Low.US (LOW.US) Q2 conference call: K-type differentiation of DIY consumption, betting on Pro and online business hedging pressure

The Zhitong Finance App learned that Low.US (LOW.US) announced mixed results for the second quarter of fiscal year 2026 on Wednesday, while lowering the full-year guidance, indicating that the continuing weakness in the US real estate market is eroding the prospects of this home improvement retailer. The company then held an earnings conference call.

According to financial reports, Lowe's second-quarter revenue increased 8.3% year-on-year to US$25.96 billion, US$150 million lower than analysts' average expectations; net profit was US$2,399 million, which was basically the same as the same period last year; and adjusted earnings per share were US$4.40, which was 0.18 US dollars higher than the average analysts' expectations.

Investors were even more disappointed by Lowe's downgraded full-year results guidance. The company currently expects total sales of $92 billion for the fiscal year 2026, lower than the analysts' average forecast of $92.94 billion, compared to $92 billion to $94 billion; expected comparable sales remained flat, with an increase of 2%; projected adjusted operating margin of 11.6%, previously estimated at 11.6% to 11.8%; and projected adjusted earnings per share of $12.25 to $12.45, which was lower than the analysts' average forecast of $12.25 to $12.75.

The following is the Chinese translation of Lowe's Q2 financial results conference call:

Company participants

Shelly Hubbard - Vice President of Investor Relations

Marvin Ellison - President, CEO and Chairman

William Boltz - Executive Vice President of Merchandise

Joseph McFarland - Executive Vice President of Stores

Brandon Sink - Executive Vice President and Chief Financial Officer

Conference Call Participating Analysts

Steven Forbes - Guggenheim Securities

Katharine McShane - Goldman Sachs

Christopher Horvers - J.P. Morgan

Simeon Gutman - Morgan Stanley

Gregory Melich - Evercore ISI

Brian Nagel - Oppenheimer & Co.

Seth Sigman - Barclays

Christopher Nardone - Bank of America Securities

Company Executives Speak

Conference Moderator:

Good morning everyone, and welcome to Lloyd's FY2026 second quarter results conference call. I'm Rob, the moderator of this meeting. I would like to remind everyone that this meeting is being recorded.

Now I'm handing the meeting to Shelly Hubbard, VP of Investor Relations.

Shelly Hubbard, VP of Investor Relations

Thanks and good morning everyone. I was in attendance today with Chairman and CEO Marvin Ellison; Bill Boltz, Executive Vice President of Merchandise; Joe McFarland, Executive Vice President of Stores; and Brandon Sink, Executive Vice President and Chief Financial Officer.

I would like to remind everyone that the statement on forward-looking statements was included in this morning's press release, which is available on the Lloyd's Investor Relations website. In this conference call, we'll be posting forward-looking comments, including our expectations for the 2026 fiscal year. Actual results may differ materially from expressed or implied expectations due to various risks, uncertainties, and significant factors, including those discussed in the Risk Factors, Management Discussion and Analysis (MD&A), and other sections of our Form 10-K Annual Report and other documents submitted to the U.S. Securities and Exchange Commission.

Additionally, we'll be discussing certain non-GAAP financial measures. The reconciliation schedule for these metrics with US GAAP can be found in the quarterly earnings section of our investor relations website.

Now I'll leave the meeting to Marvin.

President, CEO and Chairman Marvin Ellison

Thanks Shelly. Good morning everyone. In the second quarter, we achieved sales of $26 billion, an increase of 0.2% in comparable sales. Despite the intensification of the competitive landscape — competitors used tariff rebates to cut prices later in the quarter, we are still encouraged by the continued momentum of the “Total Home” strategy. Strong performance in the Professional Client Business (Pro), online business, and home services business helped offset ongoing macro pressure, weak DIY discretionary spending, and unfavorable weather over Memorial Day weekend. I am pleased with the entire team's ability to effectively manage the business and remain agile in this environment.

Our team performed well this quarter, providing highly competitive value, good inventory levels, and excellent customer service in stores and digital channels, while maintaining strict expense management discipline. This operational discipline allows us to absorb rising costs of fuel, transportation, energy, and other inputs (even without considering the impact of tariff rebates) while achieving better-than-expected profit transmission. Later, Bill will detail category performance and customer responses to our product portfolio, value, and seasonal performance.

Starting with the Pro business, we grew again this quarter. Pro customers continue to respond positively to our differentiated product portfolio, strong inventory levels, exclusive service levels, fulfillment capabilities, and tailored digital experiences. Joe will later provide more perspectives on the initiatives driving this momentum. Furthermore, we are pleased with the progress of the integration of Foundation Building Materials (FBM) and Artisan Design Group (ADG). Our team continues to work closely to share best practices and build solutions for our customers. We believe these acquisitions will allow us to grow together with large Pro customers over the long term while receiving more planned Pro expenses.

Switch to online business. Online sales increased 15.7% this quarter, reflecting the continued return on our investment in digital experiences. These investments include customized experiences on Lowes.com and mobile apps, expanded visualization capabilities, and continued growth in the online marketplace. Improved user experiences and competitive value from loyalty programs are driving higher conversion rates and enabling us to respond to dynamic customer preferences. Our online AI assistant, MyLow, continues to add value to digital customers, helping them answer questions about home improvement projects, product specifications, and solutions.

Since launch, Mylow (which also supports our employee AI assistant app) has supported over 25 million questions from customers and employees, showing the strong adoption rate and resonance of the tool. In fact, online customers using Mylow are three times more likely to convert than customers who don't use the tool, proving that a well-designed AI assistant experience can be a clear driver for purchasing decisions.

