Good morning, everyone, and welcome to Lowe's Companies Fourth 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 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. Mike McDermott, Chief Customer Officer; and Mr. Bob Hull, Chief Financial Officer. Joining during the Q&A session will be Mr. Rick Damron, Chief Operating Officer; Mr.

Richard Maltsbarger, Chief Development Officer and President, International; and Mr. Marshall Croom, incoming 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. I'm pleased that we delivered a strong quarter with comparable sales growth of 5.1%, exceeding our expectations. Our comp growth was driven by a 4% increase in comp average ticket and a 1.1% increase in comp transactions. .

Our U.S. business achieved 5.1% comp for the quarter, with positive comps in all 14 regions. During the quarter, we delivered positive comps in 12 of 13 product categories. We drove strong holiday performance with our winter wonderland experience as well as compelling offers in appliances and tools.

A favorable macro backdrop, our strength in omnichannel retailing and our project expertise drove demand across the quarter, with interior category outperformance in kitchens, appliances and rough plumbing and electrical and outdoor strength in lawn and garden and lumber and building materials. .

Our emphasis on providing better omnichannel experiences positions us well for continued success, enabling us to better 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 continue to see strength in our Project Specialist Interiors program, with strong double-digit comp growth this quarter. And we posted 25% comp growth on Lowes.com, driven by robust growth in both transactions and ticket, following our website redesign in Q2. This is a testament to the growing strength of our omnichannel platform..

Pro customer sales were robust, with another quarter of comp growth well above the company average. We're proud of our success with the Pro customer and continue to make investments to expand our capabilities to better serve this important customer..

We also drove continued strong performance in international markets, with double-digit comps in Mexico and mid-single-digit comps in Canada in local currency.

We're pleased with the progress and early success on the integration of RONA, including the execution of our e-commerce strategy, rollout of appliances and store conversions, and remain excited about this compelling opportunity to bring together Lowe's' global scale and resources with RONA's local expertise..

For the quarter, we delivered adjusted earnings per share of $0.86, a 46% increase compared to last year's fourth quarter adjusted earnings per share of $0.59. .

Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $551 million of stock under our share repurchase program and paid $306 million in dividends. .

Turning to full year fiscal 2016 results. We delivered comparable sales growth of 4.2%, with all regions and product categories achieving positive comps. .

Sales growth, combined with our sharp focus on improving profitability, led to a 21% increase in adjusted earnings per share. Our fourth quarter and full year 2016 results demonstrate the strong foundation we are building to enhance the value we provide to customers and further differentiate Lowe's in the marketplace..

Along with improved operating results, we made meaningful progress this year expanding our customer reach and advancing our omnichannel capabilities, as evidenced by the rollout of our interior project specialists across all U.S.

stores, our successful redesign of Lowes.com, strengthening our market position in Canada with the acquisition of RONA and deepening and broadening our relationship with the Pro customer..

We've entered 2017 from a position of strength as macroeconomic fundamentals remain favorable and are aligned for another solid year of home improvement industry growth.

The industry is poised to grow its share of wallet as a percent of overall consumer spending and should benefit from strong consumer balance sheets and debt service ratios near record lows, as well as continued job gains and income growth. Credit usage continues to improve, supplementing the spending power generated by stronger incomes. .

We expect housing in 2017 to remain a bright spot. Rising home prices should continue to encourage homeowners to engage in more discretionary projects, in addition to ongoing maintenance and repair spending.

Improving incomes and household financial conditions should continue to be a catalyst for household formation, which will help sustain homebuying and related spending..

Expected growth in the home improvement market is further supported by the results of our fourth quarter Consumer Sentiment Survey, which revealed that postelection, homeowners have an increasingly favorable view of the national economy and their personal financial situation.

And we believe this trend will continue as almost half of the homeowners we surveyed indicated that they are very likely to begin a home improvement project in the next 6 months, and more than half of homeowners believe that home values are rising and will continue to increase. .

In 2017, we look to build upon our strong foundation to better serve the needs of the rapidly changing customer and capitalize on a favorable macro backdrop. .

As discussed at our December analyst and investor conference, we're focused on 3 strategic pillars to drive value for customers and shareholders. First, we're dedicated to expanding our home improvement reach and ultimately serving more customers, DIY, DIFM and the Pro, more effectively.

And we will further differentiate ourselves by establishing market leadership for home improvement project solutions..

