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Lowe's Companies, Inc. (NYSE:LOW)
Q1 2018 Earnings Conference Call
May 23, 2018, 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 first quarter 2018 earnings conference call. This call is being recorded. Please note if you press *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.

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 declined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risk 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 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. Marshall Croom, Chief Financial Officer. Joining during the Q&A session will be Mr. Richard Maltsbarger, Chief Operating Officer. I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Good morning and thanks for your interest in Lowe's. Before we discuss our first quarter results, I want to take a moment to talk about the leadership announcement we made yesterday. As you know, in late March, I announced my plans to retired from Lowe's. Since that time, the board has been engaged in a thorough and comprehensive search to identify the right leader to take the reins. I'm pleased the board has found that leader in Marvin Ellison.

Effective July 2nd, Marvin will become President and CEO. Marvin is an experienced retail CEO and a 30-year industry veteran with expertise in complex omnichannel environments. He has a deep appreciation for Lowe's culture, people, and customers which makes him the ideal person to serve as this great company's next leader. I'm confident that this will be a smooth transition.

As this is my last earnings call, I want to reiterate that it has been an honor to serve as Lowe's Chairman, President, and CEO. We're fortunate to have a strong leadership team who is passionate about helping people love where they live and creating enhanced value for shareholders. I'm confident in the company's prospects for growth and value creation under Marvin's leadership and I look forward to following Lowe's process for many years to come.

With that, I will now turn to our results. In the first quarter, we experienced a delayed spring selling season due to prolonged unfavorable weather across geographies that impacted outdoor categories. As a result, we delivered fourth quarter comparable sales growth of 0.6%, driven by a 4.3% increase in comp average tickets. However, spring has finally arrived and comps in May are double-digit positive.

Our US home improvement comp in the first quarter was 0.5% with positive comps in 6 of 14 regions, while two regions were essentially flat. We posted positive comps in 5 of 11 product categories while one category was essentially flat. As you know, Lowe's has built a very strong seasonal business over the years, with approximately 35% of Q1 and 40% of Q2 sales historically driven by outdoor categories.

With more rain and snow in the first quarter than we've seen in 12 years and the coldest April since 2007, outdoor products were certainly impacted. However, comps for indoor products were positive.

Appliances led product category growth with another strong quarter of double-digit comps supported by our integrated omnichannel experience. And we continued to strengthen our relationships with pro customers, driving out performance in rough plumbing and electrical, lumber building materials, tools and hardware, and millwork.

We're pleased with our sales growth with pro customers as we leveraged the strong foundation we built to drive comps above the company average. We continue to make investments to deepen our relationships and make it simpler for pros to do business with us, including the expansion of our pro services team.

We continue to see strong customer response to investments we've made to enhance our online shopping experience which is reflected in our 20% online comp growth this quarter. Internationally, we delivered double-digit comps in Mexico, while comps in Canada were positive, both in local currency. We continue to make progress integrating RONA. We believe the business is poised for continued growth from the rollout of appliances, a strong digital offering and online store conversions and remodeling.

However, comps in Canada were pressured by challenging weather conditions similar to those we experienced in the US. For the quarter, we delivered diluted earnings per share of $1.19, a 15.5% increase over last years adjusted diluted earnings per share. Delivering our commitment to return excess cash to shareholders, in the quarter, we paid $340 million in dividends and repurchased $750 million of stock under our share repurchase program.

As I mentioned, spring has finally arrived. We are encouraged by the strong sales momentum we're experiencing in the month of May. Spring is a first half event and I'm confident the Lowe's team is prepared to capitalize on increased demand with compelling offers in seasonal staffing and inventory in place to serve customers.

Our entire leadership team and board of directors are actively working together to analyze our performance and business expectation and drive improvements in key areas such as tracking conversion, inventory management, and gross margin stabilization. Mike will speak to those efforts in a moment.

Looking ahead to the rest of the year, we expect that solid macroeconomic fundamentals, such as strong employment and income gains, will sustain home improvement market expansion and that the home improvement industry is poised to grow its share of overall consumer spending. Housing is expected to remain a positive driver as demand in excess of supply drives home price appreciation and we continue to see household formation improvement over the past year, which should persist amid steady job gains.

We'll continue to focus on and invest our resources in what is most relevant to engaging customers in the moments that matter and improving the capabilities our employees need to better serve customers. In doing so, we will strengthen our competitiveness, positioning us to continue capitalizing on home improvement demand.

I would like to thank our more than 310,000 outstanding employees for their commitment to serving customers, serving their communities and fulfilling our purpose-driven mission to help people love where they live.

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

Michael McDermott -- Chief Customer Officer

Thanks, Robert and good morning, everyone. We entered the season well positioned to capitalize on spring demand with compelling messaging, more personalized, targeted content, strong assortments as well as inventory in-plays and seasonal staffing ready to help customers complete their project. But a late spring due to unfavorable weather across geographies exerted approximately 300 basis points of pressure on comp sales.