Next up is the home service business. We are growing again as Do-It-For-Me customers continue to use the simpler and more convenient experiences we've created, particularly in replacement projects. Improvements have increased conversion rates, cycle times, and customer satisfaction, giving us confidence that homeowners will get more share as they prepare for larger projects.

Now on to the macro environment. Although the long-term fundamentals underpinning home improvement are still stable, the short-term situation is still full of variables. Higher fuel prices, combined with wider economic uncertainty, have affected household budgets. Customers continue to tell us they are cautious when it comes to spending and prioritize when and where to invest in their homes. As a result, DIY discretionary demand is still under pressure. Despite this, our Pro customers and the “do it for me” business have shown solid performance, reflecting the success of the “Total Home” strategy.

Given Lowe's customer structure, the speed and health of DIY demand remains an important driver of our overall performance. While these external conditions remain uncertain, we remain committed to being the workplace of choice for employees, providing customers with a quality shopping experience, and advancing strategic investments. This strategy has enabled us to achieve 5 consecutive quarters of comparable positive sales growth, demonstrating the resilience of our strategy in different economic environments.

Equally important, our Continuous Productivity Improvement Program (PPI) continues to advance. This strict focus on cost control and resource optimization allows us to continue to invest in strategic priorities, enabling the company to outperform the market as market conditions improve.

Before I finish, I'd like to thank our frontline employees for everything they do for our customers every day. Spending time to visit the store every week is still one of the most meaningful parts of my job. Every visit makes me feel the enthusiasm, professionalism, and dedication that the employees bring to Lowe's. Their insight continues to help us improve the customer experience, and their dedication remains one of our greatest competitive strengths.

Now I'll leave the meeting to Bill.

William Boltz, Executive Vice President of Merchandise

Thanks Marvin and good morning everyone. We achieved comparable positive sales growth in 9 of our 13 commodity divisions this quarter, demonstrating continued strong execution, commitment to value, and discipline in managing in today's challenging environment. In terms of construction products, we have achieved extensive growth, and we have achieved comparable sales of rough plumbing, doors and windows, electrical, and timber. These results reflect our strategic investment in the Pro business and the continued strength of our repair and maintenance programs.

In terms of rough plumbing, we have promoted sales of HVAC, water heaters, and air circulation products, supported by trusted brands such as A.O. Smith and SharkBite, and their solutions make installation quick and easy. We have also achieved comparable sales in timber, particularly anticorrosive wood, wall panels, and composite flooring, with leading brands such as Trex, TimberTech, and Deckorators. On the electrical side, we have seen growth in cabling, landscape lighting, and fire safety. This quarter, we completed the full distribution of Cree in the light bulb category, introducing this innovative brand exclusively into the Lloyd's Home Improvement Center channel. One of the star products is Cree's new 6-way light bulb, which allows customers to easily adjust the color temperature on the bulb or on a wall switch.

Moving to home decor, we excelled in interior categories, including comparable sales of appliances, paint, and kitchen and bathroom. Starting with home appliances, we have achieved a seventh consecutive quarter of comparable sales growth, continuing to strengthen our leadership position as the preferred destination for planned purchases and emergency replacement needs through best-in-class omnichannel experiences, fast and reliable fulfillment, and the broadest portfolio of leading brands including LG, GE, Bosch, and Whirlpool.

We are also bringing consumers the latest innovative products to make life easier, such as the new GE Profile refrigerator with kitchen assistant function, which features the first built-in bar code scanning technology. This refrigerator can scan everyday groceries and automatically add them to shared digital shopping lists, then sync to Instacart for fast delivery. Since the speed of appliance delivery is critical during an emergency, Lowe's can achieve next-day delivery and the widest selection of large appliances for installation in almost any US zip code area. This is indeed the fastest contract fulfillment service in the home improvement industry.

In addition to home appliances, we are seeing demand for kitchen and bathroom renovation and refresh projects, covering categories such as bathroom cabinets, bathtubs, and toilets. Coatings remain a bright spot, with growth in interior coatings, accessories, and bottled coatings.

Now moving to the hardwire category, we have achieved comparable sales growth in lawn and garden, tools and hardware. The spring seasonal category performed well in the first half of the year, and customers responded positively to the value of fresh products, hard landscape and landscape products. Our attractive credit offers support to the demand for outdoor power equipment, and our broad portfolio of key brands such as John Deere, Toro, Ariens, and eGO remains an important differentiator.

Tools and hardware also performed well, particularly in terms of metal storage and fasteners. We have one of the strongest brand lineups in the home improvement industry, providing customers with trustworthy national brands and our own brands. CRAFTSMAN continues to provide value and innovation, including limited-edition workbenches designed to celebrate America's 250th anniversary. Customers responded to Kobalt's extensive color choices in metal storage to help them personalize their workspaces.

Looking ahead, although DIY discretionary spending is still under pressure, and the K-type economy continues to affect consumer spending, we are encouraged by plans to drive demand growth in the second half of the year. These plans serve both price-sensitive and high-end customers. For example, we've expanded our portfolio of high-end appliances on LowES.com, providing customers with more choices at a wider range of price points and enabling us to unlock additional sales in our largest categories. We are introducing the same approach to the patio category to expand our portfolio of high-end outdoor furniture online and in the year-round market.

By providing luxury design and innovation, these expanded combinations enable us to better capture demand from more customers and serve customers in a wide price range. We are also continuing to strengthen our brand portfolio and maintain strong inventory levels in key purpose categories. We're expanding our selection of power tools, hand tools, and storage, adding hundreds of new products while attracting DIY and Pro customers, including more than 150 new DEWALT products, the number one brand preferred by Pro customers. On the part of Bosch and Kobalt, we're adding new 4-volt lifestyle products to help our DIY customers complete household tasks more efficiently.