Second, we're developing capabilities to anticipate and support customers' changing needs. We are evolving our business to further drive trust and loyalty by empowering customers at every critical moment of their project journey. That includes advancing our customer capabilities through our omnichannel assets..

And finally, we are committed to generating long-term profitable growth and substantial returns for shareholders. Across the enterprise, we are actively seeking to enhance our operating discipline and focus and make productivity a core strength.

This laser focus on improving productivity will not detract from our ongoing efforts to deliver customer-centric omnichannel experiences. Rather, we see these efforts as complementary and, together, will further strengthen our relevance and allow for investment and future capabilities to grow the business and better connect with customers.

These efforts give us confidence in our business outlook for 2017. Bob will share those details in a few minutes. .

I would like to express my appreciation to our employees for their unwavering commitment to anticipating and serving customers' evolving needs. We're proud of our employees and their tireless effort to help customers love where they live.

Our employees fuel our success and have been instrumental in enabling our transformation to a customer-centric omnichannel home improvement company..

Before I close, I would like to take a moment to personally thank Bob for his distinguished service and his many contributions over the past 17 years, including 14 years as our CFO.

During his tenure, Bob's financial discipline and leadership have played an invaluable role in our growth and transformation to an omnichannel home improvement company while, at the same time, delivering exceptional returns to our shareholders. We congratulate Bob on his retirement. .

We look forward to a smooth transition, as Marshall Croom, a 20-year Lowe's veteran, with over 30 years of deep financial and operational experience, transitions to his new role as our CFO. Marshall's extensive experience and intimate knowledge of our business, coupled with his proven leadership, positions us well for future success..

Thanks again for your interest. And with that, let me turn the call over to Mike. .

Thanks, Robert, and good morning, everyone. As Robert shared with you, we delivered a strong quarter, with positive comps across all regions in 12 of 13 product categories, growth driven by both average ticket and transactions. .

We leveraged our omnichannel platform, project expertise, customer experience design capabilities and enhanced digital marketing to deliver strong holiday performance.

Our winter wonderland experience provided an inspirational holiday showroom where customers could see everything from artificial trees and poinsettias to indoor and outdoor decorations, providing cohesive decorating solutions for the holidays.

We connected our compelling in-store display with digital assets, leveraging Pinterest, Facebook, Instagram and YouTube as well as a seamless shopping experience on Lowes.com..

In addition to evolving our holiday experience, we've also continued to innovate with our product assortment and exclusives such as our Disney light day. The customer response to our winter wonderland experience was strong, driving comp sales increase of 8%..

We also drove strong comps through our holiday events, with Black Friday representing our largest sales day in company history, both in-store and online. We expanded our events, capitalizing on customer excitement for the season with compelling offers in tools, holiday decor and appliances..

Throughout the quarter, we captured project demand, leveraging our in-store experiences, in-home selling program, strong value proposition, enhanced online selling tools and improved marketing speed from our digital capabilities, driving gains in multiple categories.

We recorded above-average comps in appliances, lawn and garden, kitchens, lumber and building materials and rough plumbing and electrical. We saw broad-based strength in both indoor and outdoor projects. We drove high single-digit comps in appliances, leveraging our investments in customer experience both in-store and online. .

In-store, our appliance suites showcasing coordinated appliances allow customers to visualize how their appliance purchase will look in a refreshed or remodeled kitchen. .

Online, we have enhanced the customer experience and presentation, including improved product search, integrated and upgraded product videos, enhanced product presentation like 360-degree views and simplified product groupings to make it easy for customers to select their products.

Our focus on advancing the customer experience through our omnichannel assets, together with leading brands, breadth of assortment, competitive pricing, knowledgeable sales specialists as well as delivery and haul-away services, drove our share gains in appliances..

This quarter, we also delivered high single-digit comps in kitchens, led by strength in cabinets and countertops, through a combination of targeted promotions, our investments in project specialists who meet customers in their homes and our strategy of focusing the entire kitchen project.

In order to sell a complete kitchen, we display our products, including cabinets and countertops, immediately adjacent to our appliance offering.

We're leveraging our customer experience design capabilities to create store sets that inspire customers to envision a variety of project possibilities, such as a series of kitchen vignettes to show all the elements of a complex installation, like a kitchen remodel, pulled together into a beautiful finished project..

