Lowe's (LOW) Q1 2021 Earnings Call Transcript

Lowe's (LOW -0.31%)
Q1 2021 Earnings Call
May 19, 2021, 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 2021 earnings conference call. My name is Melissa, and I will be your operator for today's call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Kate Pearlman, vice president of investor relations.

Kate Pearlman -- Vice President of Investor Relations

Thank you, and good morning, everyone. Here with me today are Marvin Ellison, our president, and chief executive officer; Bill Boltz, our executive vice president, merchandising; Joe McFarland, our executive vice president, stores; and Dave Denton, our executive vice president, and chief financial officer. I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on Lowe's investor relations website. During this call, we will be making comments that are forward-looking, including our expectations for fiscal 2021.

Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the risk factors, MD&A, and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we'll be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release in our investor relations website.

With that, I'll turn the call over to Marvin. 

Marvin Ellison -- President and Chief Executive Officer

Good morning, everyone. I'd like to begin by thanking our frontline associates for their continued hard work and commitment to the company. We would also like to extend our thoughts and prayers to our associates in India, who are grappling with an aggressive resurgence of COVID in the country. At Lowe's, we have associates in Bangalore, India in our digital information technology and finance functions, who played a key role in our transformation efforts over the past two years.

To help our team in India safeguard their health, we sent personal protective equipment to our team members there. We've also made financial commitments to support nonprofit organizations in India that are working to respond to this humanitarian crisis. As we have moved into the second year of the pandemic, we remain focused on our No. 1 priority, which has always been protecting the health and safety of our associates and communities.

And with that in mind, in Q1, we invested nearly $60 million in support of COVID safety protocols. Now turning to our results. Our outstanding performance continued this quarter with total company comparable sales growth of 25.9%. Our U.S.

comps were 24.4% with broad-based growth across all geographic regions and divisions. In fact, for the quarter, comp sales for all 15 U.S. regions exceeded 18% and all U.S. divisions exceeded 20%.

During the quarter, operating margin expanded 313 basis points on an adjusted basis, leading to diluted earnings per share of $3.21, which is an 81% increase on an adjusted basis over the prior year. Our outperformance in operating margin was supported by our continued transition to an everyday competitive price strategy, as well as our disciplined pricing and product cost management strategies. Our improved operating margin also reflects the progress of our operational transformation driven by our perpetual productivity initiatives or PPI. Bill will discuss our everyday competitive price strategy, pricing, and product cost management, and Joe will provide details on our PPI initiatives later in the call.

On Lowes.com, sales grew 36.5% on top of 80% growth in the first quarter of 2020, which represents a 9% sales penetration this quarter and a two-year comp of 146%. With customer demand for an integrated omnichannel shopping experience only increasing, we continue to invest in our omnichannel capabilities. Pro comps outpaced DIY comps with over 30% comps in the quarter. Although this has been a two-year journey, I'm very pleased with the progress that we made with our Pro customer.

We began by addressing the basics, ensuring that we were carrying the brands and products that Pros need in the job life quantities, and also provided the excellent service this busy customer expects. And now, we've shifted to the more strategic phase of growth in the Pro by resetting the layout of our stores with the Pro in mind and deepening our relationship with the pro through a loyalty program that provides them with members-only benefits. Joe will discuss more about the specific initiatives that we're undertaking to serve the Pro, both online and in-store later in the call. The small and medium-sized Pro is our target customer.

This customer is a frequent shopper who purchases products in multiple departments, which drives increased productivity throughout the store. And I'm confident that we have a compelling growth opportunity as we continue to improve our engagement with this highly valued customer. In addition to the strength in Pro, we delivered over 60% comps along with significant increase in customer satisfaction in our installation services business. We've overhauled this business and improved the service offering by consolidating our provided network and implementing industry-leading technology.

And although all of us are looking forward to a post-COVID world, our research tells us that the importance of the home will remain elevated for many years to come. And given the increased importance of the home, this quarter, we launched SpringFest, our new reimagined approach to the season. Our campaign provided inspiration for home projects, so our customers could transport themselves to the destination of their choice without ever leaving the sanctuary of home. In a moment, Bill will discuss the outstanding results that we're able to generate from this reimagination of spring.

Now turning to Canada. We delivered comp growth that outpaced the U.S. despite several COVID-related operating restrictions. I'd like to thank the new Canadian leadership team for all of their hard work, as well as the frontline associates in Canada for their resilience and commitment to continuing to serve our customers in this challenging operating environment.

This quarter, we also announced the acquisition of STAINMASTER brand, which is the most recognized and trusted carpet brand on the market today. With this acquisition, we're building on our decade-long exclusive position as the only national home improvement retailer to carry STAINMASTER carpet. This is an important step in our Total Home strategy as we seek to elevate our product assortment and provide consumers with the products and brands they trust for every project across the entire home. We see great potential to extend the STAINMASTER brand in other product areas, where we can continue to leverage its high-performance characteristics.

This acquisition also expands our private brand portfolio joining the family of private brands, including allen + roth, Kobalt, and Project Source. We're focused on expanding our private brand penetration with a balanced brand strategy that includes a powerful national brand portfolio that appeals to both Pro and DIY customers. At the same time, we'll offer a select number of high-value private brands, building consumer loyalty for these products. Our results in the first quarter continue to give me confidence that we're making the right investments to accelerate our market share gains through our Total Home strategy by enhancing our investments in Pro, online, installation services, localization, and elevating our product assortment.