To help customers carry out landscape projects in the fall, we use our outdoor advantage to provide competitive value and a premium product portfolio to support lawn restoration, fall planting, and seasonal clean-up projects, particularly in markets affected by the drought this summer. We're also excited to welcome Traeger to our already strong grill product line. As one of the leading brands in the field of outdoor grills, Traeger will begin selling at select stores and online across the country later this year, further strengthening our portfolio of grills, pellet fuels, and accessories to provide customers with more reasons to choose Lowe's for outdoor projects. As these customers engage with Lowe's, we'll continue to build on the momentum of the MyLowe's Rewards loyalty program. We have over 30 million members who shop more frequently and spend more on a single time than non-members. We'll continue to reward this loyalty with exclusive member offers, special events, and enhanced same-day fulfillment options to make choosing Lowe's more valuable.

Before I finish, let me talk about another important driver behind our performance — the Continuous Productivity Improvement Program (PPI). Our team continues to make meaningful progress in supporting the “Total Home” strategy by streamlining processes, improving execution, and helping employees spend more time serving customers. One example is the promotion of self-watering plant stands in over 700 stores. The solution eliminated routine watering in garden centers, reduced plant loss, and freed up our MST team members to focus on shelf replenishment and service areas.

Additionally, we're investing in new digital tools for the MST team to help them prioritize the most impactful areas, increase productivity per square foot of sales, and create a better shopping experience for customers. As part of our space productivity plan, we are progressing the planned expansion of the pet and workwear category to all stores by the end of the year. These investments have made our stores easier to shop and operate.

In summary, we continue to focus on our core strengths: bringing customers attractive value, innovative products and brands, and an excellent shopping experience. I would like to thank our procurement team, MST team members, and supplier partners for their collaboration, commitment, hard work, and outstanding execution. Their work is invaluable in providing the experiences that make Lowe's unique.

Now I'll leave the meeting to Joe.

Joseph McFarland, Executive Vice President of Stores

Thanks Bill and good morning everyone. First, I'd like to thank our frontline employees for their hard work during the critical spring and summer sales season. During one of the busiest periods of the year for home improvement, they've always focused on one thing: making it easier for customers to complete projects. Their dedication continues to have a meaningful impact in our stores.

Our same-day fulfillment service has maintained steady momentum this quarter, and more customers are using our delivery options to advance their projects. By providing customers with another quick and easy way to access our broad product portfolio, same-day fulfillment is becoming an increasingly important part of the Lowe's omnichannel experience.

Another way we provide a better experience for our customers is through continued employee adoption of Mylow Companion. As Marvin mentioned, this AI-driven resource is being used extensively by our team. More and more employees are using the tool every day because it gives them more confidence to help customers across all categories, answer questions faster, and spend more time on what matters most — serving customers.

Now back to our second quarter performance. Starting with the Pro business, we grew again this quarter, driven by small to medium Pro customers. We know Pro customers value three things most: time, availability, and value. This is the focus of our investment. Through advances in technology and initiatives, we are providing Pro customers with a more seamless shopping experience that meets their work and business needs. Additionally, our digital Pro business tools and MyLowe's Pro Rewards loyalty program continue to enhance the value we provide to Pro customers. These expanded tools enable Pro customers to plan, quote, manage, and grow their business within the Lowe's platform.

In our recent survey, our core Pro customers said their backlog of orders has remained stable. However, they saw homeowners being more cautious when it came to spending. This has led to projects continuing to be smaller, focusing more on repair and maintenance needs rather than major refurbishments.

Move to the productivity side. We are pleased with the progress of our PPI plan for the second quarter. Our continuous productivity improvements have paid off significantly, successfully transitioning all store and field employees to a new centralized communication portal, integrating multiple previously independent channels into one efficient platform. This new tool helps reduce complexity, improve clarity and prioritization, and bring real wage productivity gains.

Looking ahead to the second half of the year, we will continue to focus on productivity and continue to promote and adopt Freight Flow 3.0 and Full Shelf Replenishment. The two projects aim to improve inventory levels and inventory accuracy by identifying and prioritizing the highest inventory requirements and streamlining the product flow process from truck to shelf. These efforts not only drive labor productivity and customer service, but also ensure that customers find the products they need when and where they need them.

Finally, I would like to thank all of our employees for their professionalism, care, and dedication every day. Their ability to embrace new technology while staying focused on serving customers is what makes Lowe's unique. I am deeply grateful for everything they do for their customers, each other, and the communities they serve.

Now let Brandon speak up.

Brandon Sink, Executive Vice President and Chief Financial Officer

Thanks Joe and good morning everyone. In the second quarter, we achieved sales growth and significant free cash flow, reflecting the resilience and flexibility of our operating model — continued productivity improvements and the company-wide focus on execution and cost management enabled us to effectively handle the quarter and meet profit expectations.

The first is the second-quarter results. We achieved GAAP diluted earnings of $4.27 per share. This quarter, we confirmed $96 million in pre-tax non-GAAP charges from amortization of intangible assets associated with the acquisition. Excluding these effects, adjusted diluted earnings per share were $4.40. GAAP diluted earnings per share and adjusted diluted earnings per share include earnings of $0.11 from IEEPA duty rebates. Even after excluding this earnings, adjusted diluted earnings per share still exceeded expectations.