We're using our stores as an additional source of inspiration while making the buying process for projects simpler and more intuitive. We also saw strength in outdoor project categories.

We achieved high single-digit comps in lawn and garden as customers in the South and West took advantage of warmer weather early in the quarter to complete lawn and garden projects.

And we also achieved strong comps in lumber and building materials, driven by continued demand related to recovery efforts from Hurricane Matthew and the Louisiana flooding and not to mention the strong performance with our Pro customer. .

As customers engage in both indoor and outdoor projects, we leverage our omnichannel capabilities to help them throughout their project journey. We drove 25% comp growth on Lowes.com as well as above-average comp growth from our in-home sales program..

Our interior and exterior project specialists represent another important element of our omnichannel strategy as they serve the do-it-for-me customer who needs a bit more help navigating their project while we meet them in their homes to design, plan, hold together products across multiple categories and manage their project to completion. .

We're also deepening and broadening our relationship with the Pro customer, driving comps well above the company average, with our outstanding portfolio of brands, our strong value proposition through our 5 Ways to Save as well as our omnichannel offering through our growing ProServices team and LowesForPros.com.

We continue to evolve our capabilities to connect with the Pro across channels, and 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 ProServices specialists or at our stores with our dedicated in-store ProServices teams..

Our AEPs have been very effective in growing our business with larger Pro customers, especially maintenance, repair and operations, or MRO, customers, further solidifying our relationship and targeting property management companies as they make more trips and shop more categories across our platform. .

We've greatly improved our Pro offering with key brand introductions and investments in the breadth of assortment to ensure that Pro customers have the right selection of products, ultimately serving as a one-stop shop, a place where Pros can purchase all the products they need to complete their project and get back to the job site quickly.

Our 15% comp in pneumatics this quarter, driven by our home channel exclusives with Hitachi and Bostitch, the top 2 brands in pneumatics, is a testament to the power of our successful brand partnerships..

We're also reconnecting Pros who we believe have not recently purchased at Lowe's to show them what's changed in our stores and online, using targeted marketing, including expanded digital capabilities as well as exclusive Pro offers to drive awareness and generate new business.

We've also enhanced our buy-in-bulk program with new signage in-store, a new digital focus on LowesForPros.com and marketing campaigns designed to drive awareness of the great values we provide this customer..

During the quarter, we also demonstrated the strength and flexibility of our supply chain as we were faced with a variety of weather conditions, ranging from unseasonably warm temperatures to severe winter storms. We're proud to say that we were able to serve customers regardless of unpredictable weather. .

Our supply chain demonstrated agility and flexibility, holding inventory centrally then working to efficiently move product to areas of heightened demand to meet customers' needs, reaching areas in the path of storms within hours of impact. We continue to focus on opportunities to drive further efficiencies in our supply chain as well. .

In addition to our efforts to drive top line growth, we also continue to focus on making productivity a core strength while investing in the areas that matter most to customers. The latter portion of the quarter, we rolled out a new store staffing model across all U.S.

Lowe's home improvement stores to ensure that we are optimally prepared for the upcoming spring selling season. The changes streamline our management structure to provide better leadership and accountability to drive improved customer experiences..

We're also expanding our central production offices, moving scheduling of installation services from a store-level activity to a more efficient, centralized approach in our call centers, enhancing consistency and proficiency of communication and delivering a better customer experience..

We're pleased with our fourth quarter results and the progress we are continuing to make on our initiatives to drive top line growth, enhance our productivity and profitability and position Lowe's for the future. .

Turning our attention to the first quarter. As spring approaches, we're excited about our omnichannel kitchen and bath and outdoor refresh events, which offer unique customer touch points, compelling content and superior values..

Our events coordinate engaging experience for customers, designed to capitalize on their excitement for the season, including our refreshed seasonal pad and new online patio experience that showcases curated collections and the latest in style trends; and our new grill display, featuring Weber Genesis and Char-Broil grill innovations. .

We'll leverage the national launch of our in-home selling program during our kitchen and bath event and all year long to help customers bring their project aspirations to life. We're also excited about our upcoming Pro events, delivering great values both in-store and online at LowesForPros.com..

Thank you for your interest in Lowe's, and I'll now turn the call over to Bob. .

Thanks, Mike, and good morning, everyone. Sales for the fourth quarter were $15.8 billion, an increase of 19.2%. Total customer transactions grew 15.1%, and total average ticket increased 3.6% to $69.58. The transaction growth was aided by both the 53rd week and RONA.