Weather had a disproportionate impact on seasonal categories, such as lawn and garden and seasonal and outdoor living. However, we drove positive comp growth for indoor products. We achieved double digit comps in appliances, as we leveraged our investments in customer experience, both in store and online as well as our best in class selection of leading brands and our service advantages like next day delivery, haul away, and facilitation of repairs and maintenance.

We also saw continued strength from the pro customer with comps above the company average. Pro demand drove solid comps in rough plumbing and electrical and we continue to be excited of the effectiveness of destination brands in attracting pro customers. Pro strength also drove above average comps in lumber and building materials, tools and hardware and millwork.

In order to continue growing our pro sales, we're investing to improve the pro experience. We're building on our strength in the MRO space by leveraging our maintenance supply headquarters business, having launched a streamlined product category this month with branch expansion to follow later this year. We're investing in outside selling capabilities as well as improving jobsite delivery options.

We continue to execute on our strategic priorities, including enhancing our digital presence. We drove comp growth on lowes.com in the quarter, which now represents approximately 5% of sales. We'll continue to upgrade our online shopping experience with enhanced assortment informed by digital line reviews and optimized search capabilities to meet customers' evolving expectations.

And as the do it for me opportunity continues to grow, we're providing differentiated services, delivering complete home improvement project solutions to our in-home sales platform. We're connecting our omnichannel access, making it even easier for customers to engage with our in-home project specialists and request services in lowes.com, driving an increase in projects this quarter.

As noted on our February call, we're focused on strengthening our day to day executions. We're working diligently to improve traffic conversion by accelerating associate readiness and knowledge through our training programs and providing even more prescriptive scheduling to better align staffing to customer traffic, not only by department but also around QE marketing and promotional campaigns. We're also reengineering key processes, project quoting, our paint service model, and our pick up in store experience all improve our utilization of associate hours and provide a better customer experience.

This quarter, we completed the first phase of our process to centralize project quotes, starting with flooring, allows our sales associates to guide customers through their projects, focusing on education, project planning, and product selection, rather than spending their time on the administrative task of compiling a project quote. We also added functionality on lowes.com to allow customers to request a consultation online, which has the dual benefit of making the process easier for the customer while removing another administrative task from our selling associates.

We recently rolled out our improved paint service model, separating tasking and selling activities. We cross-trained 17,000 associates to assist with mixing paint during peak selling periods, allowing our skilled paint associates to focus on providing project advice and color selection expertise.

We've advanced our pick up in store customer experience with convenient reserved parking spaces, dedicated space in stores with clear signage to direct customers to the pick-up location, and optimized processes to ensure that product is staged and ready for pickup within two hours of an order being placed.

We expect the new processes will drive greater efficiency to drive fulfillment and improve our ability to meet the expectations of case studies, allowing them to pick up product within five minutes of arrival. Central quoting, our paint service model, and our pick up in store experiences are examples of actions we've taken within the quarter to improve our processes in stores and a snapshot of the more extensive process reengineering effort under way to improve store execution as we continue through 2018.

We've identified additional opportunities as well. For example, in high-touch categories such as flooring, millwork, and kitchens, we will improve installer responsive and lead times, and integrate our systems to provide better visibility into order status and improved communication to the customer. These opportunities in high-touch categories are additional ways to improve the experience and drive better conversion over time.

As we work to better capitalize on traffic growth, our supply chain transformation efforts are also key to better serving customer expectations and improving conversion in the short and long-term. We're focused on optimizing the flow of product through our supply chain to better connect customer needs with the products and services we offer and improving inventory management to ensure that we have the right product in a sellable position for the customer.

For example, we're currently testing ways to improve the flow of product from our regional distribution centers to our stores, including more frequent highly organized shipments of product to allow for greater efficiency in unloading trucks and stocking product on shelves. And given increased demand for in home delivery, we're piloting a segmenting delivery network for appliances and other bulky product through a network of bulk distribution centers and cross-dock facilities.

This segmented network will manage inventory at the market level, improving our working capital efficiency while also reducing damage as bulky product is handled less and will manage deliveries more efficiently at the market level rather than at the store level.

In the first quarter, we make progress in stabilizing gross margin. Throughout the year, we plan to expand our application of new pricing and promotion analytics tools to ensure that we're competitive on highly elastic traffic-driving products while increasing profitability across less elastic items. Through our value improvement efforts, we will continue to work closely with our vendors to reduce first costs.

Looking forward to Q2, we're encouraged by the strong sales momentum we've seen as weather has improved. Given that spring is an event that spans the first half of the year, we're focused on capturing the increased demand that the season is now creating. We believe we're well-prepared with seasonal staffing and inventory to serve incremental traffic. We look forward to our Memorial Day, Father's Day, and July 4th events with exciting messages, compelling values, strategic brands, and differentiated experiences all designed to capitalize on the excitement of the season.

We're proud to welcome Craftsman into our outstanding portfolio of brands with mechanics toolsets, tool storage, garage organization, flashlights, and pressure washers, available just in time for Father's Day. Then later this year, we'll expand our Craftsman offering to include individual mechanics and hand tools, power tools, and select outdoor power equipment.