From now on, my reviews will include some non-GAAP comparisons and exclude the impact of non-GAAP fees where applicable. Second-quarter sales were $26 billion, up 8.3% from the second quarter of last year. Comparable sales increased by 0.2%, with a 0.4% decrease in May, 1.7% increase in June, and 1.2% decline in July. Note that seasonal time adjustments for the July 4 holiday generated a comparable sales benefit of about 75 basis points for the June fiscal month, which was offset by a similar drag in the July fiscal month. While we continued to make progress in our Pro, online, and home services businesses this quarter, we are still dealing with a challenging home improvement background and weak DIY demand.

The average comparable customer unit price increased by 2.3%, reflecting moderate price inflation and the continued strength of the Pro business; comparable transaction volume fell 2.1%, affected by pressure on weather-sensitive outdoor and seasonal categories. The gross margin for the second quarter was 33%, down 80 basis points from adjusted gross margin for the same period last year, including the dilution effect of FBM and ADG acquisitions, which was partially offset by favorable credit revenue. The gross margin also includes approximately $80 million (or 30 basis points) of tariff rebates, which were largely offset by rising fuel and transportation costs during the quarter.

Sales and administrative expenses (SG&A) accounted for 17.2% of sales, improving SG&A leverage by 14 basis points compared to the same period last year, which is in line with expectations. The adjusted operating margin was 14%, down 62 basis points from the adjusted operating margin for the same period last year.

As Marvin, Bill, and Joe previously mentioned, our PPI plan continues to achieve significant results this quarter, and our strict cost management approach allows us to effectively manage profitability even when sales fall short of expectations. The effective tax rate is 24.4%. Inventory at the end of the second quarter was US$17.7 billion, an increase of approximately US$1.4 billion over the same period last year. The growth was mainly affected by the normalization of tariff-related time disruptions in the same period last year, investment to support inventory levels, and FBM acquisitions of about 500 million US dollars.

Shift to capital allocation. In the second quarter, we generated $3.1 billion in free cash flow and total capital expenditure of $542 million, reflecting our continued commitment to investing in key initiatives of the “Complete Home” strategy. We paid $673 million in dividends, $1.20 per share, strengthening our commitment to returning capital to shareholders and our position as a dividend aristocrat (increasing dividends for over 50 years). At the end of the quarter, the adjusted debt to EBITDA ratio was 3.0 times, and we are moving towards our leverage target of 2.75 times, which is expected to be achieved by mid-2027. At the end of the second quarter, we held $3.2 billion in cash and cash equivalents, and the return on invested capital (ROIC) was 25.5%.

Today, we're updating our full-year financial outlook for FY2026 to reflect the first half results and current consumer demand and housing trends. Across the retail home improvement industry, macroeconomic pressures such as interest rates, inflation, and gasoline prices continue to affect DIY demand. Although high mortgage interest rates continue to curb new home construction activity and put pressure on large specialty contractors and home builders, we remain committed to advancing investment in the “Complete Home” strategy and growth platforms through FBM and ADG construction.

We continue to believe that these investments place us in a good position to seize opportunities in home improvement and home construction in the medium to long term. At the same time, we are focused on taking action to enhance performance in any environment. The second-half sales-driving initiatives outlined by Bill and Joe reflect our commitment to invest in future growth and deliver compelling value to Pro and DIY customers. We are also committed to driving productivity, strictly managing expenses, and implementing consolidation actions, which we anticipate will strengthen our business as the market recovers.

Based on this, we updated our full-year outlook to the lower limit of the previous guidance range. We expect sales of approximately $92 billion, which is roughly the same in comparable sales; an adjusted operating margin of approximately 11.6%; and full-year adjusted diluted earnings per share of approximately $12.25. We continue to anticipate capital expenditure of no more than $2.5 billion. The outlook includes customs benefits confirmed in the second quarter, but does not include any potential additional revenue for the second half of the year. We will provide updates on future earnings calls on future duty refunds received and how to use them.

The outlook also reflects the continuing pressure faced by FBM and ADG in the residential construction terminal market, where continued weakness in new home construction is putting greater short-term pressure on demand. For the third quarter, we expect comparable sales to be in line with the full-year outlook, with adjusted diluted earnings per share falling approximately 7% compared to the same period last year.

Finally, we remain focused on serving our customers, driving productivity, and continuing to invest in building a stronger business to achieve long-term growth and shareholder value.

Now we're ready to answer your questions.

Q&A session

Conference Moderator:

The first question came from Steven Forbes of Guggenheim Securities.

Steven Forbes of Guggenheim Securities

Marvin, you mentioned the competitive pressure at the end of the season. I'd like you to elaborate on whether these pressures are present in specific regions, categories, or channels, given the comparable monthly sales data for July? Also can you provide more information on how you can incorporate passive or active plans to deal with these pressures in the second half of the year?

President, CEO and Chairman Marvin Ellison

Steve, Thanks for the question. As I said in my statement, we observed an increase in competitive pressure in July. Competitors are very aggressive in terms of price, focusing mainly on seasonal categories. In other words, grills, patios, and fresh products may have brought them sales volume and sales performance, but they are clearly not very profitable. If you look at our July results, you can see this impact. Nonetheless, our goal is to honestly share what we're seeing in the competitive landscape, while also clearly explaining what we're doing and how we can drive the business forward in the second quarter and second half of the year.

Let Bill share some of the work we're doing to keep our focus on delivering value, innovation, and leveraging the differentiating benefits of loyalty platforms and other initiatives.