The extra week in the period added roughly $950 million in sales, contributing 7.1% to sales growth. RONA sales were approximately $825 million or 6.2% of sales growth. Comp sales were 5.1%, driven by an average ticket increase of 4% and transaction growth of 1.1%.

The comp sales calculation included 14 weeks this year versus the comparable 14-week period. .

Looking at monthly trends. Comps were 4.7% in November, 6.3% in December and 4.2% in January. We estimate that weather positively impacted comp sales in the quarter by approximately 100 basis points. The majority of this came from serving customers in storm-impacted areas in the aftermath of Hurricane Matthew and the flooding in Louisiana.

Lastly, new stores drove 80 basis points of growth. .

For the year, total sales were $65 billion, an increase of 10.1%, driven by comp sales of 4.2%, RONA contributing 3.8%, the 53rd week adding 1.6% and new stores..

Gross margin for the fourth quarter was 34.1% of sales, which decreased 25 basis points from Q4 last year. Gross margin was negatively impacted by RONA due to both purchase accounting adjustments and the mix of business. In the quarter, these items negatively impacted gross margin by 25 basis points. .

SG&A for the quarter was 23.99% of sales, which leveraged 455 basis points. In last year's fourth quarter, we recorded a $530 million noncash impairment charge associated with the decision to exit our Australian joint venture. This year-over-year comparison drove 403 basis points of expense leverage. .

In Q4 2016, we experienced 59 basis points of benefits leverage, primarily related to incentive comp as we had lower attainment levels relative to last year..

We also experienced leverage in store environment, store payroll and many other lines as a result of the strong sales growth in the quarter. Somewhat offsetting these items were severance-related costs for organizational changes that are a part of our comprehensive effort to focus and prioritize resources.

The changes resulted in a charge of $84 million, which caused 53 basis points of deleverage..

Depreciation and amortization for the quarter was $374 million, which is 2.37% of sales and leveraged 44 basis points. .

Earnings before interest and taxes, or operating income, increased 474 basis points to 8.05% of sales. For Q4, we estimate that the 53rd week aided EBIT by roughly 30 basis points. The severance-related costs hurt EBIT by 53 basis points in the quarter.

The RONA impacts associated with purchase accounting adjustments, the mix of business and integration costs negatively impacted EBIT by 36 basis points in the quarter..

For the quarter, interest expense was $159 million. The effective tax rate for the quarter was 40.3%.

The higher rate was driven by a tax charge, primarily related to final Internal Revenue Code Section 987 regulations, which triggered the reversal of deferred tax assets associated with cumulative currency translation adjustment for our international operations..

Earnings per share were $0.74 for the quarter, including approximately $0.08 from the 53rd week. There were a number of discrete items not in our business outlook that impacted EPS for the quarter. First, the charge associated with severance-related costs hurt EPS by approximately $0.06.

Next, the impact of the new tax regulation noted a moment ago reduced earnings per share by $0.04. Lastly, there was a $0.02 negative impact associated with the takeout of RONA's preferred shares in the quarter, which reduced net earnings allocable to common shareholders in the EPS calculation..

Adjusted earnings per share was $0.86, which was 45.8% higher than Q4 2015's adjusted $0.59. For 2016, adjusted earnings per share of $3.99 were up 21.3% versus 2015. The extra week in 2016 aided EPS growth by 250 basis points. .

Now to a few items on the balance sheet, starting with assets. Cash and cash equivalents at the end of the quarter was $558 million. Inventory at nearly $10.5 billion increased $1 billion or 10.6% versus the end of last year. Just over 60% of the increase related to the addition of RONA, with the balance to support strong sales growth. .

Inventory turnover was 4.05, up 13 basis points to last year. Asset turnover increased 5 basis points to 1.85. .

Moving on to the liability section of the balance sheet. Accounts payable of $6.7 billion represents $1 billion or 18.1% increase over Q4 last year due to the timing of purchases year-over-year, terms improvement as well as the addition of RONA. .

At the end of the fourth quarter, lease adjusted debt to EBITDAR was 2.21x. Return on invested capital is 15.8%. The impact of the charges hurt ROIC by 154 basis points. .

Now looking at the statement of cash flows. Annual operating cash flow was $5.6 billion, and capital expenditures were $1.2 billion, resulting in free cash flow of over $4.4 billion, which was up 24% to last year. .