We're honored to be the exclusive destination in the home center channel for this iconic brand, offering some of the best tools, storage, and outdoor power equipment in the industry. Together, we're making it easier for customers to access the high-quality, durable tools, and expert guidance they need to confidently tackle any home improvement project.

We're also excited about our expanded partnership with Sherwin Williams as we work together to deliver a simplified line design that makes it easier for customers to select the right product for their painting needs. Sherwin Williams is now the exclusive national supplier to Lowe's US retail outlets for interior and exterior paints, including the Valspar, and HGTV Home brands. Under this expanded strategic partnership, Lowe's will become the national home center to offer top-selling brands Krylon, Minwax, Cabot, and Thompson's WaterSeal, as well as the top paintbrush brand, Purdy.

In summary, we'll continue to improve our execution while accelerating the investments that will improve our ability to serve rapidly evolving customer expectations, strengthen our competitiveness and position Lowe's to capitalize on solid project demand now and into the future.

Thank you for your interest and I'll now turn the call over to Marshall.

Marshall Croom -- Chief Financial Officer

Thanks, Mike. Good morning, everyone. During the quarter, we adopted the new revenue recognition accounting standard, ASU2014-09. As a result, we reclassified certain items within operating income, the most significant of which was the reclassification of the profit sharing income associated with our proprietary credit program from SG&A to sales.

The adoption of this standard had no impact on operating income and no impact on comparable sales. It was adopted on a modified retrospective basis so the prior year has not been adjusted. Sales for the first quarter increased 3% to $17.4 billion, supported by total average ticket growth of 5.7% to $74.98. Total transaction count decreased 2.8%.

Adoption of the new revenue recognition standard provided a 76 basis points benefit to sales growth. Comp sales were 0.6% driven by an average ticket increase of 4.3%, offset by transaction decline of 3.7%. Looking at monthly trends, comps were 0.6% in February, 1.1% in March, and 0.1% in April.

As Mike indicated, prolonged unfavorable weather across geographies delayed the spring selling season and negatively impacted comp sales in the quarter by approximately 300 basis points. Gross margin for the quarter was 34.63% to sales, an increase of 23 basis points from the first quarter of last year.

Adoption of the new revenue recognition standard provided a 58 basis points benefit to gross margin. As we've grown our share in appliances, gross margin has been impacted from both the mix and rate perspective. We were also lacking competitive actions taken a year ago, which were partially offset by benefits from buying improvement as well as positive results from our pricing optimization efforts. Lastly, our transportation costs, shrink, and inflation negatively impacted gross margin in the quarter.

SG&A for the quarter was 24.12% to sales, which deleveraged 113 basis points. Adoption of the new revenue recognition standard resulted in 66 basis points of the deleverage. While our spring seasonal hiring was a success, lower than planned sales drove 32 basis points of payroll deleverage. An increasing demand from continued growth in appliances drove 18 basis points of deleverage in customer delivery costs.

Depreciation and amortization for the quarter was $360 million, which was 2.07% of sales and leveraged 9 basis points. Operating income declined 81 basis points to 8.44% of sales. Interest expense for the quarter was $160 million, which leveraged 4 basis points. The effective tax rate for the quarter was 24.3% compared to 35.5% last year as a result of tax reform. Diluted earnings per share was $1.19 for the first quarter, a 15.5% increase over last year's adjusted diluted earnings per share of $1.03.

Now to a few items on the balance sheet, starting with assets. Cash and cash equivalence at the end of the quarter was $1.6 billion. Inventory at $13.2 billion increased $950 million or 7.8% versus the first quarter of last year, which was primarily driven by investments in key categories such as appliances from appliances, flooring, and tools, as well as investments across pro categories. Inventory turnover was 3.8 times, a decrease of 20 basis points versus the first quarter last year.

Moving on to the liabilities section of the balance sheet, accounts payable of $10.1 billion represented $199 million or 2% increase over the first quarter last year. At the end of the first quarter, lease adjusted debt to EBITDA was 2.23 times. Return on adjusted capital was 19.4%.

Now looking at the statement of cashflows, operating cashflow was $3.4 billion and capital expenditures were $224 million, resulting in free cash flow of $3.2 billion. In the first quarter, we paid $340 million in dividends and we repurchased approximately 8.7 million shares of stock for $750 million. We have approximately $6.2 billion remaining our share repurchase authorization.

Looking ahead, I'd like to address several of the items detailed in our Lowe's business outlook. As Robert and Mike indicated, spring is a first half event. We expect to recover the majority of our first quarter sales miss over the next two quarters and believe we are prepared with the seasonal staffing and inventory to serve increased traffic.

As a result, the only adjustment to our guidance stems from the adoption of the new revenue recognition accounting standard. So, from 2018, we expect this change to positively impact sales by approximately 1% and negatively impact operating margin by approximately 10 basis points. It does not affect operating income or comp sales.

We now expect the total sales increase of approximately 5%, driven primarily by comp sales increase of 3.5%. We anticipate opening approximately 10 stores. As a result of the new accounting standard, we now expect gross margin expansion of approximately 60 basis points for the year. And on a GAAP basis, we now expect an operating margin to decline approximately 40 basis points. Effective tax rate is expected to be 25.5%. For the year on a GAAP basis, we reaffirm our diluted earnings per share guidance of approximately $5.40 to $5.50 for the year.

