Lowes Companies Aktie

Well, good morning. Thank you all for joining us. So my name is Brian Nagel. I'm the senior equity research analyst here at Oppenheimer, covering consumer growth and e-commerce. So this is a continuation of our 26th Annual Oppenheimer Consumer Growth & E-Commerce Conference. And again, we very much appreciate you all tuning in this morning.

So I'm very pleased to have with us Lowe's and 2 of the company's senior executives, CEO, Marvin Ellison; and CFO, Brandon Sink. Gentlemen, thank you for joining us.

Good to be with you, Brian.

We've done this event many years now. So again, I thank you for always representing well here at our conference. Thank you.

You're welcome too.

We're going to structure this as an informal fireside chat with me asking questions and the Lowe's team answering those questions. To the extent if there are questions from the audience, please send them through the channel, I'll be happy to work them into our conversation.

So guys, I thought we'd start before, and there's obviously a lot to talk about specifically with Lowe's. But I think -- I thought we'd maybe just start, just given kind of the state of the world, I guess your views on just the consumer backdrop, what you're seeing out there and how the consumer backdrop is impacting Lowe's at this point?

Yes. So Brian, always great to be with you. So I think from my perspective, we gave our guidance earlier this year, and nothing's really changed since our initial view of how we thought the year would play out. So the consumer is about where we thought they would be. So let me just kind of remind you of who our core customer is.

Our core customer is a homeowner with an average household income north of $100,000. They have gainful employment. They receive wage increases. They have record equity in their home. They have money in the bank. So overall, we describe it as a consumer with a really strong personal balance sheet, and this consumer is resilient. However, within that is just sentiment remains low, particularly when it comes to discretionary big ticket. And that is where we're seeing the hesitation in the consumers' ability or willingness to spend.

The good news is, as I said earlier, this is a healthy consumer, but the broader macro is giving them a bit of hesitation. And as a reminder, our business is predominantly the do-it-yourself, DIY, customer. And even within this really difficult consumer sentiment based on the broader macro, we still feel really good about our ability to perform and take market share.

I mean, as a reminder, we've had 4 consecutive quarters of positive comps. We've taken market share even in this really difficult housing market. And again, I don't need to give you all the housing metrics, you know them as well as I do.

And so for us, we're in that old simple adage of controlling what we control. We're focused on making sure that we're offering value, product innovation, service. We're committed to doing all the things we need to do to make sure that the customer feels as though when they walk in our stores or they go online and they're getting a great environment that's going to serve them very specifically. And our mission statement is making sure that we're solving problems and fulfilling dreams for the home. And so we're really focused on that. And so we don't see any major deviation from what we thought we would see.

Having said that, we're really encouraged because we believe that all the foundational things that we've done relative to IT, supply chain, product innovation, service model and all of those things, including the acquisitions we've made, is really going to set us up really well when the inflection happens in the housing market.

We don't know when that's going to be. We know what has to happen. And right now, we're focused on taking share in the short run, but preparing this business to operate really well when that inflection happens.

So Marvin, so as you think about the macro environment, and I think I probably know the answer to this question, but what's the -- is there a variable you're watching the most for that, sort to say, that macro unlock? And I guess, obviously the rates and what impact that lower rates could have on the overall housing market. But then also gas price, obviously, a lot of volatility lately. But how much of -- if we got some type of sustained moderation in gas prices, how much could that be a macro unlock for Lowe's?

No, look, it's a good question, and it's a timely question. So specific for us, if you think about the consumer that I just described, gas prices alone does not prevent this consumer from shopping. But when you combine elevated gas prices and the strong visibility around overall gas prices, you combine that with the broader uncertainty in the macro, then that consumer becomes a bit cautious. And you've seen some of the consumer sentiment data from the University of Michigan. I mean, is that some of the lowest levels on -- that they've ever measured. And I think that is a causality of all of those factors, gas prices and broader uncertainty in the macro.

So when we take a step back, Brian, we believe that mortgage rates coming down is obviously the big macro unlock that we're looking for. I mean, obviously, none of us can call when that's going to happen, but we know all the indicators that's going to drive that mortgage decision down is going to be core inflation coming down. And for us, gas prices and having some level of decision on what's happening in the Middle East, obviously will play a huge role into that.

And we think that when that starts to happen, we're getting some clarity on what's going to happen relative to global oil prices and gas prices coming down and then seeing some of the core inflation data starting to hit in the right direction, then we believe that we're going to see hopefully, mortgage rates start to follow.

I mean, as recent as today, there's an article in the Wall Street Journal talking about the supply-demand imbalance in housing and how you have certain markets, geographic markets in the country that have been really difficult to build homes because of restrictions, how those restrictions are starting to loosen up because we're truly at a supply-demand imbalance where something has to happen in the short run and there are some estimates up to 5 million homes needed just to meet current demand, not to mention, analysts are basically forecasting that the number is closer to 12 million over the next 5 years of homes needed just to meet demand.

So we believe that although the short run is challenging based on all of the economic factors we've talked about, that we're in an environment that we're going to see a gradual improvement in home improvement based on the improvement in housing. And the question we ask ourselves is, have we built a strategy where our total home strategy, have we made right investments, have we made the right acquisitions that's going to position us to really take share and grow this business when that inflection starts to occur. And we think we put ourselves in the right position.

In the meantime, we're going to do what we've always done. We're going to control expenses, we're going to continue to invest in our business, we're going to continue to invest in our associates. We're going to continue to offer great value, innovation and a great environment for our customers to shop. And we think if we do that, we'll continue to take market share, run this business well, and we're going to keep our fingers crossed that we're going to see brighter days ahead in the macro that we'll be able to take advantage of.

And Brian, I would just add, I'm really pleased with the ability of our team to kind of weather what I'll call multiple inflationary cycles over the last 6-plus years. That's from Trump tariffs, first administration in 2018, we had the COVID supply chain shocks, we had the tariffs last year and now sort of maneuvering through fuel prices, geopolitical situation. This year able to continue to deliver results, expand margins.

And I think for us, especially with this environment with a customer that's seeking out, responding to value, really leaning into offers, whether it's free shipping, whether it's free same day, a number of different things that we're doing to drive transactions and stay relevant. So we've been able to do all those things in multiple cycles, and we'll continue to do that no matter what the macro scenario that's put in front of us.

That's very helpful. So Marvin, I want to, I guess, focusing more on Lowe's now and just staying a little big picture. So as you know, I followed your company and your sector for a very long time now.

You've been at the head of Lowe's like almost a decade now. And you've done a fantastic job of really repositioning successfully the business. So I guess the question I want to ask is you look at what's been done under your tenure as CEO at Lowe's. Maybe talk about some of the big wins there. But just as importantly, what's still -- where is the opportunity still lie from your standpoint and I guess, in the repositioning of the company?

No, it's a great question. And so let me kind of start with where we were in 2018 when I joined the company. I describe it simply as a company with a great balance sheet with a brand that had been tarnished because of just poor execution and decision-making relative to how we serve customers.

And so as you think about the things that we've done with the redesigning of our IT infrastructure, and I'd argue right now with the leadership of our IT team that we have one of the most innovative and most effective IT infrastructures, AI implementation and all of the elements of IT, both store, customer-facing and associate-facing of any retailer in the country. We redesigned our supply chain. We're able to totally update and innovate our product assortment.

And most importantly, we addressed the service-related issues that really were impacting us. And we're just pleased when you look at all the recognition we receive, whether it's J.D. Power, whether it's Fortune that's recognizing the fact that the brand has recovered and that we are now viewed as one of the best operating retailers in the world.

But when I think about the opportunity, the opportunity for us is greater in front of us than I think that what's been behind us because as I've described, we're in the new industrial revolution with what's happening with AI and overall advancements in technology.

And I think we can do a couple of things. Number one, we can continue to grow our omnichannel and our online business. I mean, we delivered a 15.5% comp in the past quarter, and we think there's a lot more in front of us. And we're excited about the introduction of our marketplace, the first product marketplace of any home improvement retailer in the U.S. And we're in the early stages, but what we're seeing is incredibly exciting. So we know that there's incredible upside there.

We're really excited about all the innovation we're putting in place that's allowing our associates to operate more productive and giving our customers an easier place to shop, and that's primarily driven by technology. And I cite our AI agent and our AI companion tool, Mylow. When customers use this AI assistant online, they're able to convert at triple the rate of customers that don't use it. And when our associates use it in the store, we have 200 basis points of customer service improvement.

We're getting roughly 2 million questions a month when you combine customers and associates. So this is an iterative system that's learning, and we know the future is incredibly bright for us because we can make our associates more productive. We can take friction out for our customers, and we think that's just going to unlock incredible opportunities for us.

We're excited about our Pro strategy. We have made great progress. When I started back in 2018, our Pro penetration was somewhere around 18%. Right now, we're approaching 40%. And that is not including the acquisitions we made with FBM and ADG. And when you think about the fact that we launched Pro Extended Aisle, which, in essence, opens up an incredible marketplace of suppliers of value, price and quantities to every single Pro desk, we think the upside potential there is incredible, not to mention the partnerships with ADG and FBM opens up a $250 billion total addressable market in residential construction, where, as I said earlier, we think that the growth opportunity is still in front of us.

And last but not least, I'm just really excited about our ability to be a positive contributor to our communities. I mean, we announced through our foundation that we're committing $250 million to create 250,000 skilled trade physicians. I mean we're at a critical juncture in this country with the need to have more skilled trade individuals, whether it's getting a plumber, an electrician available to show up to your home or whether it's the skilled trades needed to build out this data center infrastructure that we're going to need for the future technology.

So I can go on and on and on. But I think, Brian, we're doing 2 things now. We've created a business that can operate brick-and-mortar and digital to serve our small to medium Pros and our DIY customers. In addition to that, we built out a business now that will give us the ability to have an interior solution, everything from drywall to flooring, cabinets, countertops, appliances and so on and so forth, for new construction for multi and single family. We never had this opportunity in the history of this company, and that growth potential has yet to materialize what we know is out there. So I can go on and on and on, but those are the things that are yet to be done, and we're excited about our future.

That's very helpful. So before we guide -- before we tackle some of those key points more individually, I guess let me ask a bigger question. So as investors watching this continued -- I keep on using the word repositioning, but improving health of the Lowe's model. What are the key metrics we should be watching from here? If you take that all together, with the technology and other initiatives here, how should we be thinking about where the slack still is in that within the business model from a financial standpoint?

Yes. So I think, Brian, for us, it's ongoing growth and the ability to take share. I mean, we're operating in a challenged environment. Our guidance suggested kind of flat home improvement this year. I think that's what we continue to see. We expect 100 basis points on top of that.

And I think if you start to look even beyond 2026, that ability to take share in multiple environments, that's mainly what we're looking at, Brian. Marvin just cited growth that we're seeing within the Pro. We continue to look at Pro penetration where we're taking share in our retail box with small to medium. We've now opened up a more diversified customer with the larger Pro that we can access through the FBM and ADG model. So excited about a potential new revenue profit pool that we can generate there that will create profit dollars and ongoing earnings. So those really are the numbers that I'm looking at, Brian.

I think bottom line, we're going to continue to drive productivity. We've cited $1 billion for 2026. That's split roughly half between margin and SG&A. We're well on track to achieve that this year. We're also managing some new pressure points as it relates to fuel. So we're trying to figure out how much we can accelerate there.

So confident that we can deliver our margins. So really just looking forward beyond '26, I think it's that revenue growth, the ability to take share and the ability to deliver incremental margins even in a pressured macro that we have a lot of confidence in. And then if we can get some benefit from housing policy, from the administration, whether it's pent-up demand from HELOCs, whether it's tax incentives, some of these near-term drivers for us, that just creates incremental upside beyond what we're tracking and what we're expecting to deliver here in 2026.

So Marvin, on the Pro business, you mentioned something already. But let's talk about how Lowe's is looking at the continued growth in the Pro, both within the store, that how you serve Pros there. But then maybe more importantly, with these acquisitions you've made, the ongoing development -- I guess you can just talk about the ongoing development of the Pro business for Lowe's.

Yes. And I think that's the right way to describe it, Brian, is the ongoing development and evolution of it. And again, I'll just repeat what I said earlier. If you go back in time, I mean, we're roughly 18% penetration. And we really didn't have a focus or a strategy. So the first thing we did is we decided that we're going to focus on the small to medium Pro customer in our stores because we felt, a, we could serve that customer well; and b, that's a $250 billion total addressable market, just that segment of Pro. So it's a very lucrative and very fragmented segment.

And so over the course of the past 7-plus years, we've invested to improve our service model. We've invested in inventory to ensure that we have the quantities needed for Pros to come in and feel confident they can buy what they need. We've been very focused on making sure we're price competitive in commodity type items. We had lots of work to do with our brands. The previous management team had walked away from national brands and Pros, as you know, are very brand loyal.

And so we made investments. Today, we are the largest seller of DEWALT product and DEWALT remains the #1 power tool brand for Pros, and we reintroduced brands like Klein Tools, that are kind of the key brand for electricians and HVAC professionals. And we started to fix the fulfillment issues. I mean, we were very hit or miss and we made investments. We put technology in place. And so those are the foundational things that we did.

And again, those things have allowed us to take that penetration from about 18% again, now we're approaching 40%. And so, then we took a step back and we said, okay, we can address the small to medium Pro in the store, but how do we address the more planned spend and the more larger complex Pro. And so we're doing really 2 things.

The first thing is, I mentioned this Pro extended out, which is basically think about it as a product marketplace for Pro. So we've added a number of suppliers. So if a customer comes in and they want to get a truckload of drywall or they want to get a truckload of electrical wire, the ability to do that now at the right quantity, price and selection is all digital, and we can do it seamlessly. And in most cases, those suppliers not only will provide us a product, they'll deliver to the job site. And so we're continuing to roll this out, and we've been extremely pleased with the results we've seen.

And then we decided to ask the question, as we look at housing and we look at the shortages we've discussed in single-family and multifamily housing, and we know that there has to be a cycle of rebuilding to occur. We want to know how can we play a role in this, and we decided to make those acquisitions of ADG and FBM. And we did this in a very surgical way rather than going out and going out a big net and we're going to try to be all things to all segments of this plan Pro spin, we said, let's focus on the interior of the space because, a, we felt like that Lowe's could complement that well; and b, we felt like that the profit opportunity there is better for us.

So when you think about ADG, which does cabinets, countertops and floors and FBM that does drywall, steel framing and installation primarily. And if you combine those capabilities and those product categories with what we do on the interior, specifically in areas like appliances, fixtures, et cetera, we now are building a capability that we can have an interior solution for single and multifamily builders current and in the future. And so that is the evolution.

And so this opens us up not only to a $250 billion small to medium Pro. Now we have a $250 billion total addressable market in this interior space for single and multifamily that we've never had an opportunity to grow revenue. So we're excited about the future, and we are excited about continuing evolution. And I didn't mention the value of our loyalty program and how we're seeing incredible valuable learnings and stickiness from those Pro customers engaged in our loyalty program. So again, the building blocks in place and now we're continuing to build on top of those foundational things.

Yes. And Brian, I would just add, as it relates to ADG and FBM, we know that residential construction has been pressured, but really pleased with kind of 6-plus months the momentum that we've had as it relates to the integration efforts. I'm extremely successful with driving out cost, procurement with steel, with insulation, with drywall.

And then Marvin mentioned, just as it relates to the ADG model, the ability to start bundling appliances, introducing private brands, STAINMASTER as an example in terms of what we can now offer through builders. And then as it relates to FBM, ability to give our larger Pros access to the capabilities that FBM offers. And then on the flip side, starting to open up our host of complementary products to FBM customers, making momentum on all of those fronts and sort of outpacing what we expected were synergy realization here in year 1. So really pleased with that.

So as you think about the Pro business outside the store and the acquisitions we mentioned, ADG and FBM, do you anticipate further acquisitions to build out that effort?

Look, the short answer is we're going to be very opportunistic. And we think that you will see us make tuck-in acquisitions to support both ADG and FBM in specific categories to either reinforce categories that they're already in or to look at new categories that help us in that interior space that we're referring to.

Again, we want to be really disciplined and we want to be really focused. And we've created a very detailed road map and strategic plan on where we want to play because we want to only play in the areas, categories where we feel like that we can be a leader and we can be really effective in serving the customer in some of these bundles that Brandon talked about pulling some of these capabilities together. But there are not a lot of companies in the U.S. that can go to a large builder and offer them a bundle of multiple things that they can do.

But again, the short answer is, yes, we'll be opportunistic. We'll do some tuck-ins and those tuck-ins will be primarily focused on creating and reinforcing the capabilities that these 2 companies already have.

Yes. Brian, I would just add, the opportunity for me remains highly compelling. I think we look at it. It's financially accretive given our cost of capital. So, we're looking -- we acquired FBM as a growth platform. So I think being committed to that, looking at additional product verticals, geographies, we are being disciplined as Marvin said. So I think near term, very much focused on tuck-in. We've made the commitment from a balance sheet standpoint to get back to our leverage target as we look ahead into 2027.

So we're going to manage to that while being opportunistic. But again, looking at this as a longer-term growth platform, and we really like the opportunity and believe we have a lot of conviction in the strategy.

And this may be an oversimplified question. As we think about it, again, as investors, we think about the synergies here, and how now these acquisitions help the Lowe's enterprise grow. So if I'm a customer of, let's say, FBM, do I also shop Lowe's stores? Is there overlap there in that customer base?

There's some overlap, but I think to Brandon's point, it's more on those complementary products. It's more on the power tools, it's more on the power tool accessories, it's more on the tools for building materials. And what we're trying to do is offer more of those complementary products in the FBM environment.

And again -- but what we also believe, Brian, is that we're taking like FBM is being added to our Extended Aisle in our Pro system. So if a Pro customer comes in to a store and they want to truckload a drywall, the question is, why shouldn't we fulfill that order from an FBM branch. And so that's what we're in the process of testing and figuring out how we can make that happen.

That way, we basically can take every Lowe's store and Lowe's Pro that has an FBM branch in the geographic area and make those 2 platforms marry together. And so we're learning a lot. But on the short run, Brandon's team, the merchant team, our integration team, our integration management office has done an incredible job of going and attacking those synergies when it comes to cost, when it comes to products, when it comes to suppliers. And that's been a real short-term win that's been a benefit to both Lowe's and FBM.

And to Brandon's earlier comments, I mean, we're going to continue to find tuck-ins and opportunities that's going to continue to make FBM and ADG more effective and grow those platforms so that we can make them incredibly beneficial to the overall Lowe's enterprise.

Yes. And Brian, I'll just add, there's certainly opportunity in an FBM branch to make the physical space more productive. So as Marvin mentioned, fasteners, safety equipment tools. We're also opening up on fbm.com kind of a more endless aisle introduction of Lowe's catalog SKUs and items.

And then the flip side, you mentioned FBM customers potentially shopping Lowe's stores. We're working on the ability to use their trade credit through FBM and Lowe's stores, and we feel like that could potentially be an unlock for us as well.

So let's talk more about online. Again, Marvin, you mentioned this, and we've seen this in your recent results. I mean, a clear bright spot for Lowe's has been this outsized growth in online. So I guess the question I want to ask is who's shopping online? Is it your existing customers, you're getting better penetration with those customers? Is it a new customer? And how do you see this -- again, I'll use the same words, how do you see online evolving for Lowe's over time?

Well, look, we're very excited. I mean, as I stated earlier, we delivered a 15.5% growth result in the most recent quarter. And really, Brian, the entire customer portfolio is shopping online. We're seeing growth in the Pro segment. We're seeing growth in the DIY segment. We're seeing growth across multiple categories.

The thing that we've been able to do, and this has literally been a 7-year journey. I mean, I'll just take you back to Black Friday of 2018 when the online site crashed. I mean, that was the eye-opening reminder that we have a lot of work to do here. And so if I snap the chalk line on that event and I look to today, I mean, there's really no comparison to where we are.

And so the steps that we've been able to take is improving the user experience with large investments in technology because at the end of the day, you and I both know the key is remove the friction, reduce the clicks to checkout and make sure that the site is functional and that the customers can find anything they want. And we've been working on navigation, search, all of those things.

The other thing that we've been able to do that's been really, really helpful is making sure that the experience online is unique to the customers' needs. And part of that is just great, great involvement with wonderful technology partners like Apple. When you think about Apple Vision Pro and virtual reality and some of the things we've been able to do with really great tech partners.

But throughout all of that, when you look at desktop, app, you look at mobile, all of those things are working, and we're seeing growth there. We think the future continues to be bright because of the introduction of marketplace, which, in essence, gives us just the ability to add an incredible large number of SKUs without having to own the inventory and being able to be really price competitive. And what we're seeing in the marketplace is we're seeing a new value customer coming in because we can offer certain products at a value that even beyond what we carry in our brick-and-mortar stores, but we're seeing a premium customer come in as well.

I mean, most retailers don't want to take the risk to put in an extremely premium product in the stores because if you don't sell it, you're stuck with the inventory. But the marketplace gives us the opportunity to serve a value customer and a premium customer, and we're able to do that. But we're also able to take the core foundational things that we do really well like appliances. And we built out this unique delivery infrastructure. We have the best fulfillment capabilities for appliances in the U.S. We're the only retailer where you can buy an appliance in-store or online, and you can get it delivered and installed next day in virtually every ZIP code in the country.

And so the experience online is as seamless as the experience in the store. And as I mentioned earlier, I mean, our virtual assistant -- AI assistant Mylow built on an open AI platform, when customers use our virtual assistant Mylow online, their conversion rate is triple of customers that don't. So that tells us that there is an absolute benefit to having an AI assistant that makes the shopping experience easier by answering specific product-related questions.

Although 15.5% was really good, we think the best days are in front of us because we put so much work into it. We put together such a talented team with industry experience, and we're going to continue to build on this because we know customers are more and more -- being more comfortable to migrate online, and we want to make sure we meet the customers where they are.

And Brian, just to put a financial lens on what Marvin just said. If you look back 5-plus years, we've tripled the size of the online business, doubled the penetration. I think we're up to 13% here at the end of Q1 with kind of a path, I think, over the longer term to get that number closer to 20%. 50% of online purchases are fulfilled via BOPUS, through our store, another 25%, mostly big and bulky through market delivery with what Marvin just outlined.

And what I'm pleased with is the ability over that same time frame to expand our operating margins. So confident even though the growth and the path forward that we're going to deliver positive contribution margin on these incremental online sales. So I really like the direction that we're going here.

I know our time is going to start to wind down. A couple of topics I do want to make sure we hit on. So again, stepping back from the Lowe's business, trade tariffs. So I think you've done a great job of managing what has been a volatile trade backdrop. The question I'll ask is, how do you view tariffs at this point? How have you -- you and your partners work, so to say, mitigating the impact of your business? And where are you on any type of tariff refund or tariff rebates?

Yes, Brian, I'll take that. I think the tariff environment remains extremely fluid. We've been transitioning from IEPA tariff environment last year. We're working through temporary Section 122, which was supposed to be in place for roughly 6 months, watching the evolution into steel and aluminum through 232 and whatever else comes through 301.