William Boltz, Executive Vice President of Merchandise

Yes, Marvin, thanks. Steve, as we look forward to the second half of the year, we remain highly focused. First, the focus of the third quarter was Labor Day to ensure that we were able to successfully host Labor Day promotions. We are also promoting membership activities for MyLowe's Rewards members. We need to continue to maintain momentum in businesses that have already been effective, especially for small to medium Pro customers, such as rough plumbing, doors and windows, electricity, paint, wood, etc., which I mentioned earlier. We have some great plans for Labor Day, and as I said, the focus is on fall planting and lawn restoration. We've set up our store for Halloween and will quickly transition to Christmas decorations later in the quarter.

We have lots of exciting new products coming soon, involving innovations from Kobalt, CRAFTSMAN, DEWALT. I shared in my statement that we are confident in the home appliance category and have been growing for seven consecutive quarters, but we really want to seize the opportunity in the field of high-end appliances and focus on brands such as Bosch, KitchenAid, LG SIGNATURE, Cafe, ZLINE, and Forno, all to meet the needs of customers to buy higher quality products. In the flooring category, we will complete the full delivery of Daltile, and we are very excited about it. We saw progress at the beginning of the first half of the year, but the hard surface delivery will be completed in the third quarter.

Then I mentioned grills. Introducing Traeger to the grill product line was a big plus for us, and really added to the brands we already own such as Char-Broil, Pit Boss, Weber, etc. Now the Traeger brand has given us tremendous credibility in this field. We're excited about that. So we're full of energy. Also, as we get out of the fourth quarter to prepare for spring, there are many things to move forward, but we have a lot of plans and things to focus on online and in stores.

President, CEO and Chairman Marvin Ellison

Steve, one last thing to add. We are committed to operational discipline. As Brandon and I mentioned, we are coping with rising fuel costs, transportation, and other input costs. But even so, we remain focused on achieving strong profit transmission and are committed to profitability and efficiency. This is where we are satisfied, and it will also be our hallmark as a management team, no matter how the macro environment changes.

Steven Forbes of Guggenheim Securities

Maybe Brandon could quickly follow up. How are FBM and ADG performing this quarter? Does the reduction of the full-year guidance to the lower limit of the initial guidance include a reduction in the planned organic growth of these two businesses?

Brandon Sink, Executive Vice President and Chief Financial Officer

Yes. Steve, with regard to FBM and ADG, we do see that high interest rates have a more significant impact on housing construction, which is curbing new housing construction and recent housing demand. FBM and ADG are addressing these challenges. It is important to note that ADG is fully exposed to the housing construction market, and FBM is about 45% exposed to residential construction (including single-family and multi-family homes). We all know that the industry has been at a low point for many years. As for FBM's business, we continue to be satisfied with 55 percent of the commercial business.

But as I mentioned, the outlook assumes that pressure on housing construction continues in the second half of the year, which is affecting FBM and ADG's revenue and profits. The team continues to drive meaningful integration benefits. At the same time, we are actively seeking additional acquisition opportunities and look forward to becoming a larger enterprise after the market recovers. Our long-term goal is to take advantage of the demand opportunities for 14 million housing units over the next ten years.

Conference Moderator:

Next question comes from Goldman Sachs's Kate McShane.

Goldman Sachs Katharine McShane

I think your comment about the intensification of the promotional environment and its impact on comparable sales in July was one of the biggest effects we've seen in quite some time. Can you comment on the promotions from the third quarter to now? How do you plan to manage subsequent promotions? Do you think this will be a major change to the new normal?

President, CEO and Chairman Marvin Ellison

Kate, I'm Marvin. We don't think this is the new normal. We think this is temporary. We think this is the result of competitors seeking different ways to use these funds to drive revenue after receiving a tariff refund. We don't think this will change radically. Historically, as you know, the home improvement industry has generally been a rational and predictable promotional and pricing environment. We believe that situation will return to that state of affairs in the second half of the year.

Frankly speaking, we are going to enter the market with great self-discipline. One reason we have a DIY loyalty program is that we can provide differentiated value to our loyal customers, and we can do it in a consistent, profit-driven, and consistent manner, which is something we continue to do. However, we have some really exciting plans for the second half of the year to stay competitive. Please ask Bill to introduce some of the programs we are committed to driving and creating value for our customers. These plans will make our customers their first choice.

William Boltz, Executive Vice President of Merchandise

Yes, thanks Marvin. Kate, I shared some of these examples in the first question, but we'll finish shipping pets and work clothes in the second half of the year. We're excited about how these categories are performing. If you remember, this is an opportunity around our ongoing productivity program, which is centered around making stores and online spaces work more efficiently. We're excited about that. We have a large number of innovative products. I mentioned that more than 150 new tools will be launched in the second half of the year, covering multiple brands, which will help drive our gift sales period. We have a lot of new products in our holiday arrangements this year, and we know these will drive store traffic. There are also some new character decorations to put in the front yard, and we're excited about that too. On the Pro side, we have invested a lot of energy in businesses such as doors and windows, which have performed well for many consecutive quarters.

We have been growing for six consecutive quarters in crude plumbing, and categories such as paint, electricity, doors and windows have been growing for four to five consecutive quarters. We will continue to build on this momentum. As we mentioned in the first question, Labor Day is of utmost importance to us, and everything revolves around serving customers who want to do fall planting, transition to fall, put pumpkins on the porch, and decorate their homes for fall.

Brandon Sink, Executive Vice President and Chief Financial Officer

Kate, let me add one more thing. We've observed an upward trend in conversion rates during promotions as customers seek and respond to value. We've recently invested in upgrading our back-office promotion tools, which are and continue to better inform our promotional strategies. But as Marvin and Bill both mentioned, we'll take full advantage of membership offers, in-store activities, and enhance our ability to fulfill contracts, and I believe our guidance for the second half of the year already reflects all of these developments in terms of comparable sales, traffic, and profit margins.