We are forecasting cashflows from operations of approximately $6.5 billion in capital expenditures of approximately $1.7 billion. This is expected to result in estimated free cash flow of approximately $4.8 billion for 2018. Our guidance assumes approximately $2.5 billion in share repurchases for 2018.

Regina, 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 # key. In order to allow questions from as many individuals as possible, please limit yourself to one question and one follow-up. Our first question will come from the line of Seth Sigman with Credit Suisse. Please go ahead.

Seth Sigman -- Credit Suisse -- Analyst

Thanks. Good morning, guys. And Robert, best of luck to you. There's been a lot of talk in recent quarters about the opportunity to improve conversion in the store. Mike, you discussed a number of initiatives to improve that today. As you sort of benchmark yourself versus others in the industry and other retailers, is there a way to frame the opportunity? I guess I'm more curious over time, is that something that's declined within the Lowe's store? We're just trying to understand the opportunity. I guess related to that at the core, what do you think the core issue is here? Is it in stock? Is it service? Is it assortment? Any perspective on that I think would be helpful.

Richard Maltsbarger -- Chief Operating Officer

Absolutely, Seth. This is Richard. I'll actually take the question. To your question specifically, we have experienced a declining close rate over the past year. We have began to highlight that last year as a part of our communications and we certainly still have work to do. We've had early progress in the quarter. I'd like to talk through some of the elements that we've put in place and some of the actions that Mike and I and the rest of the leadership team have in place for the rest of the year.

So, first, in our call last quarter, we talked about a primary focus on associate readiness and development. I'm happy to say we came into this spring season the most ready for the season that we've been in recent memory with both the associate staffed and the readiness of their development under our program we call Red Vest Ready.

The reality is with the delayed spring, we didn't achieve all the benefit we expected from that early season hiring, but thankfully, as the season has begun to spike over the past couple weeks, we believe we've had the staff in place to take advantage and it's helping to support the strong comps that we've experienced.

The second area we're focusing on is reengineering key processes and activities, with a primary focus on being able to reallocate investments we make in non-selling labor to increase the percentage of that labor that can be on the floor serving the customer.

A great example is what Mike covered with you in his earlier remarks, where during the quarter we cross-trained approximately 17,000 associates, most of whom are non-selling associates to be able to bring them to the floor during peak periods, such as intraday periods as well as key holidays like this weekend for memorial day to serve those customers by splitting the tasking behavior of mixing paint from a selling behavior of being in the aisle providing color expertise and project planning expertise to our customers with our dedicated paint associates.

Other activities that we've had under way include what Mike talked about in terms of tests of more prescriptive scheduling, where during the quarter, we executed several tests in select markets. Some of those benefits of those tests are now being rolled across the country as we set our staffing plans for Q2 and as we move through these holiday periods.

However, as I've gotten into the first 100 days of the role, been in the field, gotten the feedback from our store associates, been able to talk to many of our best customers, there are two additional areas in which Mike and I and the rest of the leadership team are taking action. The first is supply chain product flow, where we believe we've made the inventory investments necessary to have the depth and breadth in key categories like appliances, and flooring, and tools and hardware to serve both the pro customer and our DIY customer.

Our focus has now shifted to how would we optimize that flow to improve our service levels and to improve our in stock percentages. As Mike noted, a key focus there is the movement of that good from our regional distribution center to our stores.

The last area, as Mike noted, is he and I have led a deep dive into our high-touch selling categories during the quarter with specific emphasis on flooring, millwork, and kitchen, and identified ways in which we actually allow our selling associates to have more time in front of the customer. Central quoting is a great example of that. As Mike noted, the administrative burden passing to a central quoting team to allow our in-store project specialists to spend more time educating the customer, providing their project plan, helping them select their products, and then turning the finalization of the quote over to a team that specializes in doing this non-selling tasking activity.

Ultimately, over time, Seth, it's going to take a combination of each of these different kinds of actions for us to improve conversion. We're confident from the early signs we've seen. We saw a great uptick in our customer satisfaction levels for in store experience during Q1 and believe that we're on to the right set of work that we need to undertake to improve conversion over time.

Seth Sigman -- Credit Suisse -- Analyst

Okay. Richard, thank you very much for that color. Appreciate it.

Operator

Your next question comes from the line of Seth Basham with Wedbush Securities. Please go ahead.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot and good morning. My question is around the comp trends by ticket, your ticket under $50.00, comp down 4.1%. Is it possible to break that out excluding the seasonal categories so we get a better sense of what the underlying trend is?

Michael McDermott -- Chief Customer Officer

The most significant impact, the tickets under $50.00 could be lied to our lawn and garden and seasonal business. Certainly weather had an impact on that performance. That's a significant transaction driver for us, with our concentration, about 35% of our business in the first quarter. That was the primary driver there.

Seth Basham -- Wedbush Securities -- Analyst

Got it.

Marshall Croom -- Chief Financial Officer

Seth, one other point if I could, just to add on to that -- we talked about the 300 basis points of pressure in the spring, a lot of it is impacting the transactions as well for the seasonal items, which are spread across the lower buckets as well.