These initiatives will allow us to drive sustainable growth as we deliver a total home solution for our Pro and our DIY customers. Before I close, I'd like to once again extend my appreciation to our frontline associates. In the first quarter, I had an opportunity to visit stores in nine of our 15 geographic regions. As I observed, our associates hard at work serving customers through very challenging circumstances, my respect and admiration continues to grow.

In recognition of these efforts, we decided to close our stores and distribution centers on Easter Sunday for the second year in a row to give our associates a much-deserved day off to spend with their families and loved ones. I'm also pleased to announce that for the fifth consecutive quarter, 100% of our stores earned a winning together profit-sharing bonus, a record $152 million payout to our frontline hourly associates. This represents an incremental $70 million above the target level. While the near-term macro outlook remains uncertain, we're confident that we will continue to outperform the market driving both market share gains and improved operating efficiency.

Our two-year-plus journey to transform Lowe's has given us improved operating capabilities and a technology infrastructure that's dramatically enhanced, which in turn makes us more agile and able to respond quickly to any potential changes in the business environment. And with that, I'll turn the call over to Bill. 

Bill Boltz -- Executive Vice President, Merchandising

Thanks, Marvin, and good morning, everyone. We delivered U.S. comparable sales growth of 24.4% in the first quarter. Our compelling offerings, great values, and improved in-stocks allowed us to capitalize on the continued strong demand for home improvement products.

Consistent with recent trends, growth was broad-based across Pro and DIY customers, in-store, and online, and across product categories. In fact, 13 of 15 merchandising departments generated comps over 15% and all merchandising departments were up more than 20% on a two-year comp basis. As Marvin described, we were extremely pleased with how consumers responded to our SpringFest event. Similar to our approach to the winter holidays, we extended this event across four weeks to create a new sense of excitement and to prompt return trips, while also avoiding congestion in our stores.

We offered four different weekly giveaways of garden-to-go kits that provided everything needed for a fun spring project, and also strengthen our customer connection through a required MyLowe's activation online. The success of this event was due to the great organizational alignment across our stores, marketing, and merchant teams. Turning now to our top-performing categories. Lumber again delivered the highest comp driven by strong Pro demand and unprecedented inflation in the category.

Over the past year, as lumber products have been in tight supply, our merchants have worked closely with our suppliers and successfully secured new sources and additional product to ensure that we can maintain a competitive in-stock position in the category. Strong in-stocks in this tight market have allowed us to continue to strengthen customer relationships, especially with the Pro. In addition to lumber, we delivered comps exceeding 30% in electrical, decor, kitchens, and bath, and seasonal and outdoor living. Our electrical category posted strong comps in the quarter, driven by inflation in copper, as well as solid demand from the robust repair/remodel market.

In support of our total home market share acceleration strategy, we drove strong engagement with our customers as reflected by increased sales in decor, and kitchens, and bath. The strong sales in our decor category were driven by great performance in home accents as we continue to elevate our product assortments, especially with our recently refreshed allen + roth brand. In fact, this quarter, our merchant teams launched new spring collections that span across a broad array of product categories through a lifestyle point of view with inspirational on-trend designs that gives our customers the confidence they need to decorate their homes in style. Our kitchens and bath department outperformed in the quarter as homeowners continue to enhance their living spaces and economic stimulus supported bigger-ticket projects.

Finally, seasonal and outdoor living benefited from the early demand in patio and grills as homeowners embrace the arrival of spring. We also saw strong sales in the newly launched battery-powered EGO and SKIL brands as consumers are attracted to the convenience and the quality of their zero-emission rechargeable outdoor power equipment. In fact, during the quarter, EGO delivered some of their largest weekly sales results in the history of their brand. The addition of EGO and SKIL has only strengthened our No.

1 position in outdoor power equipment and truly complements the leading brands we carry such as John Deere, Honda, Husqvarna, Aaron's, and CRAFTSMAN. And during the quarter, we continued to see strong demand for our other powerhouse brands like Weber and Char-Griller, which remain the top two brands in outdoor grilling. We were excited to add new brands to our arsenal, including the exclusive launch of FLEX cordless power tools. The FLEX brand is known by the most discerning builders, contractors, and trade professionals.

And this new lineup of power tools offers the latest innovation, more power, and faster charging than the competition. We are also excited to bring the Lesco brand of fertilizer to Lowe's this spring. A brand that is trusted by landscape pros and knowledgeable homeowners alike. The addition of FLEX power tools and Lesco fertilizer further complements our powerful Pro brand lineup, which already includes Simpson Strong-Tie, DEWALT, Spyder, Bosch, Eaton, and SharkBite.

As Marvin mentioned, we delivered strong sales growth of 36.5% and a two-year growth of 146% on Lowes.com. We continue to enhance the online customer experience with improved search and navigation functionality that allows consumers to easily shop for products across categories. Additionally, we continue to see strong download rates of our mobile app as we are working to enhance our customer loyalty through a great mobile experience. As Marvin mentioned, we delivered a solid improvement in our product margins this quarter, driven by disciplined vendor cost management, improved and enhanced pricing systems, and our continued transition to a more relevant everyday competitive price strategy that is complemented by targeted seasonally relevant promotions.

All of these initiatives are part of our ongoing merchandising excellence strategy. We will continue to leverage and refine these capabilities as we deliver strong everyday values to our consumers, while we continue to manage our product margins by taking a data-driven portfolio approach to pricing. Our Total Home strategy will continue to allow us to expand and elevate our product and brand assortments and take market share. Before I close, I want to thank our vendor partners and our merchants for their continued focus on taking care of our stores and our customers.

Thank you, and I'll now turn the call over to Joe. 

