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Lowe's (NYSE:LOW)
Q3 2017 Earnings Conference Call
Nov. 21, 2017 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning everyone, and welcome to Lowe's companies Q3 2017 earnings conference call. This call is being recorded. Please note, if you pressed * 1 to enter the question queue prior to the start of today's call, your signal did not register. You will need to press * 1 again to enter the queue. All supplemental reference slides are available on Lowe's Investors Relation 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 to the following 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 of the most directly comparable GAAP financial measures. Statements made during this call will include forward-looking statements as defined in the Private Security 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 earning release and in its filings with Security and Exchange Commission. Hosting today's conference will be Mr. Robert Niblock, Chairman, President, and Chief Executive Officer; Mr. Rick Damron, Chief Operating Officer; and Mr. Marshall Croom, Chief Financial Officer. Joining during the Q&A session will be Mr. Richard Maltsbarger, Chief Development Officer and President, International; and Mike McDermott, Chief Customer Officer.

I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

Robert Niblock -- Chief Executive Officer, President and Chairman

Good morning and thanks for your interest in Lowe's. This quarter our teams were tested by the largest natural disaster response we've ever mounted, and I'm extremely proud of the way they met the challenge. Our merchants, vendor, logistics, and storm teams worked together seamlessly to ensure customers had the right products to protect and repair their homes. Following the storms, our operations team worked tirelessly to get out stores up and running quickly and over 3,000 employees generously volunteered to serve on employee-relief teams providing additional support to customers in their time of need and giving employees impacted by the hurricanes a chance to focus on their own recovery efforts. Lowe's has also provided financial support, committing over $2.5 million in disaster relief through cash and card donations, and we continue to work closely with our nonprofit partners to provide both immediate and long-term support to impacted areas. I'd like to take a moment to thank our employees for their remarkable efforts to serve their communities, help customers, and support their colleagues in the face of numerous natural disasters.

Turning now to our third-quarter results. We delivered comparable sales growth of 5.7%, driven by a 4.8% increase in comp average ticket and transaction growth of 0.9%. Hurricane-related sales contributed 140 basis points to comp growth. Our US home improvement comp was 5.1%, with positive comps in all regions and all the product categories. Lumber building materials led product category growth with double-digit comps, driven by pro demand, hurricane prep and cleanup, and inflation. Appliances also posted double-digit comps, supported by our best-in-class omnichannel offering and we achieved above-average comps in rough plumbing and electrical. We're pleased with the progress we've made to enhance our product and service offerings for the pro customer, delivering another quarter of comps above the company average. Our integration of Maintenance Supply Headquarters and Central Wholesalers remains on track and we continue to be excited about opportunities these acquisitions provide to further expand our products and services to serve the multifamily housing industry. During the quarter, we also advanced the customer experience through omnichannel assets, driving 33% online comp growth. We're seeing positive customer response to our evolving omnichannel capabilities, continuing to meet customers at every critical moment, whenever, wherever, and however they choose to engage with us. In fact, we were recently recognized by Forbes magazine as one of the top 10 most-engaged companies. This distinction highlights our commitment to engage customers with a purpose, offer consistent experiences, and put the customer at the center of everything we do.

Internationally, we delivered strong performance including half-single-digit comps in Canada and double-digit comp growth in Mexico in local currency. We made further progress with the integration of Rona, continuing our rollout of appliances, converting our second Rona big-box store to a Lowe's-branded store, and continuing to drive growth with our e-commerce platform. We're excited with the momentum in the business and believe we are well-positioned for continued success in Canada. We continue to focus on improving our profitability while investing in key capabilities to drive sales growth. For the quarter, we drove diluted earnings per share up $1.5, a 19.3% increase over last year's adjusted diluted earnings per share and in line with our expectation. Delivering on our committed to return excess cash to shareholders in the quarter, we repurchased $500 million of stock under our repurchase program and paid $344 million in dividends.

Turning to the economic landscape, the home improvement industry remains poised to see solid growth, with job and income gains supporting consumer spending. We believe that revolving credit usage will continue to supplement the spending power generated by stronger incomes. Housing is also expected to remain a bright spot. Household-formation improvement this year is encouraging, and home-price appreciation should continue as housing demand outpaces supply, encouraging homeowners to engage in discretionary projects in addition to ongoing maintenance and repair spending. And, as we survey consumers, we continue to see favorable trends. Our third-quarter consumer sentiment survey highlighted that consumers have an increasingly positive view of the national economy and continue to view their personal financial situations favorably. Given that over half of homeowners believe their home values are increasing, intent to engage in discretionary home improvement projects remains strong.

Reflecting our third-quarter results, we were pleased with our continued traffic growth, driven by optimized marketing messaging and the benefits provided by strategic investments in our integrated omnichannel experience. We look to further build upon our strong foundation by developing capabilities to anticipate and support customers' evolving needs and improve our operating discipline and execution, making productivity a core strength for Lowe's. We remain committed to balancing our promotional strategy with our price-optimization efforts to improve profitability, and we will further leverage our new store leadership model, which provides better management and accountability while optimizing our investments in customer-facing associate hours to fully capitalize on strong traffic trends and deliver an improved customer experience. Once again, I would like to thank our employees for their unwavering commitment to serving customers and their communities. The team faced challenging circumstances this quarter and they delivered, demonstrating our purpose-driven mission to serve the communities in which we live and work.