So our guidance kind of reflects where we are in the existing environment, but sort of expecting ongoing rules and ongoing evolution. But our playbook, irrespective of any of that, is unchanged, and we've seen a lot of success with it. So we've rationalized the number of SKUs through this process. We're down, Brian, probably 20% in terms of SKUs relative to kind of pre-Liberation Day tariffs. We continue to work through country of origin diversification has been a huge focus.

We're down -- we started this with about 20% penetration with China. We're at about 15% as we stand today. And when we get to the end of 2026, that number is going to be significantly reduced. We continue to partner across with our suppliers on sharing in the burden, managing the cost. And then lastly, doing a tremendous job with the pricing organization, managing any incremental through the portfolio.

So I mentioned earlier, we've weathered a number of these inflationary cycles. I think we have a great playbook. Team is doing a fantastic job and confident we can manage this back half of '26. And then you mentioned the refund process. I would just say we are going through the motions. We're waiting on further direction and instruction from the U.S. Customs Bureau and watching to see what the instructions are. There's multiple phases to this.

As of Q1, we didn't disclose that we had filed or we had received. So that process is ongoing. And anything that we see, any developments that we see here in Q2, we'll communicate that on our August call.

Guys, last topic on just capital allocation. So again, I mean a huge positive in my mind in the Lowe's story is just your ability to generate cash to utilize that cash, redeploy that cash. So philosophically here, particularly as we talk about some of these recent acquisitions you've made, how do you think about, I guess, the uses of capital for Lowe's at this point?

I think, Brian, capital allocation policy and philosophy largely unchanged. Our #1 priority is investing in the business. That's organic and inorganic. Organically, we've communicated that's going to be about $2.5 billion annually. And then we're going to continue to look at the inorganic opportunities. We're very committed to getting back to the leverage target, as we mentioned.

So managing that, managing the leverage here in the short term. We paid down $2.3 billion in debt here in Q1, so making nice progress against that. And then committed to an ongoing dividend. We increased our dividend 4%. We're up to $1.25 per quarter per share. So that's something that we remain committed to. We're kind of in the dividend king, dividend aristocrat status, and that's something that we're very proud of. So we continue to target roughly a 35% payout rate. So making progress there, but backing up largely from a philosophy standpoint, the capital allocation largely unchanged.

Well, guys, is there anything we didn't talk about that we should have talked about here?

No, Brian, the only thing I will say is I'll just go back to previous comments. I mean this is a challenging housing macro, all the factors we talked about with mortgage rates and consumer sentiment being a bit cautious on big ticket discretionary.

But the only point I'll close with is that we're incredibly confident in our business. We're pleased with the fact that, again, in the face of a really difficult housing macro and with a DIY customer base that's our primary customer segment that drives our business, we're able to deliver 4 consecutive quarters positive comps.

We believe that we're continuing to take market share. Again, this is a much more fragmented market than a lot of people realize. And so we're going to continue to take share irrespective of the macro. But more importantly, we are positioning this company for the future. We think everything that we're doing from investments to leading in AI innovation to the product categories that we've been able to introduce to the innovation we put in place to how we are continuing to drive productivity through our PPI initiatives.

We think all of those things set us up for a true growth renaissance when we start to see any positive movement in the housing macro. So again, we're going to execute and control the things that we control in the near term, but we're really excited about the future, and we think we're well positioned to take advantage of that.

Well, Marvin, Brandon, thank you. Congratulations on the ongoing success here. We very much appreciate you attending.

Thank you.

Thank you, Brian.

Good morning, everyone. Welcome to Lowe's Companies First Quarter 2026 Earnings Conference Call. My name is Rob, and I'll be your operator for today's call. As a reminder, this conference call is being recorded.

I'll now turn the call over to Shelly Hubbard, Vice President of Investor Relations.

Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President, Stores; and Brandon Sink, 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 2026, 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 on the Quarterly Earnings section of our Investor Relations website.

Now I'll turn the call over to Marvin.

Thank you, Shelly. Good morning, everyone. Before we begin, let me take a moment and welcome Shelly Hubbard to the team. Shelly recently joined Lowe's as Vice President of Investor Relations, and we're excited to have her on board.

Now let's start with our results. In the first quarter, we delivered sales of $23.1 billion with comparable sales increasing 0.6%, leading to adjusted diluted earnings per share of $3.03, up 3.8% versus the prior year. Our results were driven by strong spring execution, along with continued strength in Pro, Appliances, Online and Home Services. We're pleased with our performance this quarter despite February storms that slowed the start of the spring season. Our teams executed at a high level throughout the quarter, particularly during SpringFest, where we were well positioned with strong in-stocks, compelling offers, targeted member deals and traffic-driving store events. Bill will provide additional perspective on our spring performance later in the call.

Our continued growth in Pro, Online and Home Services in Q1 reflects how our Total Home strategy is positioning Lowe's for short- and long-term market share gains. Starting with Pro. We maintain our momentum with our competitive assortment of national brands, consistent strong in-stock position and outstanding service levels. Additionally, we are pleased that our loyalty program, MyLowe's Pro Rewards designed specifically for the small to medium Pro continues to resonate with our customers. Combined, these investments are providing the reliability, value and convenience our Pro customers have come to expect from Lowe's.

Now shifting to online. We delivered sales growth of 15.5% this quarter driven by continued enhancements to our user experience, standout online deals and improve fulfillment capabilities, including same-day delivery, and to enhance the value of our loyalty programs, we began offering free same-day delivery for purchases over $25 for MyLowe's Rewards and MyLowe's Pro Rewards members. This offering further differentiates our loyalty experience, helping to drive increased member engagement for both DIY and Pro customers.

We're also pleased by the impact of Mylow, our AI-powered shopping assistant is having on the online shopping experience, giving our customers the ability to ask questions on recommendations budget guidance and other home improvement needs. Since launching 1 year ago, Mylow adoption has scaled meaningfully and now supporting over 1 million customer inquiries each month. Importantly, the conversion rate for online customers who use Mylow is triple that of customers who do not use the tool, suggesting a well-designed agentic AI experience can be a clear driver in the purchasing decision.

Turning to Home Services. We again delivered growth this quarter, underscoring our ability to capture market share in a highly fragmented category and reinforcing that our enhanced installation experience continues to resonate with homeowners undertaking complex projects. Additionally, we recently announced HomeCare+, a first-of-its-kind subscription service to support customers with routine home maintenance tasks. This service taps high-performing, technically trained Red Vest Lowes store associates to help busy customers stay on top of their to-do list. HomeCare+ is available exclusively to MyLowe's Rewards members further strengthening customer engagement and loyalty while building long-lasting relationships with our DIY customers.

Let me now transition to our view of the macro environment. While DIY demand remains under pressure, we're continuing to grow market share in a challenging housing environment shaped by elevated interest rates, higher cost, and low housing turnover. And while we expect the broader market to remain flat in 2026, our focus remains on disciplined execution of our Total Home strategy driving continued growth regardless of market conditions. We believe Lowe's is well positioned not only to perform in this environment but to deliver meaningful upside as macro conditions normalize.

Which brings me to our acquisitions of FBM and ADG. Our near-term integration efforts are on track as we focus on extracting cost synergies from overlapping areas of spend and at the same time, exploring cross-selling opportunities. We remain confident that FBM and ADG will enable Lowe's to capitalize on the future recovery of the residential homebuilding market.

Before I close, I'd like to highlight our expanded commitment to the Skilled Trades. The Lowes Foundation recently announced a $250 million investment to help train and develop the next generation of skilled trades people. Through this effort, we aim to support approximately 250,000 individuals helping address the growing need for skilled labor across our industry and beyond. This investment reflects our commitment to strengthening the communities we serve and create an economic opportunity while also supporting long-term demand for the home improvement and construction industry.

In closing, I'd like to thank our frontline associates for their continued dedication throughout our busy spring season. their commitment to serving customers and supporting the communities where we live and work are critical to our success.

And with that, I'll turn the call over to Bill.

Thanks, Marvin, and good morning, everyone. We're pleased that we delivered positive comp sales for the fourth consecutive quarter, driven by strong performance in our spring seasonal categories across all 3 geographic divisions. We accomplished this despite a slow start to the quarter after winter storms hit much of the country.

Before I walk through our performance, let me start with a quick update on our merchandising structure. We recently realigned select product categories, reducing our merchandise divisions from 14 to 13. Most notably, we combine power tools with outdoor power equipment to create a stand-alone power equipment division. This change will help us manage our battery platforms under 1 team and improve coordination and alignment between our merchants and supplier partners.

Turning now to our performance in hardlines. We delivered positive comp sales across every merchandise division, including lawn and garden, seasonal and cleaning, tools and hardware and power equipment. As spring kicked into full gear, we saw broad-based growth in many of our seasonal categories. This performance reflects strong alignment between our merchandising, marketing, supply chain and store teams, all focused on serving customers and converting demand as weather improved.

Our merchants ensured we had the strongest lineup and the best values. Our marketing team delivered a clear and compelling message to drive traffic to our stores and our website. Our supply chain team kept product in stock, our stores executed at a high level with excellent customer service. A key driver of this performance was our third annual SpringFest event, where we leaned into our MyLowe's Rewards loyalty program and gave customers what they told us they want most: extended savings, rewards and convenient delivery options, including free same-day delivery on key items like mulch, one of the most popular spring projects. These offers resonated with customers and gave them more reasons to choose Lowe's for their spring home improvement needs. As a result, we saw a standout performance in live goods, landscape products and hardscapes from great brands like Scott's, Oldcastle and Pavestone, along with strong engagement from customers shopping for patio furniture and riding lawn mowers.

This performance was supported by our industry-leading lineup of outdoor power equipment brands, such as John Deere, Toro, EGO, Husqvarna, CRAFTSMAN and Cobalt, where we drove strong engagement, including during our Toro and Ego Days events. And as we continue to focus on improving our space productivity, a key pillar of our Total Home strategy, we grew sales in categories like workwear and pet, where our strong offering includes national brands like Carhartt, Dickies and Wrangler Apparel, and private brands like Heart & Herd, Pet Toys and Treats. We remain on track to complete the national rollout of workwear and pet to all of our stores by the end of the year.

Now turning to Building Products. We continue to drive growth in Pro-driven categories, particularly in rough plumbing and electrical, especially with our core small- to medium-sized Pro, who remains busy with repair and maintenance projects. The warmer-than-average weather in March across much of the country, combined with our strong in-stock position, led to standout performance in irrigation and sprinkler projects. And we also saw a particular strength in HVAC and water heaters supported by our improved Lowe's Home Services offering, which provides fast, convenient repair and installation for our do-it-for-me customers. With simple scheduling, professional service and the confidence that comes with an experience backed by Lowe's.

And this capability continues to also drive our millwork category, which again delivered positive comps in the quarter, driven by windows and doors. Customers are returning to Lowe's for these replacement projects supported by our leading brands such as Pella, Therma-Tru and Larson, which are exclusive in the home center channel.

And lastly, to home decor, where we drove positive comp sales in appliances and paint. In appliances, we continue to drive sales with our broad assortment of the leading brands, fast delivery and best-in-class omnichannel experience positioning Lowe's as the destination for urgent replacement purchases. As a reminder, approximately 70% of appliance transactions are driven by a duress occasion, where a customer needs to replace a refrigerator or a washing machine quickly. Customers can research appliances online, come into the store and work with a knowledgeable Red Vest associate and then choose to complete the transaction wherever and however they prefer. This is where Lowe's continues to stand out. We're the only retailer that can deliver and install major appliances next day in virtually every ZIP Code in the U.S., a capability that continues to drive our performance.

Now let's shift to paint, another area where we're driving results through an improved customer experience. This quarter, we delivered growth across multiple categories, including interior paint, sundries, tools, stain, spray paint and buckets. Behind our performance in paint is the work our teams have been doing to remove friction from the shopping experience from simplifying the in-store journey to make it easier for customers to navigate the category online. We've enhanced our digital experience with a paint color visualizer, improved online product information and created a more intuitive checkout experience, all of which are driving stronger online engagement and conversion.

At the same time, we're partnering closely with our vendor partners, like Sherwin-Williams to elevate the in-store support for our Red Vest associates ensuring that they have the tools and expertise to guide customers with confidence and help them drive sales across the category.

Finally, as we move through quarter 2, we're excited about the value, innovation and fast and free delivery options we're offering around key holidays like Memorial Day, Father's Day and July 4, with a strong focus on key seasonal categories like lawn and garden, patio furniture and drills from Weber, Char-Broil and Blackstone. We're also looking forward to building on our partnership with Lionel Messi, this summer as fans around the world tuning for the World Cup. Our campaign includes a limited edition 10-foot Messi inflatable and exclusive fan experiences that tap into the growing soccer culture across North America.

As I close, I want to thank our merchants, our MST associates and our supplier partners for their continued collaboration and strong execution as we kicked off spring.

And with that, I'll turn the call over to Joe.

Thank you, Bill, and good morning, everyone. Let me start by thanking our frontline associates for their hard work throughout the spring season, their commitment to delivering outstanding service to our customers during one of our busiest times of the year, continues to make a meaningful difference across our stores. Their focus showed up this quarter and strong customer satisfaction scores during SpringFest as our team prioritized execution and delivered a consistent experience across all departments.

Customers also appreciated our flexible fulfillment options as they work to complete their spring projects, including same-day delivery for their time-sensitive needs, which you heard about from Marvin and Bill. Fulfillment is just one of the improvements enabled by our transformed front-end layout, which provides a smoother pickup experience for customers using buy online, pick up in store for drivers executing same-day deliveries and for our associates serving them both.

Turning now to our first quarter performance and starting with Pro, where we delivered another quarter of growth. We continue to build on our momentum with our core small- to medium-sized Pro customer, who has remained resilient in this macro environment. Pros are responding positively to the enhanced tools we've deployed digitally and at the Pro desk, which are designed to save time and simplify the shopping experience.

And we're continuing to leverage AI to create new capabilities. A recent example is our launch of materials list. PROS can bring in the list in just about any format, whether a photo, handwritten note, PDF or spreadsheet, and our associates can use this tool to convert it into an actionable quote. In the past, this was a manual task, which meant generating these quotes could take days, taking associates away from serving Pro customers. Now with this AI-enabled tool, we've reduced that time from days to minutes.

In a recent survey, our core Pro customers indicated their backlogs are generally stable, but they have concerns about the growing costs associated with labor as they continue to navigate a constrained labor market. On this note, I'd like to take a moment to reiterate what you heard from Marvin about our expanded commitment to address the nation's skilled trades workforce gap. Our Pro customers are at the forefront of this growing demand, and we hear from them directly about the difficulty in hiring trained workers to fill out their crews. This is one of the most critical challenges facing the home improvement industry and this $250 million investment by the Lowe's Foundation is integral to supporting our Pro customers and helping them grow their business.

Switching gears now to our perpetual productivity improvement, or PPI initiatives within store operations. Over the past year, we continued to scale Mylow companion, our AI-powered tool designed to support associates on the sales floor. We've enhanced this capability with new features, including voice detect, to help associates access information more quickly and confidently. And we've expanded its language capabilities, so associates can now ask for and receive information in Spanish. Our associates are embracing this technology. In fact, they have asked more than 5 million questions through Mylow companion since its launch, reflecting strong adoption across our stores.

As we continue to integrate AI-enabled tools into our operations, we're making it easier for associates to deliver a better customer experience while driving productivity at the same time. We're also making progress on our freight flow 3.0 and full shelf replenishment initiatives. These efforts accelerate the speed of product from the distribution center to the sales floor while better leveraging our associates' time. As a result, we are improving in-stocks, making it easier for customers to find the product they need to complete their projects.

Before I close, let me thank our associates once again for their continued dedication to our customers and our communities. As a demonstration of our appreciation, we closed our stores on Easter, giving our teams time to rest, recharge and spend the day with their families. And as we approach the Memorial Day and the end of military appreciation month, I also want to recognize the more than 26,000 military members and spouses who are Lowe's associates and thank them for their service, their leadership and commitment continue to make a positive impact across our company, and I'm proud that for the third consecutive year, Lowe's has been recognized as a 5-star Employer by the VETS Indexes Employer Awards.

With that, let me turn it over to Brandon.

Thank you, Joe, and good morning. Beginning with our Q1 results, we generated GAAP diluted earnings per share of $2.90. In the quarter, we recognized $96 million in pretax non-GAAP charges from acquisition-related intangible asset amortization. Excluding these impacts, we delivered adjusted diluted earnings per share of $3.03, up from $2.92 last year. My comments from this point for will include certain non-GAAP comparisons that exclude these impacts where applicable.

Sales for the first quarter were $23.1 billion, up 10.3% from Q1 last year, in line with expectations. Comparable sales were up 0.6% driven by well coordinated spring execution, including our SpringFest event, along with continued strength in Pro, Appliances, Online and Home Services. Comps for February were down 1.4% as winter storms impacted much of the country. Comps accelerated to 2.1% in March and 0.5% in April as spring arrived across the country and customers responded to our seasonal offerings.

Comparable average ticket increased 1.5% driven by modest price inflation and strength in Pro and Appliances, while comparable transactions declined 0.9% as growth in seasonal categories was offset by continued DIY discretionary pressures. For the first quarter, gross margin was 32.7%, down 70 basis points and in line with our expectations, primarily driven by the dilutive impact of FBM and ADG, offset by favorability in credit revenue.

SG&A was 19.2% of sales, leveraging 17 basis points from continued disciplined cost management and the accretive impact of FBM and ADG. Adjusted operating margin rate of 11.5% was down 43 basis points versus prior year, also in line with our expectations. Our perpetual productivity improvement, or PPI initiatives, continued to deliver meaningful results, helping offset underlying cost pressures, mitigate inflation and support reinvestment and value for our customers.

The effective tax rate was 24.5%. Inventory ended the first quarter at $18.4 billion, up $112 million versus prior year including inflationary pressures from tariffs as well as approximately $500 million related to recent acquisitions. Excluding these pressures, the year-over-year inventory reduction reflected continued progress on SKU rationalization and productivity initiatives while maintaining strong in-stock levels to support customer demand.

Moving to capital allocation. In the first quarter, we generated $2.8 billion in free cash flow. Capital expenditures totaled $521 million, reflecting continued investment in our Total Home strategy, including tech-driven productivity efforts and key AI initiatives. In the quarter, we paid $674 million in dividends at $1.20 per share. We also repaid $2.4 billion in bond maturities as we continue progressing towards our commitment to deleverage and return to a 2.75x leverage ratio by mid-2027. Adjusted debt to EBITDAR was 3.1x at the end of the quarter. And we ended the quarter with $786 million of cash and cash equivalents and delivered return on invested capital of 26.8%.

Looking forward to the remainder of the year, today, we are affirming our fiscal 2026 outlook. We continue to expect sales in the range of $92 billion to $94 billion, with comparable sales in a range of flat to up 2%. We expect adjusted operating margin in a range of 11.6% to 11.8% and full year adjusted diluted earnings per share of approximately $12.25 and to $12.75. We also expect capital expenditures of up to $2.5 billion.

In terms of the second quarter, here are a few items to keep in mind. We saw solid growth in our spring categories in the first quarter, along with continued strength in Pro, Appliances, Online and Home Services. And as Bill mentioned, we have a great lineup of top brands and compelling values as well as tailwinds from the rollout of our workwear and pet assortments to additional locations. All of this positions us well for the second quarter, where we expect our Total Home strategic initiatives, including Pro, Loyalty, Online and Home Services to continue to drive performance.

Based on this, we expect second quarter comp sales to be roughly in line with the midpoint of our full year guide, and we expect second quarter adjusted operating margins to be pressured from: the impact of acquisitions, which we will begin to anniversary in the second half of the year; investments in our sales driving actions, which are more focused in the second quarter due to our mix into the spring season and key holidays; and near-term pressure from higher transportation costs that we are actively working to offset through productivity initiatives in the back half of the year.

Additionally, we expect adjusted diluted earnings per share in the second quarter to be approximately 2% below prior year adjusted diluted earnings per share. This results in first half sales and adjusted diluted earnings per share essentially in line with our expectations from the start of the year. We have been clear in our intent to remain competitive and drive sales in this environment, particularly around key seasonal moments and through enhanced fulfillment options, and we are seeing customers respond to those actions consistent with our expectations.

As we look ahead, we are confident in our team's ability to continue executing with discipline while navigating within the current uncertain environment. We remain committed to advancing our Total Home strategy and driving value for both our customers and shareholders.

And with that, we will open it up for your questions.

[Operator Instructions] First question comes from the line of Christopher Horvers with JPMorgan.

I wanted to put the comp outlook into perspective, and think about the first quarter a little bit, do you look at sort of the -- some of the strength in March as sort of deferred February demand and a comparison? And then as you think about just the -- because there was weather, bad weather and good weather, I think, year-over-year. And then as you think about the overall spring seasonal business, you tend to have a bit more southern exposure, and it seems like the deferral on the weather front is maybe in the northern tier. So do you think there was any shift of spring out of the first quarter into the second quarter?

Chris, this is Brandon. I would say overall for weather, the theme for Q1 was roughly mix for the quarter. I think February results definitely impacted by the winter storms early in the year. If you look at just the first weekend of February, it had a 30 basis point drag on the entire quarter just from the storms rolling through March and April saw I think a much more normal spring temperature. We did see some dry weather start spread out over most of the country. But I think as we looked at the exit rate into April, some of that had to do with just the timing of our events and our SpringFest April, relatively in line with expectations. And then as we mentioned in the comments, I think really excited about Q2. Great products, value in spring categories, our biggest weeks with Memorial Day, Father's Day, J4 great offers, go-to-market plans. We do also expect some benefits from our tax refunds here in Q2. And then as we look at the second half, really excited as we continue to drive the total home strategy across a number of different areas.

And then just stepping back because obviously, tax stimulus has helped the consumer broadly, and you could see that as all retail is reporting earnings right now, as you think about how much maybe that helps your business, do you think it's helped so far this year? Do you have concerns that as you get into the back half of the year if energy prices here, you could see the actual consumer pullback? Or do you sit here today on May 20 and say, overall, net-net, it's coming in line with your overall expectations from the tenor of the consumer, how they're purchasing and where they're engaging in the assortment?

Chris, we've done a lot of work on the tax stimulus trying to understand the nature and timing. Obviously, the macro events place a little bit more of a question mark around that. But we looked at Q1, the tax refund impact was more limited on our business. More significant drivers were the weather that I mentioned earlier. At this point, we estimate about 20% of the refunds have been spent. About 50% of that sitting in savings with consumers just given the uncertainty and the remainder of that has offset some of the higher fuel prices of recent. And then we're also estimating as we look forward, and this is based on IRS data, there still is just under about $50 billion of refunds that are yet to be distributed over the next 3 to 4 months, likely tied to extension. So in terms of spending, we do believe we could still see some benefits in Q2, in particular from higher income consumers, and we've contemplated that in our outlook here for Q2 and the balance of the year.