Joe McFarland -- Executive Vice President, Stores

Thanks, Bill, and good morning, everyone. In the first quarter, our associates were laser-focused on providing excellent customer service, supporting a safe store environment, and delivering record sales volumes. As Marvin mentioned, 100% of our stores earned a "Winning Together" profit-sharing bonus, a record $152 million payout to our frontline hourly associates. I would like to thank our associates for their continued dedication in providing world-class customer service.

As Marvin mentioned, our focus on perpetual productivity improvement, or PPI, initiative continued to yield results during this quarter as we leverage store payroll by using technology to reduce tasking hours, improve customer service, and increase sales productivity. For example, we rolled out digital signs, first in appliances, and most recently, in our lumber department. These signs cut down on associate tasking labor, and they also support better product margin performance as we can now more rapidly implement price changes in line with the market. We're also leveraging an improved freight flow app, creating a fully digital process that gives our associates better line of sight to when products will arrive at our stores.

The app, which was developed in-house, even helped store associates to prioritize the incoming merchandise so they can quickly and efficiently position the product on the sales floor for our customers. And we launched secure mobile checkout, which we are using to improve the speed of service in high traffic areas inside the store and on the exterior of the store in areas such as outside lawn and garden and under the Pro canopy. This checkout app developed in-house is allowing us to take care of customers from scanning items, tendering payment, and printing or emailing receipts before they even join a line. Our customers are delighted with the solution, especially on busy weekends.

We are also driving productivity in our in-store fulfillment. This quarter, we expanded our contact with shopping options by completing the rollout of BOPIS lockers to 100% of our U.S. stores in April. Customers really enjoy these touchless easy-to-use lockers.

In fact, this has already become the highest-rated store fulfillment options. Having built these lockers in 100% of our U.S. stores will allow us to expand our omnichannel capabilities, further improve customer satisfaction, and limit customer congestion at our service desk. Turning to our Pros.

As Marvin mentioned, Pro outpaced DIY in the quarter with over 30% comps. We continue to gain momentum with the Pro through our improved in-stock inventory levels, our enhanced service offerings, and our new Pro loyalty program. Our Pro sales associates have also begun to leverage our new CRM platform to proactively engage with our Pro customers and sell the entire project to them. Our most compelling growth opportunity with the Pro is expanding the share of wallet with our existing customers.

Our new CRM platform, as well as the redesigned store layout that aligns product adjacencies, enable us to more effectively serve their needs for the entire project across all of their jobs. And we continue to enhance the shopping experience for our Pro customers, small to medium-sized businesses who are always pressed for time. We are launching a tailored shopping experience created specifically for Pros to ensure that the time they spend away from their job site is efficient and productive. We're introducing new convenience products at checkout and services like dedicated Pro trailer parking and phone charging stations, all designed to help add value to each trip the Pros take, thus cutting down on the number of stops they make throughout the day.

We're also enhancing their online experiences with the ongoing migration of LowesForPros to the cloud. This will give our Pro customers access to incremental options that our DIY customers already have on lowes.com, and it will allow us to more quickly add new Pro-only features in the future, including a personalized app experience. Both in-store and online, we continue to demonstrate that Lowe's is on a mission to be the new home for Pros. As Marvin mentioned, we are seeing terrific momentum in our installation business, with over 60% comps this quarter.

As a reminder, just two years ago, this was a money-losing business and poor customer satisfaction. Although we are lapping Q1 2020 results that were pressured by COVID, we are very pleased with the overall execution and the trajectory of this business. In closing, I cannot be more pleased with the improvements we are making in our stores as reflected in our strong net promoter scores in a recent third-party study. Our executive officers, senior officers, merchants, and field leaders are out visiting stores on a weekly basis to ensure that we are listening to and supporting our frontline associates.

This remains a very difficult environment to operate retail stores in, and I could not be prouder of the accomplishments of this team and their commitment and hard work from our frontline associates. With that, I'll turn it over to Dave.

Dave Denton -- Executive Vice President and Chief Financial Officer

Thank you, Joe. I'll begin this morning with a few comments on the company's robust capital allocation program. In Q1, we generated $4 billion in free cash flow, driven by improved operational execution and continued strong consumer demand. We returned $3.5 billion to our shareholders through both a combination of dividends and share repurchases.

During the quarter, we paid $440 million in dividends at $0.60 per share. We also repurchased 16.8 million shares for $3.1 billion at an average price of approximately $182 a share. We have approximately $17 billion remaining on our share repurchase authorization. Capital expenditures totaled $461 million in the quarter as we invest in our strategic initiatives to drive the business and to support our growth.

We ended the quarter with $6.7 billion of cash and cash equivalents on the balance sheet, which includes proceeds from our $2 billion notes offering in March. In addition, we entered into a $1 billion term loan facility in April, which remains undrawn. Our balance sheet remains extremely healthy with adjusted debt to EBITDA at 2.07 times at the end of the quarter, well below our long-term target of 2.75 times. Now, turning to the income statement.

In Q1, we generated diluted earnings per share of $3.21, an increase of 81% compared to adjusted diluted earnings per share last year. This growth was due to strong sales growth, improved gross margin rate, and SG&A leverage as a result of strong execution across many facets of our business. Please note that in the prior-year quarter, there was a very modest impact on diluted earnings per share related to the Canadian restructuring effort. My comments from this point forward will include approximations when appropriate and comparisons to certain non-GAAP measures where applicable.