And finally, before I turn the call over to Rick, I want to take a moment to thank him for his innumerable contributions to Lowe's. As you know, we announced this morning that Rick will be retiring after 36 years at our company, the last five as our Chief Operating Officer. Rick has worked across every aspect of our operations and he has positively impacted Lowe's customers and employees. We wish him all the best in his retirement. Richard Maltsbarger, who currently serves as our Chief Development Officer and President, International, will succeed Rick upon his retirement in February. Richard is a proven leader with a keen understanding of our business and industry. He has been instrumental in the development and implementation of our strategy. Rick and Richard have a great working relationship and I expect the transition will be seamless.

And with that, I'd like to turn the call over to Rick.

Rick Damron -- Chief Operating Officer

Thanks, Robert. It's been an honor to our work besides you and our incredible Lowe's organization and management team through the various phases of my career. I'm thrilled that Richard will be stepping into this role and I'm confident that he will further propel the company's operations and customer experience to new levels of growth and success. I look forward to working closely with Richard over the next few months to ensure a seamless transition and will be cheering Lowe's on from the sidelines of my retirement.

During the quarter, we drove increased traffic in-store and online with compelling messaging and integrated omnichannel experiences, capitalizing on a supportive macroeconomic backdrop and customers' continued desire to invest in their homes. We delivered a 5.7% comp, achieving positive comps in all regions and all product categories. We drove double-digit comps in appliances, posting our best appliance comp in seven quarters, leveraging our investment in customer experience both in-store and online, our service advantages of same or next-day delivery and haul away, and facilitation of repairs and maintenance, our best-in-class selection of leading brands, and our strongest strategic relationships with partners such as Whirlpool, who we proudly announced as one of our 2017 vendor partners of the year. We also achieved double-digit comps in lumber and building materials and above-average comps in plumbing and electrical. Lumber and building materials benefited from robust pro-growth inflation and strong hurricane-related demand for plywood, pressure-treated lumber, [Inaudible], shingles, drywall, and insulation. And as hurricanes Harvey and Irma drove demand, our team sent over 11,000 truckloads of products to impacted areas, supporting both pro and DIY customers as they prepared for the storms and worked to repair their properties afterward. For the pro customer, we also added Account Executive ProServices, or AEPs, to the Texas and Florida markets to support incremental demand. Historically, most storms have four distinct phases. First, preparation, in advance of the storm. Second, impact, when the storm actually causes damage. Third, cleanup. And fourth, recovery, when repairs are made and damaged items are replaced.

In the third quarter, we experienced preparation, impact, and some initial cleanup from hurricanes Harvey and Irma. We expect hurricane recovery to begin in fourth quarter and extend into 2018. Given that Harvey was more of a water event and Irma was more of a wind event, we expect that the magnitude of the benefit and the recovery period for Houston will surpass that of Florida. Rough plumbing and electrical performance this quarter is evidence of the power of destination brands as our evolving brand portfolio continued to capture pro sales and drive above-average comps in the category. Our pro business continues to thrive, with comps above the company average, driven by a favorable macro backdrop as well as our continued efforts to optimize our product and service offering to better serve the pro customer. In addition to our outstanding portfolio of brands, we're also expanding our relationship with the pro customer across all categories with our strong value proposition including our "Five ways to save," as well as advancing our capabilities to connect with the pro seamlessly across channels through Lowesandpros.com and growing pro services team.

The addition of Maintenance Supply Headquarters and Central Wholesalers further expands our capabilities to serve multifamily property-management customers throughout the country with enhanced product and service offerings while strengthening our platform for future growth with this important customer. In fact, we are pleased with the early results of the MSH and Central integration efforts. The teams are leveraging best practices to build a new product catalog with an expanded offering for the maintenance, repair, and operations professional, which will roll out this spring, and we're working with our suppliers to improve terms and price. Finally, our pro services teams are collaborating to serve customer needs, including serving multifamily property managers in the hurricane-impacted areas. We continue to build pro awareness with targeting marketing as well as pro exclusive offers to grow our share of wallet with existing pros while also expanding our base of pro customers. We continue to execute on our strategic priorities, including leveraging our omnichannel capabilities to help customers achieve great project results. Customers can engage with our associates in store for expert advice, our content on Lowes.com for inspiration, our contact centers for ongoing support, and our project specialists, who work with them within the homes to design, plan, and manage their home-improvement projects. We are leveraging our investments in Lowes.com, providing an upgraded online shopping experience with enhanced functionality and display for touch-screen devices to deliver an optimized mobile experience, improved product, and content recommendations, refined search algorithms, optimized assortments informed by digital [Inaudible] and expanded views, including video content. Along with our flexible fulfillment options of "Buy Online, Pick Up in Store" and "Buy Online, Deliver from Store" and our enhanced digital marketing, our efforts combined to drive online comp growth of 33%. We will continue to advance our online platform, adding more functionality, such as inventory and order-status visibility, to improve the customer experience.