Conference Moderator:

The next question comes from J.P. Morgan's Christopher Horvers.

Christopher Horvers, J.P. Morgan

My first question is about geographic regions. We've heard from many home-related retailers that the coastal housing market is performing strongly, while the southern region is under pressure or underperformance, and you've certainly seen this in housing prices and relative housing price performance. Can you talk about the performance in different regions and how do you think this affects your business compared to your competition?

President, CEO and Chairman Marvin Ellison

Chris, I'm Marvin. As you can imagine, we're watching this every week. Frankly speaking, there are no substantial differences between regions other than weather effects. We have experienced dry conditions in some parts of the US, and some extreme weather in the Midwest. But as you look at all the other housing-related factors, we closely track, but judging by its importance, weather is still the biggest driver of regional performance.

Christopher Horvers, J.P. Morgan

Understood. It's a great transition. Obviously, Memorial Day weekend was tough for everyone, and it rained a lot. But considering last year, I think you did benefit from the “bathtub effect” from the first quarter to the second quarter, which was evident in July. Can you talk about year-over-year weather developments? Regarding July and the year-on-year (even after adjustments), there was a significant improvement on a two-year year-on-year basis. I'd like to try to incorporate weather factors into your views on July and predictions for future business.

Brandon Sink, Executive Vice President and Chief Financial Officer

Chris, I'm Brandon. As Marvin said, the main weather impact was during the Memorial Day weekend. It was one of our biggest DIY activities of the year and had a drag on our overall quarterly results. Even if you look at the combination of the two years, last year's Memorial Day for the Fallen Soldiers was very difficult. You mentioned some two-year trends. I think the two-year trend in May was negative because of this dynamic, but we are actually encouraged. I mentioned that holidays have a 75 basis point seasonally adjusted effect on monthly results. However, if you look at the pure two-year trend, it actually accelerated throughout the quarter from May to June and July. So from a two-year perspective, we ended July with a positive 3.4%. Therefore, we are confident that after excluding weather factors, the business is developing in a good direction and entering the third quarter.

Conference Moderator:

The next question comes from Morgan Stanley's Simeon Gutman.

Morgan Stanley Simeon Gutman

My first question is about the outlook for the second half of the year. Can you elaborate on what has changed? Did your initial outlook assume an upward trend in the second half of the year and that upward trend no longer exists? Or has the consumer situation worsened? Or a combination of both?

Brandon Sink, Executive Vice President and Chief Financial Officer

Simeon, I'm Brandon. Looking ahead, the results of the first half of the year, the situation in the second half of the year, current DIY trends, and the pressure on housing construction are all the basis for our predictions for the second half of the year. We also continue to expect the momentum and strength of the “Complete Home” strategy to continue. Therefore, the areas we emphasized had strengths in the first half of the year — Pro, online, loyalty, home services — we expect them to continue.

But if I take it apart, our expectations for the third quarter were flat, which reflects a very similar demand environment to the second quarter. As a result, it is basically flat, and the situation is similar. By the fourth quarter, there was implied negative growth. In fact, this is similar to what was expected in the third quarter in terms of business mix and momentum. The only major difference is the winter storm we experienced last January, which will drag us around 50 basis points in the fourth quarter of this year. Overall, the outlook for the second half of the year is based on expectations of normal weather trends, and we have not included any anticipated events. So the fourth quarter was simply about our base effect for the same period last year.

President, CEO and Chairman Marvin Ellison

Simeon, I'll add one last point. We don't expect additional macro pressure or other overlapping factors other than the fourth quarter weather factors Brandon mentioned. We're just trying to be cautious; based on our performance in the first half of the year, we assume that the second half of the year will be very similar to the first half. We would be very happy if the macro environment brings us any good wind, or if we can speed up our performance on some of the measures Bill has outlined, but we think continuing our performance in the first half of the year into the second half is a matter of self-discipline.

Morgan Stanley Simeon Gutman

OK. My follow-up question then is, does anything change when you consider allocating capital in different aspects of the business (DIY and Pro)? Is this stagnant housing market leaning you in a certain direction? Would you rather invest in places where sales are currently available, or push harder into the Pro field (you currently have less exposure)?

President, CEO and Chairman Marvin Ellison

I'll answer this. From a philosophical point of view, we have a good balance sheet, so we will always invest in the future. We don't operate on a quarterly basis, nor do we operate from a short-term perspective. We know that in the case of John Burns Real Estate Consultants, they estimate that the home improvement sector has a backlog of between $20 billion and $50 billion in demand for deferred projects. Therefore, we know that the current environment is cyclical; if there is a downside, there is an upward trend. This is the business logic of investing in ADG and FBM. The current environment for single- and multi-family housing is very difficult, but it won't always be the case.

We know that at some point this country will have to build houses. When that comes, we're in a better position today than ever before, and the future will be better than at any time in the company's history. We will allocate capital based on where we believe will provide the best return to our shareholders. We are very satisfied with having one of the best return on invested capital in the retail industry, and we will maintain this focus. We believe this will benefit our shareholders in the long term.

Conference Moderator:

The next question comes from Greg Melich of Evercore ISI.

Evercore ISI Gregory Melich

I have two questions. First, let's talk about tariffs. You mentioned there might be more. Can you help frame the expected scale compared to what you've seen this quarter? My follow-up questions are about comparable sales trends.