Strong sales growth was driven by several factors, including a continued consumer focus on the home, a favorable weather backdrop across the country, commodity inflation, especially within the lumber category, consumer support from the March government stimulus package, and our improved execution as we continue to elevate our product and service offerings. Q1 sales were $24.4 billion, driven by a comparable sales increase of 25.9%. This was a result of a balanced contribution from both ticket and transactions as comparable average store ticket grew 14.1% and transaction count grew 11.8%, with strong repeat rates from both new and existing customers. While a little difficult to measure, we estimate that the March government stimulus checks drove 300 basis points of growth, while commodity inflation benefited comps by 460 basis points in the quarter.

Lumber and other commodity prices remained at elevated levels versus last year. U.S. comp sales were up 24.4% in the quarter, consistent with results from the past few quarters. Growth was well balanced across DIY and Pro customers, selling channels, geographies, and nearly all merchandise departments.

Our U.S. comps were 24% in February, 35.9% in March, and 13.9% in April. February comps were negatively impacted by the harsh winter storms that hit Texas and several other states, while March were positively impacted by storm recovery and the third round of stimulus. Additionally, we began cycling last year's COVID-related spikes in the band in the second half of April, and those more difficult comparisons impacted April comps.

Looking at U.S. comp growth on a two-year basis from 2019 to '21, February sales increase 30.3%, March increased 48.1%, and April increased 37.1%. Gross margin was 33.29%, up 19 basis points from last year and up 183 basis points as compared to Q1 of '19. Product margin rate improved 165 basis points.

As Bill mentioned, our teams effectively leveraged our merchandising excellent strategy to manage product cost and retail pricing throughout the quarter. While we are seeing inflation in some product categories, our merchants work to diligently mitigate and minimize vendor cost increases. Additionally, our supply chain team leveraged our scale and carrier relationships to minimize distribution cost pressures experienced throughout the retail sector. On the pricing side, our shift to an everyday competitive price strategy continued to benefit our margins in Q1 as we leverage enhanced pricing tools to improve margin across the array of products that we sell.

We began to see improving trends from our increased focus on shrink control this quarter, with shrink improving sequentially from Q4 of 2020. However, results pressure gross margin by 15 basis points versus last year. We expect that our shrink performance will continue to improve as we move throughout the year. These benefits to product margin rate were partially offset by 90 basis points of pressure from product mix shifts due to lumber inflation and a less favorable product mix, 20 basis points of pressure from supply chain costs as we continue to invest in our omnichannel capabilities, and 20 basis points of pressure from credit revenue.

SG&A of 18.4% levered 288 basis points, compared to adjusted SG&A in LY, driven primarily by lower COVID-related costs, as well as operating costs leverage resulting from strong sales and our ongoing productivity from our PPI initiative. As anticipated, we incurred nearly $60 million of COVID-related expenses, as compared to approximately $320 million of COVID-related expenses last year. The $260 million reduction in these expenses generated 140 basis points of SG&A leverage. Additionally, strong sales and a focus on efficiency and productivity allowed us to generate leverage of 100 basis points in operating salaries, 35 basis points in occupancy expense, and 5 basis points in advertising.

Now, operating profit was $3.2 billion, an increase of 63% over LY. Operating margins of 13.3% of sales for the quarter was up 317 basis points to the prior year, driven by both improved operating leverage and improved gross margin rate. The effective tax rate was 23.5%. The tax rate was slightly lower than expected, primarily due to a tax benefit related to divesting of certain employee stock options.

We continued to build up our inventory levels throughout the quarter to meet the sustained high levels of customer demand while improving our in-stock position. At quarter-end, inventory was $18.4 billion, up $2.2 billion from Q4 levels, in line with seasonal patterns. This reflects an increase of $4.1 billion from Q1 of 2020 when inventory levels were pressured due to unexpected spikes in demand, as well as COVID-related supply disruptions. Of note, this includes a year-over-year increase of $780 million related specifically to inflation.

Now, before I close, let me comment on our current trends and how we are planning our business for the balance of 2021. Our year-to-date results are tracking ahead of the robust market scenario that we covered in our December Investor Update. The underlying drivers of home improvement demand appear to be more resilient and stable than we originally forecasted. Those factors build our confidence in our ability to deliver strong results on top of an exceptional year in 2020, including 12% operating margins and flat gross margin rates for the year.

We remain confident that our total home strategy will enable us to capture market share. We are very encouraged by our performance in Q1, including our strong sales volume even as we begin to cycle last year's mid-April surge in demand. Month to date, May U.S. comp sales trends are materially consistent with April performance levels on a two-year comparable basis.

Looking forward, year-over-year comparisons remain difficult throughout the remainder of the year. Also, we continue to see COVID restrictions in some areas across Canada. As markets reopen, we are closely monitoring consumer behavior, anticipating a potential modest shift in spending away from the home. We remain agile and ready to respond to whatever environment we face this year with our focus on gaining market share throughout 2021 while improving operating margins.

With regards to our quarterly performance, please note that we are cycling particularly high gross margin levels in Q2 of LY. In the prior quarter, there was an industrywide pullback in promotions and a more favorable product mix. As a result, we currently anticipate a moderate decline in gross margin rates in Q2. Despite this moderate year-over-year decline, our gross margin rate is expected to expand nicely over pre-pandemic 2019 levels.

Investments and pricing, vendor cost management, and our everyday competitive promotional strategy have been driving improvements in our gross margin performance over the past two years. As I stated earlier, we continue to expect to deliver flat gross margin rates for 2021. Further, we expect the business to generate robust levels of free cash flow. We plan to invest $2 billion in capex this year to drive future growth and returns as we continue our disciplined approach to capital allocation with $9 billion in planned share repurchases this year while also supporting our dividend.

In closing, we're very excited about the momentum in our business and our ability to deliver significant shareholder value over the long term. With that, we are now ready for questions.