Our interior and exterior project specialists are another important element of our omnichannel strategy and a differentiated capability in capturing and serving project demand for the DIY customer who needs a bit more help navigating their project. We're making it even easier for customers to engage with our in-home project specialists and request services from Lowes.com and we're working to centralize our process for providing installation quotes, allowing for greater efficiency and more consistent customer experiences. We're rolling out this capability in the flooring category for the remainder of the year, with all US markets expected to be online by Q1 2018 and expanding to other categories throughout 2018. We're also driving brand loyalty through our MyLowe's platform. Our simplified military-recognition program allows active-duty personnel and veterans to register through MyLowe's and receive 10% off their purchases every day. We're also offering free parcel shipping exclusively for MyLowe's members. We've seen great response, with 1.5 million new memberships since we offered the expanded benefits in Q1. And we've seen those customers increase their spend by 15% after registering for MyLowe's. We continue to focus on driving productivity and profitability and drove 27 basis points on leverage, in-store payroll in the quarter. This leverage was primarily the result of our new store leadership model, which streamlined management hours to provide better oversight and accountability. As we discuss our second-quarter call, to more fully capitalize on our strong traffic trends and ensure we're delivering an excellent customer experience, we began adding incremental associate hours this quarter and continue to provide the necessary training and resources to all associates. We worked through the quarter to increase hours, and we'll continue to optimize our labor allocation to ensure resources are utilized in the areas of greatest need in order to improve traffic conversion. We also made progress in centralizing indirect spend, leveraging our scale to drive efficiencies in procurement. We have now centralized 60% of indirect spend compared to 30% at the end of 2016.

Our supply chain is another productivity focus area, offering opportunities to streamline cost even as we improve the [Inaudible] options for customers. For example, we are working to consolidate freight shipments from both in port and domestic freight to drive greater efficiency and optimize the flow of inventory, significantly reducing the number of trucks arriving at our distribution centers and stores, allowing us to reinvest labor in others areas. As we look forward to the fourth quarter, we're enthusiastic about our plans for an integrated omnichannel holiday experience, including the exciting Black Friday and Cyber Monday events. We'll continue to highlight our project expertise and our best-in-class kitchen and appliance offers. And we'll leverage our in-store and online assets to create unique holiday decor experiences, capitalizing on the nostalgia of the holiday season and providing cohesive decorating solutions as well as compelling gift ideas across all of our assortments. We are excited to announce the introduction of Craftsman products in-store and online in the second half of 2018. We're committed to offering a wide selection of brands DIY and pro customers trust, and Craftsman strengthens our ability to deliver on customer expectations across many product categories. The partnership between Stanley Black and Decker and Lowe's will bring some the most innovative products into our omnichannel home improvement shopping experience, allowing both DIY and pro customers even greater access to high-quality, value-oriented product offerings for their next home-improvement project. We are proud to be the partner of choice in the Home Center channel for the Craftsmans brand and look forward to sharing additional information with you in 2018. Thank you for interest in Lowe's and I will not turn the call over to Marshall.

Marshall Croom -- Chief Financial Officer

Thanks, Rick, and good morning, everyone. Sales for the third quarter increased 6.5% to $16.8 billion, supported by total customer transaction growth of 0.7%, the total average ticket growth of 5.8% to $72.63. The acquisitions of MSH and Central contributed 70 basis points of the growth in the quarter, while new stores contributed 50 basis points. The calendar shift from the 53rd week in Fiscal 2016 had no impact on comp sales, but it did decrease third-quarter total sales growth by approximately $60 million or 40 basis points. Comp sales were 5.7%, driven by an average ticket increase of 4.8% and transaction growth 0.9%. Looking at monthly trends, comps were 3.9% in August, 8.2% in September, and 4.5% in October. As Rick indicated, we drove traffic in-store and online with optimized messaging and our strategic investments in integrated omnichannel experiences, capitalizing on customers' continued desire to invest in their homes.

Our teams also responded to the demand generated by hurricanes Harvey and Irma this quarter, and we estimate that the storm positively impacted comp sales by approximately 140 basis points. Gross margin for the third quarter was 34.07% of sales, a decrease of 28 basis points from the third quarter of last year. As we've grown our market share in appliances, gross margin has been impacted from both a mix and rate perspective. Additionally, there was a mix impact from hurricane-related demand. And lastly, we continued to take competitive actions which were partially offset by benefits from [Inaudible] improvement well as early results from pricing optimization efforts. SG&A for the quarter was 22.71% of sales, which leveraged 323 basis points. In last year's third quarter, we recorded $462 million in non-cash charges, which drove 293 basis points of the leverage for this year. Please refer to Page 14 of our supplemental slides for a summary of those charges. The main driver of the remaining 30 basis point of leverage was 27 basis points of payroll leverage, primarily the result of our new store leadership model. Depreciation and amortization for the quarter was $358 million, which leveraged 31 basis points. Operating income increased 326 basis points to 9.23% of sales. Prior year non-cash charges accounted for 293 basis points of the increase in operating income. Interest expense for the quarter was $160 million which leveraged 8 basis points. The effective tax rate for the quarter was 37.1% compared to 51.2% in third quarter of Fiscal 2016. The higher rate last year was driven by the joint venture non-cash charge, which was a long-term capital loss. And earnings per share was a $1.05 for the third quarter, a 19.3% increase over last year's adjusted earnings per share of $0.88. This is in line with our expectation.