The next question is from the line of Steve Forbes with Guggenheim Securities.

Marvin, I wanted to explore the recent launch of HomeCare+. Really just curious if you could talk about what the hypothesis is as it pertains to member spend trends over time and realizing it's early, but any comment on how those initial member cohorts are engaging with not just the services themselves, but also the broader sort of ecosystem that you guys have into market?

Steve, thanks for the question. I think the key word is early, and it is early, but we're pleased with the launch. And our goal is to build a long-term relationship with the DIY customer. We're just embracing the fact that the majority of our customers are do-it-yourself customers, and we think that this is something that's unique and differentiated that doesn't exist in the marketplace. But it's early, it's a long-term play. We think it gives us a unique opportunity to leverage our loyalty platform, MyLowe's Rewards, offering a unique subscription service at a great value, leveraging trained local associates that customers will no trust and have confidence in. We see this as a long-term play, it's part of our mission statement of solving problems and fulfilling dreams for our customers. And we're really excited about what we've seen early, but it is early.

And then just a quick follow-up on Pro Extended Aisle. You guys have been talking about it for quite some time now. I don't know if it's at a point where you can maybe comment on how fast that segment is growing versus the total Pro segment and whether you're already capturing revenue synergies, you sort of hinted at it, right, cross-selling synergies with FBM, but love to hear you maybe just expand more about the Pro Extended Aisle initiative.

Well, look, we're excited about it. It's part of our initiative to do a better job of getting more Pro plan sales, and it gives us the opportunity to literally extend our product offering our delivery capabilities without having to add inventory to our stores. We are in the process of continuing to add suppliers and capabilities but we believe the Pro Extended Aisle success is a direct correlation to the fact that we had another strong quarter in Pro sales. And we're forecasting that Pro will continue to outperform DIY not only in the second half but for the balance of the year, and we think the Pro Extended Aisle initiative is tied directly to that outcome.

Next question is from the line of Kate McShane with Goldman Sachs.

We know in the original guidance discussion you have left some room for possible promotions. How does that look in Q1? And what are your thoughts around promotions heading into the rest of the year?

So the first thing is when we think about promotional cadence, we're really consistent with how we perform year-over-year. We're excited about some of the things that we were able to do with SpringFest, and we're really excited about what's coming up with some of these big holiday events in the second quarter. But as an overall comparison, we're very consistent with how we have historically executed promotions. I'll let Bill talk about some of the key promotional activity from Q1 that led to some sales success in what we're expecting leading into some of these huge sales events for Q2.

Yes. Thanks, Marvin. And so Kate, in my prepared remarks, I talked about our third annual SpringFest event in the quarter. we're really pleased with how we executed against that. We had member offers that were strong. We had a really strong in-store event. And our merchants brought really great offers to drive traffic and conversion both in our store and online. And then we're -- as we've said before, we're continuing to demonstrate to our customers that we've got to bring value. We've got to bring innovation. We got to continue to bring new stuff. And I think our team did a really nice job of doing that as well. And then we continue to listen to the customer and they're looking at all these values that we bring to market.

And so when we think about Q2, what's up in front of us coming into this weekend with Memorial weekend, obviously, is continue to keep these values front and center for the customer. So we're excited about what we've got to offer in lawn and garden, we've got in our seasonal business, Grills, Appliances and Outdoor project areas like decking, paint, stains that kind of product. So team has done a really nice job. We've got great brands that are helping to drive it. And then as we shift gears go into June and July, it's all about that taking care of that in June and then coming back in July 4th and executing against a strong July 4th event.

And Kate, this is Brandon. I'll just add, we've been consistent here in our intention to remain competitive and drive sales in this environment and particularly in the key seasonal categories, events, fulfillment options that we've been able to offer seeing great responses from customers as it relates to these actions, as Bill mentioned. And at the beginning of the year, again, we said we were going to be investing in the sales driving initiatives tailored around this and our guidance of 11.6% to 11.8% fully contemplates that.

The next question from the line of Scot Ciccarelli with Truist Securities.

You had positive comps in 70% of your product categories, but the total comp for the quarter was 60 basis points. I guess my question is like, how should we read that? Is it that most or all of your categories are kind of slightly positive -- I guess, still slightly positive and a [ few slightly ] negative? Or are there some outsized upside performers offset by some sizable drags?

Scot, this is Brandon. I'll take that. I think the pressure that you're continuing to see is really around the DIY. Marvin mentioned ongoing strength we've seen with the pro consumer, our services business online. DIY still very much engaging, but it continues to be in the repair maintenance replacement-related categories. And then obviously, here in Q1 with the seasonal nature of the business, smaller transactions, outdoor, lawn and garden. But I would say continued, this has been a trend now for multiple years. The categories that are related to big ticket discretionary are those categories in merch divisions that sort of continue to lag. And that's what we're dealing with, that's what we're managing through, and that's where we're trying to lean in and provide additional value where we can.

And Brandon, is there any way to kind of size the amount of your exposure to those bigger projects that are obviously the weakest point?

Yes, Scot. We've said pretty consistently as we look at the overall portfolio, about 2/3 of our business is repair maintenance and about 1/3 of it in the discretionary category. So that's roughly how it breaks out, and there really hasn't been a change in that.

The next question is from the line of Simeon Gutman with Morgan Stanley.

Can I ask, it looks like transactions are below 2019 levels. That's not new. That's I think, for the last couple of years. So it supports this lock-in effect. But if you think about the age of the housing stock, which we talk about, the maintenance repair, which you just mentioned, how big of a piece of the business that is you would think that the sector could show some more life. So I want to question how you think about that and if you think the sector can really grow without faster turning homes?

Simeon, this is Marvin. I think overall, this has been the most difficult housing market that I have faced in this business since the financial crisis. And as Brandon mentioned, it's almost exclusively or disproportionately on the DIY customer. That's the majority of where our revenue comes from. And so I look at it from this perspective, we've delivered 4 quarters of positive comp in an environment where the DIY face more economic pressure than I've ever seen before. And so we're really confident that as we start to see some type of moderation or normalcy in the home improvement and the housing market. We think that we're positioned really well for long-term gains just because we structured this business to win in any economic environment.

And again, with roughly 60% to 65% of our revenue coming from the DIY facing this type of headwind still able to deliver positive comps is something that we take as a win, but also we're focusing on areas like Home Services, Pro, Online, et cetera, that's allowing us to continue to perform well.

And I'll just make one more point, and I'll give it to Brandon. I mean, we're pleased that our Appliance business was positive in the quarter, and that goes directly to what Bill talked about. I mean we have spent capital to have the best store environment in this space. We not only have spent money on the environment. We've also expanded brands, and we've done an incredible job of creating the best fulfillment capabilities in the home improvement industry. And we think all those investments are paying dividends in an incredibly difficult market. And we think that, that just bodes well for Lowe's in the future as things start to recover. I'll hand it over to Brandon.

Yes, and I'll just add, we've been extremely focused on driving transactions, driving traffic in store onto our site. And I think that shows with our performance with transactions, some of the best performance we've seen here in several years. So focus is there. We've called out the sales driving actions that we're going to continue to invest in. I think we look at the first half, it still is largely going to be skewed towards ticket. But as we look at the second half and expectations, we do expect transactions to continue to improve. It is going to be centered in those repair maintenance categories, but anything we can get with the macro or any consumer engagement on these big-ticket discretionary categories is going to be upside to that.

And a follow-up, the cost environment, Brandon, looks like it's gotten a little bit more challenging since when you guided. Can you talk about the amount of cushion or, I guess, flexibility you have versus having to pivot either more PPI to be able to get to your margin goals, given the cost?

Yes, sure, Simeon. The macro, as you mentioned, certainly introduced some new risks and uncertainties here in the last 3-or-so months monitoring the situation here pretty closely, impact to both the consumer and our supply chain. We are seeing a pretty immediate impact from the oil prices. It's pressuring fuel, commodity-based products like resin and plastics. Q1 [ net impact ], Simeon, has been pretty manageable. Q2. We are starting to see some of that pressure. We're beginning to work with our vendor partners, supply chain partners to work to mitigate through that, adjusting contracts where we can, sharing that burden. And then you mentioned we're looking hard at the PPI portfolio, where we can invest where we can pull some things forward where we can get outsized benefit to try to offset that. So all that work is very much in motion.

And last thing I'll say is just while challenging, I think this team has proven the ability to effectively manage through that here in the past multiple inflationary cycles to be specific, three, that this team has lived through in the last 6-plus years, and we have a proven playbook here to remain competitive and manage profitability. So challenging, but confident that we can work our way through it here.

Our next questions are from the line of Seth Sigman with Barclays.

I wanted to follow up on one of the last points. If you look back over the last few quarters, your growth has really been driven by ticket, and that got you to positive growth. It was still positive in Q1, but it has moderated. So I am curious if you're seeing a shift in mix? Or is that just less inflation in Q1, something specific in Q1 that would have led to that moderation in ticket? And then if you could also elaborate a little bit more on pricing and where we are in some of the price increases that started last year related to tariffs, maybe now on the back of fuel? Just where are we, what inning perhaps that would be helpful.

Yes, sure, Seth. On the first question, really around Q1 contraction and ticket growth. That really is a function of mix here with Q1 as we lean into smaller ticket spring seasonal projects like lawn and garden, obvious is a slowdown in what I'll call larger projects. Our big ticket performance still positive over 2% in Q1, and that continues to be driven by Appliances, Pro and then the services repair maintenance projects. So I think to highlight that.

And I think your second question, just about what inning, we are continuing to work through, I think, the tariff environment. I mentioned the fuel, the sort of renewed round of inflation. All very fluid. We're managing the tariff situation with the IEEPA ruling, new section 122, 232 tariff actions that we're working through and how that impacts the business, in particular, in the second half of the year, expecting new news as it relates to 301. So we're continuing to partner, Bill and his team doing great with our supplier partners as we manage through that, executing our country award and diversification strategies. All that's in our outlook in terms of those expectations and the rules and the framework that we're managing under today. I think, again, we showed that we could manage through this tariff environment last year in 2025 and comfortable that we have our arms around it here over the back half of the year.

Okay. That's helpful. And then on FBM and ADG, I believe those will come into the comp base at some point later this year, Q3, Q4. Maybe just talk about underlying performance in Q1 and then how are you planning those businesses for the rest of the year?

So Seth, this is Marvin. Let me just kind of start out with a remind of the strategic rationale to Roundy's acquisitions. We estimate that there's going to be roughly 12 million new homes needed by the year 2033. And historically, Lowe's has generated 0 revenue in the new home on multifamily construction projects, and we estimate that's roughly a $250 billion total addressable market. So these 2 acquisitions we believe, puts us in a really good position as this building phase starts to have what we have described as an interior solutions platform for residential and commercial builders. And so that's the strategic rationale around why we made these acquisitions, and we're very pleased with what we've seen so far from all of the synergies and all the activities around costs.

So I hand over to Brandon, and he can give you an update on those activities and then get more specific to your question.

Yes, Seth, I'll just speak to kind of what we're seeing with these businesses here in the short term. And we did expect as we came into the year that we'd be navigating a challenging residential construction market, and I think it's playing out exactly in line with that. I think just as a reminder, to step back, ADG, their business is fully exposed to new home construction, that's single-family, multifamily FM more of a 50-50 mix, both feeling the pressure on the residential side. I think for FBM, we have been really pleased with what we're seeing on the commercial side. They continue to win data center, stadium, municipality contracts which does reflect some of the benefits of their diverse customer base. And then I think you also mentioned progress. We're really pleased with what we're seeing on the synergy side and the integration work primarily in the procurement cost space, and that's categories like drywall, steel and insulation.

So while tough conditions overall right now from a macro standpoint, this is giving us the opportunity to win new business and take care in a down market, and we fully expect ADG and FBM both to build on the leadership position and emerge even stronger on the back side of this, especially when kind of the macro factors that Marvin outlined start to turn.

The next question is from the line of Steven Zaccone with Citi.

I wanted to ask about same-store sales for the full year, with your commentary about 2Q in the plus 1 level, how do we think about the second half? What are some of the drivers to see some improvement in the second half of the year to get to that high end of the range since it's still there?

Yes. Thanks, Steve, if you're looking at the high end of the range, I do think it's continued traction with a number of our sales driving initiatives, our Total Home strategy. And Marvin mentioned progress that we're seeing with our Extended Aisle momentum that we have with our Online loyalty platforms, expanded fulfillment. Bill talked about the rollout with pet and workwear where we expect to be in all stores by the end of the year. I mentioned also earlier some stimulus potentially from the tax refunds and then any potential HELOC activity that's unlocked. I think there continues to be $35 trillion that's out there, an average of $400,000 per household, about 1/3 of that [indiscernible]. So continue to look at that as a potential opportunity to be unlocked. And then any progress that we're making around Pro plan spend both in our store and with the FBM and ADG acquisition. So those would be all things if they came together that I think could push us potentially to the upper end of the range.

Understood. Then Marvin, a question follow-up on Simeon's question. How do you view the risk of higher rates as an impact to your business? You mentioned some of the survey backlogs are still stable. Do you think higher rates or rest of the industry see some downside? Or is it more we see this too long period of kind of softer industry growth?

Steve, for us, we basically have factored that into our guidance for 2026. We started this year with a pretty muted view that we would have basically flat growth overall in the home improvement sector. And we basically set our guidance to take share and outperform the market. We've been able to do that for successive years, and we see it the same exact way. We try to get out of the prediction business relative to what will happen in the macro specifically around things like rates. Obviously, that has a direct correlation on our consumer. We hear a lot and talk a lot about this lock-in effect that we're all experiencing with historically low housing turnover as a result of that.

But we don't see anything in the current environment that we didn't anticipate relative to rates in the broader macro. Again, we came into this year with a pretty muted point of view as we did in the first quarter, as we've done for 4 consecutive quarters, we've had the ability to take market share. We've taken market share in the small to medium Pro segment. We've taken market share in the home services area. We grew our dot-com business by 15.5%. And in a really, really difficult DIY environment, as I mentioned, we continue to perform well in spite of the headwinds. So we see the market pretty much as we anticipated and that's factored into our guidance.

Our next question is from the line of David Bellinger with Mizuho.

Can you clarify some of the commentary around recent trends? You've guided to about 1% same-store sales growth in the second quarter, should we assume you're running at that level today? And as April progressed and we moved into the early Q2 period, have you noticed anything within consumer spending patterns, whether that's DIY, Pro, anything across income cohorts that's breaking the consistency of the consumer and the resiliency of the consumer narrative in any way?

So David, this is Marvin. Relative to what we're currently seeing, the best way to answer that is where the weather is seasonal to business is performing well. This time of year, this is an incredibly weather-dependent business. But having said that, the biggest sales weeks are ahead of us with Memorial Day selling period, Father's Day and the 4th of July that Bill mentioned, and we believe, although, I'm a bit biased, that we're the best executing retailer in the world, and our merchants have given us great value, but it's way too early to start to talk about what we're seeing different in the consumer.

What we've seen so far is what we've seen all year long, and that is we're operating and what we would describe as a K-shape economy where the higher income consumer spends and they're spending on innovation and they're spending on things to modernize their home and the lower income consumer is a little bit more cautious and a little bit more uncertain based on all of the macro factors that we all know so well. And we haven't seen anything different in the start of this quarter that we saw in the first quarter. As a matter of fact, as I said earlier, what we're seeing play out with the consumer is pretty consistent with what we forecasted when we gave our guidance earlier in the year.

Having said that, we built a business to perform in any environment. As Brandon mentioned, we have a track record of performing well, managing expenses and finding ways to grow sales irrespective of the macro and we plan to take share this quarter, we plan to take share for the back half of the year. And we're just hoping with our fingers crossed that we start to see the macro start to moderate at some point.

Got it. And then a quick follow-up. Can you update us on where like-for-like inflation is running? And as we think about all these upwards pricing pressures that are formulating across the industry with the Iran conflict and everything else out there today. Is there a scenario where pricing for the broader category does not accelerate? Can Lowe's use any of the potential tariff refunds as an offset and a source of price investment to keep everything as low as possible as long as possible.

Yes. I think, David, as we look at like-for-like inflation running about 3%, which was fairly consistent with what we saw in Q4, and those trends as we work through tariff increases. Obviously, as we look ahead and cycle some of the noise from tariffs from last year, we're expecting some of that to moderate. That's in our outlook around more moderating average ticket and an acceleration in transactions.

So as you mentioned, we're doing everything that we can in this environment to mitigate any inflation risk and protect value for our consumer and drive repeat traffic and transactions into our store. I think that's been pretty clear on where we're leaning in, how we're investing in the business. We continue to expect to do that over the remainder of the year.

Our next question is from the line of Zach Fadem with Wells Fargo.

I think what a lot of people are getting at in terms of the outlook is there is an implied acceleration in Q2 and the second half on both a 1- and a 2-year basis. I guess the first question is, how is your view of the category changed at all in light of all of the changes in the world around us. And could we then walk through the factors that give you confidence in your ability to take share and widen your spread versus the category as we move further through the year?

Zach, this is Marvin. I'll take the first part of that. As I said earlier, the year is playing out basically consistent with how we thought it would. And it's very early. We're just through 1 quarter of the year and a couple of weeks of the second quarter. Having said that, we still are very confident in the initiatives that correlate directly to our Total Home strategy. And we believe at the beginning of the year that we would see sales growth more so in the back half of the year than in the front part of the year, and that's just based on the cadence of our year-over-year comparisons and based on some of the initiatives and when they're going to be kicking in.

So I'm going to hand it over to Bill, and he can just outline some of those key initiatives that we are excited about that we think will continue to drive our sales. And I'll let Joe talk about some of the things we're also seeing on the Pro side that we're excited about as well. And this has nothing to do with us predicting that the macro environment is going to change. We're not looking for an inflection point in the consumer. This is simply a view that we have that the initiatives that we have in place and when they're going to be paying dividends for us, and that's how we shape the year.

Yes. Thanks, Marvin. So Zach, I think for us, it's the initiatives we've been focused on. We touched a little bit on it last quarter, but we've got -- we're excited about rolling out Daltile into our flooring department, that obviously is the #1 brand for the Pro. It gives us great confidence with the DIY consumer, allows us to access their showrooms across the United States, get to the job site home within 2 or 3 days. We're really excited about what we've done in appliances and the continued expansion that, that team has done to bring innovation. I could literally go through all 13 merchandise divisions to talk about new and innovative products that are all set to come in, in the back half of the year. Some of that you're going to see as we get into Father's Day, July 4th. But as we roll into the back half of the year, we talked about in my prepared remarks, the continued expansion of workwear and pet, those areas, those brands the private brand expansion to those categories are working well.

Our soft flooring business in carpet driven by STAINMASTER and the innovation in STAINMASTER helping to drive the soft flooring business. The work the team has done across the Pro business between the electrical rough plumbing areas I called out in my prepared remarks, just consistent day-over-day continued growth in innovation and simplification for the Pro. And then the work that our supply chain teams have done to make sure that we've got the job lock quantities, and we continue to evolve with our localized assorting in our stores to make sure that we stay relevant for the Pro how codes are changing across the country.

So we have a lot in the hopper of what we're doing online, continue to take friction out for our consumer that's starting online to shop literally every single category the online teams have done just a great job with our merchants to continue to take that friction out and make it easier for the consumer to navigate.

Yes. And Zach, just a few comments on the Pro, so we still have meaningful growth opportunity ahead of us as we think about areas like Pro Extended Aisle. This is a multiyear build-out. So we continue to add new capabilities, new suppliers, new programs, enhanced fulfillment options, and we're continuing to be very, very pleased. So we expand through markets, localization, and we're seeing green shoots there.

The final question comes from the line of Peter Benedict with Baird.

I mean PPI is important, right, for helping you guys protect profitability in this period where demand is sluggish. There was some discussion of AI in the prepared remarks around how it's helping associates. It's also helping customers online. I'm wondering if there's -- if you can talk a little more about maybe what is out there in terms of AI, helping on your systems and your -- kind of your back-end systems and the opportunity to drive productivity there. I'm thinking kind of demand planning, pricing and promotion, replenishment, those types of things. Maybe it's not a 26 deliverable, but is there something on the horizon there that we should be thinking about?

So Peter, it's Marvin. I'll take the first part of that. Look, we're really excited about the framework we've put around how we leverage AI, and we framed it in how we sell, how we shop and how we work. And as I mentioned, our virtual assistant Mylow and Mylow Companion built on an open AI platform has been incredibly instructive for us understanding the power of agentic commerce. As I mentioned and Joe mentioned, if you combine both associate and customer inquiries, would get roughly 2 million a month going into the system and it's learning and it's getting smarter, it's getting better, it's getting more intuitive.

And what we were so pleased to see is even our most tenured associates are adapting to this tool, which we were not sure if they would because these are associates with high level of technical scale, and we were not sure if they would embrace it, but because the system is so intuitive and is working so well, is being embraced across all levels of [indiscernible]. And Joe and I went a store a couple of weeks ago, and we ran across associates who have been on Board for less than a month, and he was able to walk us through and do a full demo of how to use the Companion tool and how it helped him to transition quickly into a really complex environment that home improvement is.

But also in addition to that, our tech team is using AI tools for development and [ cold review ], and this has resulted in double-digit productivity gain. So we understand that AI is going to be incredibly important to do a couple of things. Number one, is going to create great productivity possibilities for us as we look at redesigning jobs and redesigning what AI agents can do for us, you're independent of physicians, but we're also learning how AI is making existing associates so much more effective in their current job. Bill can go through a list of things as merchants are leveraging AI to be more efficient. The same thing in the store where you're seeing 200 basis points of customer satisfaction improvement based on the use of the companion tool. So we're leveraging it. We understand that it is definitely a tool for productivity, but it's also a tool to enhance capabilities of existing associates.

I'll let Brandon kind of wrap it up.

Yes. Peter, I'll just add Marvin covered off there on how we shop, how we sell under the framework. You mentioned a few areas all very much in motion under the how we work, right? So demand planning, allocation, replenishment, our pricing and promotional platforms, assortment planning. These are all areas as we've allocated capital this year that we're investing heavily in. We're starting to see benefits the $1 billion of PPI that we've messaged starting to become more and more apportionment to these efforts in these categories. So we're going to continue to drive that, continue to work through that. and that gives us confidence again to our ability to deliver the $1 billion for this year.

Thank you all for joining us today. We look forward to speaking with you on our second quarter earnings call in August.

This concludes the Lowe's first quarter 2026 earnings call. You may now disconnect.

Good morning, everyone, and welcome to Lowe's Companies Fourth Quarter 2025 Earnings Conference Call. My name is Rob, and I'll be your operator for today's call. As a reminder, this conference is being recorded.

I'll now turn the call over to Kate Pearlman, Vice President of Investor Relations and Treasurer.

Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President, Stores; and Brandon Sink, 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 2026. 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 the quarterly earnings section of our Investor Relations website. Before turning the call over to Marvin, I'd like to ask that you please hold December 9 for 2026 Analyst and Investor Conference, which will take place in New York City.