Questions & Answers:

Operator

Thank you. We are now ready for questions. [Operator instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, good morning, everyone. My first question is can you provide an update on where Pro penetration can move to over time? And maybe some level of growth that you expect going forward. And I'm asking because I think part of the margin story is getting higher sales per foot and I think Pro seems to be a big opportunity there. So curious, I don't know, Marvin or David, if you update us in that in that area.

Marvin Ellison -- President and Chief Executive Officer

Hey, Simeon. This is Marvin. You know, we purposely have not set a target for Pro penetration. As I mentioned in my prepared comments, we really started focusing on the basics and now we're elevating to a more strategic phase in Pro.

We also stated a while back that we estimate our Pro penetration today is between 20% and 25%. Now having said that, based on my history in this business, in this space, in Joe's history, and experience in this space, we can see over time, our Pro penetration getting between 30$and 35%. And we think that's the trajectory that we're currently on. But we have purposely not set a target because I've learned in the past when you set a target, then you can, oftentimes, hit the target but you do it at the expense of running a good business and we're just really focused on serving the customer right now.

Simeon Gutman -- Morgan Stanley -- Analyst

OK. Fair enough. Can I ask you a macro question until whoever and I wanted to ask, there's this school of thought that this industry, this home improvement industry, is a mid-single-digit grower, right, that did four or five X stat over the last four quarters. And so that school of thought says, hey, this industry needs to digest this growth.

We may not grow going forward, maybe in '22, or maybe flattish at best. And the other side is that people have spent more on their homes, there's more invested capital so there's more maintenance repair that we could sort of complete. And then maybe there's a housing cycle on top of this. Curious where you shake out, what's your best guess, or what some of the debates you're having on these topics are? 

Marvin Ellison -- President and Chief Executive Officer

Simeon, that is a good question. I'll take the first part. I'll let Dave provide any financial perspective. I mean, we are we're very excited and we're very bullish on the home improvement industry in general.

If you look at the macro factors that really impact this business and have historically impacted this business is things like low mortgage rates, rising home prices, the age of housing stock, improve household formation trends, and also strong consumer balance sheets. I mean, all of those specific macro factors are pointing in the right direction for us. In addition to that, when there's home price appreciation that actually benefits home improvement. It may not benefit the overall housing market but when consumers decide to stay in their existing home and make investments in upgrading the home, that correlates to really strong home improvement sales.

And as the housing stock continues to age -- we're in a repair maintenance business. That's a significant part of what we do. So when we look at home improvement, we see really robust year-over-year growth potential relative to the macro. And then if we look at just the things that we control, I mean, we've been very transparent that there have been many strategic mistakes made in this business over the past five-plus years.

And so we have what we believe is enormous upside in revenue and operating income by continuing to invest in really smart strategic initiatives that we think will drive the business for that. And we think Q1 reflects our ability to do that with our gross margin and operating income performance. I'll let Dave add any additional comments if he has them. 

Dave Denton -- Executive Vice President and Chief Financial Officer

Hey, Simeon. The only other thing that I would add is that, obviously, over the next several years, we anticipated that the millennial customer would begin to migrate into the homeownership position. I think what has happened through COVID is that the macro trend has probably accelerated. So probably given the industry segment a bit more tailwinds, we think about the next several years.

Simeon Gutman -- Morgan Stanley -- Analyst

OK. Thank you. Good luck.

Operator

Thank you. Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.

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

Great. Thank you. So if sales are running above the robust market scenario, do you think the sales upside could be reinvested into your additional initiatives aimed at gaining market share and deepening the competitive moat? Or should we think about there's potentially being an upside to the 12% operating margin that was discussed in that robust demand scenario?

Dave Denton -- Executive Vice President and Chief Financial Officer

Hey, Liz, this is Dave. I'll start with that question there. I think what you're looking at here is we have a very specific investment thesis. As we watched it in 2020 and into '21, I think if you look at the thesis that we have and all the priorities that we have, we feel like we're very well-positioned to make the right investments to grow our business long term and improve our operating performance.

I do think we're also very focused on the fact that we can't really predict the macro in the back half of this year, but we are very committed to doing two things. One, we're going to grow market share this year, and two, we're going to improve our operating margin performance. And we do expect that to be if the market holds up at that robust or above robust, around 12% operating margin. And that's our focus for this year.

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

Great. And just one quick follow-up, which is that -- which of the two categories comp below 15%? And what was the two-year growth there?

Bill Boltz -- Executive Vice President, Merchandising

Hey, Liz, this is Bill. So you know, all categories achieved plus 20% on a two-year basis. But the two categories below the company were the paint and our hardware business, driven largely because of, you know, everybody painting last year during the pandemic. And then the hardware business is driven by safety and masks and some of that business that spike last year.

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

OK, great. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Michael Baker -- D.A. Davidson -- Analyst

OK, thanks. A couple and I hate to be short-term focused here but the -- first of all, April did fall off versus March on a two-year basis a little bit. Do you think that's because of the stimulus that occurred in March? And then playing that forward, if we take that two-year trend into May and for the rest of the quarter, you should be about flat in the second quarter. Is that a fair way to think about the expectations for the quarter?

Bill Boltz -- Executive Vice President, Merchandising

Yeah. First, if you look at, I guess, our performance by month through the quarter, if you look at it on a two-year stack basis, yes, March was somewhat inflated, if you think about tax recovery from the storm in Texas and other states, as well as the stimulus hitting that period. So I think we feel very good about kind of how we've ended the quarter and the trends as we cycle into May from a sales perspective. And I think, you know, listen, we're not giving guidance for the quarter.

