're not able to execute the guidance we look for. .

So if April is on plan, so presumably, May is on plan. .

As we talk about the guide annually, we feel good about the opportunity to deliver our results. We're not going to get into the short-term nuances of this quarter versus that quarter, but we are confident in our ability to execute. .

Okay, great. And, I guess, the follow-up was for the margin progression in the first quarter and more on the gross margin side. You talked about targeted promotions unrelated to reset.

Are there other categories that you're going to be resetting doing this with that we should expect in the second and third quarter just for the rest of the year? Or was that something more specific to the first quarter, as we think about the rest of the year, and how it plays out?.

Greg, it is more specific to the first quarter and normalizes throughout the balance of the year. .

Your next question comes from the line of Christopher Horvers with JPMorgan. .

So following up on the margin, so was gross margin in line with your plan? And then, the other side of it is the SG&A came in much better even if you back out the foreign currency hedge gain, so that was very strong, so was that also in your plan? And as you think about putting up a 7% comp in the first quarter, which is fantastic, the flow-through, I guess, wasn't very large, and I know that you talked about that, that 1Q was going to be light, but you're also, I think, embedding more of like a 5% comp.

So I guess that there was actually 2 points in drive as much flow-through as one would have thought. .

So the gross margin came in a little bit below our plan for a couple reasons. First, as Rick talked about, we had greater take rate in the targeted promotion, so we had an estimate of the impact.

The customers' activity was stronger than we anticipated, which is certainly a good thing and kudos to the team for identifying the items that resonate with customers. Second, we expected the impact from the reset to be able to more balance Q1 and Q2.

We had good sell-through on the recent activity, therefore the impact was more pronounced in the first quarter. As I mentioned, that kind of clears the deck Q2 going forward. And then lastly, the mix pressure was little higher than we anticipated based on the strong demand in lumber and building materials.

As it relates to the flow-through, so the lower-than-anticipated flow-through is almost entirely attributable to the declining gross margin versus plan again based on the factors I just described. .

Understood, understood. So the SG&A came in where you thought it would be, and there was no up and down because of -- like you talked about in the fourth quarter, a switch between financing offers versus promotional offers. .

No. There was a subtle nuance within credit as it relates to our partner and they made a change that impacted us last year regarding the loan loss reserve.

The trailing impact of that hit Q1, that was modest pressure in Q1 that's largely done, so that's a pressure in Q1 that we won't see Q2 going forward, but not otherwise, Chris, nothing out of the norm. .

Understood. And then as a follow-up, there are a lot of companies who are sort of talking negatively about the consumer target, for example, this morning, following other companies' department stores last week, Costco being a little bit late.

So is there anything as you peel back demand, whether it's regionally, California is ticket versus traffic, deceleration in the quarter, is there anything that you're seeing that would suggest a deteriorating consumer backdrop?.

Chris, this is Robert. As I outlined in my comments, as we've seen the consumers, we look through our consumer sentiment survey, what their intentions are around spending, what their intentions are around investing in the home, as we're seeing continual improvement in the job market, we're seeing continuing improvement in wages.

We're seeing continued improvement in home values is driving continued improvements in their intentions for discretionary spending, which I think the best evidence of that is in the top 1% increase that we saw in top transactions during the quarter.

And nothing that we've seen in our segment surveys has led us to believe that the consumer, when we ask them how do you feel 6 months out with regard to purchases, nothing shows any change in their intentions as we survey them today.

So that, I think, is why as Bob took you through strong first quarter, we are aware of what others are saying out there with regard to the consumer. But when we take our strong first quarter performance and what we're hearing from the consumer home survey, gives us confidence in reiterating our guidance for the year that Bob has taken you through. .

Your next question will come from the line of Michael Lasser with UBS. .

So this is the second quarter in a row where you were a little bit more promotional, it seemed to have maybe a greater impact this quarter.