Now I'll turn the call over to Marvin.

Thank you, Kate. Good morning, everyone, and thank you for joining us today. In the fourth quarter, sales were $20.6 billion and comparable sales increased 1.3%. For fiscal year 2025, we delivered sales of $86.3 billion, positive comparable sales of 0.2% and adjusted operating margin of 12.1%. This led to adjusted earnings per share of $12.28, a 2% increase over last year. Despite a challenging industry backdrop, our relentless focus on expense management allowed us to hold adjusted operating margins flat to the prior year when excluding the impact of our recent acquisitions.

While our outperformance in the fourth quarter demonstrates our team's disciplined execution, our outlook for 2026 remains cautious given the persistent volatility in housing macro. This uncertainty continues to pressure big-ticket discretionary DIY projects as many consumers are reluctant to make significant investments in their homes. Within this challenging macro environment, it is imperative to remain focused on our perpetual productivity improvement or PPI initiatives. This commitment to PPI is at the center of the announcement we made recently to eliminate approximately 600 corporate and support roles.

Although these are difficult decisions to make, this workforce reduction will help us create greater financial agility within our dynamic industry while continuing to invest in customer-facing areas of the company. We will continue to manage what is within our control, which is reflected in the strength we delivered across Pro, online and home services as our total home strategic initiatives are resonating with our small to medium Pro and DIY customers alike.

Starting with our Pro results, we delivered another quarter of growth as we continue to gain traction with our transformed offering. Our Pro customers are responding to our compelling brand and product assortment, investments in inventory, job site delivery, enhanced service levels and a tailored digital experience, and we're further enhancing our Pro brand offering by extending our assortment of the #1 power tool brand, DEWALT, the tool of choice for Pros for over 100 years. We are excited that we now carry the largest selection of the walk power tools and accessories in our stores and online.

Moving to online. We delivered a 10.5% growth this quarter and set new sales records this holiday season on both Black Friday and Cyber Monday. Both DIY and Pro customers continue to shift their shopping online as our enhanced user experience and fulfillment options offer the ease and convenience they are seeking. In fact, on Black Friday, our Lowe's app was so popular that it was the #1 free app in the shopping category on Apple's App Store in the U.S. This level of engagement reflects the investments we've made to create a seamless omnichannel shopping experience. And as customers continue to integrate AI into their shopping habits, we are collaborating with leading digital platform so that we are well positioned to participate in Agentic commerce.

Now turning to home services, where we delivered high single-digit growth. This is another example of a customer experience that we have overhauled at Lowe's by removing the friction for what was a time-consuming process through digital tools and enhanced service to create an intuitive installation solution for our do-it-for-me customers.

Let me now shift to our view of the broader macro environment. Consumer confidence remains subdued given inflationary pressures and overall economic uncertainty. And despite modest relief in short-term interest rates and market expectation for additional Fed cuts, mortgage rates remain elevated. As a result, a persistent lock-in effect remains in place keeping housing turnover and new home stars under pressure, leading us to expect improvement in both the housing and home improvement markets to be gradual. That said, the structural demand drivers of the home improvement industry remain strong with home equity setting new record levels and homes continuing to age, averaging 44 years old.

With the chronic supply-demand imbalance in housing, analysts continue to expect that approximately 16 million new homes will be needed in the United States over the next decade. Despite near-term industry headwinds, we're pleased that our investments in our total home strategy and operational excellence are paying dividends. Our compelling product assortments, flexible fulfillment options, innovative installation solutions, and best-in-class digital experiences are appealing to both the value-conscious homeowner and the busy pro. We're confident that these investments position the company to outperform the market, regardless of macro conditions.

With the recent acquisitions of Foundation Building Materials, or FBM, and Artisan Design Group, or ADG, we are well-positioned to participate in the expected recovery in housing. As we start the year with these two companies, our integration efforts are on track, and we're focused on capturing cost synergies by leveraging our combined scale. We're also developing solutions to support cross-selling opportunities that will enhance our offering to our respective pro customers by capitalizing on complementary product offerings.

While FBM and ADG are navigating a challenging residential construction market, we expect them to build on their leadership position this year, leveraging their reputation for exceptional customer service while maintaining operational discipline. In addition, we're pleased with FBM's commercial business, which represents roughly half of its revenue, as they continue to win new data center contracts, which reflects the benefits of a diverse customer base.

Before I close, I want to take a moment to recognize our frontline associates who continue to show up every day with a strong sense of ownership and commitment to serving our customers and communities. As a demonstration of our appreciation for their efforts, we awarded a discretionary bonus of $125 million to our dedicated frontline associates for their outstanding performance in the fourth quarter. This includes our assistant store managers, department supervisors, and hourly associates in our stores and distribution centers. It's an honor for me to continue to support these hardworking men and women.

Our dedicated frontline associates are the primary reason Lowe's was recently recognized as Fortune's #1 most admired specialty retailer. This honor truly belongs to them. I'd like to congratulate our team for delivering another year of outstanding customer service.

With that, I'll turn it over to Bill.

Thanks, Marvin. Good morning. We're pleased with our sales performance this quarter as we delivered positive comps in 9 of our 14 merchandising divisions. Our teams remain focused on offering value and innovation to consumers who continue to be mindful about their home improvement spending. This holiday season, we helped our customers celebrate with exciting offers and deals on appliances, tools, Trim-A-Tree, and more, making Lowe's a popular destination for holiday shoppers, both in-store and online.

Starting with building Products. We delivered broad-based growth, driven by solid performance in both Pro and home services. Rough plumbing was a standout, with continued strength in water heaters, water treatment, and HVAC, along with strength in other Pro-focused areas within our plumbing assortments. This includes a new merchandising display for SharkBite PEX pipe and fittings. It showcases straight pipes stacked upright, which Pros prefer over coiled Product, as it makes it easier for them to use on the job site.

We delivered positive comps in millwork with strong performance, especially in windows and doors, supported by leading brands such as Pella, Therma-Tru, and LARSON, which are exclusive to Lowe's in the Home Center channel. Our convenient installation solutions, combined with our affordable credit offers, are helping customers manage these larger replacement projects.

Turning to home decor, where we delivered positive comps across kitchens and bath, paint, and in appliances, where we continue to build on our market leadership position. With the widest assortment of leading brands, competitive pricing, and rapid delivery, consumers are turning to Lowe's more often for their appliance needs, whether urgent or planned.

As a reminder, Lowe's remains the only retailer that can deliver and install major appliances next day in virtually every zip code in the U.S. In kitchens and bath, our recent reset in bathroom vanities continues to drive results as customers appreciate the improved shopping experience and the easier access to big and bulky products. Within our bath program, we're pleased that we've been selected by TOTO to be the first big box retailer to offer their innovative toilets as we leverage our larger showrooms to feature their premium product, which will be exclusive to Lowe's in the Home Center channel. This quarter, we were also encouraged by our results in paint, where we delivered positive comps with broad-based growth across interior and exterior paint, primers, stain, and attachments, as customers took advantage of milder weather earlier in the quarter to work on outdoor projects.

We're off to a great start with the new Sherwin-Williams ProBlock Quick Dry Primers, which we introduced in Q3. Pros are responding to the superior quality and performance versus the competition, helping to drive double-digit Pro comps in primers in Q4.

Looking now at hardlines. We delivered growth in hardware, seasonal and outdoor living, and lawn and garden, driven by strong holiday and gift-giving assortments, along with storm-related demand. It was exciting to see customers line up at our stores early on Black Friday, inspired by our creator network, to take advantage of our My Lowe's Rewards Blue Bucket giveaway, including a chance to win a golden ticket for a free appliance priced at $2,000 or less.

Our holiday Trim-A-Tree assortment was also a hit, driven by our strength in animatronics, and customers also responded to great deals in the Tools Gift Center with values from Klein, DEWALT, Bosch, and Kobalt. We also had compelling member-only deals online as well, where we delivered yet another record for the Black Friday/Cyber Monday weekend, along with several viral moments that centered around our bucket giveaway and trending Products like mini buckets, teeny totes, and mini toolboxes. In January, we helped customers prepare for winter storms Fern and Gianna with generators, snowblowers, ice melt, flashlights, and gas cans, which contributed to positive comps in seasonal and outdoor living and lawn and garden.

In the quarter, we also completed the rollout of pet and workwear to more than 1,000 stores as we continue to expand our offering of convenience items that help our busy customers make the most of their shopping trips. Given the solid results from these new assortments, we'll be expanding them to the remainder of our stores in 2026.

Shifting gears, our teams are delivering against our ongoing perpetual productivity improvement, or PPI initiatives, which I outlined at our last Analyst and Investor Conference. These include disciplined product cost management, improving inventory productivity, maintaining a disciplined approach to pricing and promotions, and expanding Lowe's Media Network. This year, our supply chain, merchandising, and finance teams drove inventory productivity and completed our multiyear SKU rationalization initiative, while also effectively navigating an unprecedented volume of tariffs and ensuring strong in-stocks to drive sales. We are growing our Lowe's Media Network as we help our suppliers better connect with our shared customers, leveraging insights gained through our loyalty programs.

As we look ahead into 2026, we'll empower our merchants with new AI tools that make their workday more efficient, freeing up time for them to focus on driving sales and optimizing our product assortments. We will also introduce new tools to our merchandising services team, or MST associates, that will direct them to service the right base at the right time based on the sales trends of their store. Looking ahead to spring, we're ready to capitalize on the demand driven by our biggest season of the year with great values, the best products and brands, and strong in-stocks to help our customers tackle all their spring projects.

We have an unmatched outdoor power equipment lineup in the home center channel, the only one to offer Toro, the leading gas-powered brand, and EGO, the leading battery-powered brand. We have a wide array of grills to choose from across Weber, Char-Broil, Blackstone, Pit Boss, along with our own private brand, Master Forge. Our new patio lineup is stronger than ever, designed to help our customers enjoy their outdoor living spaces in style.

We will also continue to earn customer loyalty through our DIY loyalty Program, My Lowe's Rewards. We recently introduced a new perk for members, My Lowe's Rewards Kids Club, featuring in-store workshops, family engagement events, and giveaways for young DIYers, helping us connect with the next generation of homeowners. As part of these efforts, we are also excited to expand our relationship with the number one influencer in the world, MrBeast. Later this spring, you'll see us activate this partnership across family experiences, merchandise, and more.

As I close, I want to thank our merchants, MST associates, and vendor partners for their hard work and partnership this year. Their focus on delivering the best for our customers really sets the bar, and we value the important role that all of them play in helping to drive our success.

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

Thank you, Bill. Good morning, everyone. I'd like to begin by thanking our frontline associates and store leaders for their outstanding work, supporting our customers impacted by Winter Storms Fern and Gianna, reflecting the critical role our stores play during hard-hitting weather events. Their commitment matters. It is just one example of the ongoing focus on customer service that our associates deliver day in and day out. Once again, this quarter, we drove improved customer satisfaction for both DIY and Pro customers, including during another busy Black Friday and Cyber Monday weekend. Customers appreciated our flexible fulfillment options during the busy holiday season, as they relied especially on same-day gig delivery to meet last-minute shopping needs.

Turning to our fourth quarter performance, I'm pleased that we delivered another quarter of growth in Pro. We are building on our momentum by expanding our Pro sales force, which allows us to reach new customers while also growing share of wallet with existing Pros, including in their planned spend. With the recent rollout of our new AI-enabled Pro Companion, we're giving our Pro sales team even more opportunities for success. This new capability helps sales associates quickly prepare for conversations with Pros by enabling rapid access to relevant information so they can walk in with recommendations already in hand, leading to more effective customer interactions. We're helping the sales associates at the Pro desk serve complex orders through the Pro Extended Aisle, which is a direct interface to our suppliers' catalogs.

We've just introduced a new feature that allows us to stage job site delivery, so Pros can get what they need immediately and then deliver the rest of the order at a later date based on their schedule. This new capability not only improves the customer experience, it replaces what was a time-consuming process for our associates with a single click.

I'm also excited to share that Lowe's is now the exclusive national home improvement partner to the National Association of Home Builders, or NAHB. This allows us to connect with their 140,000-plus Pros and offer member-only savings. Looking ahead, in our recent survey, our core Pro customer indicate they continue to work on smaller-ticket repair projects and that their backlogs remain stable.

Now, let me discuss the progress we've made this year against our perpetual Productivity improvement initiatives or PPI. As a reminder, each year, our store operations teams tackle a number of productivity initiatives. Let me give you a couple of highlights from 2025. In the fourth quarter, we completed the rollout of our front-end transformation across our store portfolio.

This multiyear effort meaningfully improves the checkout experience for customers while freeing up labor hours, so associates can spend more time serving customers in the aisle. The transformed front end includes an expanded buy online, pickup in store area that makes it faster and easier for our customers to grab their online orders, helping us better serve the continued shift to omni-channel shopping. We've also enhanced our freight flow as part of our PPI work. By redesigning the process and leveraging tech-driven solutions, we've made meaningful gains in labor productivity as we more efficiently move product from the truck to the sales floor.

Looking ahead to fiscal 2026, we're already working on our next set of PPI initiatives. One priority is to even further enhance our stocking through an initiative we're calling Freight Flow 3.0, which allows us to better sequence inbound inventory from our distribution centers. Overnight teams will focus on stocking the highest priority product immediately, while early morning teams arrive earlier to manage the remaining product flow. This approach means more associates are available to help our Pro customers when they arrive early to shop before heading to their job sites. These changes are already yielding better inventory accuracy and in-stocks, while also supporting customer service.

Another PPI goal this year is our new full shelf replenishment initiative, which launched across all stores last month. Using real-time data to identify out-of-stocks, this AI-enabled technology sends stores a prioritized list of the most critical items to restock, which helps ensure that products are available where and when customers need them. These enhancements are improving both the associate and customer experience. With better visibility, smarter prioritization, and more product on the shelf when it's needed, our stores are becoming easier to shop every day.

Finally, as Marvin mentioned, we are recognizing our frontline teams in our stores and supply chains for their critical contributions to our results in the fourth quarter and this year with a discretionary bonus. Assistant store managers will receive $5,000, and hourly associates will receive bonuses ranging from $150 to $700. These bonuses are on top of their normal incentive plans.

These associates show up every day with a relentless focus on customers and eagerness to embrace new technology and a commitment to helping one another succeed. This bonus is a reflection of a culture of winning together that we have created. That's what sets Lowe's apart.

With that, I will turn the call over to Brandon.

Thank you, Joe. Good morning. Starting with our fourth quarter results, we generated GAAP diluted earnings per share of $1.78. In the quarter, we recognized $149 million in non-GAAP charges associated with the acquisitions of Foundation Building Materials, or FBM, and Artisan Design Group, or ADG. Keep in mind, in the fourth quarter of last year, we also recorded a pre-tax gain of $80 million associated with the 2022 sale of our Canadian retail business. Excluding these impacts, we delivered strong results for the quarter with adjusted diluted earnings per share of $1.98.

My comments from this point forward will include certain non-GAAP comparisons that exclude these impacts, where applicable.

Fourth quarter sales were $20.6 billion, with comparable sales up 1.3%, driven by growth in Pro, online, and home services, as well as winter storm activity. We estimate that the demand related to winter storms Fern and Gianna positively impacted Q4 comp sales by approximately 50 basis points. With a strong start to the holiday season, we delivered positive comps of 0.4% in November. Comps were down 1% in December, then accelerated to 5.8% in January, lifted by storm-related demand. Comparable average ticket increased 3.6%, driven by price increases and a mix into Pro and appliances, while comparable transactions declined 2.3%.

For the fourth quarter, adjusted gross margin was 32.7%, down 18 basis points as the dilutive impact of FBM and ADG was nearly offset by higher credit revenue, multiple PPI initiatives, and favorable Product mix. Adjusted SG&A was 21.4% of sales, deleveraging 37 basis points as higher frontline discretionary bonuses and annual incentive payouts, as well as sales-driving actions, were partly offset by the accretive impact from the acquisitions. Adjusted operating margin rate of 9% was down 41 basis points versus prior year, and the adjusted effective tax rate of 23.6% was consistent with the prior year rate. Consistent with our expectations, FBM and ADG operating results were accretive to adjusted EPS for the fourth quarter, while diluting operating margin by approximately 30 basis points.

Inventory ended Q4 at $17.3 billion, in line with prior year, despite the inclusion of approximately $500 million in inventory from acquisitions as well as higher tariffs. We continue to execute on multiple inventory productivity initiatives through AI-enabled solutions while also benefiting from SKU rationalization. These outstanding results demonstrate the strategic alignment and collaboration we're driving across the organization.

Shifting gears to capital allocation. In 2025, we generated $7.7 billion in free cash flow and returned $2.6 billion to shareholders through dividends, which includes a dividend of $1.20 per share in the fourth quarter, totaling $673 million. We invested approximately $3 billion in cash for the acquisitions of ADG and FBM, and borrowed $7 billion to finance the remainder of the purchase price of FBM.

During the year, we also repaid $2.5 billion in bond maturities. Capital expenditures totaled $2.2 billion for the year, driven by investments in our Total Home strategic initiatives. Adjusted debt to EBITDA was 3.31 times at the end of the quarter. We ended the quarter with $982 million of cash and cash equivalents and delivered return on invested capital of 26.1% for the year.

I would like to discuss our 2026 financial outlook. While short-term interest rates have been coming down, affordability and the lock-in effect continue to pressure demand. Consumers are still cautious about discretionary big-ticket purchases. While many homeowners will receive larger refunds this year, it is unclear how much of that will be spent on home improvement. It is also unclear when mortgage rates will ease, which will continue to exert pressure on existing home sales and new home construction.

Taking all of this into account, we forecast the home improvement market to be roughly flat this year in a range of down 1% to up 1%. We remain confident in the continued execution of our Total Home strategy, which will enable us to grow faster than the market and take share. With that, we are expecting 2026 sales ranging from $92 billion to $94 billion, with comparable sales in a range of flat to up 2%. We anticipate that ADG and FBM will contribute approximately $8 billion to sales. We expect operating margin in a range of 11.2% to 11.4% and adjusted operating margin in a range of 11.6% to 11.8%. This includes 30 basis points of dilution related to the wrap of FBM and ADG in 2026. As a reminder, the acquisitions drive approximately 50 basis points of dilution on an annualized basis.

We expect gross margin to decline approximately 75 basis points compared to the prior year when we factor in the dilution related to the acquisitions. However, the acquisitions are accretive to consolidated SG&A as a % of sales. We will continue to drive our perpetual productivity improvement, or PPI initiatives, across the enterprise with a target of roughly $1 billion of productivity again this year. This includes the impact from the workforce reduction that Marvin mentioned earlier. This productivity will offset pressure from merit increases and general operating cost inflation and continued investments in our Total Home strategic initiatives.

Additionally, we expect net interest expense of approximately $1.6 billion as we absorb incremental expense related to the FBM acquisition, partly offset by planned repayment of $2.3 billion of bond maturities in the first quarter. These assumptions result in expected full-year diluted earnings per share of $11.75 to $12.25. We expect adjusted diluted earnings per share of approximately $12.25 to $12.75. This includes the impact from FBM and ADG, which is expected to be accretive to adjusted EPS for the year. We also expect capital expenditures of approximately $2.5 billion for the year as we invest in our strategic imperatives to drive growth. This will be heavily concentrated in our retail business.

Finally, to assist you with your modeling for the first quarter, here are a few points to keep in mind. Given severe winter storm activity in February, we are now expecting Q1 comp sales to be below the midpoint of our full-year guide. Adjusted operating margin rate is expected to be approximately 20 basis points below the bottom end of our full-year guide due to the dilutive impact of the acquisitions.

In closing, we're pleased with our track record of disciplined execution and that our DIY and Pro initiatives are gaining momentum. Looking ahead, we are confident that we're making the right investments to deliver long-term sales growth and sustainable shareholder value.

With that, we will open it up for your questions.

[Operator Instructions] Our first question is from the line of Peter Benedict with Baird.

I guess my first one is just on the Pro Extended Aisle efforts that you guys started to kind of roll out last year. Just maybe give us a sense for where you are with that. It got a brief mention in the prepared marks, but I'm just curious kind of where you sit with that, what the opportunity is going forward. That's my first question.

Peter, this is Marvin. Look, we continue a multiyear build-out for 2026. We're very pleased. It's actually exceeding all expectations. And we're adding new suppliers, new markets every single week, and we'll do that throughout 2026. You know, this is helping us create more traction with planned Pro spend. That's something that has been on our playbook for quite a while. We're excited to get new products like vinyl siding, building materials, doors, flooring, electrical wiring. Overall, we feel really good about this. We're not yet providing specific financial results other than to say, this is exceeding expectations, assisting with the planned Pro spin, and something we're excited about, and we think it will help to drive our Pro business for the balance of this year.

I guess my follow-up would be maybe for Brandon, just how should we think about the incremental margins here once we get past, you know, integrating the acquisitions and the noise that's kind of related with that? I think there's a question out there in terms of, you know, as sales eventually start to recover, you know, what the flow through is gonna look like. Any updates to your thoughts there? Just level set us on what your view is there.

Yes. Sure, Peter. I'll start with the fact that, you know, we're very pleased here with our Q4 performance progression of the year. We had positive comps here for the last 3 quarters. Marvin announced a payout to our frontline associates of $125 million in discretionary bonuses, delivered another $1 billion in productivity, delivered flat operating margin on the core business for the year. That all being said, as we look ahead to operating margin for 2026, as we've referenced, and as I said in my earlier comments, FBM/ADG is creating an additional 30 basis points of dilution related to the RAP, 50 basis points on an annualized basis. We are generating $1 billion incrementally in productivity for 2026, as we outlined at our AIC last year.

We are seeing some modest incremental cost pressures that we haven't previously anticipated that are also embedded within that. I also mentioned that we're continuing to invest in a number of sales-driving initiatives that are tailored to, you know, value-conscious consumer, investing in fulfillment options, member benefit. All that's reflected in our updated expectations for 2026. The last thing I'll say, Peter, you know, I think this team's demonstrated a history of disciplined execution. We believe it's a hallmark differentiator for us and expect that to continue here in 2026 as we focus on landing that number.

Our next question is from the line of Chris Horvers with JPMorgan.

So my first question is just thinking about demand. I know you said Fern and Gianna were 50 basis points benefit to the quarter. You know, that would still suggest like a 2 or 3 in January. If you look at the 2-year run rate, you know, that also improved in both December and January. For the quarter, and you were lapping, I think, a 70 basis point headwind relative to the hurricane recovery last year. You know, at a big picture level, do you think the demand in the category is just starting to elevate at the margin? Could you maybe try to put together the narrative around the winter storms versus lapping polar vortexes versus lapping also hurricanes last year?

You know, some detail there on sort of the net weather, and elevate to a high level, how you think about whether or not maybe the demand's just getting better at the margin?