We continue to be focused specifically on making sure that we have great service. We have -- that we're in stocks in the right categories and we're supporting our consumers across our marketplace. And I feel like we're gaining momentum as we think about our business both in 2020 and here as we cycle into '21.

Marvin Ellison -- President and Chief Executive Officer

Hey, Michael, this is Marvin. The only point I'll add to that is we were up against a 20.4% comp in the month of April in the U.S., and we comp almost 14% on top of that. So we feel really good about that. That exceeded our expectations, it exceeded our internal plan, and it also demonstrated to us that even going up against some of the spiking demand from last year, we still can perform at a high level.

So we actually felt great about our performance in April. But it demonstrates when you're up against a significant surge in demand, you're going to see sales comp pressure and that's to be expected.

Michael Baker -- D.A. Davidson -- Analyst

Yeah, sure. OK, that makes sense. And to follow up and not ask a tough question, particularly, you know, on a 25% comp against the 12% last year, it was really, really incredible and strong. But can you talk about market share gains? A simple look at the growth of the market using the NAICS, you know, sales for building materials, garden equipment, and supply source, that did grow a little bit faster than you did this quarter.

So I wonder how you think about what market are you looking at or what numbers are you looking out to underpin your market share gain comments for the quarter in the year?

Marvin Ellison -- President and Chief Executive Officer

You know, Michael, coming from someone who has worked in a couple of different retail formats, I've always said that home improvement has probably the most suspect market share data on a short-term basis of any retail segment. So to be quite candid, when we look at the amount of growth we delivered in the sales revenue to regenerate it and we look at it on a one-year or two-year comp basis, we can't quibble about losing market share. We really focus on a broader market and we've said consistently that in this COVID environment, and this is on the current and post COVID, the retailers are -- they're most capitalized and can make investments in omnichannel and omnichannel fulfillment and creating different channels for customers to shop and can lean into technology and also leverage the supply base as our merchants and supply chain were able to do over the past quarter. We will win and we will take a broader market share.

I mean, we believe that we did that and so we feel very, very comfortable in our market share position and performance prospects.

Michael Baker -- D.A. Davidson -- Analyst

Yeah. Fair enough. Appreciate the time. Thank you.

Operator

Thank you. Our next question comes from the line of Christopher Horvers with J.P. Morgan. Please proceed with your question.

Chris Horvers -- J.P. Morgan -- Analyst

Thanks. Good morning, everybody. So a couple of questions. My first question is on the product margin benefits that you're seeing on the pricing side, should these accelerate over the year, given that some of the learning builds somewhat -- sort of to say in the systems, and to what extent is it more sensitive to sort of highly seasonal and markdown prone quarters like Q2 and Q4 versus the third quarter?

Dave Denton -- Executive Vice President and Chief Financial Officer

Yeah, listen. I think -- this is Dave. We have made a lot of investments from a product cost management and pricing perspective infrastructure here at Lowe's and we feel very confident between the merchant and advanced team of kind of managing that. It is not necessarily seasonally related.

This is really about managing our everyday pricing costs in a more effective manner over time. I do think that we're still in the early stages of this journey as we think about the next several years to improve our performance here. Clearly, at the moment, we are -- as we said in our prepared remarks, there are some inflation pressures in our business that we're managing through. I do believe that we have -- we'll continue to invest in these tools and technologies to enable us to improve our margin performance over the longer term.

Now keep in mind, Chris, I just want to go back to what we said of our long-term financial algorithm here is really to maintain kind of flattish gross margins over time with the fact that we would improve product margin, but we will reinvest some of that product margins in the supply chain to drive performance and growth over the long term.

Chris Horvers -- J.P. Morgan -- Analyst

Got it. Understood. And then in terms of -- as a follow-up on the 12% margin question, if you do end up beating that minus 2% sales outlook, I guess, why wouldn't you be above a 12%? Is there an offset, perhaps, bonus and employee incentives? Is it a headwind from lumber inflation that creates a rate headwind that more than offsets in the natural leverage of beating the robust scenario sales guide?

Bill Boltz -- Executive Vice President, Merchandising

Yeah. Hey, Chris, I just want to get ourselves focused. Listen, first and foremost, we've said about the fact that we're going to gain some market share. We've got to improve operating margin performance here, and we'll try to get to our 12% in the short term here.

Beyond 12%, we have objectives, and we believe we can expand it further. But let's at least get to our 12% margin first. And so, we're just kind of laser-focused on making sure that we're delivering upon our commitments from that perspective.

Marvin Ellison -- President and Chief Executive Officer

Hey. And, Chris, this is Marvin. You can appreciate the challenge we have looking at the overall macro outlook for the business with all the dynamics occurring in the marketplace. The good news is the better the macro performs, the better we'll perform.

We feel great about the things that we control and some of the tools, and some of the processes we've put in place. And some of the decisions of the leadership team are really paying dividends. And as David said a couple of times already today, we were committed to outperforming the broader market and improving operating margins. And if the macro improves significantly above the robust scenario, then our business will perform equally as well.

And that's how we're approaching it.

Chris Horvers -- J.P. Morgan -- Analyst

Understood. Best of luck, guys.

Marvin Ellison -- President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Hey, good morning. Great quarter. You guys spoke about the big increase in lumber pricing. Home Depot said the same thing yesterday.

Curious what you're seeing on the demand side and unit velocity over the past three months.