Can you talk about the influence that some of the increased promotional activity that you engage in had on the comp? And what are you learning about consumer price elasticity across various categories as -- this is a 3 part question, I apologize.

Is the promotional activity more pronounced in-store or online?.

I can take that. First, let me just talk about where we focused our promotions and a little bit about how we went about it first quarter.

We are more focused on lawn and garden seasonal living, tools and hardware, major appliances and interior projects, because we thought those would be the types of products and projects the consumers' mindset will be geared towards. So we leveraged our sales and operation planning process.

And what's important about this process is it allows us to have a better sense on the micro seasons that apply to the consumers' mindset, so that we hit the consumer with the right promotion at the right time.

We're much faster in being able to flex our promotions in our digital assets because it's one of the investments that we made in our digital capabilities and what we saw was a higher take rate. And as Bob said earlier, that's certainly a good thing.

Our flexible supply chain allows us to make adjustments to where the consumer is making purchases and ensure that we don't disappoint them by not having product. But I wouldn't say that the intensity and depth of promotion was greater. What I would say is that our execution around promotions continues to get better.

So we're doing a much better job of getting the right promotions in front of the customer at the right time, leveraging our digital capabilities as well as some of the process that we put in place. .

Are you learning anything about price elasticities? It seemed like last quarter it was more focused on appliances. Maybe this quarter was more on seasonal in tools? And so maybe the construct of the home improvement industry, which conventional wisdom says that there's not -- that the elasticity isn't as great here as in other categories.

It may not be true and you can push that a little harder to drive more traffic.

Is that the right way -- is that the way you're thinking about it?.

So Michael, we've got tools that allow us to understand the effect of promotions and price elasticity of items. That's the magic is to have the right level of promotions that resident customers -- not too much because too much promotion creates some leakage in the system and less than ideal flow-through.

So we do have some tools in place to allow us to evaluate the effectiveness of the promotion of drawing customers in, try to get the sense of the close rate, as well as elasticity of the item. So we are continuing to turn knobs and pull levers to maximize the effectiveness there. .

And, Bob, you mentioned that you think promotions will be less of an impact on the gross margin in the second quarter, is that because you're going to pull back on the promotions? Or you think this is more effective and less dilutive? And then I'm done. .

So as Mike said, one of the key areas that was a focus in Q1 was lawn and garden and some of the higher take rate, higher effective promotions were around that category.

Those are not things we expect to repeat in the second quarter or beyond for that matter regarding lawn and garden, which allows us to be comfortable that the impact is largely contained in the first quarter. .

Your next question comes from the line of Matthew Fassler with Goldman Sachs. .

A couple of quick ones here.

I know you gave the monthly cadence as reported, did the Easter calendar shift impact the monthly cadence at all?.

It did, Matt. As we think about Easter impacted it -- with the change, Easter would have impacted March. March would have been 9.7%, April would have been 3.4%. .

Got it. That's very helpful.

Second question, can you talk about what you saw directionally for online growth this quarter? And any changes in how the customer DIY and/or Pro is using lowes.com?.

Yes, Matt, lowes.com and e-commerce grew 23.5% for the quarter, and we saw strong growth in traffic as well as conversion to the sites. We feel good about the investments that we've made over the past year and really beginning to drive increased shopability of the site.

I think the key aspects there is when we go back and we talk about the things we've done to the site to really make it more customer friendly, like I said in my comments, the enhanced video content that we are adding to the site, the improved product descriptions, as well as increased content there is also resonating well with the customer.

So those aspects have, I think, continued to help us drive incremental growth from the dot-com platform.

LowesForPros, from an e-commerce perspective, is performing extremely well, as we said, exceeding our expectations, and we're extremely pleased with what we were hearing and the feedback we're getting from consumers as well as our AEPs in the field about the usability of the site.

The functions of the site enables to make the ability for the Pro to shop much more easily with us. So we're really proud of those 2 things as we continue to move forward. We had not seen a shift in the mix of business regarding the in-store pickup. We still see that as roughly 60% of all e-commerce transactions that have picked up.