Yes, sure, Chris, this is Brandon. A lot to unpack, as you mentioned here for Q4. I'll start with... you know, you referenced we had 100 basis points of headwind from Hurricane Selena and Milton last year. That has been in part offset by the benefits. I called out 50 basis points for Fern and Gianna here in Q4. We also referenced on the call last year an easier lap from the ice storms that played out over the course of January. As it's specific to the month of January, the 50 basis points on the quarter for Fern and Gianna was about 200 basis points on the month.

Sorta cutting through all of that noise, we're still very pleased with the underlying demand trends, and traction that we're seeing across all areas of the business, Pro, DIY, DIFM. As that translates, looking at Q1, we do expect the demand drivers that we've seen, the underlying consistency, to be again consistent with what we've seen in Q4. We are seeing some level of disruption here out of the gates with the aftereffects of Fern and Gianna to start the month of February and now Hernando up in the northeast, here to end the month. You know, we're managing spring over the course of the first half, looking at it as a first-half event. Excited about everything we have locked and loaded.

We have the biggest weeks ahead of us, and for the first half of the year, focused on, you know, delivering at the midpoint of the guide. Bill, you may want to reference just some underlying strength across categories that are separate from sort of the weather demand that we've seen.

Yes. Thanks, Brandon. I think, you know, when you look at January and you set the weather aside, you know, we saw strength across, you know, as was called out in our prepared remarks, these pro-related categories, millwork, lumber, building materials, electrical. Then we continued to see strength in paint, garden businesses outside of ice melt, hardware, soft surface flooring, which is carpet, kitchens and bath, rough plumbing. You know, those are all built around the foundation, and, you know, we're gonna leverage those as we go into the first half of the year and continue to drive those.

And then my follow-up question is as you think about sort of the post-storm and post-tough winter recovery and lawn and landscape and even exterior of homes, we haven't had a winter like this in perhaps a decade. You also have a larger relative, you know, outdoor business relative to your peers. Is there an analog? How are you thinking about the potential pickup in sales in the first half of the year as it relates to the tough winter that we've had?

Chris, this is Marvin. Look, we're optimistic, and we've tried to build all of that into our guidance. Candidly, we've also tried to take a conservative approach. I think, it's pretty obvious, and I'll state the obvious, that this is a pretty unique environment with unpredictable tariffs, high interest rates, and a consumer demand that is not as sustained as we would like it on the DIY side. We feel really good about our plan for spring. We feel great about our plan for 2026, and part of that is the fact that we have the best in-stock that we've had in my tenure here going into spring. We have the best garden strategy that we've had in my tenure here going into spring.

We have a lot of things working in our favor, not to mention that we have, you know, 30 million and growing members of our MyLowe's Rewards loyalty program that gives us a unique opportunity to message to those members. We are optimistic, but we're also cautiously optimistic just because there's lots of uncertainty out there. But we are very confident that whatever the macro environment provides, we will outperform the macro. We will take share. We took share in the fourth quarter. We took share in the third quarter. We'll take share in 2026.

Our next question is from the line of Kate McShane with Goldman Sachs.

We wanted to drill down on the comment that you'll be investing in sales, driving initiatives for the cost-cautious customer in 2026. What could that look like? Are you looking at price investment, promotion, some combination of both? How does that compare to how you managed through that in 2025?

Kate, this is Marvin. Thank you for the question. Kate, there's really no major change coming to our strategy relative to price or promotion. We manage price on a portfolio basis in this really volatile tariff environment. We'll continue to do that. We will be very specific on what we call tier one promotional events. You know, think the launch of spring, you know, think Labor Day, Memorial Day, Fourth of July. You'll see us leaning hard on some of those time frames, but other than that, we don't plan to be more promotional than any years past.

What I will tell you, and I hand it over to Bill, is that we're really excited about offering the customer value and making sure that the cost-conscious homeowner can look to Lowe's, both in-store and online, to find anything they want at a value and also find anything they want that could be more of a premium item. I'll let Bill talk about some of the things we have in store for spring in 2026.

Yes. Thanks, Marvin. You know, Kate, I think as we look at 2026, it's, you know, largely reflective of what we tried to do in Q4. That was, you know, meet the customer where they want to be met. Both online and in-store, offering these values for both a DIY and a pro customer, be out there, be relevant, with seasonally relevant products, which is very similar to what we've been doing and working on over the last few years. We're excited about what we've got planned in our lawn and garden business. We're excited about the new that we have, the innovation that we have across the store. The merchant teams have done just a really nice job of bringing new, exclusive and innovative values that we can put in front of the consumer.

We've got great brands, we've got great partners with our vendors. You know, we're starting from deep south to north, and we'll take it as the season comes and as spring starts to, you know, come alive. We want to be there and meet the customer where they're at. We'll just have great offers out there, throughout the spring season.

Kate, I'll just add, in addition to that, you know, we mentioned the Pro Extended Aisle, and we continue to make the investments. This is a multi-year build-out, and so as we think about that, meaningful growth opportunity is still ahead of us. The investments that we have made, with our transform offerings in our home services business, and so, and continuing to make the investments in the Total Home strategy.

Then I just wondered if we could follow up with Brandon, how we should be thinking about the cadence of transaction versus ticket throughout 2026?

Yes. Sure, Kate. I think when we look at 26 and what's embedded with the guide, similar to the second half of 2025 that we saw, we do expect the growth to be more weighted towards ticket in the first half of 26, and that's primarily as we, as we wrap the tariff price increases that we've been implementing. As we move into the second half, we do expect to see transaction trends to improve. We're gonna start cycling that over the second half of the year and expect that to move more in line with neutral again as we, as we start looking at the second half of the year.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

This is Zach on for Simeon. Thanks for taking our question. What are the strategic priorities for the wholesale distribution business? Can you give us an update on the integration of FBM and ADG with the core Lowe's business?

This is Marvin. I'll take the first part, and then I'll let Brandon jump in. First, what I would say is that we're really excited about the integration activities and the progress that we're making with both FBM and ADG. When you think about the future of acquisitions, we've already made a few tuck-in acquisitions for both FBM and ADG, and we feel as though we'll continue to do that to ensure that we're building out this interior solutions platform that we talked about. Our objective is to have the ability, when you combine Lowe's, ADG, and FBM, to provide the home builder with virtually everything they need for the interior space of the home. You know, think doors, windows, ceiling systems, insulation, appliances, cabinets, countertops. That is the strategic vision that we're building out for both.

As we think about, you know, future tuck-ins, they will be more than likely in that direction to ensure we're building out that portfolio of companies and products and services so we can serve that larger home builder. I'll let Brandon provide some additional context.

Yes, sure, Zach. As we put some financials to this, as we look ahead to 2026, I mentioned we're gonna have revenue, we're guiding revenue of about $8 billion combined for ADG and FBM. That does represent organically low single-digit positive growth, solidly accretive to adjusted EPS as we look at 2026. We like what we're seeing on the commercial side with FBM, as we manage through sort of the cyclicality of what we're seeing, some of the near-term pressure we're seeing on the home building side. As Marvin mentioned, we've activated our integration teams.

We continue to work together with both FBM and ADG on our strategies and plans to realize synergies. We're making really nice early progress, specifically, you know, work that we've done with vendors on product costs, looking at SG&A, logistics, back office, and then at the same time, really looking go forward at the cross-selling opportunities that exist across all three of these businesses. Really nice progress. Excited about what's ahead for 2026. We'll continue to manage this and continue to get after it.

That's helpful. And then just as a quick follow-up, if we adjust for the mix impact of these acquisitions, can you speak to what you're expecting for the core on core EBIT margin in 2026, both at the low end and the high end of the range, and how that relates to the rule of thumb, if you will?

Yes, sure, Zach. I think I mentioned earlier, you know, stripping this out, really it's just a function of top line. Excluding the 30 basis points of step back, again, you're gonna see at the high end a reflection on our 2% comp, and that's if we see, you know, upside traction that we have with some of our sales-driving initiatives, you know, potential for tax refunds. Then the low end is essentially on a flat comp for the core business is gonna be at the low end. Really just a reflection. We mentioned the investment and the sales-driving initiatives, and then where we fall within that range is just gonna be a function of how the top line plays out.

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

The guidance you provided spans a bit broader of a range than Lowe's has historically provided. If 2026 turns out to be meaningfully better or worse than that range, what internal and external key performance indicators would have told you that first, and what is that KPI saying today?

Michael, this is Marvin. I'll take the first part of that. I think the best way to think about your question is, whatever we get from a macro perspective in housing, we intend to outperform it. That is our internal expectation every year, and I think consistently, we've been able to do that. We're basically forecasting home improvement macro to be relatively flat, looking at 2026, and therefore, we set a guidance from 0%-2%, with the expectation that we'll outperform the macro and we'll take share against any competitor, small or large, and we think that we demonstrated that in the back half of this year. Having said that, there are always indicators in merchandising categories, certain financial metrics we're looking at. Obviously, the one thing that we look at closely relative to the DIY are big-ticket, discretionary purchases.

When we start to see a sustained number of discretionary big-ticket purchases from the DIY, that's gonna give us an indication that the consumer is getting healthier, and they're more confident in making those purchases. I'll let Brandon add any additional context.

Yes, Michael, I would just add a 2% spread has been pretty consistent the last couple of years as we've come out with the guide. In an uncertain environment like this, I'll just add a little bit more color to what Marvin said. This is really for us, I think where we fall is purely sort of indicative of, you know, overall home improvement in the macro and what plays out versus what doesn't. I think on the low end, probably an environment where we're seeing elasticity is a bit more pressured, deteriorating consumer sentiment, you know, the continued deferral of big-ticket spend, which we've been experiencing now for a number of years.

On the high end, I think potentially some uptick in big-ticket discretionary projects, potential benefit from the tax refunds, HELOC activity, which we think is an opportunity for us, and then, you know, obviously continued momentum in some of the core areas of the business, you know, primarily pro with some of the planned spend initiatives. That's just to give you an indication, sort of on the high end and the low end, as to how the macro could play out and how that translates to where we fall within the guide.

That's very helpful. And my follow-up question is a bit broader of a question, but Marvin, there's a lot of focus in the market and in the economy as of late, about what all of the technological innovation is gonna mean, both for companies as well as industries. The home improvement sector seems to be perceived to be a bit more insulated, at least as of today. How are you thinking about the broader impact of artificial intelligence on home improvement? How is Lowe's looking at the potential positive versus the drawbacks from deploying all this technology, both from a demand perspective as well as how it's evolving the cost structure over the next couple of years?

No, well, Michael, I appreciate the question. I think for us, we set an internal framework that AI will help us improve how we sell, shop, and work. Basically, as we think about AI internally, we frame it around those three strategic areas of our business. As a result of that, we're very focused on employing AI to help our associates sell, to improve the shopping environment for our customers, both in-store and online, and creating productivity in the workspace, both in-store and at our store support center. Some examples of that are things like our Mylow Companion, which we are leveraging as a virtual assistant, not only for customers, but also as a companion tool for our associates. We've seen roughly 1 million questions a month come through this virtual assistant and this companion tool.

We built this on an OpenAI platform. It learns, and it gets better with every interaction. It helps our associates do the most difficult part of transition to a home improvement world, and that is product knowledge. One of the biggest challenges that Joe faces and our HR team faces whenever we bring on a new associate, is giving them the confidence they can be on the sales floor, engage a customer, and provide specific product knowledge. Not only does this platform and this assistant allow that to happen, it also now can do it in Spanish. That helps to break the language gap that we may have in certain geographic areas.

We've seen dramatic improvements in customer service in a 200 basis points range in our stores where associates are adopting this, and we're seeing our conversion rates online roughly double when customers engage with Mylow. That is just one tangible example of how we're taking AI and we're making it work, not in a philosophical, you know, not in a theoretical perspective, but in a very tangible perspective. As Joe mentioned in his prepared comments, we're leveraging this in Pro. We've now built a Pro Companion tool, which gives our Pro team the ability to understand exactly how to prepare for customer conversations. When they engage with a large pre-planned Pro, they can be informed, they can have great advice and counsel, and they can provide good direction.

I can give you 50 examples of how Bill is leveraging this from the merchant team, how we're freeing up his merchants from being task-driven and now being more strategically driven, working with suppliers on how we can drive revenue, how the tech team is using AI tools for development and code review, and they're seeing double-digit productivity gains and increasing speed to market. We are embracing this as a net positive, and we're understanding that it's coming and we're on the cutting edge of working with it, and we're excited about some of the work we're doing in agentic commerce with some of the leading tech platforms out there as well. It's something, as a large company, that we understand is critically important to our current state and our future, and we're embracing it.

The next question is from the line of Jonathan Matuszewski with Jefferies.

Marvin, if you adjust for the weather and put the storms aside, are there commonalities in markets where you're seeing comp sales underperforming and where they're outperforming? Basically, can you draw any conclusions from home prices or white-collar employment or other factors on a market-by-market basis?

Jonathan, thank you for the question. I can say that there are really no material differences that we're seeing in geographies if you strip out weather. Now, we understand that there are housing dynamics across the country, we've seen no material difference in our overall financial performance in these geographies thus far.

And then a follow-up question, you know, you referenced Lowe's Media Network. Was hoping you could share an update there in terms of how that's contributing from a P&L standpoint, and how you see any tailwinds to the gross margin guide in 2026, Brandon, as that continues to grow?

Well, I can tell you we're really excited about the media network. It's something that we've been investing in for a while. We've now hired a new leader. We've improved our technology platform, and what I'll do is I'll let both Bill and Brandon talk about how we're leveraging it from our supplier partnerships on Bill's side, then I'll let Brandon provide any financial perspective.

Yes. Marvin, I'll jump in here. Just, you know, a couple of things. We're leveraging insights from our customers from both our loyalty platforms, both the Pro and the DIY, you know, which has given us a key differentiator for our Media Network. We're expanding channels, looking at creator networks, as I mentioned in my prepared remarks, across our sports marketing, connected TV, and online video. We're also looking at how we provide visibility and measurable results to our suppliers, leveraging, you know, the value creation that we can drive here. 'Cause we think, you know, with our Media Network, we open up a number of different avenues for these guys to be able to tap into.

So, we're excited about kind of where we're going and the early results of it, and we're in the early innings, but we're off and running.

And Jonathan, this is Brandon. Last thing I'll say, just the benefits of Lowe's Media Network, the advertising revenue, the growth, is reflected in our expectation of $1 billion of productivity into 2026. That's roughly split evenly into gross margin, which would include the benefits from the Lowe's Media Network, and then the other half in expense. Again, factored in the growth, it's scaling in line with our expectations and gonna be a big part of what we expect to deliver for 2026.

The next question is from the line of Brian Nagel with Oppenheimer.

So First question I have, I guess it's from a macro standpoint. You know, a lot of thought lately, including on today's call, about the ongoing stagnation in the U.S. housing market and, you know, the headwind of higher rates. The question I want to ask, you know, we're starting to maybe see rates move lower, you know, in the data. As you're watching your data, are you seeing? You know, again, recognizing it's early, are you seeing some type of, you know, benefit, you know, as rates have started to move lower?

If not, are you starting to see I guess the other question, would you be seeing some type of break, and what would that normally be, that relationship between rates and your business?

Brian, this is Marvin. I'll take the first part of that. Look, I would, you know, say that we are obviously watching this really close, but you said it's just a little too early to have any definitive point of view that there's a correlation between rates going down of late and any type of demand changes in the marketplace. Look, we think intuitively that when you get rates down on a sustainable basis below 6%, we think that that's gonna be as much of a psychological unlock as anything else. It's just too early for me to sit here today and give you a definitive financial point of view on it. I'll let Brandon provide some thoughts.

Yes. Brian, I'll just add, you know, we've looked at the Fed cut 175 basis points in the last 18 months. There's a consensus of a couple of more cuts, 50 basis points, this coming year in 2026. The near term impact that is easing the burden for consumers in areas like, you know, credit cards, auto loans, HELOCs. Watching the long end of the curve, more particularly, which is, as you know, pegged to the 10-year, which has been hovering somewhere around 4% to 4.5%. We do look at sub 6% rates as potentially stimulating demand. We saw that this week, for the first time, dip just below 6%. Translating all of that into the guide, there is a delay, as Marvin referenced.

We don't know exactly when that's gonna start to take shape and how that's gonna impact consumer spending. Again, for us, that's what's resulted in us having a little bit wider range, just given the opportunity and some of the uncertainty that continues to be out there.

That's helpful. I appreciate it. And then my follow-up question, I guess, also bigger picture, but just with respect to tariffs, you know, you and your sector have done a very good job of managing the tariffs we've seen. We've gotten, I guess we'd say, new news and maybe some from certain further shifts in tariff rates. Again, recognizing this is also early, but, you know, any thoughts on, you know, what we're seeing now and, you know, what the adjustments that could spur within your business?

So Brian, I'll state the obvious, the tariff policy is fluid. We're currently reviewing all the new rules like everyone else. What I will tell you is that we remain confident in our full year guide regarding the top and bottom line. In the meantime, we're just gonna continue to execute our global sourcing playbook, and we're gonna just be in tune to everything that is changing and adjusting. Again, it's just such a fluid situation. It's just too early, again, to have a really specific point of view other than we have a very, very effective playbook. We're gonna manage that playbook, and we're gonna be very, very alert to any other changes that happen.

I appreciate it. Thanks, Marvin.

So everyone that's our final question, and I'd like to close with a couple of comments. First, I'd like to take a moment to recognize Kate Pearlman, our VP of Investor Relations and Treasurer, after a distinguished tenure with Lowe's, Kate has decided it's the right time to embark on a new chapter of her Professional journey. While we are sad to see her go, she leaves us on the highest note having built a world-class IR and treasury function. So we want you to join us in thanking Kate for her years of dedication to Lowe's, wishing her nothing but grace favor and blessings in our future endeavors. And we now look forward to speaking with you again on our May 20 earnings call.

So Rob, that's all we have.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for joining us for the Lowe's fourth quarter 2025 earnings call. Thank you.

Okay. Hi, everyone. I'm Simeon Gutman, Morgan Stanley's hardline and food retail analyst. Welcome to day 1 of our Global Consumer and Retail Conference. I'm pleased to be joined by Lowe's, represented by Marvin Ellison, Chairman, President and CEO. First, quick disclosure, and then I'm going to sit down. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Quick intro, one question, and I'll sit. Lowe's has been one of the best transformation stories in retail over almost a decade, not quite yet from, I would call a triaging operational execution, financial execution to being one of the better operators across all of retail. And now we're watching the beginning of a strategic pivot, slight pivot and watching that in action. So it's been a pleasure to do that. Thank you for being here as the architect, Marvin. First question, looking back at 2025, the housing backdrop has been more stagnant than we and the market anticipated. How has the backdrop compared to your expectations as you came into the year?

Well, first, great to be here this morning. Simeon, I would say, honestly, 2025 has played out basically the way we forecasted it when we were looking forward in 2024. We believe that 2025 from a macro perspective would look a lot like 2024. However, we are a bit surprised that mortgage rates remain as elevated as they are in the second half of the year. But candidly, we forecasted that in our bear case of the macro. So we're not really surprised that we're dealing with a relatively stagnant macro environment.

And we basically set our business plan, our perpetual productivity improvement initiatives really based on that hypothesis. Having said that, we look at the overall home improvement consumer, and we think the consumer is healthy. You have record equity, I mean, estimating anywhere between $35 trillion to $36 trillion with $11 trillion being available for HELOCs. You have really good employment for the consumers that shop in our stores. But you still have a degree of consumer sentiment that's a little repressed based on concerns about the macro and candidly, about the overall job market for the future. And so those consumers have, as a result of that, pulled back on discretionary big-ticket spending.

And so most of what we're seeing as a headwind from our business perspective is that DIY customer being very cautious on big ticket discretionary. And as a result of that, it's created a bit of headwind. But we're pleased that we delivered positive comps for 2 consecutive quarters, and we're pleased to see that we're taking share in areas like the small to medium Pro category and also in our home services insulation business where we had double-digit comps in the third quarter. So even within this more difficult macro backdrop, our business is performing well, and we feel really good about the short-term and the long-term prospects of the consumer and also our Total Home strategy.

Ever since top line peaked coming out of COVID, the market has been looking forward to the turn of the cycle. And that optimism has held for better part of the last 3 or 4 years. Finally, this year, the irony is that the market itself seems to be giving up a little bit of that hope and being resigned to a flatter home improvement market. Your call was distinct in the space. There was more green shooty optimism from it, my impression. So how do you look at that? And then how do you take that as you head into 2026?

Well, I think for us, we've tried to be very conscious. And the one thing that I will constantly remind the team is we have to accept the current reality, build a strategy around that, but really think about what the market and our business will look like when housing recovers because over the annals of time, you know that this is a cyclical environment. It goes down and it comes up. The question is, at what rate are we going to see the recovery in the housing market in the home improvement segment. And so we'll speak a lot about 2026. in our February earnings call, but just a perspective.

So the way we're thinking about it is in the short run, we're going to be very, very focused on providing our DIY consumers with a value. We're going to be really, really focused on creating differentiation in things like our DIY loyalty program where we have 30 million active members. And what's interesting is within that program, those loyalty members shop 50% more and they spend twice as much. And so we look at that, and that gives us a degree of optimism that when we see a full recovery in the DIY, that the rich data that we are gathering from these 30 million-plus members is going to be very informative on how we continue to communicate with them. But also, we spent hundreds of millions of dollars to improve our store environment.

And if you walk and enter our stores versus our competition and you look at areas like our kitchen and bath showroom, our appliance showroom, our flooring showroom, our millwork, which is windows and doors, that environment is cleaner, brighter, more refreshed and also from a technology standpoint, a lot more innovative than anyone in the marketplace because we're building a strategy for the future. And it's not a coincidence that we made these investments and we're now seeing double-digit positive comps in home installation when it is in a repressed environment, that means we're taking share in a down market. So the question is, if we're able to take share in a down market, then what will that performance look like when you start to see recovery.

And so that's the short-term view. But in the long term, we're thinking about it a couple of ways. Number one, if the -- or when the consumer starts to recover big ticket discretionary spend, then we leverage things like our market delivery network, where we're the only retailer and install an appliance same day and next day in virtually every ZIP code is unmatched across any other retailer. In addition to that, we can take that same delivery network, and we can start to now inject other big and bulky categories like vanities, grills, patio furniture because the network is built and has been transformed.

So now how do you leverage it to just push more volume to it. So we see that in the future as the market recovers. And then all of these showrooms, all of the digital investments we've made will now allow us to really percent of that DIY spend when it comes back. So that's one side of it. The second side of it is our small to medium Pro business has consistently grown quarter-over-quarter. And we were very specific and very surgical in saying small and medium Pro is our target segment because of 2 reasons.

Number one, we felt like that customer was being ignored in the marketplace by our competitor. And number two, we candidly believe that we have the capabilities with our fulfillment, with our loyalty program and our go-to-market strategy to serve that customer exceptionally well, and that's bared out. But now as we think about what else can happen with single-family construction, multifamily construction housing turnover, which is at its lowest rate since the early 1990s, we know that has to come back.