In November, we entered into a $190 million share -- accelerated share repurchase agreement, which settled in the quarter for 2.6 million shares. We also repurchased approximately 5 million shares for $361 million through the open market. In total, we repurchased $551 million of stock in the quarter and $3.5 billion for the year. .

In January, our Board of Directors authorized a new $5 billion share repurchase program. The new program has no expiration date, and when combined with our prior share repurchase program, we have approximately $5.1 billion remaining authorization. .

Looking ahead, I'd like to address several items detailed in Lowe's' business outlook. In 2017, we expect total sales increase of approximately 5%. The sales increase is driven by a number of factors. First, we are forecasting a comp sales increase of approximately 3.5%.

Second, sales growth will be higher for the first 5 months until we anniversary the RONA acquisition, which provides about 2% growth. Also, we plan to open 35 stores, which adds approximately 1%. However, total sales growth will be reduced by roughly 1.5% related to the comparison of 52 weeks in 2017 versus 53 weeks in 2016.

On an adjusted basis, we are anticipating an EBIT increase of approximately 50 basis points, driven entirely by expense leverage. For 2017, we expect expenses to grow at roughly 60% of sales growth..

Regarding EBIT, a full year of RONA results versus roughly 7 months last year will pressure EBIT by an estimated 15 to 20 basis points for 2017. The effective tax rate is expected to be 37.8%. .

For the year, we expect earnings per share of approximately $4.64, which represents a 16.3% increase over 2016's adjusted EPS. On a 52- versus 52-week basis, EPS growth will be 240 basis points higher. .

In comparing our guidance model to first call estimates, the quarterly earnings per share estimates look fine, but there are a couple of items I'd like to address related to the complexion of Q1..

There's a calendar week shift as a result of 2016's 53rd week. This year's first quarter will include 1 less week of winter and 1 more week of spring than last year. While this has no impact on comp sales, it does benefit first quarter total sales by approximately $500 million. .

As I mentioned a moment ago, the mix of RONA's business will impact EBIT until we anniversary the acquisition in the second quarter. The estimated negative impact to the first quarter EBIT is approximately 60 basis points. .

We are forecasting cash flows from operations to be approximately $5.9 billion and capital expenditures of approximately $1.4 billion. This results in an estimated free cash flow of approximately $4.5 billion for 2017. Our guidance assumes approximately $3.5 billion in share repurchases for 2017. .

Regina, we are now ready for questions. .

[Operator Instructions] Our first question will come from the line of Simeon Gutman with Morgan Stanley. .

A question for Bob Hull, and wish you well, Bob. Something I asked at the Investor Day, thinking about the flow-through for 2017, I think the guidance was somewhere around 25 basis points for every point of comp above 1.

I think the question then is the same now, what's driving it? I think it applies slightly higher incremental margins than what the business has been delivering.

And so what's changing? And any other color on that?.

Thanks, Simeon. So as we look at the outlook for 2017, on an adjusted basis, we're looking at 50 basis points of EBIT expansion. I commented that the impact of the full year RONA results versus 7 months in 2016 pressures us by 15 to 20.

So if you take the midpoint of that, call it, 67 basis points with a 3.5% comp, the flow-through per point of comp above 1 is about 27 basis points. So we feel good about that. As I indicated, we're expecting flattish gross margin for the year, with all of the increase coming from expense leverage. .

Okay. And then my follow-up, more of a near-term question, and no secret that Feb and March are tough compares. Seems like the business has good momentum through January. I know you don't normally comment on it.

Curious if you have any thoughts, and I don't think tax returns are normally a factor for the segment, so just curious on sort of what you're seeing currently in the business. .

Yes. So Simeon, Q1's off to a great start. We're ahead of plan. We're really excited about 2017. .

Your next question will come from the line of Peter Benedict with Robert Baird. .

I had a question kind of around the marketing plans for '17. I mean, I'm not sure you'll divulge too much, but just remind us, I think, marketing was kind of an issue last year, at least during the middle part of the year. How are you planning it -- to do that differently as we look through '17? That's my first question. .

Peter, this is Mike McDermott. Look, we're excited to welcome Jocelyn Wong to the expanded role of Chief Marketing Officer. She's going to have responsibilities in 2017 for customer experience design, content strategy and development, customer relationship management and advertising and media across all of our U.S. home improvement businesses.