That's even heavier as it relates to LowesForPros delivery. Still continues to grow as a proponent of that and parcel is about 30% of our dot-com sales. .

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

So one follow-up question on the gross margin. In the past, you guys have talked about some offsets in either product cost deflation or value improvement, which I don't think was called out in the quarter.

Can you speak to those items and if you see those as bigger opportunities as we through the year?.

So Seth, those items continue to be in play. We did see some modest spending for both of those items in the quarter, but they were offset by the 3 negative factors that were mentioned. .

Got it. Okay. And then just a specific question on the appliance category.

I think that category saw one of the biggest swings in the quarter, went from outperforming in the past, to below the company average, and I think that's just optics to some extent as I think that you said the category was still up mid-single digits, but is there anything else to read into that, as we try to understand both where we are in the cycle and also, perhaps how the competitive landscape may be changing in that category specifically?.

No. We don't think there is anything else to read into it. If you look at our appliance business, it's outperformed for the last 5 quarters, it's cycling over a double-digit comp. The 2-year stack is well above the company average. We continue to have one of the best assortments with all of the national brands.

We continue to take advantage of next-day delivery, haul away, in-house consultation, repairs and maintenance. We're really proud of the fact that we control the last 3 feet of the appliance experience. We don't outsource that. J.D. Power's just recognized us as the best in appliance retail satisfaction.

The investment that we made in floor space gives us one of the largest floor space in the industry and the reason why we think that's important is that if you consider our floorspace in appliances coupled with our floorspace in cabinets, it positions us well to take advantage of the cycle in '16 as it plays through.

The last thing I'd say is that in kitchens in particular, if you look at the high-ticket items in kitchen, things like cabinets and countertops, we saw strength there. So that's a test to us that the cycle is still well intact. .

Your next question will come from the line of Mike Baker with Deutsche Bank. .

One follow-up question to an earlier one.

How much did the greater uptake on the promotional activity impact the comps?.

Certainly had some impact, Michael, as lawn and garden is one of the best-performing categories. So it was certainly a driver of the quarter. But as the team described, there's many actions impacting the Pro, impacting the paint category, impacting a variety of things that help drive the totality of the performance in the quarter. .

Okay. I think the 4 product categories, I think was -- Mike Jones mentioned as where you focus promotions, 2 were above, 2 were below company average. So I was looking for more color on that, but okay, understood.

Another question, you did keep the 80 to 90 basis point guidance for the year on the margins, which means for every comp point above 1%, you're going to look for between 27 and 30 basis points improvement. You're obviously below that here.

So is the reason that you didn't change that, is it what you said earlier about not changing the comp outlook just too early in the year? Or are there specific reasons to believe the flow-through will be not only better than it was in the first quarter, but better than that 27 to 30 typical rule of thumb?.

So I would say, Michael, we think there's potential upside on the sales line. Again, we feel good about momentum we saw in Q1. We hope to sustain the momentum. However, we feel it's way too early to start thinking about changing outlook for the year. So we do think there's some upside in the comp line.

We talked about some gross margin pressure in the first quarter that won't continue. So we certainly take that into account. However, we do feel even better than we did 90 days ago about our ability to continue to drive expense productivity and leverage, which gives us confidence in the outlook to the extent sales are better.

And so that's driven by lumber and building materials categories that flow-through might be closer to 25 basis points. But again, it's too early to start changing pieces of the outlook. .

Your next question will come from the line of Eric Bosshard with Cleveland Research Company. .

Two things.

First of all, from a bigger picture perspective, just wonder, Bob, if you could comment on how we should be thinking about gross margin, understand the moving parts in the first quarter, but as we think about this year or the next couple of years, strategically, how are you thinking about balancing promotions and sales relative to gross margin, and what path does that suggest for gross margin?.

So two things. One, it ties back to a previous answer and then secondly, long-term gross margin performance. So as I mentioned earlier, we do have tools to allow us to evaluate the effectiveness of promotions.