How do we get a piece of that? And so our acquisitions of ADG and FBM now positions us not only can we do the things I just outlined for the DIY and the small to medium customers in our stores and our digital platform, now we have the ability to get a percent of that $250 billion total addressable market in an area that we literally had 0 revenue opportunity at the beginning of this year, and that's single-family and multifamily construction. Now obviously, that segment is under pressure today. But we acquired these companies for the future. And even in the short run, FBM, 55% of their revenue is driven from a commercial space. And so we're seeing things like data center development and construction, medical facilities, residential facilities where we're shifting that focus of FBM into that.

And so we've tried to create a strategy that can allow us to grow short term in quite a bit of macro headwind. But when the recovery happens for DIY, we are perfectly positioned. And when the housing recovers, whether remodel, whether renovation, whether new home construction, we now can play in all segments. And so to me, that's the investment thesis for Lowe's long term because we now have a much more diversified portfolio.

If I can put some words back in your mouth, if you let me. The multiple delivery network, big ticket, some of the showrooms, technology, Pro, you mentioned the small to medium Pro. Those are what will allow you to take outsized market share now and into the cycle. your ticket actually starting to outpace the industries. Is that part of the strategy? Or is there some price or it's the mix of product that's helping drive that?

It candidly, it's a combination of both, but it's more category-driven. If you think about categories like appliances, I mean, it is major appliances is obviously a big ticket category. I mean we're continuing to have market share dominance in our performance as recent as the third quarter where appliances was one of our highest performing categories of our entire merchandising portfolio. And that is almost exclusively due to the fact that we have the most space and brands dedicated to it in the store, but our online experience is exceptional as well as this whole market delivery network. I mean we've gone -- if you think about online for a second, I mean, we had over 11% growth in the third quarter.

And even as recent as this weekend, the App Store named our app, the #1 selling app in the App Store and the #4 overall app from a consumer rating and performance standpoint. I mean we've gone from that incredible recognition this weekend to when I arrived in 2018, the site crashed on Black Friday. And so you think about the transformation, to your point earlier that we've been through with wonderful leadership and just investments in making sure that we are modernizing our business. And so we think that these investments obviously allow us to perform well in the short run, a really difficult macro environment.

But we're building a platform for the future because when the DIY comes back, when the small and medium Pro continues to resonate, I mean, we have built an IT infrastructure that takes friction points out that we think is going to give us a lot of opportunity to your point, we're taking now in a repressed market, but we think we can take share when the market grows, and I couldn't say that to you as recent as 2 years ago. But now I feel like we're in a much better position.

You've mostly undone some prior acquisitions and ventures that Lowe's had been involved with. And then you started to rebuild the muscle, the capabilities through technology and execution. Now you bought a couple of businesses. And we've debated the merits of this for the last couple of years, and we're not sure about it. Can you talk -- can you clarify the market's perception of this new strategy with FBM and ADG, FBM and ADG? What's the vision? What's the synergy potential over time?

Yes. It's a great question. And so to be very transparent, we were not ready to make any acquisition until this year because I felt strongly along with the executive team at Lowe's that we had to create an incredible stable foundation of our core business. I've seen so many companies of you to become distracted with other subsidiaries and other growth initiatives while ignoring the core business, and that's what happened with the previous management team at Lowe's.

And so we very conscious that we had to get our core business running really well, and we had to make some incredibly long-term expensive investments in things like IT infrastructure, digital infrastructure, pricing systems, labor management systems, e-commerce, et cetera. These are complex multiyear initiatives that are not easy to do what they were required for us to really modernize our company. And so we felt coming out of 2024 that we had finally created not only a stable foundation, but best-in-class performance in some of these categories. And so over the holiday season, we started to evaluate what would the recovery look like.

And we came to the realization that when single-family, multifamily construction started to recover, and if you think about some of the data that says that you're going to need roughly 16 million to 19 million new homes by 2033, we realized that we had no market presence in that total addressable market. And so we're going to be only outside looking in what could be a renaissance in housing just based on supply-demand issues in the U.S. And so we made a decision, and we felt like that our strategy in the store was performing really well for the DIY customer. We talked about loyalty programs. We talked about our private brand strategy.

We talked about our portfolio and our digital making great progress with the smart program for the great opportunities for us to grow that. And so we took a step back and said, now we believe that we can have a broader portfolio to serve a customer that's not just the DIY and small to medium Pro. And so we decided to identify potential targets that will give us an opportunity to address this single-family, multifamily construction supply-demand that will have to occur within the next 5 to 10 years.

And we think FBM and ADG gives us an incredible opportunity to do that when you combine it with some of the unique capabilities we have at Lowe's, specifically our ability to deliver appliances and also the private brand of STAINMASTER that we -- that is proprietary to us that we can leverage across a single-family home platform that nobody else can. So that was really the emphasis behind it, and we felt like it was a perfect opportunity to make those acquisitions.

So you said the housing -- you said renaissance in housing, I'll say the housing renaissance. To clarify, these businesses, the supply chain, they're totally disconnected from Lowe's. How does that look like? Is this the platform? Do these businesses consolidate over time into one platform and you branch off from there? How do you keep it separate from Lowe's to not harm the DIY or the customer experience?

Well, to your point, the first requirement is our internal version of the Hippo-critical altnet is do no harm to our business or to their business. And so we put together an integration management office so that we can have a very disciplined process to not allow the core management team of Lowe's and functional leaders to get distracted with these acquisitions. And so this integration management office basically creates guardrails and a liaison to make sure that we stay really focused on the key priorities, which for now is getting the EBITDA synergies that we know are available, and we're working to do that, and we're making really progress -- good progress in that area. But to answer your question directly, one of the things that attracted us to FBM is that they have a common IT platform across all of their businesses.

So they have a common ERP. ADG is in the process of rolling out an ERP, and we're putting it on the same ERP platform as FBM. And those 2 companies will be on the same ERP platform as our Lowe's Pro supply business. So we will have a common -- what we'll call a common IT platform across FBM, ADG and our Pro supply business at Lowe's, which gives us a unique opportunity to have project visibility across those 3 entities. So over time, the view is to create what we call an interior solutions process for single-family, multifamily and commercial construction. What do I mean by that? I mean that today, FBM provides drywall, insulation, steel framing and ceiling systems. ADG provides floors, countertops, cabinets and Lowe's provides appliances and everything else in the house, including window coverings, fixtures, light fixtures, ceiling fans.

And so imagine for a second, single-family construction company or single-family entity or multifamily and have a one-stop shop to provide everything inside of that structure with one invoice. The simplicity of that, the cycle time improvement within that is something that doesn't exist in the marketplace. That's what we're working toward. We're definitely not there yet. We're now just in the early stages of the integration, again, addressing the EBITDA synergies that we have on our road map, and we're making progress in that area. But that is the vision in the future is to create an interior product solution for single-family, multifamily and commercial construction, and that's what we're building towards.

You mentioned the housing market at the bottom, both the new and existing. -- this business could arguably add more cyclicality even though we're at the bottom. Is that a fair statement that you're a more cyclical business because you have this exposure to the segment?

To me, I look at it as the opposite. So as an example, I talked about FBM as an example, being roughly 55% commercial. And so that gives us the opposite of cyclicality. It gives us a little bit of balance because now that single-family construction is under pressure, commercial construction is actually doing really well when you think about categories I listed with data centers. And I mean, we're participating in a multi -- very large high-rise in South Florida that FBM is providing drywall and metal framing. It's one of the largest projects that they have on their books. And again, the data construction revolution is upon us. And I think it's unlike anything we've ever seen before in this country and really around the world. And so we're trying to get as much of the share of that business as we can.

So the commercial aspect of FBM and takes away the cyclicality. And also, we think because Lowe's is such a predominant DIY company from a sales penetration in small to medium Pro, it gives us a really balanced portfolio to have a DIY focused, small to medium Pro focus in the store and online. And now we have this separate platform that will allow us to have revenue-driving opportunities in single-family, multifamily and commercial construction that we currently don't have. So we think it's more of a balanced portfolio than adding to the cyclicality of our overall business platform.

How do you see Pro versus DIY shaping up in the medium term? Maybe we overcomplicated looking for signs of life in one of these segments as a precursor to saying, hey, the cycle is coming through. So talk about the drivers and then if anything, you're adapting in either segment.

So we think that Pro will continue to outperform DIY in the short run. And when I say Pro, I'm speaking specifically to our Pro customer, which is the small to medium Pro. And the reason why I emphasize that is because the small to medium Pro is basically a small business owner. And that small business owner has to be incredibly agile. So if their core business is remodel, but the remodel market is down, they have enough agility to shift to repair and maintenance, but they stay busy. So when we highlight the results of our annual quarterly survey on the third quarter and our Pro customers said they're confident about their book of business.

They look at their overall project pipeline and they feel really good about it. That is what our customers are saying to us because these customers are agile. They can shift and they can modify their focus based on the needs to keep their crews busy and to continue to keep revenue going.

So as we look at that, we think that, that small to medium Pro will, in the short run, outperform DIY. Having said that, we still look at the DIY customer, and that customer remains a bit cautious, as I mentioned. And that is specific to big ticket discretionary. I mean they're still just kind of waiting to see if mortgage rates will go down. They're waiting to understand what the tariff environment will look like. They're waiting to understand the overall job market. So they're kind of on the sidelines. And so that customer is looking for value and they're looking for a reason to transact.

And so we owe it to ourselves to give them that. But we feel good about the medium- to long-term outlook for that DIY customer, while we think Pro will continue to perform well within the short and the long run. As I said before, -- we delivered positive comps 2 consecutive quarters. We delivered double-digit comps in our home installation business, we call it the home services business. And what that's telling me is even in a rather depressed market, we are taking share from others.

And so one of the questions that someone asked me is that Marvin, when you look at your double-digit comps in your installation business, do you see that as a precursor of the customer returning? Is that a green shoot? And my answer is not entirely. How we see it is that we have dramatically improved capabilities, and we've taken a lot of friction out of this installation process. I mean we've gone from literally binders and whiteboards is what I inherited to what we think is a best-in-class technology platform with great visibility for the project, for the associate, the customer and the installer. In addition to -- while I talked about the improvement in our showrooms and people may say, well, isn't this a digital-driven category?

The reality is we have to remember that almost all of these transactions start online. But if you're going to spend $50,000 for a kitchen, you're going to walk into a physical facility, touch it, see it and speak to someone before you make that transaction. So having a showroom environment provides you with differentiation and modernization is really important. And so we think that our ability to drive double-digit comps is almost exclusively driven by the fact that we have a better environment for customers to shop.

We have a much improved digital platform. We have a great go-to-market strategy and a credit partnership that provides another degree of differentiation. And so we're taking share in a down market. And again, I'll just repeat what I've said a couple of times. We think that, that is an informative result because what will happen when the market recovers and we maintain these capabilities, we think that our ability to take share in the down market is only expands when we are in a market with a little bit of tailwind, and we think it only bodes well for our future.

Jumping off of demand, maybe a little on productivity and margin. And after that, a little AI. One of the hallmarks of the last -- since 2018 has been the crispness of the execution quarter-on-quarter very favorable sales environment to start and then a tough one in the last 4 years. Can you talk about opportunities to drive productivity expansion? PPI has been a high point of it. What is the potential to unlock further gains in even a subdued environment?

We think it absolutely exists. I mean we're now finalizing the 2026 PPI initiatives that we're going to start to execute, and we'll be talking in February about the I mean I think we talked about a $1 billion commitment in 2025, and we've delivered on it. And we're going to lay out our commitments for '26 in February, and we have amount of confidence to be able to deliver on those.

And it's not -- it's for no other reason than the fact that we have created in our Lowe's culture, a culture of operational discipline. It started in the stores because we had the amount of opportunity. And now that whole perpetual productivity improvement philosophy has now expanded into merchandising, global sourcing, supply chain. And now your point about AI. AI will only expand and enhance this philosophy.

And so we're very fortunate that we have the philosophy now embedded in our culture. And now with AI and generative AI, we have opportunities to continue to unlock this in a way that we think we can drive sustainable productivity. I mean, one case in point is we have our companion tool, we call it Mylow, which over the weekend was really interesting because with Cyber Monday and all of the online activity, we had an opportunity to just determine how many customers would use this virtual companion tool.

And it was interesting of some of the questions that were being asked of Mylow. I mean, things like promotion questions, things like -- and this was really interesting. We had a couple of questions like on Thanksgiving, my stove is not working. It will not heat. What are some of the things I can do, which is I would not want to be that customer. But luckily, we were able to give them some really good advice on things they can do to check, to determine how they can repair. And that's the purpose of Mylow.

We basically built it on an OpenAI platform where we take all the training data we have inside of our company relative to product knowledge, and we load it in the system. And so we basically are educating every customer with the same information that an associate would have to train them to work in a certain area. And so the uptick on that over the weekend was really interesting. We're looking at that data. And that's part of what we believe will help to unlock productivity because the most expensive initiative we have on an ongoing basis is training costs. I mean, because in a home improvement environment, you want an associate that can answer a technical question.

So it's a lot more difficult than asking what aisle the shampoo was on than a traditional retailer and you have an employee on the sales floor. And so Mylow and our focus on AI and generative AI is giving us the ability to quickly train associates, give them incredible knowledge. And where we roll this out in our stores, we're seeing measurable increase in customer service. And this is customer service from customers who have no idea anything has changed. They're just telling us that the service is much better. And so we think we're on to something.

So you run one of the largest retailers in the world. AI, I don't want to say there's an overhype, but what is your assessment of how impactful it will be? And do you think it has a bigger top line inflational impact in the next 3 years or more from a middle of the P&L impact?

No, it's a great question. And my honest answer is it's too early to make a full assessment. Here's what I'll tell you based on what I believe today. I think for us, and I can speak specifically for the Lowe's environment, I think AI is going to do a couple of things. Number one, I think it's absolutely going to unlock productivity based on some of the examples I gave with how quickly we can train an associate and get them ready to serve a customer. I feel like some of the things we're doing specifically in AI from an AI architect standpoint and the ability to write and approve code, we're seeing -- we're seeing measurable returns on the efficiency in that area.

But what we're also determining the -- this is the yet to be answered question is how can the injection of AI free up an associate to do other things to create revenue. So rather than thinking about it solely as a job replacement tool, how do you think about it reducing someone's workload by 50%? And then what do you do with that other 50%? Can we now free a merchant up who's spending 50% of their time building spreadsheets, responding to e-mails, communicating with suppliers. If AI can take that task away, can you now take 50% of that merchant's time and they can focus on sales-driving initiatives.

That is yet to be determined, but we think the hypothesis is that, that is something that we believe is viable, and that's what we're trying to understand. We're excited about it. We -- I would say we have some of the best partnerships of any large retailers. You name the tech company, and we have a firm working relationship with them because we're trying to learn and we're trying to be a first mover in a lot of these areas, and we think we have been. And we're going to be on the forefront of this, and we're going to make sure we learn quick and we adopt as quickly as we can as well.

Pricing tariffs, we touched on it a teeny bit in terms of ticket. Do you think the U.S. consumer has seen I would say, the worst, the highest point of inflation collectively. And obviously, your business has a gauge because there's still some tariff residuals coming through late this year, early into next year. So do we really know how the consumer will handle the peak level of inflation when we get there?

Look, it's a fair question. I would say I can speak only for Lowe's. And I would say we've been very transparent from the very beginning. When some competitors were saying things like we're not going to raise prices, we instead said we're going to be price competitive because the math didn't work out in a relevant fashion to make a definitive statement, we're not going to raise prices. And we felt like that when that was put out there that it was something that we didn't feel like it was a plausible or a realistic statement. So for us, we've been really focused on being price competitive, being relevantly promotional.

You look at our, you look at areas like Labor Day, 4th of July, Memorial Day, which in home improvement, as you know, our big promotional periods. We year-over-year, were equally as promotional as we have always been because we know that matters to the customer in this environment looking for a value. So I will say for us, we're going to continue to manage this across the portfolio. We have incredibly rich data to understand the price sensitivity and the elasticity of our consumer.

We're going to continue to offer a value. We're going to continue to have a really consistent promotional cadence. And we believe that we can continue to manage this in a way that we can limit the price burden or the inflationary burden to our consumers while still giving them a reason to get out the couch to shop in-store, online because we can offer a value based on the cross-functional work that we're currently doing and also the work we're doing with our suppliers to share some of the cost burden.

Two more questions. One on capital allocation and then one, I don't know, more fun one. So you've stated the goal to get leverage back down to, I think, 2, 7.5 over time. You've made the acquisition, so it will take some time to grow out of that. Does that preclude your flexibility in any way? And could any of those capital priorities change in the meantime?

No. I mean look, our capital priorities remain the same, that is invest in the business, continue to pay out a dividend and to buy back shares to return capital to our investors. And so that hasn't changed. Now to your point, we did increase our leverage in order to make these acquisitions, but we've committed that we will get back down to the 2.75x, and we'll try to get that done in 2027. And at that point, we'll start to get back on a more robust share repurchase schedule that we traditionally have been on. We believe that we can use cash flow to make the necessary tuck-ins and smaller acquisitions required for ADG and FBM to continue to really grow and to take market share. And we believe that can be done without going back to increase our leverage.

And we think that keeps us on that same time horizon to get back down to the 2.75x again, in that 2027 time period. We don't today see any large acquisition out there that we think that we will go after. We believe that the 2 platforms that we've acquired can be sustained and they can grow and we can continue to take share and get geographic breadth, again, with existing cash flow with a series of tuck-ins. And we think that allows us to stay committed to those 3 capital allocation priorities.

I wish I'd ask you this after the day of meetings. But what do you think the market is still underappreciating or missing with the Lowe's story?

I think for me, when I look at the investment thesis for Lowe's, it comes down to just a couple of basic factors. So short run and long term. So in the short run, in arguably one of the most difficult housing markets we've seen since early 1990s, we've been able to be very consistent in our overall performance from an operational perspective with consistency around our earnings per share performance and our operating profit and being very disciplined and very diligent.

But we've also leveraged our balance sheet to make great investments in the business so that we are now taking market share in a down market, and that's allowed us to deliver 2 consecutive quarters of positive comps and average ticket growth because customers are leveraging us for investments in their homes like appliances, kitchen, bath, flooring, et cetera. And so in the short run, we've been able to run in a very effective business in a really difficult market and in a market where the DIY has been under the most pressure that I can ever remember in home improvement.

And so we've proven in a really difficult market, in a difficult macro, we can grow sales, we can maintain discipline from a productivity standpoint and a profitability standpoint, and we are making the right investments in the business. And long term, we now position ourselves where we can serve the DIY customer. Again, we are the only home improvement retailer with a DIY loyalty program with over 30 million active members. In addition to that, we're the only home improvement retailer with a product marketplace.

And if you look at omnichannel retail across this globe, one of the common denominators of great online growth and sustainable growth is the existence of a marketplace. So we have that in the early stages. And we've made these investments in our store environment. So this home installation business in these showrooms, we have the best store environment and the best digital platform. That's the short run. In the long run, you need 16 million to 19 million new homes by 2033. So single-family, multifamily construction has to come back.

And you have this boom in commercial construction areas like data centers. And so not only are we positioned in the short run to manage the DIY with some of the differentiation we have and the small and medium Pro, now we are positioning ourselves to go beyond remodel and renovation in the store, we now can go to a more complex Pro, and we can broaden our portfolio to another $250 billion plus total addressable market, and we can get a piece of this new home construction when it starts because, again, it's just a supply-demand issue. It has to come back. It's not an if, it's a win.

And so we're positioned in the short run in the store for the DIY, the small and medium Pro, and we're positioned in the long term with the more complex Pro, single-family, multifamily construction. And we're doing it all with incredible discipline and with a very, very sustained execution in our stores, and we have created investments that we think will pay off in the future. And so I think that's the investment thesis for Lowe's.

Thank you. Appreciate you sharing the story. Good luck in the holiday season and good luck in 2026.

Great. Thank you. Pleasure to be here.

Good morning, everyone. Welcome to Lowe's Companies' Third Quarter 2025 Earnings Conference Call. My name is Rob, and I'll be your operator for today's call. As a reminder, this conference is being recorded.

I'll now turn the call over to Kate Pearlman, Vice President of Investor Relations and Treasurer.

Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President, Stores; and Brandon Sink, 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 2025. 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 on the quarterly earnings section of our Investor Relations website.

Now I'll turn the call over to Marvin.

Thank you, Kate, and good morning, everyone, and thank you for joining us today. Third quarter sales were $20.8 billion with comparable sales increasing 0.4% year-over-year despite a roughly 100 basis point headwind related to Hurricanes Helene and Milton. During the quarter, adjusted operating margin expanded approximately 10 basis points, leading to adjusted diluted earnings per share of $3.06, which is an increase of 6% versus last year. These results reflect continued operational discipline and strong execution across our perpetual productivity improvement or PPI initiatives. And auto sales results continue to be impacted by softer demand within an uncertain macro environment, we're encouraged to see improvement in DIY customer engagement and discretionary projects across many areas of the home.

We're also pleased with our performance in the North and West divisions, which were not affected by storms in the prior year. And we're seeing strength across all 5 key initiatives within our 2025 Total Home strategy, which we launched at our Analyst and Investor Conference last year. Let me give you an update on the performance of our Total Home strategy, beginning with the small to medium Pro where we once again delivered growth this quarter. We're enhancing our Pro offering through our Pro extended aisle, which is a direct interface with our supplier systems. It allows our Pro sales associates to sell directly from their product catalogs with the suppliers opting fulfilling their orders directly to the job site. This expands our product assortment, inventory quantities and delivery capabilities for larger orders.

Second, when it comes to accelerating online sales, we delivered online sales growth of 11.4% this quarter, driven by increased traffic and continued strong conversion. We're also continuing to enhance the online experience across lowes.com and our mobile app to make it simpler and faster for DIY and Pro customers to find all the products they need. Looking ahead, we're pleased with the ongoing build-out of our marketplace. This allows us to expand our product assortment to offer our customers everything they need for their homes across the price spectrum from value to premium without assuming the risk of owning the inventory. Third, we're leveraging our loyalty ecosystem to increase our customer preferences for Lowe's, so they choose us first and shop more often.

In fact, our 30 million MyLowe's Rewards members shop twice as often and spend over 50% more than nonmembers. Through both our DIY and Pro loyalty programs, we're gaining deeper customer insights, which help us tailor more personalized value-enhancing offers through data-driven marketing. Fourth, we're really pleased with the strong results this quarter in Home Services, where we delivered double-digit comps. Later in the call, Joe will discuss the initiatives that are driving these gains. And the fifth and final initiative in our Total Home strategy is increasing space productivity. We made great progress optimizing our selling space, and Bill will provide details on a couple of key initiatives later in the call. Overall, I'm very pleased with the progress that we have delivered through our Total Home strategy and the strategic alignment we're driving across the organization.