Seth Basham -- Wedbush Securities -- Analyst

When you think about your conversion challenges, you're focusing, it seems primarily on converting within big ticket categories. What do you feel about the smaller ticket categories? Do you feel like you're well-positioned there or are there challenges in smaller ticket categories as well?

Michael McDermott -- Chief Customer Officer

I believe we're well-positioned in smaller ticket categories across a broad array of product categories in the business. Obviously, from a conversion perspective, we are focused on high-touch categories as we try and improve the customer experience from both inspiration all the way through to enjoyment. When I take a look at our overall value perception, our competitiveness, our product assortment, I feel very good about the decision we've got across the take with categories.

Seth Basham -- Wedbush Securities -- Analyst

Thank you very much.

Operator

Our next question will come from the line of Eric Bosshard with Cleveland Research. Please go ahead.

Eric Bosshard -- Cleveland Research -- Analyst

Good morning. One of the initiatives you spoke to was gross margin stabilization. I'm wondering if you can expand a little bit on what you're seeing there and what you're trying to accomplish.

Michael McDermott -- Chief Customer Officer

Yeah, as Marshall highlighted, gross margin increased by 23 basis points, revenue recognition provided 58 basis points of that benefit. Obviously, we're lapping the competitive actions we took in 2017, partially offset by continued value improvement activity as we work closely with our vendor partners to deliver value in the marketplace and reduce first cost. But I'm really excited about the positive momentum I'm seeing, particularly around the installation of improved competitive analytics and pricing optimization tools.

As we widen our visibility to the market, it gives us the ability to effectively manage the trade-offs required to remain competitive and stabilize gross margins. We saw meaningful sequential improvement in gross margin from fourth quarter to first quarter and we'll continue that work to deliver against our commitment.

Eric Bosshard -- Cleveland Research -- Analyst

And then follow-up if I could -- Robert, I'm just curious your thoughts as you pass the baton to Marvin what might be different or what might be the same if you have any perspective or thoughts you could provide us on that.

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Certainly, Eric, we're excited to have Marvin join the team. He's an experienced retail CEO, significant experience in the home improvement industry. So, I think that's very exciting for us to have him join. I called Marvin this week and spoke to him and congratulated him on the role and welcomed him back to the home improvement industry and told him I'd be available for anything I can do to assist in a smooth orderly transition.

I think Marvin will be wanting to come in and review our strategy, what plans we have in place, initiatives that we're working on in areas as you've seen on the call today where we've outlined opportunities for improvement and he'll want to dive in and add his thoughts to what the team is already working on to see how we can continue to make progress and do a better job of taking care of customers' needs.

Eric Bosshard -- Cleveland Research -- Analyst

Thank you.

Operator

Our next question will come from the line of Scott Ciccarelli with RBC. Please go ahead.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Good morning, guys. I know you've talked about the decline you've seen in close rates and obviously, that's been a driver to your decline in transactions. But do you also have a feel for what's happened to your stores from a pure traffic perspective?

Michael McDermott -- Chief Customer Officer

The traffic continues to be positive for both our stores and lowes.com. We continue to see positive yield from the Start with Lowe's campaign. We're driving better awareness, great values perception, engagement, and ultimately traffic. I think we're striking the right balance, the right allocation of digital and mass media. We're optimizing our spend and delivering targeted and personalized messages. I think we're really connecting with the customer in a very positive macro environment. We continue to engage customers with trusted brands, great values and promotions and a strong assortment. I think a lot of things are working for us on the traffic front right now.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Okay. Then hopefully just a quickie for Marshall -- on the monthly cadence you guys provided us, are there any calendar shifts we need to be aware of?

Marshall Croom -- Chief Financial Officer

For us, no. We're four, five, for basis for us. So, there wasn't any meaningful shifts in the calendar for the first quarter.

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Got it. Thanks, guys.

Operator

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

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks. Good morning. I want to talk about the guidance and the decision to hold it for the full year. I picked up from the prepared remarks. It sounds like you expect to make up the sales in the second quarter and it sounds like a little bit of the third. Is that the same in terms of profit flow through and is there any less investment you're making in the year or is making the full year all predicated on recuperating some of the loss flow through that occurred in the first quarter.

Marshall Croom -- Chief Financial Officer

Simeon, we are anticipating recovering the majority of the sales miss in the first quarter. That's what we're expecting to flow through in Q2 and Q3. So, that's what we would have factored in to maintain our guidance. Again, the only other change that we made would have been for the revenue recognition accounting standard, but we believe we've got, again, the staffing, the inventory, the efforts to really -- how we're improving our customer experience, the shopability of the stores, the shoppable inventory, a lot of the associate investments that we're making to make them connected and confident within the stores.

So, we do anticipate leaning into the investments that we laid out on the call in February for 2018 as we're looking to really ramp up our strategic investments to better improve customer engagement. So, think about some of the spend that we have across services, supply chain transformation efforts are just examples of what we're continuing to invest in.