Now turning to the balance sheet. Cash and cash equivalents at the end of the quarter was $743 million. Inventory at $12.4 billion, increased 1.4 billion, or 12.8%, versus the third quarter last year. This was primarily driven by investments in key categories, such as appliances and tools, as well investments across pro categories. Part of the increase is also attributable to the addition and acquisitions of MSH and Central. Inventory turnover was 3.94, an increase of 5 basis points over the third quarter of last year. Asset turnover increased 12 basis points to 1.91. Accounts payable of $8.9 billion represented $1.1 billion, or a 13.6% increase over the third quarter of last year due to the timing of purchases and terms improvement. At the end of third quarter, lease-adjusted debt to EBITDAR was 2.16 times and return on invested capital was 19.5%.

Now, looking at the statement of cash flows. We generated strong operating and free cash flow in the quarter of $5.4 billion and $4.6 billion respectively. Our capital allocation strategy first focuses on investments that align with our strategic priorities to expand our home improvement reach, develop capabilities to anticipate and support customer needs, and generate profitable growth and substantial returns. For example, our acquisition of Maintenance Supply Headquarters is a strategic investment to further grow our pro business by expanding our ability to serve the multifamily housing industry. The transaction is expected to be slightly accretive to earnings this year. And after strategic investments, we looked to return excess cash to shareholders. In the quarter we paid $344 million in dividends. In August we entered into a $25 million accelerated share repurchase agreement, which settled in the quarter for approximately 3.2 million shares. We also repurchased approximately 3.2 million shares for $250 million through the open market. In total, we repurchased $500 million of stock in the quarter. We have approximately 2.1 billion remaining on our share-repurchase authorization.

Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook. We are reaffirming our guidance for the year. While we expect incremental hurricane-related sales in the fourth quarter, we continue to optimize our investments in customer-facing associate hours to fully capitalize on the strong traffic trends generated by our enhanced marketing efforts. We are also facing a tough prior-year comparison and, as you know, weather in the fourth quarter is unpredictable. Also, earnings per share of $1.05 in the third quarter was again in line with our expectations. With that backdrop, for the year we expect the total sales increase of approximately 5%, driven by a number of factors. First, we're forecasting comp sales increase of approximately 3.5%. Second, the Rona acquisition is expected to drive about 2% growth due to a full-year of Rona results versus roughly seven months from 2016. Also, we expect new stores and acquisitions of MSH and Central to add approximately 1%. Also, keep in mind total sales growth will be reduced by roughly 1.5% related to the comparison of 52 weeks in 2017 to 53 weeks in 2016. On a GAAP basis, we are anticipating an operating margin increase of 80 to 100 basis points. Remember, a full year of Rona results versus roughly seven months last year will pressure operating margin by an estimated 15 to 20 basis points for 2017. Effective tax rate is expected to be approximately 37% for 2017. For the year, on a GAAP basis, we expect earnings per share of $4.20 to $4.30. Again, please refer to Page 14 in our supplemental slides for the summary of adjustments as you compare 2017 to 2016. We are forecasting cash flows from operations to be approximately $5.4 billion and capital expenditures of approximately $1.2 billion.This results in an estimated free-cash flow of approximately $4.2 billion for 2017. Our guidance assumes approximately $3.5 billion in share repurchases for 2017.

Christie, we're now ready for questions.

Questions and Answers:

Operator

To ask a question, press * 1 on your telephone keypad. To withdraw your question, press the pound key. In order to allow questions from as many individuals as possible, please limit yourself to one question and one follow-up.

Your first question comes from Peter Benedict with Baird. Please go ahead.

Peter Benedict -- Robert W. Baird -- Analyst

Hey guys, thanks for taking the question. First is around the efforts to drive better conversion. Can you maybe help us with the key actions you're taking here in that area? How did the third quarter do relative to your expectations there? That's my first question.

Marshall Croom -- Chief Financial Officer

Sure, Peter. There are several actions that we're taking as we think about conversion. As you know, we have been able to begin tracking our traffic inside the stores. So it's the first time we've got real solid data on year-over-year comparison which allows us to really understand what's happening inside the stores. We're working through the optimization of hours. As we talked about in Q3, or Q2, we invested incremental hours to really be able to maximize the opportunity to convert our traffic that we're seeing from the marketing-spend investment and the traffic that it's generating. During Q3, we worked to fully deploy those hours and were able to achieve that by the end of the quarter as we added the incremental hours throughout the quarter. And now we continue to work on better utilization of those hours and deploying those during peak traffic times when we see the opportunity to increase our conversion more holistically. And, as always, we continue to work on the training and development of our employees to meet the demands of our customers. So if I'm looking at it from that perspective, we've done a solid job in adding the hours that we committed to. Now we're working to continue to optimize those hours to customer traffic and continue to work on training and development of all of our employees to meet the needs of the customer.

Robert Niblock -- Chief Executive Officer, President and Chairman

Peter, this is Robert. The only other thing I would add is, as highlighted in my comments, the progress that Rick took you through that we're making on this effort was somewhat impacted by our need to redeploy resources into the hurricane-affected areas as we spoke about. So, kind of got that behind us. And so, we made progress and continue to be focused on it throughout the fourth quarter.