Let me now discuss the importance of generative AI to improve how we sell, how we shop and how we work. This is what we refer to as our AI framework. And as we continue to make strategic investments in our AI capabilities, we're already seeing tangible results. Our virtual assistants, Milo and Milo Companion, which are built on an open AI platform, are answering nearly 1 million questions per month about everything from product specs to project know-how to the status of a customer order. In fact, when our customers engage with Motlow online, the conversion rate more than doubles, which is clear evidence that AI is simplifying decision-making and driving sales. And when our associates use Milo Companion to help customers shopping in our stores, we're seeing customer satisfaction scores increase 200 basis points. And every interaction with our virtual assistant is feeding our proprietary models, allowing us to continually improve accuracy and build a durable advantage in home improvement expertise.

Within our technology team, engineers are using AI tools for development and code review, leading to double-digit productivity gains and accelerating our speed to market. In fact, Lowe's has just been recognized by OpenAI with their $100 billion token Milestone Award as a reflection of the depth and breadth of AI adoption throughout the organization. Achieving this milestone places Lowe's in an elite tier of companies that are not just experimenting with AI, but operating at a true enterprise scale. Looking ahead, we have a detailed road map of several additional high-impact AI initiatives that will drive further enhancements to the Pro and DIY customer experience, both in-store and online. This will include our participation in agentic commerce so we can continue to meet our customers where and how they choose to shop. And we also anticipate incremental productivity gains as we leverage AI to drive operating efficiency across the enterprise.

Now let me turn to our acquisition of Foundation Building Materials or FBM, which we completed in October. I'd like to begin by extending a warm welcome to the entire FBM team. As a reminder, FBM is a leading distributor in interior building products, including drywall, metal framing, insulation and selling systems. FBM's business mix is balanced evenly between commercial and residential. And while the housing market is currently under some pressure, we're pleased with the momentum we're seeing with FBM's commercial sales. Some recent highlights include several data center projects, a luxury 150-unit residential high-rise and medical facilities as FBM leverages a strong reputation for reliability and technical expertise to win these contracts. And when we consider the impact to Lowe's, this acquisition gives us a more comprehensive product portfolio, expands our revenue streams and further enhances our offering to our Pro customers.

In fact, efforts are already underway to quickly connect FBM's product catalog to our Pro extended our and FBM customers will gain access to Lowe's as complementary products like tools, safety gear and fasteners, so they can more quickly and conveniently source everything they need for their jobs. FBM's 370 locations nationwide also strengthens our fulfillment capabilities, especially in high-density urban markets in California, the Northeast and the Midwest where Lowe's has less of a physical store presence. Our acquisition of FBM and Artisan Design grew our ADG creates a comprehensive interior solutions for our homebuilders with everything from drywall and insulation to doors, flooring, cabinets and appliances and I look forward to updating you on the progress we're making with both acquisitions in the future.

Now let me transition to our view of the macro environment. Overall, the U.S. hormone remains healthy. balance sheets are strong and consumers continue to spend. However, affordability and uncertainty in the broader economy continue to weigh on consumer confidence particularly when it comes to larger discretionary purchases as borrowing costs have been elevated for longer than originally anticipated. Looking ahead, lower interest rates, including for home equity loans could begin to spur demand even as many homeowners remain reluctant to move and give up their historically low mortgage rates. This cycle is different from past housing slowdowns in a few important ways. First, homeowners today have record levels of equity roughly $400,000 on average. And at the same time, they are more likely to invest in the home they already own instead of giving up the low mortgage rate.

This is referred to as the lock-in effect and could make home equity financing a more attractive solution. So while the near-term macro backdrop reflects an anxious consumer, the combination of strong fundamentals, substantial home equity and the potential for low rates ahead gives us confidence in the long-term health of the home improvement sector. And we remain confident that the continued execution of our Total Home strategy will position Lowe's win in the short and in the long term. Before I close, I'd like to wish all of our associates a blessed and safe holiday season. Our associates are our competitive advantage, and I appreciate all they do to make Lowe's a great company.

And with that, I'll turn the call over to Bill.

Thanks, Marvin, and good morning. This quarter, we delivered positive comps in 10 of our 14 merchandise divisions, and solid performance across both DIY and Pro despite lapping hurricane activity last year. Starting with home decor. We delivered positive comps in appliances, flooring, paint and kitchens and bath. We continue to strengthen our leadership position in appliances by providing customers with a value proposition that no other retailer in the industry can match. This includes the widest assortment of top brands and innovative products, all at a must-win price point. And by leveraging our market delivery network, we're the only retailer who can deliver and install major appliances in virtually every ZIP code in the U.S. next day.

This capability is crucial for items like refrigerators or washing machines that often need to be replaced immediately. One example of our innovative product offering is an exclusive new Bosch hybrid tub dishwasher line available only at Lowe's. These models combine the quiet operation Bosch is known for, along with the durability of stainless steel, in the affordability of polymer. The result is a better clean and a better value with the most accessible price points in the industry.

Turning to flooring. We saw a broad-based strength across soft services, vinyl and tile flooring. In carpet, customers are enthusiastic about the benefits of STAINMASTER PetProtect. Its lead defense backing helps prevent spills and pet accidents from seeping into the carpet pad or sub floor. STAINMASTER is the most trusted brand in carpet and it is exclusive to Lowe's. Touching on paint. We drove broad-based growth across stains, primers and paint, along with accessories and applicators. And we're excited to announce the launch of Sherwin-Williams Pro Block Quick Dry primers, an innovative product that block stains and provides outstanding coverage and drives in less than an hour. This new primer is available only at Lowe's and Sherwin-Williams locations, marking the first time that we have co-launched a product. This product provides Lowe's with true differentiation within the home center channel as we continue to build on our strong relationship with this key supplier.

Lastly, in kitchens and bath, we recently completed a reset of our bathroom vanity showrooms and these new sets are delivering results ahead of our expectations. The updated showroom provides a much better shopping experience for both Pro and DIY customers because they can now see and interact with a larger number of products and the stock products are now much more accessible and readily available for quick take with. This is an important way we're driving space productivity and leveraging our larger stores as a competitive advantage.

Turning now to Building Products. We drove positive comps across millwork, rough plumbing, lumber and electrical. We're supplementing our already robust in-store pro offering and building products with our Pro extended aisle. As Marvin mentioned, this initiative expands our product offering, increases our inventory depth and enhances our delivery capabilities. And in millwork and rough plumbing we've seen strong performance driven by higher installation sales in home services, which Joe will discuss shortly. Millwork is another area where we're seeing innovation like the Larson 60 MT storm door with magnetic technology that keeps the door closed. It offers both performance and curb appeal and it gives customers a reason to upgrade.

Turning to hardlines. We delivered positive comps in lawn and garden, with particular strength in live goods and hardscapes. Customers were inspired by the outdoor vignettes that showcased everything they needed to build their vertical gardens, along with upgrading a mailbox display and more. And the mild weather gave customers more opportunities to tackle more outdoor projects which helped drive extended demand. We're also pleased with a strong start to the holiday season in our tools, trimetry and decor categories. Shifting gears to tools where we also delivered positive comps and we saw strong performance in hand tools and tool storage. Customers responded to our value offerings and improved assortments like the Cobalt 46-inch workstation available in a wide range of colors. During the quarter, we leaned into value and drove strong online engagement during our DEWALT days event supported by a homepage takeover and a compelling free tools battery offer.

Now let me give you an update on one of our key Total Home strategy initiatives, increasing space productivity, which is all about driving incremental sales opportunities by optimizing our sales footprint. This quarter, we completed the rollout of our rural format in 150 additional stores, bringing the total to nearly 500. We're also on track to complete rollout of workwear and pet to more than 1,000 stores giving us an opportunity to drive these assortments beyond our rural stores. In line with our pet expansion, which is focused on grab-and-go items like toys and treats, we're pleased to announce our new private brand, Heart & Herd. It offers pet owners high-quality, value-priced products for dogs and cats, just in time for holiday gifting.

And as part of our space productivity efforts, we've made significant progress on our SKU rationalization initiative designed to improve our inventory productivity. By the end of 2025, we're set to achieve our multiyear goal of reducing our in-store SKU count by 15%. As we head into the holiday season, we're delivering new exciting products, both in-store and online through our Black Friday buildup event. We're giving customers an early start on their holiday shopping with great deals, including several that are already available now. In closing, I'd like to thank our merchants, inventory and supply chain teams, along with our MST associates and our supplier partners for their continued efforts to deliver results for our customers ahead of the busy holiday season.

And now I'll turn the call over to Joe.

Thank you, Bill, and good morning, everyone. Let me begin by recognizing our store and supply chain associates who show up every day with energy and commitment to serve our customers. quarter after quarter through changes and challenges, they've proven themselves to be our company's greatest asset. And that's why I'm particularly pleased to share that the investments we're making to support our frontline associates are truly paying off. New training programs are better equipping our store teams to sell complete customer projects, including featured seasonal products and services by enabling our associates to deliver more comprehensive solutions.

These programs are boosting their knowledge, confidence and effectiveness at driving sales. And as Marvin mentioned, they can also rely on our AI-powered Milo companion for product details and for help answering customers' questions. add it all up, and we're empowering our associates with the tools they need to sell more effectively across all departments in the store. Additionally, a few weeks ago, we concluded our associate annual engagement survey a critical component of our proactive listing strategy, which supports our efforts to become the employer of choice in retail. Scores across the key measures of engagement and associate well-being as well as leadership effectiveness have all continued to improve, and our 95% participation rate continues to be industry-leading. All told, our better train and highly engaged associates are elevating the Lowe's shopping experience, which is reflected in improved customer satisfaction scores for both the DIY and Pro.

To focus now on the Pro, enrollments in our MyLowe's Pro Rewards program continue to grow as our core small to medium Pro customers experience firsthand the benefits of our easier-to-use loyalty platform which allows them to start earning rewards immediately and achieve higher rewards with lower levels of spending. We're also pleased to see PROS taking advantage of our enhanced digital capabilities as they shift to more shopping online. And looking ahead, we're encouraged that our recent Pro survey overall sentiment improved for small to medium Pros as they remain confident in their job prospects and report stable backlogs. Shifting now to performance in Home Services this quarter. We're pleased with our double-digit growth in this key initiative within our Total Home strategy. The team delivered broad-based strength across a number of product categories. including windows and doors, HVAC, water heaters, kitchens and bath and window treatments.

These strong results were driven in part by tech-enabled solutions, which have enhanced the experience of customers, installers and associates alike. For our customers, we've accelerated the process from inquiry to complete installation by providing intuitive solutions for scheduling, quoting and payment. These enhancements have transformed what was a time-consuming process by removing friction and pain points along the customer journey.

Turning now to our focus on operating efficiency. I'd like to thank our asset protection teams for continuing to deliver one of the best inventory shrink results in big box retail. Despite the challenging environment, these results are driven by a combination of outstanding leadership in industry-leading technology. We also focus this year on a number of perpetual productivity improvements or PPI initiatives in our stores including our front-end transformation, streamlining our BOPIS fulfillment and the freight flow optimization. And we're already working on our PPI road map for 2026 for store operations as we leverage AI-enabled solutions to further enhance the customer experience while also driving labor productivity.

Before I close, let me take a moment to discuss one of our new initiatives to support veterans. As part of our long-standing commitment to the military community and the support of our objective to deliver 10 million square feet of impact in 2025. As a marine who served in combat, I'm particularly proud to share that in partnership with Building Homes for Heroes, and our hometown of Mooresville, North Carolina, we've just broken ground on Freedom Hill. This first-of-its-kind community will provide mortgage-free housing and support services for up to 15 households of injured veterans and first responders.

As the executive sponsor of Lowe's philanthropic support of our military communities, it will be an honor for me to see lives changed through this initiative.

With that, let me turn the call over to Brandon.

Thank you, Joe, and good morning. Starting with our third quarter results. We generated GAAP diluted earnings per share of $2.88. In the quarter, we closed on our acquisition of Foundation Building Materials or FBM. We recognized $105 million in pretax transaction costs, including the fees associated with $9 billion in bridge financing. To finance the $8.8 billion purchase price, we issued $5 billion of bonds with a competitive weighted average coupon of 4.38% and borrowed $2 billion under a 3-year term loan. Given our better-than-expected cash flow generation, we financed the remaining $1.8 billion with cash on hand. We also recognized $24 million in non-GAAP adjustments associated with Artisan Design Group, or ADG.

And keep in mind that in the third quarter of last year, we recorded a pretax gain of $54 million associated with the 2022 sale of our Canadian retail business. Excluding these impacts, we delivered adjusted diluted earnings per share of $3.06, exceeding our expectations. This is a 6% increase compared to adjusted diluted earnings per share in the prior year quarter. My comments from this point forward will include certain non-GAAP comparisons that exclude these impacts where applicable. Third quarter sales were $20.8 billion with comparable sales up driven by DIY engagement across project-related categories as well as another quarter of growth in Pro, online and appliances.

As Marvin mentioned, we also lapped storm-related demand which was a roughly 100 basis point headwind to sales this quarter. While we continue to manage through an uncertain macro environment, we are pleased that we delivered positive comps in 10 of 14 product categories. Monthly comps were up 2.5% in August, up 0.9% in September and down 2.6% in October when storm-related demand was most concentrated last year. For the quarter, comparable average ticket increased 3.4%, driven by ongoing strength in Pro and appliances, mix shift into larger ticket purchases and modest price increases while comparable transactions declined 3%. Gross margin was 34.2% in the quarter, up 50 basis points as we cycle a number of storm-related pressures in the prior year. We also saw improvements in credit revenue and better sell-through of inventory as we drive our SKU rationalization efforts.

Adjusted SG&A was 19.6% of sales, deleveraging 36 basis points as we cycled lower bonus attainment in the prior year and also invested in sales driving actions. Adjusted operating margin rate of 12.4% was up 10 basis points versus prior year and the adjusted effective tax rate of 24% was in line with prior year results. Inventory ended Q3 at $17.2 billion, down approximately $400 million versus prior year. The net decrease also reflects the inclusion of inventory from recent acquisitions of approximately $600 million and higher tariffs. These results were driven by several inventory productivity initiatives across the company as we leverage advanced AI inventory solutions to enhance our demand planning, allocation and replenishment while also driving our SKU rationalization efforts. ADG operating results were accretive to EPS on a non-GAAP basis for the third quarter and pressured operating margin by approximately 15 basis points, in line with expectations.

Turning now to capital allocation. In Q3, we generated $687 million in operating cash flow, inclusive of the payment of federal and state taxes of roughly $900 million that have been deferred under a provision related to Hurricane Helene. Capital expenditures totaled $597 million as we continue to invest in our strategic growth imperatives. In the quarter, we paid $673 million in dividends at $1.20 per share. Adjusted debt to EBITDAR was 3.36x at the end of the quarter after we repaid $1.75 billion in debt maturities and borrowed $7 billion to finance the acquisition of FBM. The structure of this financing in conjunction with the timing of our existing bond maturities will allow for steady deleverage to our 2.75x target, which is expected by mid-2027. We ended the quarter with $621 million of cash and cash equivalents and delivered a return on invested capital of 26.1%.

Turning to our financial outlook which we are updating to include our year-to-date results and our expectations for FBM. We are seeing a cautious consumer amid ongoing uncertainty in the macro environment and the timing of an inflection in the home improvement in housing markets remains unclear. We're now expecting comp sales to be roughly flat for the year, which is at the bottom end of our previous guidance. When we include FBM sales of approximately $1.3 billion in the fourth quarter, we are expecting sales of approximately $86 billion for the year. We also now expect full year adjusted operating margin of approximately 12.1%, which includes 20 basis points of dilution from FBM and ADG. We're expecting adjusted diluted earnings per share of approximately $12.25, which represents a 2% growth over the prior year. Please note that this includes the impact of FBM, which is roughly neutral to adjusted EPS, and we expect capital expenditures of up to $2.5 billion for the year.

On an annualized basis, we expect FBM and ADG to negatively impact consolidated adjusted operating margin by approximately 50 basis points. We are already working collaboratively with the FBM and ADG teams on cross-selling opportunities as we expand the offering for our Pro customers. We've also begun the efforts to extract cost synergies and from our overlapping areas of spend. Taken together, we remain confident that there are compelling long-term EBITDA synergies from both revenue growth and lower operating expense. These investments in our Pro growth initiative, along with the other investments in our Total Home strategy will position us to capitalize on the expected recovery in housing and home improvement and continue to deliver long-term sales growth and shareholder value. And with that, we will open it up for your questions.

[Operator Instructions] Our first question comes from the line of Chris Horvers with JPMorgan.

So my first question is about just how you're thinking about the trend in the business in light of the performance that you've seen over the past 6 months and a harder compare and then into '26. So you noted that quarter-to-date is positive. Is there anything you could elaborate on that? And is the flat guide for the fourth quarter simply just like, hey, there's uncertainty and there's a harder compare. And then as you think to '26, if the home improvement market is flat to slightly down this year and you're putting up a flat comp. If you take a look at the sum total of everything a little bit of lower rates, a little bit of replacement cycle, a little bit of innovation and what you're doing on the self-help side, should your sort of -- should the market and should Lowe's comp accelerate in '26 relative to '25?

Chris, this is Marvin. Bill and I will talk about November then we'll let Brandon share a tiny bit about how we think about '26 because as you can respect, we're not going to get into a ton of detail about that until our February call, we'll provide guidance for the year. Relative to November, look, we're very pleased with the positive comp performance to start the quarter in spite of storm overlaps from last year. we've seen improvements in the top line since exiting October. And we just believe that some of the key elements of our toll strategy are working and we're excited about November because there are some great things on tap. So I'm going to let Bill talk a bit about November, but also talk about appliances, which we think is really key to our performance, not only for the quarter, but what we're seeing in November.

Yes. Thanks, Marvin. And Chris, we're excited about kind of the early start to the quarter, obviously, coming off of October. Strength for us really broad-based across the store, but particular strength within our seasonal categories, holiday, trimer tools, appliances and other gift-related businesses that are getting off to an early start. Our stores look great. We're starting to see live trees show up now. Poinsettia is showing up now as we get ready for next week. And we're seeing some early excitement around some key areas of the store. So whether it's by now and installed by the holidays within our flooring and cooking areas or you look at cobalt and some of the strength that we're seeing there with some new products in workstations, the buy and get offers within our tool business, driven by DEWALT, Craftsman Cobalt.

We've got just a lot of strength going on right now that we'll carry into next week with Black Friday. So we're excited about how things are progressing. And in our appliance business, we've had really since last year, 4 straight quarters now of comp growth and unit growth, which is telling us the health of that business and that consumer responding to the offers and the innovation and the new products that the team has put up.

And Chris, this is Brandon. I think when I step back and look at the totality of the year, we're now 3 quarters of the way through, obviously, navigating a lot of factors, a very choppy macro. But when I look at just the trends of the business, I think a lot for us to be cautiously optimistic about as we look ahead to '26. We're seeing acceleration on 1-year comps when you exclude storm-related activity for Q3 and what's implied in our Q4, also 2-year comps accelerating nicely as we've moved through the year. ongoing strength in Pro online.

Bill just spoke to appliances, some early signs of life in our home services business, which is really positive. We cited broad-based performance across categories with 10 or 14 categories, geographies broad-based, really excited about FBM and ADG as we start the integration efforts. And obviously, just really pleased with the bottom line performance and the ongoing operational discipline that the company and has been able to show. So please through 3 quarters. And as we look ahead into 2026, as Marvin mentioned, we'll have more to come in February, but those are early thoughts.

And then on a related question, I mean, kitchen and bath, I think you said it was positive looking back, it seems like you'd have to go all the way back to 1Q '23. What's changed there? And as you think about it, Marvin, you've talked about like we have a lot of big ticket. We have a line remodel, the kitchen bath, the appliances. And when we sort of need lower rates to improve that sort of big-ticket remodel category, but you are seeing signs of life. So is there sort of a misperception around sort of how remodel-oriented you are amongst investors or how do you think about maybe that category showing signs that it will inflect to the positive? .

So Chris, I think it's 2 things. I'll take the first part, and I'll let Bill just talk about some of the work in resets and new products. I really believe that this is more about lowest taking share in this space. If you can go back to 2018 at our first Alison Investor Conference, I presented how we were managing this installed business with binders and whiteboards. And it's taken us a while, candidly, to get this business digitize with a technology platform that makes this entire process easy for the associate, the installer and most importantly, the customer. We think now we have a best-in-class tech stack for this space. We have central selling and so what you're looking at outside of kitchen and bath, which Bill will speak to, you see in categories like windows and doors in HVAC and water heaters.

These are more replacement categories for customers who are living in the oldest housing stock in the history of the U.S., but because we have a better go-to-market strategy. Bill's teams given this great pricing. Brandon seems given us a great credit portfolio we're taking share in this area. But we're also seeing, to your point, signs of life in areas that make us cautiously optimistic that maybe there are brighter days ahead, and I let Bill talk about some of those categories.

Yes. So Chris, I'll mention in my prepared remarks that during the quarter, we had completed our vanity reset across the stores. And that's one of the nice bright spots driven -- driving our kitchen and bath business. But we're also seeing broad-based strength, toilets, bathing, faucets, disposed of kitchen sinks, bath repair. So it's really kind of broad-based across the categories. We're excited about that. But it really boils down to the strength. I think we're also seeing within our central selling organization where the store associates take the lead. We get -- turn it over to our central selling team, and they're helping to close the deal on a kitchen cabinet. -- the strength of what Joe's team is doing in the store to take good care of the customer. There's just a lot of things that are adding up to the strength of the kitchen and bath business, but those are just a few highlights.

Our next question is from the line of Zack Fadem with Wells Fargo.

I wanted to follow up on your comments around improving pro survey sentiment. And I'm curious if there's any extra color you can talk through in terms of how that's trended through the year? To what extent do you think this is a good leading indicator for your business? And then what do you think is driving the recent improvement?

So Zack, thanks for the question. Just to hit it at a high level, our small to medium pro business remains very stable. And roughly 75% of our Pros are very confident in their job prospects. And also, this segment of the Pro consumer continues to work on smaller ticket repair and maintenance projects, and that's been very consistent with what we've been saying all year long. So when we look at our Pros, when we talk to our Pros, they feel very confident in their business. They feel confident in their access to credit and even feel a little more confident about their ability to hire and attract labor. So we feel great about what our pros are telling us.

And let me hand over to Joe to just talk about some of the things we're doing in the store to drive this continued growth and, in my opinion, market share gain with the specific customer segment.

Well, thanks for the question. And we're really pleased with the flywheel effect that we're seeing from the Transform Pro offering. And when you think about where we've been headed with the loyalty through MyLowe's Pro Rewards, a relaunch there, we have just a wonderful enhanced digital experience that pro extended aisle we have made investments in fulfillment. The last 3 years, our inventory investments are really beginning to pay off. The order modifications of fulfillment flexibility in the in-store experience. So we're excited to see this flywheel effect all come together with the great product offerings that we have. And we have good confidence that when this does bounce back, we're well positioned to capture the share.