Joe McFarland -- Executive Vice President, Stores

Hey, I will -- I'll start it off. What I can tell you is, you know, we're just really pleased that the merchants were able to create such strong supplier relationships that we could keep up with demand in an unprecedented environment of unit demand. I'll let Bill talk about units and how we're performing and kind of how we feel about the rest of the year.

Bill Boltz -- Executive Vice President, Merchandising

Yeah. You know, Chuck, I think, you know, my take on Marvin, I think, you know, demand continues to remain strong. You know, all the preparation that was done coming off of last year has certainly enabled us to, you know, to fulfill that demand going forward. All the work that's being done right now is to maintain that as we go through the rest of the year and continue to manage, you know, the needs of the Pro customer, you know, and make sure that we can take care of them first.

I mean, that's really what we're focused on in that job-light quantity and making sure that we're right by the market. And that's been the focus of the team.

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

That's great right there.

Dave Denton -- Executive Vice President and Chief Financial Officer

And Chuck on --

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

And just probably just on the installation business, you talked about a 6% comp in the quarter. I guess I'm curious like, you know, what penetration of the business is that today? How -- can you grow that? And then also just from a profitability perspective, how it compares to the rest of the business?

Dave Denton -- Executive Vice President and Chief Financial Officer

Yeah, Chuck that business is in the mid-single-digits penetration for our business. And we do think we have a big runway here. As Joe indicated in his prepared remarks, that business was something that really wasn't invested in historically and was something that we had a really, I'd say, poor service model historically and was not the best from an operating performance perspective financially. I think we've now turned that business around and have a really nice foundation as we think about growing it.

So, I'll ask Joe to give a couple of comments on it.

Joe McFarland -- Executive Vice President, Stores

Yeah. Thanks, Dave. I'll just make a few comments. You heard in my prepared remarks the performance, very, very pleased with it.

You know, we've attracted industry veterans that really understand indeed the complexities of being inside the home, and especially in a COVID environment. You know, all the new platforms that we have been focused on, the consolidation of installers across the country, and remaining laser-focused on the programs that we really want to drive. And that's all under the same umbrella as our total home strategy. So, we're very pleased with the team's efforts.

I'm very pleased with all of our installer partners across the country and looking forward to a great continued momentum there.

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question.

Scott Mushkin -- R5 Capital -- Analyst

Hey, guys. Thanks for taking my questions. So, I had a more long-term strategic question when you guys think about your business into 2022. As you look at your strategic priorities, what do you think drives incremental growth for Lowe's kind of company-specific.

You know, what are your top three type of things as you look out over the next 18 months? Thanks.

Marvin Ellison -- President and Chief Executive Officer

Scott, this is Marvin. I think it goes directly to our total home market acceleration strategy, where we talk about continuing to invest in online, which is really more omnichannel-focused, making sure that we're investing in our installation services business, and also improving our overall performance with the Pro. As I mentioned in my prepared comments, I mean, all of our customer segments are really important, and we are focused more intently on being a customer-focused business. The Pro adds a different dimension because of the frequency of how the pros shop and also how to Pro shops throughout the entire store.

And one of the strategic mistakes made in the past here is not understanding that customer and understand the economic value of that customer. So, we're going to continue to stay really focused on that customer. But I would say those three things, omnichannel, ensuring that we can continue to have a really robust and seamless installation service business, and focusing on the Pro are three of our priorities. But the whole total home strategy encompasses what we're going to be leaning into for the next couple of years.

Scott Mushkin -- R5 Capital -- Analyst

That's great. And then just like looking out the back half of this year, are you seeing any signs that there's been -- this very high level of inflation is creeping demand at all? Or is that not something you're seeing?

Marvin Ellison -- President and Chief Executive Officer

You know, we're not seeing it. I'll give you thoughts and I'll let Dave give a more financial perspective. I mean, we feel really good about this business and this business model. You know, as I look at home improvement as an overall retail sector, I just think that even though we're all just totally fatigued both mentally and physically with the pandemic and there's nothing that we can say positive about operating through all of the health and safety issues that we've all dealt with both business and personal, when you look at the macro for home improvement, it's a very positive backdrop.

And as we look at, you know, forward-looking quarters and into next year, even with the inflation we're seeing in certain areas specifically lumber and copper, we just don't believe that that's going to create an impediment for growth or significant headwinds, you know, for this business sector. I'll let Dave add any other comments.

Dave Denton -- Executive Vice President and Chief Financial Officer

Yeah. The only thing I would add is just to reconfirm what Marvin said. We see no slowdown in demand at this point in time across our business and our categories. And I think if you can speak to our Pro customers, we're hearing from them that they, one, are very busy at the moment; and two, have extremely long backlogs at this point in time.

So, I think this demand will continue for some period of time.

Scott Mushkin -- R5 Capital -- Analyst

Thanks, guys. Appreciate it.

Operator

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer and Company. Please proceed with your question.

Brian Nagel -- Oppenheimer & Co. -- Analyst

Hi, good morning. Congrats on a nice quarter. The first question I wanted to ask, you've talked a lot about, you know, the various scenarios for 2021 and the operating margin and markets, your opportunities for Lowe's. How do you look at the expense levers? I think you may have talked about this a bit in your prepared comments, but how do we think about the expense levers to the extent that sales prove choppier, you know, through the balance of 2021?

Dave Denton -- Executive Vice President and Chief Financial Officer

Yeah. Obviously, this is Dave, obviously, the biggest expense lever we have is how we manage operating salaries across our business, and probably labor, a little bit in the supply chain. I think what we've done is we've -- we have invested in tools and processes to really allow us to effectively manage that labor component and really adjust it based on demand that we're seeing from a profile perspective. With that, I'll turn it over to Joe.