Peter Benedict -- Robert W. Baird -- Analyst

OK, that's helpful. Thanks. And then just shifting over to some your omnichannel stuff. Maybe talk about your delivery capabilities today, where they stand, where you think you need to take these, and also [Inaudible] just updated commentary around "Buy Online, Pickup in Store" and "Deliver from Store," where you sit with those and where you see those going. Thank you.

Marshall Croom -- Chief Financial Officer

Peter, I'll start with "Buy Online, Pick Up" and "Delivery From Store." Those two aspects of omnichannel delivery have been part of our Lowes.com platform since its original launch in 1999. So it's something that we're very familiar with. From an execution standpoint, 60% of our dot-com sales are currently picked up in store, with 40% of those customers buying incremental products when they arrive to pick up their items. Another 10% to 15% is delivered from store with the remaining 25% to 30% being parceled. So, for us, that tells a great story of the role of the store and the omnichannel environment and how our customers continue to utilize our stores for fulfillment options in their omnichannel strategy. As it relates to delivery, holistically, as you know, we operate both in-house deliveries and a third-party model in order to continue to drive the capacity that we want to be able to be nimble enough to meet the changing needs of our customers. We're very pleased with our delivery programs and how our teams continue to execute against those offerings which is evidenced by, I think, our growth in appliances, as we highlighted, which is a strong delivered category and our teams are able to continue to meet the demands of that business and be able to drive those sales. So we're comfortable with where we are. We continue to look at options for fulfillment. If you look at parcel, we'll be opening our first direct fulfillment center in Q3 of this year, in 2018, in Nashville, and we continue to ship parcels from our stores from a fulfillment perspective.

Peter Benedict -- Robert W. Baird -- Analyst

That's great. And how about delivery to the pros? How are we thinking about that?

Marshall Croom -- Chief Financial Officer

Sure. Delivery from pros has been part of our ongoing programs since we've been executing against the pro initiatives. We feel very comfortable with our ability to meet the needs of the pros through various different fulfillment options. We are able to narrow delivery windows to a two-hour timeframe for our pros when we run through the process and the programs. So we feel confident that we're able to meet their needs on an ongoing basis both within our in-house and our third-party models. Mike Tummillo and the pro team continue to work on options to continue to improve that from a fulfillment perspective. So we feel good about our existing ability to execute versus the pro as well as our ongoing strategic options that we're building out to continue to meet their needs in a dynamic marketplace.

Peter Benedict -- Robert W. Baird -- Analyst

OK, that's helpful. Thanks very much, guys.

Robert Niblock -- Chief Executive Officer, President and Chairman

Thanks, Peter.

Operator

Your next question comes from Brian Nagel with Oppenheimer. Please go ahead.

David Bellinger -- Oppenheimer -- Analyst

Good morning. This is David Bellinger on for Brian. So a couple of questions from us. First one on the progression of comps throughout the quarter. You were coming off a strong 7.9 gain in July and that slowed to 3.9 in August. Can give us more detail on what drove that and was it more traffic versus ticket and also what led to the improvements in September and October. Was there some type of internal change made in addition to the $200 million lift from the hurricanes?

Marshall Croom -- Chief Financial Officer

I'll take the first part. We were actually pleased with what we were seeing from in-store and online traffic in August and, as Rick mentioned, we were working on investing in increasing our associate hours for customer-facing in the areas where we needed the most [Inaudible] help us drive better conversion. So as that played out in the quarter, we began to see that pick up in September but a little bit soft in August.

David Bellinger -- Oppenheimer -- Analyst

OK. And then just looking at the comp guidance for the year and sticking with the 3.5%, it looks like comps year to date are up about 4% and that implies Q4 slowing to something below 2%? Should we read anything into that or is that simply conservatism in your forecast? Can you comment on early trends into November and how that compares to what's implied in your outlook?

Marshall Croom -- Chief Financial Officer

OK. Certainly, we think that our guidance for the quarter for the year is appropriate and balanced as we look to invest in running the business and continue to invest in our ongoing capabilities. We are confident in our ability to drive traffic in Q4. We do expect some benefit from the hurricanes as we move into Q4 and into 2018 but one of the things again, we've been optimizing our selling hours in the stores and still tweaking that, like where we are today but, again, recognize in Q4 we have tough comparisons to last year. As we mentioned weather to be a kind of wild card in the fourth quarter, so, just keep those in mind as we head into Q4. As far as where we are, quarter to date, we're just slightly ahead of our expectations for the quarter.

Robert Niblock -- Chief Executive Officer, President and Chairman

David, this is Robert. I would layer on this. Marshall talks about tough comparisons to the prior year. Keep in mind that we're also cycling the fourth quarter of last year [Inaudible] the benefit of Hurrican Matthew and the Louisiana flooding, so we've tried to take all that into our guidance and just to reiterate, we're saying approximately 3.5% comps per year is what we're looking at.

David Bellinger -- Oppenheimer -- Analyst

Got it. Thank you very much.

Operator

Your next question comes from Kate McShane with Citi. Please go ahead.

Kate McShane -- Citigroup -- Analyst

Thank you. Good morning. Thanks for taking my question. My question is centered around the multifamily acquisitions that you made. It's helpful for you to break out the contribution of that business going forward but I wondered if you could walk through how the integration is going and how much of a lift do you expect in your stores once it rolls out to all the Lowe's stores?