Brandon Sink, Executive Vice President and Chief Financial Officer

Greg, I'm Brandon. As we emphasized, customs benefits of $80 million or $0.11 per share were confirmed in the second quarter, which were largely offset by fuel and transportation pressures. We are moving forward with the application process for additional tax refunds. Due to time uncertainties, our outlook for the second half of the year did not include any estimates. I'd like to say that our second-quarter tax refund amount was only a small portion of the total IEEPA tariffs we paid over the past 18 months. We are pursuing all amounts we are eligible to collect and anticipate that any further proceeds will be reinvested into customer-facing activities to continue strengthening our value proposition.

As Marvin mentioned earlier, we will continue to monitor competitive developments and focus on gaining market share in the second half of the year while maintaining self-regulatory profit margins. We'll provide more information on future earnings calls in the second half of the year about tariff rebates and plans for how we can use these benefits.

Evercore ISI Gregory Melich

Very good. My follow-up question was about online sales growth. 16%, which is a pretty good number. I'd like to take a closer look at what are the drivers? Is it a combination of speed and category? What are the specific initiatives? If we look at a 2% drop in comparable trading volume, is Pro trading volume up and DIY down that much? Or what do you think about the relationship between online and overall passenger flow?

President, CEO and Chairman Marvin Ellison

Greg, I'll answer online questions, and Brandon will respond to trading volume questions. Online performance is the result of a combination of factors. But first, we're very pleased that online comparable sales have increased more than 15% for two consecutive quarters. We've seen growth in both Pro and DIY online, and both traffic and conversion rates have increased. Based on the overall improvement of the digital experience, the conversion rate performed well. We have provided customers with a customized experience, expanded visualization capabilities, and a very high adoption rate of new fulfillment options. We're happy that customers have responded positively to the free shipping and same-day delivery options introduced earlier this year, which has really boosted online business.

Also, as I mentioned in my statement, our digital assistant Mylow has become a very useful addition to online businesses. Since launch, we've received around 25 million questions. Among them, customers who use Mylow when shopping online have a conversion rate of three times that of unused customers. All of these factors played an important role. Our marketplace platform is still in its early stages, and we're excited about what we've learned. The advantage of marketplace platforms is that they provide customers with good pricing options, whether value or high-end. As a result, we've seen very good adoption rates. As Bill talks about the K-economy, online is a great place to observe this phenomenon in real time because we see both high-end customers and value-oriented customers shopping. We believe this is just the beginning; we have many plans to invest online, which we believe will continue to be a driving force for our business.

Now let's ask Brandon to talk about transaction volume.

Brandon Sink, Executive Vice President and Chief Financial Officer

Greg, second question about the drop in trading volume. This mainly focuses on the DIY aspect. The contraction mainly occurred in weather-affected outdoor and seasonal categories under pressure in trade, particularly in the southern region, around Memorial Day activities. This is the main driver of stress.

Conference Moderator:

The next question comes from Oppenheimer's Brian Nagel.

Oppenheimer Brian Nagel

We've talked a lot about duty rebates and some pricing actions, but I'd like to explore this further. My question is, you mentioned a competitor. Can you provide more details? Is it a smaller competitor or a bigger competitor? Also, based on Lowe's comments, my understanding is that you guys chose not to match these pricing actions and therefore at least temporarily lost market share? Is that right? If these pricing actions continue, will you stick to this strategy?

President, CEO and Chairman Marvin Ellison

Brian, I'm Marvin. The most honest answer is the one I've said before; we think this is temporary. We believe several competitors have received tax rebates and decided to take pricing actions to either (a) drive sales, or (b) clean up seasonal inventory. This is what we saw. This is the competitive landscape we're seeing. We chose not to match certain promotions at the time because they weren't in our financial plans, and we didn't think it would be prudent to match them financially. It's actually quite easy to determine who did what. You only need to look at the changes in their tariff rebates compared to last year's gross margin, and you can roughly determine who did what.

For us, we are very satisfied that we will continue to be self-disciplined. That's why we're excited to handle the cost pressures we face like everyone else, while using PPI programs to ensure we take the right planning steps to drive profitability and create good profit transmission. We will remain competitive, but we will compete rationally. Again, we think this is temporary. We don't expect this to happen in the second half of the year because we don't think competitors will get additional tariff rebates in the second half of the year to enable them to be so aggressive in terms of price. This is a phenomenon at a specific point in time that affected July, and we're just honestly sharing what we've seen in the competitive landscape.

Oppenheimer Brian Nagel

Very helpful, Marvin. My follow-up question is a bit more general. Looking back, it is clear that there are many changing factors. Tariffs are one of them, weather, etc. But if you look at Lowe's demand dynamics, are consumers improving, worsening, or remaining the same? How would you describe the potential demand dynamic?

President, CEO and Chairman Marvin Ellison

Let me share an opinion and then let Brandon provide some financial analysis. Brian, we think consumers have largely remained the same. As we have said many times, we are very satisfied with the overall health of our consumers. Our core consumers are middle-income homeowners. They have strong personal balance sheets, real disposable income is growing, homes are aging, and net asset value is increasing. But all of this presupposes that consumers are becoming more cautious. It's not just a matter of fuel prices — fuel prices account for only about 2% of their annual spending — but a combination of fuel prices, geopolitical events, and other macro-uncertainties. When all of these factors are combined, people just become wary about what they can spend at their disposal.