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Simeon, this is Robert. Also recognize as we get to through the balance of the year, we'll start to lapse into the marketing additional surge that we had from last year as well as you're already seeing some of the early signs of the gross margin stabilization work that Mike and his team are doing and that will continue to make progress throughout the year. So, you'll see a layering effect of those items on top of the recovery of the sales that were delayed from the first quarter.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. So, just to clarify -- so, no less rate of investment than what you planned? I'm speaking to the investments that were made in light of some of the tax savings. Then as far as the improvement goes, it's cycling some things from last year as opposed to internal improvements beyond what you initially planned or that you're running better than expected.

Marshall Croom -- Chief Financial Officer

I think one, we're continuing to lean in to the investments as planned for the year. To Robert's point, there are certain things, competitive actions, the amp up in advertising, certain things we amped up beginning last year that will allow. With certain efforts under way, I would say we're encouraged but more to come as we get traction on some of the tests and pilots that we've got under way so that we're comfortable with our guidance as is.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. Maybe my follow-up -- any product categories that are less weather-sensitive where you outperformed or underperformed that are worth calling out?

Michael McDermott -- Chief Customer Officer

I would tell you that Simeon, we continue to feel good about our appliance business, continue double-digit growth in that category. We're running something like 3x in the industry and continuing to take share. I think we've got the best in class assortment and experience for our customers there. I also see some great progress in some pro-related categories -- rough plumbing and electrical, for example, we continue to grow share. The water heater program with the new A.O. Smith brand continuing to gain momentum.

We saw double-digit comp in electrical cable, thinking about a commodity that pros would leverage as they do their work for customers and expanded penetration with the plumbing and electrical pro. Lumber and building materials, continued pro-growth there, storm-related recovery demand and inflation is supporting some favorability in that space and then positive improvement above the average in tools in hardware, the pro being the biggest driver of that.

You start to hear the theme that the actions and investments that we're taking in our associate engagement with a pro is paying off. Key brands like DeWalt, Marshalltown, Norton Abrasives, the recent launch of Estwing striking tools, and we really feel good that double-digit comps in subcategories like tool storage and mechanics' tools will continue to complement the launch of Craftsman. So, there are the categories I'm feeling pretty good about and continuing to see progress with our pro customer base.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks, Mike and best of luck to you, Robert.

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Appreciate it, Siemon.

Operator

Our next question will come from the line of Michael Lasser with UBS. Please go ahead.

Michael Lasser -- UBS -- Analyst

Good morning. Thanks for taking my question and best of luck, Robert. So, if we allocate the 300 basis points of comp drag that you called out due to the weather all to your traffic, put your traffic down call it 0.7%, you have a pretty easy comparison this quarter. The two-year traffic trend was noticeably degraded even on that basis, down 2.2% or so. Why would the traffic have gotten that much worse, even adjusting for the weather? Was there more disruption this quarter? You would think that a lot of focus you put on traffic and conversion it would have gotten a little bit better.

Marshall Croom -- Chief Financial Officer

Yes. When you think of the 300 basis points impact from weather impacting lawn and garden, our seasonal categories, that's really what we were seeing is reduced transaction in those categories. So, again, positive comps in our indoor categories. That's how we think about the 300 basis point impact. I think as Richard highlighted, it's not just all weather, just continued focus on opportunities within conversion. Again, highlighting the number of factors, the five points that Richard laid out, associate readiness, etc. with the opportunities we have with execution within the stores.

Michael Lasser -- UBS -- Analyst

Outside of the weather, did conversion get worse this quarter from where it hasn't?

Marshall Croom -- Chief Financial Officer

No, Michael. Outside of the weather, the pattern that we saw in the conversion challenges of last year has stabilized in a Q1 period and now the intensity of focus is on working our way back.

Michael Lasser -- UBS -- Analyst

And then my follow up question --

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Michael, this is Robert. Keep in mind, when we look at the 300 basis points drag, I also think about the strong seasonal business we built, 35% first quarter of our sales, 40% of the second quarter. So, it does have a disproportionate effect given how tough the weather was this quarter.

Michael Lasser -- UBS -- Analyst

And then thinking about the double-digit comps that you've seen thus far in May. Is that are all traffic-related? Are you seeing conversion already improve? Then you talked about it extending through the third quarter. So, what makes you to believe it's going to be all the way through the third quarter given that you've seen double-digit comp trends quarter to date?

Marshall Croom -- Chief Financial Officer

Michael, what we're seeing is balanced transactions and ticket through the first couple weeks of May. We take a look at our promotional alignment, product assortment, momentum in our business, we feel good that we'll recover a majority of that seasonal business loss as well as expanding growth in indoor categories throughout the second, third, and fourth quarter. So, a lot of optimism for us with the way the business is in May.

Michael Lasser -- UBS -- Analyst

Thank you very much. Good luck.

Operator

Our next question comes from the line of Greg Melich with MoffettNathanson. Please go ahead.

Greg Melich -- MoffettNathanson -- Analyst

Hi, thanks. Just to maybe dig a little deeper on pro and make sure I've got the guidance right, it sounds like given the categories and what you described, Mike, the pro is probably up to 35% of sales in the quarter. Is that right? If you think of what's working there, what do you think you're going to lean into to drive that the rest of the year? Then Marshall, I had a question on the guidance to follow-up.