As we think about promotions, some are to drive -- specifically to drive sales, some are specific to grow the basket and some are just general awareness around the brand and the categories we carry. So we continue to turn knobs and pull levers to maximize the effectiveness there.

Taking a step back, Eric, as we think about gross margin, we do expect some modest gross margin improvement annually. As we think about gross margin, it's probably not going to be 2017 to actually eclipse the gross margin rate we had in 2010. So it's not like we're forging new ground and looking for gross margin peaks that have never occurred before.

So roughly over that year period, it is called flattish gross margin over a long period of time. .

Okay.

And then secondly, I understand the influence of weather and your desire to not talk about the very near-term, but the difference in performance in April and May relative to February and March, anything that you learned in looking through that? Can you isolate the weather? Or is there anything else different that's going on that explains the magnitude of the step down?.

Two things regarding weather. So I mentioned 150 basis point impact in the quarter. If we exclude the weather, we would still meet our sales plan. So the underlying demand for our category is from the macro fundamentals that drive our business housing and incomes continue to be constructive beyond that.

No other nuance is impacting the quarterly -- excuse me, the monthly cadence. .

Okay, and within -- I guess, your commentary within April being on plan would suggest that's where you expected to be despite whatever happened with weather, is that the proper way to read that?.

That is correct. .

Your next question will come from the line of Seth Basham with Wedbush Securities. .

My first question is just around Pro and specifically LowesForPros. You've had that in place now for a couple of quarters.

Can you give us an update on the effectiveness and the traction you're gaining from that initiative?.

Sure. As we stated earlier, we have been very pleased with the receptivity from the consumer and the Pro customer regarding LowesForPros. We continue to see strong growth quarter-over-quarter as customers come aware of the site.

When we look at Q1, we saw significant growth in new registered Pros on the site as well as conversion in growth as a percent of total dot-com business. So we feel great about what we're seeing.

We continue to improve the functionality of the site through feedback from our customers and our sales teams to make it more conducive and easier for the customers to navigate. The other thing I would say as we continue to look at the site is to keep in mind the functionalities that it did provide that we did not have the capabilities of before.

So the Pros, for example, we're not capable of using their in-house credit. They can now. Pros did not receive their 5% val prop usage on prior lowes.com, they can today. Tax-exempt accounts weren't available to them prior usage, but they are today.

So all of those things are resonating extremely well, and we continue to work on making the site more effective, more efficient. But to date, we've been extremely pleased with what we've seen both from a risk reducer content as well as sales performance. .

Great, that's helpful. And then secondly, on cost control, great performance this quarter.

As you look through the balance of the year, Bob, when you think about labor optimization, marketing, indirect costs, can you give us some order of magnitude of the benefits you expect from each of those?.

Sure. I'll give you some high-level perspective. For the year, we continue to think indirect spend is going to pay dividends for us. That's in the 50 or so basis point range, bonuses is 10. Like to talk about the analysis around promotions. We continue to do the same thing regarding resets and things of that nature.

We think we'll get about 10 basis points of leverage on that spend this year. Risk insurance is going to be less of a drag. It's about 5 basis points. Employee insurance, also less of a drag. Advertising, about 5 basis points.

And couple kind of indirect logistics cost leverage, 10 or so basis points, and the impact of the 53rd week gives us about 5 basis points. So a lot of good items to drive expense leverage for 2016. .

Your next question comes from the line of Kate McShane with Citi Research. .

One area that I just wanted to make sure I address today is just about the supply chain. I know something that has been discussed by both you and your biggest competitor in the home improvement channel as a competitive advantage and there's a way not to get disrupted.

Can you walk us through any efficiencies achieved in the supply chain this quarter, and what opportunities you're working on over the next 6 to 12 months?.

Sure. The aspect of the supply chain has been a significant advantage for us for years, as we talk about how we build out supply chain and the avenues that we have.