Marshall Croom -- Chief Financial Officer

Sure, Kate. The integration as [Inaudible] in my opening comments is going extremely well. The organizational aspects of the design have been implemented as we continue to work to integrate the two companies, and we're seeing some strong leverage from our initial business case through working to continue to harmonize our pricing and our terms with our merchants and working with Mike's organization to make sure that we're able to leverage that and continue to move forward. Our existing focus currently is to continue to work on the integration of both companies into one operating model. As I highlighted, the teams are building out a new product catalog, which will effectively improve the customer experience across both verticals. And then as we continue to move forward, we will continue to work for the in-store integration, but that is further out in the current integration plans than today. Currently, it's really focused heavily on the integration of the two.

Kate McShane -- Citigroup -- Analyst

OK, great. Thank you. And my second question was just on the growth that you saw for ticket above $500. Was the majority of that driven by appliances or can you help us break down from the bigger categories that drove that growth?

Mike McDermott -- Chief Customer Officer

Sure, Kate. This is Mike McDermott. We continue to see great progress in the appliance business, obviously leveraging our No. 1 share position and the great brand portfolio and values that we're communicating to our customers. We also continue to see pro outpace the company average and pro certainly is also driving significant growth in big ticket. So, our project specialists, interior and exterior, continue to drive, remodel, and refresh business across a number of different categories and we continue to see momentum really across the business in regard to tickets above $500.

Kate McShane -- Citigroup -- Analyst

Thank you.

Operator

Your next question comes from Christopher Horvers with JP Morgan. Please go ahead.

Christopher Horvers -- JPMorgan Chase -- Analyst

Thanks and good morning. Can you talk about the comp trends in Canada and Mexico? It seems like they did improve from the last quarter. Did Rona contribute to that comp? I think it was only in the quarter for a partial period. And can you talk about how much the FX lifted the reported total comps as well?

Richard Maltsbarger -- Chief Development Officer and President, International

Yes, Chris. This is Richard. We had a very strong quarter up in Canada. As Robert noted in his comments, we had high-single-digit comp within Canada and there's a very strong contribution to that across all the different banners. Just a small point. We actually had Rona in our comp for the entire quarter this quarter. So this will be the first quarter where all of their sales are rolled into our comp comparison. And, as Robert said, we're very strong, we're very pleased with the progress that we're making there. We have brought our first two big-box evolutions live from the Rona brand into the Lowe's brand out in western Canada. We're underway with several more now. We have expanded our appliance mix to more than 70 stores on track and above our plan in terms of rollout given the opportunity for share in the appliance market in Canada, and we're seeing really good strong pro results in our business in Canada given our higher mix of the pro across our different banners including those specifically focused on the pro in both Quebec and out west. Similarly, very strong, as Robert noted, double-digit comps in Mexico. Very proud of the team there. The team has also, to the plan that we laid out last year, had begun down the path of expansion again, having recently opened two new stores in the Monterrey, Mexico market and putting us well on the path to our goal to double that business across three years.

Christopher Horvers -- JPMorgan Chase -- Analyst

And then the FX contribution and then I had a follow-up.

Marshall Croom -- Chief Financial Officer

That was fairly minor for the quarter. It was largely driven by operational results from Canada and Mexico.

Christopher Horvers -- JPMorgan Chase -- Analyst

OK, understood. And then I was curious how you thought about the market-growth rate in the US and the census categories show about a 7%-ish type growth year to date. You're running year to date about 5 and in 3Q, that gap persisted. Do you think the census is a fair estimation of the market growth rate? Do you have insights into certain market share trends in the key categories because one of the questions that we get from investors is, not per se the comp gap, but just trying to understand how your share is playing out in the United States relative to the census benchmark?

Richard Maltsbarger -- Chief Development Officer and President, International

Chris, certainly, I mean, it's the indicator of the health of the overall market. It's not a perfect match. When we look more specifically at the leading indicators from housing, from home improvement, we feel really good about that. We think the leading indicators certainly remain supportive [Inaudible] job and income gains driving strong growth but [Inaudible] and consumer spending, revolving credit usage continuing to be favorable as we mentioned here, and then probably most important, home-price appreciation, which is driving increased housing wealth. So as we look at that, we feel good about the macro environment, we feel good about housing, we feel good about looking at things like our consumer sentiment survey, homeowners' willingness and intention to engage in projects around the home driven by 1. their views of the overall housing market as well as views of the increasing values of their homes. So overall, we feel good about it and, like I said, when we look at our trajectory of comp growth, if we look at the quarterly progression that we've had through the year in focus the team has put behind improving our execution, we're pleased with our performance and excited about the opportunity ahead of us.

Christopher Horvers -- JPMorgan Chase -- Analyst

Thanks very much.

Operator

Your next question comes from Charles Grom with Gordon Haskett. Please go ahead.

Andrew Minora -- Gordon Haskett -- Analyst

Hi. Good morning. This is Andrew Minora on for Chuck. I have one question on hurricane impact. Can you guys quantify the impact on gross profit margin and SG&A from hurricanes? Then I have one follow-up.