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

I would say they're great. We have had strong performance with the pro, but not ready to go beyond our 30% penetration number.

Greg Melich -- MoffettNathanson -- Analyst

Okay. We'll stick with that. And then to make sure I've got the math right on this -- Robert, thanks for the help over the years and also please enjoy retirement -- the guidance now, given the shift in accounting, if EBIT dollars were down 6% in the first quarter but will still be up a little bit if I take the midpoint of your guidance for the year, it is fair to assume that EBIT dollars will be positive the last three quarters of the year or do you think it's really more of a back half given the way the cadence is flowing through, Marshall? Thanks.

Marshall Croom -- Chief Financial Officer

Thanks, Greg. Again, we're looking to recover the majority of the sales. So, that obviously will have a flow through impact. That's going to play out over Qs 2 and 3 that we have that as a recovery opportunity in the year. That's how we were thinking about we would recover sales and EBIT.

Greg Melich -- MoffettNathanson -- Analyst

So, the EBIT dollars, just to focus on that given the accounting change, that will flow through, it sounds like, whenever the sales come, and if the second quarter, it's the second quarter, but if it ends up being more the third, it will be then?

Marshall Croom -- Chief Financial Officer

Correct.

Greg Melich -- MoffettNathanson -- Analyst

Got it. Thanks a lot. Good luck.

Marshall Croom -- Chief Financial Officer

Again, accounting change does not impact sales or operating income.

Operator

Our next question will come from the line of Elizabeth Suzuki with Bank of America Merrill Lynch. Please go ahead.

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

Great. Good morning, guys. You mentioned storm-related activity helped lumper. Can you call out any particular hurricane-related benefit and quantify that in any way?

Marshall Croom -- Chief Financial Officer

Yes, Elizabeth. It was about 100 basis point-benefit in the quarter from hurricane-related activity from what we experienced last year. Again, it was a step change from Q4 to Q1, I think the benefit that we realized and we expect that to step down again in Q2 and dissipate over the back half of the year.

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

Okay. That's really helpful. Can you just talk a little bit more about the categories that didn't have positive comps outside of sales and outdoor living and lawn and garden? Presumably kitchen and flooring were probably comping negative. Can you just talk about what's going on in those categories?

Michael McDermott -- Chief Customer Officer

Sure, Elizabeth. Paint, I think, had a significant weather impact. If you think about exterior stains and exterior paint in the first quarter, weather certainly hurt us there. When you think about flooring and kitchens, as Richard highlighted, we've got a lot of work under way to improve our conversion rate on those categories, not just through the selling experience, but also managing our installer base and reducing time in phase from the moment a customer makes a selection until the moment they receive an install.

So, they're the areas of most significant focus and kitchen and flooring certainly have been impacted as high-touch categories.

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Our next question comes from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom -- Gordon Haskett -- Analyst

Thanks, good morning. Just to clarify on your guidance that the change in the gross margin view for the year. I think you set aside 60 basis points -- that's entirely due to the rev rec change?

Marshall Croom -- Chief Financial Officer

Correct, in first quarter, it was 58 basis points we were guiding to flat gross margin before the adoption of the revenue recognition standard. So, yes.

Chuck Grom -- Gordon Haskett -- Analyst

Okay. Just as a follow up to that, when you provided the guidance earlier in the year, you said you expected the front half to be lower and the second half to be better, is that still the case?

Marshall Croom -- Chief Financial Officer

Yes, that's primarily the case, lapping some of the actions that we took in Q2 and Q3 last year in addition to improving and stabilizing gross margin. So, again, more pressure on gross margin, ex-revenue recognition standard, more pressure on the first half than back half.

Chuck Grom -- Gordon Haskett -- Analyst

Okay. And you guys are not going to restate last year?

Marshall Croom -- Chief Financial Officer

We adopted the modified retrospective method. So, that does not require you to restate that, highlighting the impact in basis points on sales gross margin in SG&A.

Chuck Grom -- Gordon Haskett -- Analyst

Okay. Thanks. I think you touched on this earlier, but can you update us on the progress you've made on your product portfolio analysis?

Michael McDermott -- Chief Customer Officer

So, we continue to see positive improvement as it relates to moving more revenue under management of our new pricing optimization tools. As I mentioned on prior calls, it does take time to code models to that strategic approach and as we move more and more of that revenue under management, we are optimistic about the results we're seeing and the benefits it's having to our gross margin.

Chuck Grom -- Gordon Haskett -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Daniel Binder with Jefferies. Please go ahead.

Daniel Binder -- Jefferies -- Managing Director

Thanks. I was wondering if you could just talk a little bit about the growth on lowes.com. It looks like it was a little bit slower than where we were last year. Just to get your thoughts on that and what you think the key drivers are to accelerate it.