So we think we've got the right collection of areas to focus on, and I'm confident that she and the team will continue to enhance our efforts to drive a more integrated and omnichannel approach, recognizing that we have a number of touch points to leverage with our customers to drive traffic.

So you'll see us be very focused on connecting with customers with more personalized messages, really tailored to meet their specific needs. And we'll continue to reach out and leverage the advances that we've made in our assortment and our offering with the Pro customer. So we've got a lot of activity going on in marketing.

I feel very, very good about our new campaign, and the team's really poised for success in '17. .

That's helpful. And then maybe one for Bob.

The hurricane and the flooding impacts, do you expect that to continue, Bob, through 2017? Or so anything you need to call out on that front?.

So Pete, we do expect some benefit in 2017. We do, however, expect that to wane as the year progresses, especially as we get closer to the activity in the second half of 2016. .

Your next question will come from the line of Matt Fassler with Goldman Sachs. .

Bob, Bob Hull, best of luck to you going forward. I know that at your analyst conference in December, you spoke about the effort to align costs, and that had followed a difficult third quarter on the expense line.

I guess there have been 2 rounds of activity that we've essentially read about, one relating to some restructuring in the stores, a second more recently relating to some restructuring at headquarters.

If you could just help frame some of that activity in the context of the plan that you set out in December, particularly with regard to how roles are changing in the stores and around the organization, how labor dollars are being reallocated and then how that flows into your financial outlook. .

Yes. Matt, It's Robert Niblock. I'll start. Yes, as you're aware, we have announced some staffing changes over the last 30 days or so, both in the store and at the corporate office here.

And as we see what's -- rapid shift that's changing in customer expectations and what they expect from retailers, our whole movement to be a customer-centric, omnichannel home improvement company, really dictating that we needed to allocate our resources differently so that we could better meet the needs of customers.

It's something we have to continually do obviously to make sure we have our resources in the right places and -- so we can continue to meet their needs. From a store standpoint, yes, I think our new staffing model helps ensure us that we're optimally prepared for the upcoming spring selling season.

The changes we've made in the store, we think, have really improved our leadership capabilities with an enhanced focus on training and really empowering our associates to deliver on an improved experience for the customers. We're really pleased with the receptivity we've seen and getting that done before -- ahead of the spring selling season.

Here at the corporate office, the changes we just made at corporate headquarters are really designed to create more agile, efficient and customer-focused operating structure.

We needed -- as we continue to migrate from being a single-channel retailer to an omnichannel home improvement company, we really need to step back and make sure that we have our resources aligned in the proper way so we can best take advantage of the opportunity that we see in front of us.

And as we've talked for many quarters here, online, in-home, contact centers, those other things that are part of our omnichannel strategy are where we're seeing the highest growth. And we want to make sure we have our resources aligned behind that. So we're excited about it.

It's always tough when you make those changes that impact people's lives, but I think it's the thing -- that it was the right thing to do to continue to move us forward and capitalize on the opportunity we see ahead of us. .

Matt, related to the impact to our guidance provided at the analyst conference, they were incorporated in the outlook that we shared at that time. .

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

Best of luck, Bob. It's been a pleasure all these years. Wanted to talk about the sort of outlook that you put out in December, specifically related to 2017. There's this big pause in the industry over the summer, but things have accelerated strongly. So 2 parts to the question.

In retrospect, what do you think drove that pause? And then thinking about the -- what you were looking at when you put your Analyst Day outlook, did that affect your outlook? In other words, it doesn't appear like the -- it appears the backdrop has actually accelerated since then.

So do you think that your outlook could prove conservative in that regard? I guess, better asked, did that summer pause actually impact how you put out forward guidance?.

So Chris, we look at a number of factors, macroeconomic factors, our ongoing performance, input from vendor partners and other sources, trying to understand what's going on with the consumer, industry demand drivers, et cetera.

So certainly, as we came out of the third quarter and saw trends in fourth quarter leading up to the December meeting, we're certainly aware of our performance, also mindful of actions we were taking to drive consumer demand, to drive productivity, et cetera.

So what I would say as we talk about our outlook for the year is I feel really comfortable about our opportunity to hit the $4.64 for the year. It's going to happen differently than we planned it, but as far as getting the EPS, I think there's confidence with the team that, that figure's more than achievable. .

So I guess it's not just from a top line perspective, that summer pause really impacted putting out the 3.5% comp guide. .