I think as we look at the omni-channel environment over the last several years, we've enabled several new functions to the supply chain to allow us to continue to meet that demand, flexible fulfillment, which allows us to shift from a store group as well as our RDC.

So we're able to meet 94% of our customer demand with next-day shipping rates by utilizing that flexibility within the system.

We continue to maximize the productivity of the supply chain through new initiatives, such as project rhythm, which we work with vendors in smoothing out orders and order flow to make sure that we are as effective as possible.

We continue to drive labor efficiency in the supply chain through utilization of Lean Six Sigma practices and processes and making sure that we are able to get the effective use of tubing out to trailers and the trucks to move forward. Fleet and fuel costs continues to be an advantage in the tailwind currently.

So we continue to see those avenues play-in significant dividends for us over the next several months, and quite frankly, the next couple of years.

As we look into the construction of possibly the Internet Fulfillment Center, or DFC, Direct-to-Customer Fulfillment Center, which we have currently plans underway and being built out for -- by forecasted opening in the 2018 time horizon. .

Regina, if we got time for one more question?.

Our final question will come from the line of Peter Benedict with Robert W. Baird. .

So a couple of questions. First, I mean, the comment about Pro being well above the company average. I know it was above average in the fourth quarter, but it sounded obviously the tone to that comment was a lot stronger.

Any way to quantify that, this gap relative to maybe historical trend? Is this about as strong a gap as you've seen? Just trying to get a flavor for just how strong that momentum is right now. .

So the Pro performance, Pete, in the first quarter was approaching double-digits. .

Okay, good. That's helpful, Bob.

And then on the online business, what are the largest categories that you guys are selling online right now? And then what are the fastest-growing, I mean, are there certain categories that are kind of coming on strong, just curious how that looks?.

A couple of things. I'd say for the most part, where you see simple replace items, they tend to do better online, like appliances as an example. But one of the differences in our strategy is that we help customers pull together projects and that tends to lend itself more towards omni as the best tool to serve those customers' needs.

But our encouraging of online is automated by the fact that we tend to be more project-oriented than simple replace, thus we talk about being the project authority and not talk to just product. .

Yes and I would like to add to that. As we continue to look at overall traffic, as I said earlier, we have been extremely pleased with receptivity to new functionality of the site from the consumer.

And I think that's representative in the results over the last couple of quarters as well as the investments that we're making to make content more effective for the customers from a aggregation of data perspective as well as product information. As such, we've been extremely pleased with the sales from the site.

The visits to the site have continued to grow as well as improvements in conversion and average ticket. So as Mike talked about, we continue to see those core fundamental categories continue to do well, the single product categories, particularly in appliances and those categories.

And again, I think it's important to highlight that the store still plays a critical role in the omni-channel world where our customers are choosing to either pick up or have delivered 70% of all of our transactions from lowes.com, from the store, with 30% still be in parcel. So we feel good with where we are.

We feel good with the traction we're making and making the site much more effective and user-friendly. .

Very helpful. Last point would be on lawn and garden. Obviously, strong in the quarter, but curious about the spread North versus South? I mean, certainly a lot stronger in the South, I think, than in the North.

How large was that gap? And what kind of opportunity do you see in lawn and garden in, call it, the North, Northeast, over the balance of the second quarter?.

We think spring is still to come in the Northeast, certainly, so we think there is still some lawn and garden business to go get. But I do want to just say one thing, if you think about our business, we had some strong promotions in lawn and garden. The rest of our business continues to do extremely well.

So if you look at paint, as an example, where we had really high comps above the company average. Applicators, exterior stains, exterior paint, spray paint, caulk, interior stains, all double-digit. So we feel good about some of the spring that's ahead of us. We think that's going to drive our lawn and garden business.

We feel even better about some of our big initiatives that are also driving our business. .

Thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our second quarter results on Wednesday, August 17. Have a great day. .

Ladies and gentlemen, this concludes today's conference. Thank you, all, for joining, and you may now disconnect..