Richard Maltsbarger -- Chief Development Officer and President, International

Ultimately, the gross margin impact actually hurt our mix. This is a below-average company rate on the gross margin. So that certainly had an impact. We did have incremental SG&A expenses but all told, net-net, while it was slightly positive, it wasn't a driver to our earnings for the quarter.

Andrew Minora -- Gordon Haskett -- Analyst

OK, thank you. That's helpful. And then just on the pro comments, it's a little bit nit-picky, but you guys went from saying the growth was well above the company average to above the company average for the last two quarters. Is that more of a function of the overall comp doing better in the last two quarters or are you seeing any slowdown in the pro business? Any color there would be helpful. Thank you.

Mike McDermott -- Chief Customer Officer

Yeah, this is Mike. What I'd highlight is we continue to see positive strength in our DIY business which maybe tightens the balance between pro performance and DIY. I still feel very good about our pro performance teams doing a great job engaging the customer in a variety of different segments across that marketplace. Pro represents about 30% of our business and we continue to see expanded penetration.

Andrew Minora -- Gordon Haskett -- Analyst

Thank you very much.

Operator

Your next question comes from Michael Lasser with UBS. Please go ahead.

Michael Lasser -- Michael Lasser -- Analyst

Good morning. Thanks a lot for taking my question. Can you give us some quantification of how far along you are into the competitive pricing actions you've been taking? Are you close to being done?

Mike McDermott -- Chief Customer Officer

Michael, this Mike McDermott again. Obviously, we're going to continue to react to the competitive intensity of the marketplace. I feel good about the actions we took coming out of the first quarter, when we recognized an opportunity to improve our value perception. Teams have done a great job on both base price stock and SOS as well as our promotional pricing strategy to make sure that we are delivering those great values in the market to our customers. I also feel good about the actions the team is taking around leveraging new pricing and analytics tools and refine our pricing strategy across categories to make sure we're optimizing our effectiveness. And recognize that in the May timeframe we also drove two loyalty actions which are having a positive impact. The first was our simplified approach to military recognition offering, both active and veteran military personnel, the ability to enjoy 10% discount every day. And on top of that, we launched free parcel delivery for MyLowe's members. So we're seeing both customer growth and loyalty from those actions but they will have some impact as to our gross margin performance.

Michael Lasser -- Michael Lasser -- Analyst

And are you seeing competitors respond as you take price action?

Mike McDermott -- Chief Customer Officer

Yeah. I think the marketplace remains competitive and what I would tell you as I look at third quarter versus second quarter, it's consistent with our expectations and as we go into the fourth quarter, again, I think consistent with where we were in 3Q.

Michael Lasser -- Michael Lasser -- Analyst

Thank you very much.

Operator

Your next question comes from Simeon Gutman with Morgan Stanley. Please go ahead. Your line is open.

Simeon Gutman -- Morgan Stanley -- Analyst

Hello. Can you hear me?

Richard Maltsbarger -- Chief Development Officer and President, International

We hear you now.

Simeon Gutman -- Morgan Stanley -- Analyst

Sorry. OK, I was on the different line. A follow-up to Michael's question. It's around gross margin and in this quarter in the slide deck, the gross margin headwinds, one of them, was described as competitive actions. If in the first quarter you called that pricing investment, in the second quarter you called it promotional activity, can we discuss what these descriptions? Are they just different ways to say the same thing? And then, Mike, just a follow-up on that, can you describe what's going on in the marketplace broadly?

Mike McDermott -- Chief Customer Officer

Yes, Simeon, what I would tell you is that you should translate both of those descriptions as the same. When we think about promotional activity, actually we think about advertising and promoting value with the customer as well as some of the actions I highlight around loyalty. So, that would be in the same bucket. And as it relates to the competitive environment, it's consistent with our expectations.

Simeon Gutman -- Morgan Stanley -- Analyst

OK. And then regarding execution, we've talked over the past 12 months there's been some management change. We talked about some inconsistency between merchants and some of the marketing, and then you've added some labor hours back to stores. If you think about how you performed in Q3 and going forward, are the bumps more or less ironed out and can you talk about where you could be or you should still be getting better?

Robert Niblock -- Chief Executive Officer, President and Chairman

I'll start and let the others jump in. Certainly, yeah, we made a lot of changes to set us up for the future. Like I said, we're pleased with our new store leadership model and what we're seeing out of that. I'm pleased with the work that's being done to try and add hours back into the stores. As Rick indicated, we will continue to focus on getting those hours in the right kind of day part if we wanted to focus on the high-traffic times to better match the customer demand. There was certainly a little bit of an impact as we had to redeploy people to the hurricane-affected areas in the quarter. In addition to that, as we indicated earlier, we made some changes to the organizational structure here at our corporate office to kind of flatten the organizational structure and improve our spending control and we're pleased with the way the team has responded and working together to focus on driving the business forward.

Simeon Gutman -- Morgan Stanley -- Analyst

Thank you.

Operator

Your next question comes from Eric Bosshard with Cleveland Research. Please go ahead.

Eric Bosshard -- Cleveland Research -- Analyst

Good morning. Two things for you. First of all, the step-up in online growth the past two quarters. I know a component that is easier compares to some changes you were making a year ago but just curious if you could give us a little bit more color of what's driving that and also if there are categories that are leading that improvement. Some insight on that would be helpful.