No real impact, Chris. .

Okay. And then one follow-up. Can you share with us -- I'm assuming you're going to report comparable weeks -- same-store sales for comparable weeks.

Can you share with us what the comparable same-store sales would have been based on the week shift in 2016?.

So our comparable sales calculation does use the comparable weeks. So week 53 of 2016 comped over week 1 of 2016, which is the comparable week for the period, which is consistent with how we've reported comps the prior 3 53-week years since I've been CFO. .

Okay.

So there's no -- we can look at what you reported as comps last year as the right comparable when we're putting our estimates together?.

The 14-week period was compared against the comparable 14-week period. So yes, the comps as reported are what they are. .

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

Bob, best of luck. Robert, I wanted to ask about the increasing focus on productivity. Your SG&A per foot stands around $70. There's obviously a lot of moving pieces in there.

But what do you see as the optimal level of SG&A per square foot? Is there a way to size the aggregate opportunity from your productivity measures? And how do you harvest that opportunity on enhancing the culture to ensure that you have the necessary level of in-store execution?.

Yes. Well, Michael, I don't think we really measure it that way. What I can tell you is that as we've gone through and looked at, as I said earlier, the evolution, as we've gone from a single-channel retailer to an omnichannel home improvement company, we certainly had made changes along the way as the way that we have reallocated the resources.

But when you look at the continual shift that you see taking place in the customer and the way that they want to interact with us, you realize that we need to continue to evolve.

So if you think about it, you're sitting back with an organizational structure today that has evolved over time, not the one that we would have designed from scratch if you were starting out as an omnichannel company.

So as we continue to see that evolution, we said we really need to step back and say, okay, where do resources need to be allocated at the corporate office? We took out some spans and layers to make us a more agile, nimble organization from a corporate office standpoint so that hopefully, we can better respond to opportunities, better respond to the stores and our other channels after they've taken care of the customer on a daily basis and then also did some hard look at our management structure in the stores to say, how can we ensure that we're managed -- that we're organized in the right way to make sure that, from a leadership standpoint, we're leading people in a way that's going to provide a better experience.

So it was really more driven -- from that standpoint, we look at productivity more as, how do we take dollars and reinvest them in the areas that will drive better performance? So yes, there's obviously -- through that process, there's a cost savings impact as well.

But it's also, if we get them aligned appropriately, then we think we'll drive better performance, which leads to the productivity leap. .

Okay. And my follow-up question is on the average comp ticket growth during the quarter of 400 basis points, driven by the 9% increase in the transactions above $500. Presumably, that was helped by the growth, the above-average growth in appliances and kitchen.

Was there something from an execution standpoint that you did better that contributed to the growth? Or do you think that it was just growth from the marketplace?.

So you're right. It was strength of our kitchen and appliance business in the quarter, Michael, that drove that. Also, the above-average Pro performance is a driver for growth in average ticket.

Certainly, as we take a look at our own execution, we strive to do better every day as the items that Mike described in his comments were all items of focus for the quarter to allow us to take advantage of demand and serve customers. .

Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets. .

Robert Iannarone on for Scot. So just 2 quick ones.

Given some of the volatility you guys have experienced over the -- in the top line over the course of the year, what gives you confidence in your comp outlook of 3.5% for the year? And have you seen any changes to trend in the Northeast specifically, I think, where Pro was a little bit weaker last quarter?.

Yes, this is Robert. We did see a continued improvement in the North in our performance there. So I think, certainly, some of the actions that the team has taken to better resonate with the customer has certainly started to take traction. So we're pleased with the improvement in performance that we saw there.

As we look at 2017, we look at -- if you look at whether it's the underlying macro fundamentals that are out there, still seeing a very healthy housing market, whether it's from a turnover standpoint, whether it's from an appreciation of standpoint on housing, incomes continuing to rise as we spoke about employment continuing to improve.

All of those things, I think, set up home improvement to see -- to continue to gain shares as a percentage of share of wallet in 2017. We've seen that trend for the past few years. I think it sets us up well for this year.

And then on top of that, we've actually -- behind or postelection, we've actually seen, from our Consumer Sentiment Survey, a really strong increase in homeowners' intention to invest in their home and start a project over the next 6 months, as we talk about.

So if you look at just the underlying factors, some of the momentum that we saw coming out of our quarterly Consumer Sentiment Survey sets us up that -- we think that it sets us up well that a 3.5% comp should be achievable as we look out to 2017. .