As I said before, we think this is a cyclical phenomenon, a point-in-time phenomenon. The good news is that we've achieved comparable sales for five consecutive quarters, with a DIY penetration rate of over 60%. As a result, we are very pleased with the performance of managing our business in arguably the most difficult DIY environment. We know that once we get any kind of macro tailwind, our business will perform in proportion to the downwind because we got it right in many ways. So we don't think consumers are getting worse. We think the basics have stayed the same, but this is a healthy consumer who has become overly cautious based on all the factors I've outlined.

Brandon Sink, Executive Vice President and Chief Financial Officer

The only thing I want to add, Brian, is that we look at consumers, and they do continue to have strong balance sheets and steady employment growth. But as Marvin suggests, affordability remains a major concern, involving interest rates, housing prices, insurance, and taxes. This actually translates into prioritizing repair and maintenance spending and the types of projects our customers are working on, and a continuing trend of prudence around large discretionary projects. We've been talking about this for the past few years. This was already evident in the first half of the year, and our outlook essentially reflects more of the same situation in the second half of the year; this is reflected in our expectations.

Conference Moderator:

The next question comes from Barclays Seth Sigman.

Barclays Seth Sigman

I want to focus on gross profit margins. Excluding the impact of tariff rebates and acquisitions this quarter, Lowe's basic gross margin declined only slightly in the face of significant external cost pressure. Can you talk about how these cost pressures are impacting the business and how are you managing them? Also, Brandon, can you provide more information on the gross margin impact included in the third-quarter earnings per share guidance?

Brandon Sink, Executive Vice President and Chief Financial Officer

Yes, Seth. Regarding gross profit margin for the second quarter, we pointed out the main factors. Tariff rebates are a new factor. We also mentioned the benefits of credit earnings, which mainly come from loss preparation. But if we take a step back and look at the quarterly changes in overall operating margins, there are some unique projects in the second half of the year. We talked about tariff rebates for the second quarter, and the outlook for the second half of the year did not include any relevant expectations. The real big project is the pressure of fuel and transportation. I mentioned that it largely offset the benefits of tariff rebates in the second quarter. We now expect this pressure to continue in the second half of the year; in fact, we expect the pressure to increase as the new cost layers accumulated in the first half of the year are reflected in the second half of the year. This is the main new development reflected in the second half of the year, and is a new factor compared to the outlook provided at the beginning of the year.

Barclays Seth Sigman

Ok, this helps a lot. Then a related follow-up question. It sounds like you're still going to get a lot of tax refunds in the second half of the year. Do you guys think all of this will be reinvested? Or maybe there's room for improvement in the guidance you've just updated because you've embedded these headwinds in your outlook?

Brandon Sink, Executive Vice President and Chief Financial Officer

Seth, let me emphasize that one more time. We'll provide more information as the conference call progresses in the second half of this year and the third and fourth quarters. We are committed to reviewing these opportunities and reinvesting in customer-facing activities to reinforce our value proposition. This is the point I mentioned before. We'll stick to that and provide more information in the second half of the year.

President, CEO and Chairman Marvin Ellison

Rob, we still have time to answer that last question.

Conference Moderator:

The final question came from Chris Nardone of Bank of America Securities.

Bank of America Securities Christopher Nardone

I have a short term problem and a long term question. First, there are short-term issues; we've talked about this a bit, but you've given guidance for the third quarter. Other than FBM's base effect, I would like to know if there were any other factors driving the implicit improvement in profit margins in the fourth quarter, particularly the month-on-month change in supply chain cost assumptions?

Brandon Sink, Executive Vice President and Chief Financial Officer

No. Chris, I just mentioned that supply chain fuel transportation pressure is included in the forecast for the second half of the year. The only improvement, if you look at operating margins, is that we are comparing the fourth quarter discretionary bonus that was paid last year against the fourth quarter discretionary bonus paid last year. This is probably the only difference in Q3 and Q4 dynamics.

Bank of America Securities Christopher Nardone

OK, very clear. Then Marvin, while we've been in this relatively frozen housing market for longer, do you think this could amplify the potential upside for long-term growth — that is, long-term growth when the market picks up? I remember you said before that the market is expected to grow by about a single digit when the recovery accelerates, but is there likely to be more upward elasticity as backlog demand continues to accumulate?

President, CEO and Chairman Marvin Ellison

Chris, this is a legitimate question. The short answer is, we expect the housing market to gradually recover. But we do believe the customer's old home is of great value. As you know, we have the oldest stock of homes on record, and our customers have lived in the same house the longest on record. We know wear and tear is inevitable. The only caveat is that too much has happened in the macro and geopolitical world, and customers are just becoming cautious. The good news is that these customers are financially healthy. Are we optimistic about strong growth over the next few years? Definitely yes.

We're very focused on one thing, and Brandon and I agree on this point: we're using our balance sheet to make the right capital investments, not only in the short term, but also in the long term. We are convinced that Lowe's is far better than the company before the housing recession. We just haven't had a chance to benefit from it because our business is highly penetrated on the DIY side. This may be a bit of a drag on our business today, but we are convinced that when the market starts to recover cyclically — albeit gradually — it will be a huge benefit for our business, as DIY customers are expected to be the first to get out of trouble and achieve positive growth, and all of our investments in e-commerce business, DIY loyalty platforms, fulfillment capabilities, customer service initiatives, etc. will begin to bear fruit and pay dividends.

That's why we're optimistic. But again, we think it will be gradual, and we're ready to benefit from any recovery in the short or long term.

Shelly Hubbard, VP of Investor Relations

Thank you all for participating today. We look forward to speaking with you again during the third quarter earnings call in November.

Conference Moderator:

Thank you. This concludes the Lloyd's Q2 FY2026 results conference call. You can hang up the phone now.