Richard Maltsbarger -- Chief Development Officer and President, International

Yeah, Eric, I'll take that. We continue to see great progress as it relates to our digital performance with the 33% comp you saw for the quarter, continue to optimize our online platform, continue to add and invest in additional functionality, improving everything from content to our checkout process, adding visibility for the customer around inventory and order status and essentially driving more of a simple and seamless approach online. When I think about the categories that continue to perform well, appliances, fashion fixtures, and seasonal outdoor living led the way as it relates to our online performance. So team's doing a great job bringing that experience to life and connecting it to our overall omnichannel platform and driving additional traffic into our stores.

Eric Bosshard -- Cleveland Research -- Analyst

Secondly, it was roughly a year ago that you all started to talk about productivity and I'm curious now coming up on a year later within this, what the emphasis is within this now. It seems like it started with a little bit more focus on profitability. It feels like you're trying to shift to a little bit more balanced or focused on sales but I'm just curious how you're thinking about the productivity initiatives, especially with the 2% comp in 4Q and the 3.5% in a year where the market feels like it's stronger. Which way are you leaning and focusing on with the productivity and this initiative?

Marshall Croom -- Chief Financial Officer

Eric, this is Marshall. And actually yes and yes, we want both. Sales productivity and SG&A productivity cost out. So those will continue to be focus areas. So if you think about some of the investments we're making from the omnichannel capabilities, we want those to be sales drivers. If you think about processes within the stores from just customer experience to services, again, trying to eliminate employee and customer pain points but we've got a good line of sight into actions, one that we took this year. Rick highlighted a couple of those with indirect spend, moving the needle on how much we centralized indirect spend, along with some of the changes we've made to the payroll set model and the leadership changes that we made earlier in the year along with things that we're doing from supply chain efforts to drive better productivity, reduce burden for the distribution center and stores. So all of that wrapped up into the amount of investments we've made in 2017 to be able to drive a flat operating margin on an adjusted basis for 2017 and knowing that we've got future opportunity to keep getting after from a productivity standpoint to move into 2018 and 2019 and beyond.

Eric Bosshard -- Cleveland Research -- Analyst

Great. Thank you.

Robert Niblock -- Chief Executive Officer, President and Chairman

I think we have time for one more question.

Operator

Your next question comes from David Schick with Consumer Edge Research. Please go ahead.

David Schick -- Consumer Edge -- Analyst

Hi. Good morning. Thanks for taking the question. You talked about Craftsman and I know there's been work on merchandising around pro. Is there any metric you can give to the amount of skewer category newness that you're introducing now versus in the past?

Mike McDermott -- Chief Customer Officer

Dave, we don't really look at it that way as it relates to new assortment but what I can tell you is the merchants continue to work with our strategic partners across every category to make sure that we refine our assortments and expand value. Obviously, we're very excited to welcome the Craftsman brand to the Lowe's portfolio, iconic brand that customers know with innovation and high quality at a value. So if you think about all brand work that we've done over the last four years, adding more than 25 brands back to the portfolio, brands that DIY and pro customers know and trust, I really think Craftsman, when it launches in 2018, will continue to propel us forward with customers in both of those segments.

David Schick -- Consumer Edge -- Analyst

Great. Thanks. And then any comment on how you're thinking about the potential wage pressures on your business just that we're observing in the economy whether nationally orregionally would be helpful.

Mike McDermott -- Chief Customer Officer

Again, as we think about that, obviously, there's been some wage pressure. Just one of the things that our productivity efforts are designed to help offset, along with continuing to challenge are we rightsizing staffing in the stores in the [Inaudible] in corporate offices and always looking to balance, again, how we're getting better productivity in our processes throughout the supply chain and then the appropriate mix of hours in the stores from selling and non-selling to make sure that we're appropriately flowing freight, taking care of our customers, and providing best experience that we can.

Richard Maltsbarger -- Chief Development Officer and President, International

And, David, I would just add based on the model and the experiences we try to create and product knowledge required of our associates, we pay a higher average hourly rate already than the marketplace. So, that helps us also mitigate that, just understanding the fact that because of the model itself, we do have a higher rate than the industry as well.

Mike McDermott -- Chief Customer Officer

And we take a look at it not only [Inaudible] on the base rate but all-in, from incentives and benefits to be competitive in the marketplace.

David Schick -- Consumer Edge -- Analyst

OK. Thank you.

Robert Niblock -- Chief Executive Officer, President and Chairman

Thanks and, as always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our fourth-quarter results on Wednesday, February 28. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 58 minutes

Call Participants:

Robert Niblock -- Chief Executive Officer, President and Chairman

Rick Damron -- Chief Operating Officer

Marshall Croom -- Chief Financial Officer

Peter Benedict -- Robert W. Baird -- Analyst

David Bellinger -- Oppenheimer -- Analyst

Kate McShane -- Citigroup -- Analyst

Mike McDermott -- Chief Customer Officer

Christopher Horvers -- JPMorgan Chase -- Analyst

Richard Maltsbarger -- Chief Development Officer and President, International

Andrew Minora -- Gordon Haskett -- Analyst

Michael Lasser -- Michael Lasser -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Eric Bosshard -- Cleveland Research -- Analyst

David Schick -- Consumer Edge -- Analyst

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