And just one follow-up.

Can you guys give us any idea of what the productivity and cost savings are on more of a run rate basis from some of the recent changes you made last quarter and you've talked about incurring this quarter?.

So as we talked about in addressing Matt's question, the productivity savings were contemplated in the model we put together at December Analyst Conference and consistent as the outlook today. What I would say is, if you think about prior EBIT expansion prior [indiscernible] to expectations, there is a component of gross margin in there.

We've taken that out, and the entirety of the flow-through in EBIT expansion is driven by expense leverage. So it's embedded in our SG&A outlook for the year going forward. .

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

First, congrats, Bob, and thanks for all the help over the years. And Marshall, welcome back to the jungle. That's the only way I can put it. So I have 2 questions. One is, what was commodity inflation in the fourth quarter? And if you look at your guidance for this year, what do you have factored in? Then I have a follow-up on Pro and ticket. .

So in the fourth quarter, Greg, we actually had modest deflation. We had building material deflation of 25 basis points driven by roofing installation, which offset the, call it, 15 basis points of inflation in lumber. For 2017, there's only very modest inflation contemplated for the year. .

Modest would be something less than 20 or 30 bps?.

Less than 20. .

Okay. And on ticket, I saw that the -- it was up 9% for the larger tickets.

Could you help us understand a little bit more as to how much of that would have been, say, driven by appliances versus really building the Pro basket and driving Pro?.

Greg, really don't have a de-composition of that 9% growth in front of me. It is all of the above, right? It is the strength of the performance of those categories, and it's the tactics we have been taking over the number of years to better serve Pro customers that are driving the 9% growth. .

Great.

I guess so to follow up on Pro, just do you have a credit penetration number for private-label cards?.

The private-label card penetration was 28.7%, up about 20 basis points versus the same period last year. .

Your next question comes from the line of Eric Bosshard with Cleveland Research. .

Two things I'm curious on. One, the 35-store opens, I understand the emphasis and the opportunity with omnichannel.

But the 35 number, can you just remind us what you're spending and the focus and the expected payback from that? And then secondly, would love to understand what you felt you did differently in appliances, which underperformed in 3Q and was a much stronger performer in 4Q. .

I'll take the first part and let Mike address the second part. So as we think about the 35-store openings, that's roughly 9 U.S. big-box stores, 10 stores in Canada, a few in Mexico and 14 Orchard locations. So there are varying formats in varying geographies. As we think about the spend for new stores, that is roughly $400 million in 2017.

As we think about return hurdles, we've got risk-adjusted return hurdles for all of our investments, including real estate. We do expect the portfolio of stores to more than exceed those hurdles going forward. .

Eric, this is Mike McDermott. On the product side of appliances, obviously, the fourth quarter's a significantly promotional quarter. We made some adjustments in both our traditional and digital advertising approach to make sure that we were engaging customers in an exciting way.

We continue to see benefit from our Lowes.com replatform that we did mid-2016. And certainly, our associates in the store are providing the right level of experience for our customers, have been great.

Credible vendor partnerships, great values, innovative products and just incredible performance by our supply chain team to make sure that we were in stock in this critical season, really driving significantly positive performance in the laundry [ph] businesses as a result of some of those buys and the ability to move that inventory where it was needed.

.

Great. And then if I could just add one more, there was a reference earlier on incentive comp. I'm curious in terms of what happened with store-level incentive comp in 4Q and what the expectations in strategy is in that area moving forward. .

So Eric, if you recall, we had fairly substantial deleverage in the fourth quarter of last year based on the strength of performance, which really impacted our annual accruals. So we had significant deleverage Q4 last year, which, as we planned 2016, that was expected.

While we had really good performance this year, it didn't compare to what we saw last year. Therefore, the rate of change was less, giving rise to expense leverage in the incentive comp area Q4 '16.

Going forward, we've got a variety of plans that incent the store management and store associates to serve customers every day to ensure we help meet their needs, omni needs, going forward. So no real change in how we're thinking about incenting the folks that are on the front lines, interfacing with our customers every day. .

Our final question will come from the line of Keith Hughes with SunTrust. .

Our question has already been answered. Thank you. .

Thank you. Okay, thanks, and as always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our first quarter 2017 results on Wednesday, May 24. Thanks, and have a great day. .

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