Michael McDermott -- Chief Customer Officer

This is Mike again. We had another strong quarter with our digital properties, delivering a 20% comp. We continue to build our capabilities to support our overall omnichannel experience. Remember, lowes.com is not just about the business we do online, but integrating those interactions for our customers throughout their home improvement journey. We saw traffic, conversion, and comps all continue to improve. As we elevated our targeted marketing efforts to continue to drive traffic, optimizing our assortment to do digital line reviews, certainly remain competitive from a pricing perspective, improving conversions.

So, as we get better visibility, faster site speed, intuitive navigation with investments in new search capabilities, improved checkout that we've got planned for this year, expanded assortment. I think our dotcom business will continue to grow and our visual capabilities will enhance the omnichannel experience. So, we're in a good place.

Marshall Croom -- Chief Financial Officer

Dan, this is Marshall, I'll add to that. When we had the question about continued investment in digital platform capabilities is something that we continue to lean into and invest. We've got a new Chief Digital Officer on board who's been here about four months, Vikram Singh. So, he's digging into our platform. We're looking forward to leaning into expanding our capabilities on that front. We comped 27% on online last year. So, our 20% is on top of that and our sales penetration is now about 5% of sales from an online standpoint. So, certainly it's part of a key element to our omnichannel strategy.

Daniel Binder -- Jefferies -- Managing Director

Then as a follow-up, adjusting for any weather impact there may have been on the pro-sales growth, would you generally describe that growth rate as stable, accelerating, decelerating? I know it's above average, but try and understand trend, if it's getting better or similar to where we've been?

Michael McDermott -- Chief Customer Officer

Daniel, it's a relatively similar pattern continued strong. We do believe all the tracking that we have in the marketplace, we continue to take share in that space.

Daniel Binder -- Jefferies -- Managing Director

Thanks.

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Regina, we have time for one more question.

Operator

Our final question will come from the line of Matt Fassler with Goldman Sachs. Please go ahead.

Matt Fassler -- Goldman Sachs -- Analyst

Thanks so much. Robert, all the best to you after all these many years. I want to start by talking briefly about February. February did not seem to be a weather callout in terms of impact the way March and April were. The February monthly number on a one-year basis, two-year basis still represented a bit of a step down from where we've been. So, was it really the last two months of the quarter that were light or was the first month difficult as well?

Michael McDermott -- Chief Customer Officer

I would just say the bigger crunch we had were March and April from a transaction impact.

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Yeah. If you look at certainly the volume, as you know, Matt, in the business, it grows dramatically between second quarter and by the time we get to the end of the quarter. So, the impact on those higher volume weeks is much more significant than it would be in a month like February.

Matt Fassler -- Goldman Sachs -- Analyst

Gotcha. The second question relates to expenses -- you actually came in a bit below the number from a dollar perspective adjusted for the accounting changes and all that, a little bit before our forecast there. I know you held on to the seasonal labor investment. Were there any other expenses that were deferred or shifted into later in the year? I know you gave new operating margin guidance for the remainder of the year, but as we think about whether that SG&A cadence needs to be taken up a bit as the year progresses.

Marshall Croom -- Chief Financial Officer

No, we actually were pretty pleased with our results in the first quarter. We had some productivity efforts that helped provide an offset even with the investment in labor. So, we'll continue to keep that as a focus as we lean into the year, where else do we have productivity efforts on that front. So, while we have that as a focus, we're also keenly focused on sales productivity opportunities as we move forward.

Matt Fassler -- Goldman Sachs -- Analyst

Then finally, a bit more strategically, you talked about pricing analytics and your desire to roll them out as the year goes on and the impact you hope that has for gross margin. What's your best sense today from your consumer surveys as to your price impression and how responsive consumers are when you've been promotional and the elasticity that has emerged from those efforts?

Michael McDermott -- Chief Customer Officer

Matt, we look at value perception pretty regularly and our value perception metrics continued to be consistent with where they've been since they took the competitive action in the second quarter of 2017. We remain competitive. We see a rational environment right now as it relates to the competitive pricing point. We've got a wider view into more competitors with these new tools. I really feel good about our position on the competitive front. So, priority one is to be competitive and to deliver great value to our customers and by doing that, we've got to make the right trade-offs to maintain gross margin. That's our focus and what we've seen so far are positive results.

Matt Fassler -- Goldman Sachs -- Analyst

Gotcha. Thank you so much, guys.

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Thanks. As always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we record our second quarter 2018 results on Wednesday, August 22nd. Have a great day.

Operator

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

Duration: 59 minutes

Call participants:

Robert A. Niblock -- Chairman, President, and Chief Executive Officer 

Michael McDermott -- Chief Customer Officer

Marshall Croom -- Chief Financial Officer

Richard Maltsbarger -- Chief Operating Officer

Seth Sigman -- Credit Suisse -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Eric Bosshard -- Cleveland Research -- Analyst

Scot Ciccarelli -- RBC Capital Markets -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Michael Lasser -- UBS -- Analyst

Greg Melich -- MoffettNathanson -- Analyst

Elizabeth Suzuki -- Bank of America Merrill Lynch -- Analyst

Chuck Grom -- Gordon Haskett -- Analyst

Daniel Binder -- Jefferies -- Managing Director

Matt Fassler -- Goldman Sachs -- Analyst

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