Joe McFarland -- Executive Vice President, Stores

Yeah. Bryan, thanks for the question. And I really would point out the three major points of the PPI initiative that we talked about. First is the investment in technology to reduce the tasking hours, and we've been doing that very effectively.

Secondly is the improvement in customer service with those changes. And then finally, the overall sales productivity and sales-per-square-foot productivity of the stores. And I think as, you know, we've given some examples, the digital signs in appliances, digital signs in lumber. You know, the investments we're making in the Pro area, the investments we've made on the front end.

And so, I think the overall investment thesis that we have in driving this PPI really speaks to choppy times or good times that we have deleveraged the business.

Scott Mushkin -- R5 Capital -- Analyst

Got it. Very helpful. And my follow-up question with regard to sales. You know, clearly, you know, for Q1 and given the commentary with regard to May, I mean, sales have stayed very strong and rather broad-based.

But as you look at your business on a kind of a market-by-market basis, are you seeing any difference in sales trends in regions of the country, markets of the country that have opened up faster? You know, presumably, consumers are getting back to what their normal lives quicker.

Bill Boltz -- Executive Vice President, Merchandising

You know, Brian, it's Bill. When we talk about broad-based, it's more consistently broad-based in any time I can remember in my career. I mean, we have 15 geographic regions and three divisions. And as I had said in my prepared comments, I mean, all of our regions, you know, were -- in the north of 18%, all divisions north of 20%.

And when we look at, you know, top 40 markets, we look at our -- and so, that points to us that there are just good underlying financial, you know, metrics in the balance sheet, you know, positive aspects for customers that is showing up in how they spend in our business. It also demonstrates that we're running a more consistent business. But the short answer is we're not seeing any negative outliers. When we look at customer mobility, with -- and even when we were seeing COVID spikes around the country and vaccination rates, we still didn't see any major differences in overall revenue performance in those pockets of the country.

So, we feel good about that and it points to what we believe will be very positive signs for the rest of the year. And that's what we're hoping and praying for.

Brian Nagel -- Oppenheimer & Co. -- Analyst

Got it. Appreciate all the color. Thank you.

Dave Denton -- Executive Vice President and Chief Financial Officer

We're going to take one more question, please.

Operator

Thank you. Our final question this morning comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.

Steven Forbes -- Guggenheim Securities -- Analyst

Good morning and thanks for taking the question. I wanted to focus on the Pro. You mentioned 30% sales growth in the Pro. Curious if you could sort of remind us or speak to the contributions from existing versus new customer growth.

And if there's any sort of quarter -- quarterly variation in the Pro sales penetration rate that we should be cognizant of as we work our way through 2021.

Marvin Ellison -- President and Chief Executive Officer

Steve, the results from Pro is equally balanced between new and existing customers. You know, as Joe mentioned in his prepared comments, the key for us will be just continuing to get a larger percent of the wallet of our existing customers. If we didn't attract one new customer and we were able to get a greater percent of spend from existing customers, that would solve our Pro penetration for the next, you know, two-plus years. So, that tells you that our greatest opportunity is just getting our existing customers to buy more.

But at the same time, with the loyalty program that Joe and his team launched, we're seeing incredible growth in new customers, and we're seeing also customers being very attracted to our new credit program. And that's a great sign for us to see the acquisition of new customers. Joe, I don't know if there's any other point you'll make.

Joe McFarland -- Executive Vice President, Stores

Yeah. Thanks, Marvin. The only thing I would add, you know, we started our journey in the Pro over two years ago. We've talked a lot about the basics, the price service, the right brands.

And that we're focused on that strategic phase of the, you know, Pro growth. So, you know, things like building out our Pro loyalty database, the new CRM, the redesigned store layout, and the tailored shopping experience. So, we believe that, you know, we have attracted a lot of new customers, we're growing the wallet of our existing customers. And again, I'm very pleased with the Pro team, their focus, and everything that that team has accomplished in the last two years.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you. And then just a quick follow-up, right, regarding Pro wallet share, you know, based on the CRM data that you have, right. Any sort of color or current data that you can share as it relates to the wallet share, right, or trip share of the small and medium-sized Pro customer that you're focused on?

Joe McFarland -- Executive Vice President, Stores

You know, Steve, we're not going to publicly share a lot of that detail. Obviously, we're tracking it, you know, but for competitive reasons, we typically don't share it externally. What I can tell you is that we've been pleased with the launch of loyalty and CRM. Both programs are exceeding expectations.

We had some delays, or I say pauses in the rollout due to COVID. We're now leaning into it, we are excited about the amount of data that we're collecting, and we're more excited about the feedback from our customers on how they feel about the visibility of what they're buying, how they're buying it, and just the overall connectivity. So, we look forward at some point in the future to sharing more details. But for now, I mean, we're not going to share a lot externally other than to say we feel great about the progress we're making and the trajectory of the business specifically with that customer.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you.

Joe McFarland -- Executive Vice President, Stores

Thanks.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Kate Pearlman -- Vice President of Investor Relations

Marvin Ellison -- President and Chief Executive Officer

Bill Boltz -- Executive Vice President, Merchandising

Joe McFarland -- Executive Vice President, Stores

Dave Denton -- Executive Vice President and Chief Financial Officer

Simeon Gutman -- Morgan Stanley -- Analyst

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

Michael Baker -- D.A. Davidson -- Analyst

Chris Horvers -- J.P. Morgan -- Analyst

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Scott Mushkin -- R5 Capital -- Analyst

Brian Nagel -- Oppenheimer & Co. -- Analyst

Steven Forbes -- Guggenheim Securities -- Analyst

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