And Zack, the only thing I'll add to that, I mentioned in my prepared comments that we're in the process of adding FBM to our Pro extended aisle platform. That's going to be a huge deal for us because it is very challenging for us today to fulfill a large order of something, let's say, dry wall to a customer job site and do it efficiently. We now are working to just transition that entire fulfillment process to a company that's best-in-class that's FBM. And so we think this is going to be great for FBM is going to be great for Lowe's, but more important, it's going to be great for the customer. So again, we see this as a sustainable growth strategy, and we feel great about the work we've done thus far.

Appreciate that. And I know we aren't guiding for '26 yet, but since the model is different with FBM and ADG, could we talk through early margin scenarios in both a status quo environment as well as the scenario where perhaps we see some benefits from tax stimulus and low rates?

Yes, I'll just hit briefly what we're looking at in terms of margins on the FBM and ADG transactions. When you look at taken in isolation, I mentioned in my remarks, we're roughly 20 basis points on 2025. So that's coming roughly split from FBM and 10 ADG. And then when you look at as we wrap the year for 2026. That's going to be 50 basis points on the year. So I think 30 basis points of wrap into 2026. And the majority of that 50 basis points when you think of 2026 is going to be weighted towards gross margin on that. So I'm not going to get into any more details as it relates to base business or run rate, but that's just some early views of geography and impact from the transactions in '26.

Our next question is from the line of Simeon Gutman with Morgan Stanley.

I wanted to ask to put the macro hat on again, there's a -- I don't know if it's a bear case, but there's a housing scenario that it just stays in this trading water position for a longer you have new prices that are lower than existing homes and the age of homeowners is pushing close to 40 years old. So I think affordability is the issue. It sounds like you may reject that premise, Marvin, given some of the bright spots, but I wanted to hear how you react to it.

No, Simeon, it's a good question. So I'll give you my thoughts, and I'll let Brandon provide any additional comments. The way we see it is this. I think that mortgage rates obviously are elevated longer than any of us anticipated. But the one thing that's different, as I said in my prepared comments is the fact that you have a healthy homeowner financially, and you have $33 trillion in equity that is in the system. And we think where between $11 billion to $13 billion, $1 trillion of that is capable. So we think the lock-in effect is real because at some point, customers are going to be looking at these sub-3% 30-year fixed mortgage rates.

They like the neighborhood that they live in. They have excess equity in their home, and we think HELOCs are going to become the next opportunity for us to drive discretionary remodel big-ticket projects. So we think that is a strong possibility in the future. Now we're not going to try to time it. We're not going to try to build it in our forecast. I think that would be reckless. But we do think that, that is a very plausible hypothesis that takes you away from the bear case. So I'll pass it over to Brandon to see if he has any...

Simeon, I'll add, as Marvin mentioned, the mortgage rates, we're looking at those remaining elevated at least as of now 6% to 6.5% tied more to the longer-term yields, and that's continuing to pressure both existing home sales and new home starts. And I think as we start to look ahead into 2026, we're not anticipating meaningful near-term improvement there. But we are potentially excited about what could happen with the 50 basis points of rate cuts from the Fed here over the last 18 months, the consensus would suggest we're going to see more -- we've seen these HELOC rates go from neighborhood of 10% to 12% down to 8% to 10%. And that's creating, I think, some opportunity as we look at project backlog, when we look at the data about $50 billion of products that have been delayed or deferred with the equity now with the potential to be a significant funding mechanism.

And if we do see further near-term rate reductions that could act ongoing as an additional stimulus. So we're investing in the business through our Total Home strategy to be prepared for that type of environment and excited about the potential upside related to that into 2026.

Okay. And my follow-up, it's on the medium to larger Pro. Can you, Marvin, set up what Lowe's strategy is there. We've talked about the pieces of it. Will you keep supply chain separate? Are there categories that you think are essential to addressing that customer, whether it's an existing home remodel or even a new homebuilder and will you cross-sell that customer using the rest of the Lowe's asset base? .

Yes. So Simeon, I would say we feel great about the current strategy with the smaller medium pro is working. We've had quarter-over-quarter growth. We think it hinges on our MyLowe's Pro rewards loyalty platform. It's resonating well where our customers we think it hinges well on the products that Bill's team brings to the table every day, and that was a huge gap in deficit for us 7 years ago, and that is no longer the case. We also think it's important that we maintain a very competitive credit portfolio. We have a best-in-class, 5% off every day for our Lowe's credit cardholders, and that also extends to the Pro customer that resonates exceptionally well.

And we have every intention on leveraging FBM for fulfillment in every intention on taking the roughly 40 million FBM Pro customers and getting them connected to complementary projects, product and projects at Lowe's. But we see a very specific void in the marketplace for serving the small to medium pro. That's why we've been so intentional about focusing on that customer. And we think we can focus on that customer in the brick-and-mortar stores and Lowes.com. And we can have a very robust strategy and platform with FBM and ADG and we can do both concurrently.

One of the reasons we talk about the importance of FBM's commercial business is because it's countercyclical. When housing is down, that commercial business tends to outperform, and that's what we're seeing right now. So overall, we think we can do both and the data has proven that we have a very effective strategy with the small and medium product.

Our next question is from the line of Kate McShane with Goldman Sachs.

We wanted to ask a little bit more about the marketplace, just in terms of like what the initial performance has been, what you've seen with regards to seller onboarding product expansion and customer adoption? And just when you expect to scale this platform to a point where it could start to contribute more meaningfully to margin?

No. Kate, thank you for the question. We are really excited about the launch of our marketplace. The caveat is really early. And so we're not going to get into a lot of conversation relative to performance other than to say if exceeding expectations relative to financial performance, exceeding expectations relative to the number of sellers and the quality of sellers. So every seller that we've approached and we are literally looking at 4-star plus rated sellers are required to get on this platform. And we again had great adoption with Merkel's technology, and they actually awarded Lowe's as the fastest launch partner they've ever had.

So we were able to get that done quickly and we feel incredibly excited. And one of the unique characteristics that we have is at virtually everything purchase as a marketplace item can be returned in a physical low store because Joe his team partnered with technology some years back to create the technology rails to make that happen. So it creates incredible convenience for the customer when they need to return something. And again, I'll let Bill talk about how the merchants are playing a role to make sure that we have a really balanced approach to how we're thinking about this.

Thanks, Marvin. And Kate, the only thing I would add is, obviously, early, but we're learning a lot as we progress with marketplace. We're finding that it's an opportunity to expand programs that our current vendors are providing in our stores to provide stuff that would be found on Lowes.com. And we're also entering and finding new products, products that Quite honestly, we didn't think that could be available on Lowes.com that now is available and the consumers are engaging and buying them. So we're excited about that learning and what that can do.

But at the forefront of when we put this together based on being a closed system, is that we wanted it to complement what we were doing with what's happening inside of our stores, and that's exactly what we're seeing early on here.

Our next question is from the line of Seth Sigman with Barclays.

I wanted to ask about operating leverage going forward. You've been delivering really strong operating margin improvement this year on pretty low comps. I guess it's been mostly driven by gross margin this year. So how do you think about the sustainability of gross margin as the primary driver of that? Or does the composition of margin expansion change over time? And then I guess, in general, if you could speak to how you are thinking about the leverage point in the business? That would be helpful.

Sure, Seth. This is Brandon. Thanks for the question. I think as it relates to margin, very focused at this point on delivering the 12.1% operating margin that we communicated as part of our guide. And just as a reminder, ex the dilution from the acquisitions, that's at 12.3% consistent with the flat bottom end of our range that we communicated at the beginning of the year. So the team has done a really great job balancing flow through the balance between gross margin, SG&A, managing the tariff pressure that we've been dealing with. And honestly, the PPI initiatives continuing to deliver $1 billion split roughly between SG&A and gross margin, that has been the primary driver in our ability to deliver a softer sales.

I think as we look ahead into 2026, a few things I would highlight we're continuing to look at FEM and ADG what we think housing and commercial markets are going to be looking like in the business performance there in '26. I mentioned earlier, new home starts both single-family and multifamily remain under pressure, but confident with these businesses that we can gain share in a down market, we're going to also mention the nice balance that we have on the commercial side. So looking at that and how that impacts the margin profile in the '26. And then the last thing I'll mention, just as we continue to look at tariffs, those ramp here in Q3, we're expecting that also to continue ramping in Q4 and the wrap to affect the first half of the year. So managing through that and trying to understand how that impacts both sales margin and operating margin going forward. So all that will be waived. We'll look at that in terms of our previous rule of thumb, and we'll have more on that as we get into our call in February for 2026.

Okay. Got it. That's helpful. And then just I guess a related follow-up would be on the gross margin specifically. The gains this quarter really stepped up. Can you just unpack that a little bit more? Are there any timing consideration? I mean you mentioned tariffs starting to flow through, was there a benefit from raising prices relative to the cost coming through? Or anything else you can tell us about the mix dynamics that seem to be supportive this quarter?

I would say, Seth, on Q3 margin, really nothing related to pricing or tariffs. I would say they're that's playing out very much in line with our expectations just in terms of estimating when the cost is going to be flowing through margin. The great work that Bill and team have done on the merchandising side with our suppliers. It really is the themes that I outlined in my remarks. We're lapping storm pressure from last year. So that is serving as a benefit this year. The credit portfolio to a outperformed our expectations on better-than-expected losses. And then Bill referenced the SKU rationalization initiative. We've seen really good sell-through results thus far on the inventory that we're exiting there. That really was the core of the composition of the 50 basis points that we saw in Q3.

Our next question is from the line of Greg Melich with Evercore ISI.

I'd love to follow up on the traffic and ticket breakdown. If you look at the ticket expansion, it's accelerated like each quarter this year, how much of that 150 bps of acceleration is related to some of the early tariffs going through? How much of it is mix? And how sort of the basket evolving in terms of items in it and the size?

Yes, Greg, I can speak to ticket and transaction. So when we look at ticket growth, it's really similar when we look at Q3 performance as to what we've seen in previous quarters in terms of the drivers. So the strength in our Pro business, also appliances, I will reference that in Q3, we did have some modest price increases. When we look at like-for-like inflation, again, modest. It's very consistent with our expectations and also the year-to-date trends that we've seen as we continue to watch tariffs move through the system. The offset is transactions, and that has been pressured by the lower DIY demand. But I'll also call out the bulk of the 100 basis points of storm-related pressure with the DIY is affecting the transaction.

So that's really the driver of the offset when we look at Q3. And then I think when we look ahead to a lot of those same drivers are expected from Pro appliances. There will be some modest like-for-like inflation. Just as a reminder, we also have 100 basis points of hurricane pressure that we're cycling in that will also pressure comps and pressure DIY transactions in Q4.

Got it. And then maybe just a clarification on before. The 50 bps is the full annualized effect on the margins of the 2 acquisitions, right? So we have like basically 15 bps that show up this year and then 35 bps next year.

So yes, I [indiscernible] Greg, it's 20 on the year for 2025 and then 30% of wrap for a total annualized run rate into 2026 of 50 basis points.

Got it. And if I take the guide for 4Q, it seems like margins should be down around 60 bps, and it's fair to say that's the 2 of those sort of rolling in.

Yes, I would say when you isolate Q4, the bulk of the operating margin decrease is going to be driven by layering in the transactions. We have $1.3 billion of sales for that will pressure operating margin or diluted down as well as ADG. So that's driving the bulk of the change in Q4. .

Next question is from the line of [indiscernible] with Bernstein.

I wanted to ask about the SBM ADG integration that you're doing. Can you just help us understand to what extent you're maybe onboarding ADG on to SBM ERP system, how does that integration work in the near term?

Thank you for the question. It's early days. So the first rule that we have is to do no harm to the performance of either business platform, including loads. But we are in the early stages of the integration. The big advantage we have is FBM's current IT platform is the same platform that we are transitioning ADG 2. That is not by accident. And also, it's an existing platform that we have in our Lowe's Pro supply businesses. So we feel like we're going to have the ability to accelerate the IT integration between the companies. But as you can respect, we're in the early stages of that, but we feel really good about the plan. We feel really good about the timetable, and we have the best IT team in retail working on it. So I'm very confident we'll be able to make it happen.

Great. And then just a longer-term follow-up. You mentioned the plan to delever to the 2.75 by '27 is the longer-term plan to resume share buybacks by then? Or should we expect additional acquisitions from here?

Yes. I would say, Gian, still very focused on the integration activities. As Marvin mentioned, that's going to be our focus here over the next 2 years. We're pausing share repo and very much expect to get back down to that 2.75x leverage target by 2027. So that's our focus. FBM is going to continue to run their existing play in the meantime, expanding through greenfield expansion, organic growth. And there could be potentially some small tuck-in M&A, but that would only be what we could self-fund with additional cash flow. So I think that's the best way to think about how we're going to be operating here over the next 2 years. .

Our last question comes from the line of Robby Ohmes with Bank of America. .

Just 2 follow-ups. Just on the fourth quarter when you -- the way you're planning it for seasonal and given a little bit more probably tariff prices coming through. Any changes in the timing of promos? Are you doing any promos earlier related to holiday and things like that?

No, Robby. I mean the promotional cadence remains relatively consistent to prior years. We started the quarter off with kind of the early pre-Black Friday type stuff that we've been doing. Obviously, Black Friday next week. And then post Black Friday, when you get into Cyber Monday events for dot-com and then you get into that leading up to the holiday time frame. We've got offers out there for both the Mylos Rewards members as well as our -- all of our consumers, both online and in-store, so relatively consistent. .

That's helpful. And then just a follow-up. On flooring and the strength you guys are seeing there, you guys called out soft surfaces. Is there trade down going on? How do you think you're doing relative to industry? Is there something changing in flooring? Or is it all -- is it something about your positioning in good, better, best? Or maybe a little more color there. .

Yes. It's nice to be able to give a shout out to the flooring team and all the work that they've been doing. Last quarter, we announced the acquisition and being able to get Dow Tile into our assortment. So that's starting to roll in now. But specifically, the soft surface, it's really the strength of Stainmaster and we've called that out as one of our strongest brands, and now we've got leak defense being able to be offered. So that is not a trade down, that's a trade-up offering in the assortment.

But I think the team has done a really nice job of offering value out there every single day. And I'd stack our soft surface offer out there every single day against what's going on in the marketplace. And then you could go into luxury vinyl, you can go into resilient hybrid and they go into hard surface tile and the teams have offers out there every single day to close that consumer that's now making the decision to do a flooring project.

Robby, I would just add that the investments we've continued to make in our services business flooring was one of our first to go central selling, where we remove that complexity of the design from the store. We shortened the time to close the customer and take them off the market. And so I think all in all the products the service level, we're really seeing some green shoots.

Thank you all for joining us today. We look forward to speaking with you on our fourth quarter earnings call in February. Thank you.

This concludes the Lowe's third quarter 2025 earnings call. You may now disconnect.

Good afternoon, everyone. Thank you. It's my pleasure to introduce the management for Lowe's. Today, we have with us Marvin Ellison, Chairman, President and Chief Executive Officer. Marvin was appointed in his current role in 2018 and has more than 30 years of leadership and operational experience in the retail and home improvement industry.

I am going to turn the podium over to Marvin for some prepared comments. We're doing this one a little bit differently as my questions are going to be non-deal-related topics. And with that, I will turn it over to Marvin.

Good afternoon. Thank you, Kate. So I look forward to speaking with Kate here in a moment about our quarterly earnings results and the trends that's impacting our industry. But before we begin the Q&A, I'd like to take a few minutes to provide some context to the recent announcement we made last month on the acquisition of Foundation Building Materials or FBM.

So FBM is a leading distributor of interior building products specializing in drywall, metal framing, ceiling systems, insulation and commercial doors and hardware. FBM serves a diverse large pro customer base with approximately 45% residential mix, which spans single-family and multifamily construction and 55% commercial mix, which is split fairly evenly between new construction and repair and remodel applications.

We've been engaged with FBM's leadership team since the beginning of the year, and we've been consistently impressed by their deep industry expertise and a track record for profitable growth. Founder and CEO, Ruben Mendoza, leads a very talented leadership team with over 200 combined years of industry experience and with an average tenure of over a decade with FBM. Their national footprint of over 370 branches complements Lowe's store base, especially in urban areas of California, the Northeast and the Midwest, where we have less of a physical store presence.

FBM also has a strong track record of both organic and inorganic growth as they've successfully integrated more than 60 acquisitions onto a single ERP system, oftentimes within 60 to 90 days. This single ERP made FBM a more attractive acquisition target versus the industry peers. Having a single ERP also makes FBM more than just a collection of roll-ups, which you traditionally see in this space. And post closing, we'll bring FBM and ADG under the same umbrella to create a differentiated offering to serve the large pro within this $250 billion total addressable market. This unlocks new opportunity for Lowe's as we don't serve this customer segment in a meaningful way today.

And FBM also brings capabilities that Lowe's doesn't have, things like a fleet of over 1,200 boom trucks, 1,100 trailers, 900 flatbed trucks and over 400 tractors. These assets provide us with advanced capabilities for job site fulfillment and also the ability to serve large complex orders. We'll also gain access to digital tools like the MyFBM app, which offers real-time pricing, ordering and delivery tracking for these complex orders in both English and Spanish.

FBM also gives us something that we desire, and that is a strong trade credit program, which is often key to serving the large Pro customer orders. We're also excited about the cross-selling opportunities for this combined organization. Lowe's customers will gain access to FBM's core assortment and fulfillment capabilities through our new Pro extended aisle system available at the Pro Desk in our stores. And FBM's customers will benefit from access to Lowe's' complementary products like tools, safety equipment fasteners that drive greater attachment.

With an estimated 18 million new homes needed by 2033, we also see a unique opportunity for both FBM and ADG to work together to develop a comprehensive interior solutions platform for homebuilders, providing them with everything from drywall to ceiling systems to insulation to doors as well as flooring, cabinets and countertops. Overall, these two acquisitions accelerate the evolution of our total home strategy and strengthens our ability to serve the Pro customer, small, medium and large.

We believe this will enhance our scale, expand our capabilities and support faster, more sustainable top line growth while also delivering long-term shareholder value.

So thank you for your time. And Kate, I now look forward to taking your questions.

Thank you. So thanks so much for joining us today. I think there's a lot of conversation happening about what exactly is going on in home improvement today. I think we saw better results out of both you and your competitor in the second quarter than was expected. And I think everyone is trying to figure out what do we attribute that to and how sustainable is it?

I think for us, we've been focused for 7 years on what we call retail fundamentals. And that's a very basic way of outlining key things that we believe every retailer must do well to have sustainable growth. And quite candidly, 7 years ago, we were not doing any of them very well. We had a great balance sheet, wonderful energetic frontline employees that we call associates, but we had a strategy that was not designed for a modern retailer in an omni-channel world where brick-and-mortar and digital has to connect. So we made a lot of investments. And we believe what we saw in the second quarter is a combination of a couple of things.

Number one, as you saw throughout the quarter, our comps improved from negative comps in May to positive comps in June to a 4.7% positive comp in the month of July. So we had a really strong exit rate coming out of the second quarter. That was attributed to, in some cases, a seasonal shift from earlier in the quarter to late in the quarter to much improved seasonal weather, but also we had category performance across areas like paint and flooring and strength in appliances and seasonal categories. So it was a combination of a lot of things coming together, including seasonal shifts in weather, but also core categories performing well.

So we're cautiously optimistic that the consumer, specifically our homeowner consumer is a healthy consumer and that they're willing to spend, especially when they can get a value. But we're also cautiously optimistic that hopefully, we're going to see some trends beginning to shift in a more sustainable way, but it's just too early to call that. I think you probably heard pretty consistently today that the back half of this year will be more focused on managing tariff cost-related challenges that we're all going to face. We're preparing for that. We're tracking it daily.

We're very aware of the elasticity of our consumer and of our product categories, but we have to wait and see how the back half consumer responds to this tariff environment before we can have a definitive point of view that we've hit an inflection point or there's light at the end of the tunnel or whatever analogy you'd like to use. But we feel great about our business. And overall, we feel great about the health of the consumer, which happens to be a homeowner that really serves us on a day-to-day basis.

You've talked about mortgage rates of 5.5% to 6.5% likely being the sweet spot of when maybe housing turnover could start to improve. Do you still view this as the right level?

Kate, it's a difficult question to answer. What we believe is that if we can get to a sub 6% mortgage rate, we think psychologically, that may be a bit of an unlock for a lot of our consumers. I mean, today, roughly 90% of our customers either have their houses paid for or they have a mortgage rate of less than 4%. So these customers are in what we call a lock-in effect, where they've generated a lot of equity. I think the data tells us have roughly $33 trillion in equity available in the current marketplace. So we're at almost record equity.

Our consumer has low unemployment, wage growth, but they still have a bit of concern about the macro and the mortgage rate environment is forcing them to just stay put the weight it out. And the question that you're asking is the right question that is what level of mortgage rate will unlock this lock-in. And we believe that it's probably sub-6%, but we just have to wait and see.

Now the good news is even if the consumer remains locked in and they're unwilling to venture out into this higher mortgage rate environment, at some point, they're going to have to make a decision on their existing home. And what our Pro customers tell us in the surveys that we provide on a quarterly basis is that customers are not canceling projects, they're postponing them. They're just waiting to see if the mortgage rate environment improves. They're waiting to see if there's going to be another economic shooter fall, so to speak, in the marketplace. But at some point, they're going to have to make a decision on what they do with the existing home, whether they remodel the kitchen, whether they do a room expansion, whether they add a garage.

And so we are perfectly positioned for either scenario. If the mortgage rate environment opens up and customers decide to go out, our acquisition of ADG and FBM puts us in a position where we can take advantage of that $250 billion total addressable market. If they decide to stay put in their existing homes and just invest in an upgrade or an enhancement, then we're perfectly positioned with the investments we've made in the last 5 years to take advantage of that as well.

If we can just move on to tariffs and pricing. You've noted that you're taking a portfolio approach to price. Can you maybe talk a little bit about how you've managed through this environment, what you've had to do on the assortment side, how well you've mitigated the additional costs and what the consumer can expect to see?

Yes. Really for us, it's three things. It's about our global sourcing footprint. It's about our negotiation with our suppliers and about, to your point, how do we balance out our assortment. And so let me just take a step back and kind of level set on where we are from a global sourcing perspective. So today, roughly 60% of our goods are sourced from the U.S. Roughly 20% are sourced from China, 10% from Mexico and then the remaining 10% in areas of Southeast Asia, India and Canada and around the globe. And these percents represent direct and indirect.

In other words, they represent private brands where we are the direct sourcer of the product of record and also indirect where they have national supplier that may be manufacturing and sourcing product around the globe. These percents are dramatically different than they were 7 years ago when I arrived. We have a much greater percent of products being sourced in the U.S. and a lower percent in areas of China.

So we've been working really hard to just continue to lessen our dependency on one country of origin, and we made a lot of progress in that regard, working with our suppliers to find just the right locations for us to just have minimal risk relative to being oversaturated in one area. And so along with that, we've been working with our suppliers to share in the cost increases that the tariff environment has brought to bear. And we've had really good partnerships and understanding that we have to try to find win-win scenarios for each.

And now we've had to just take a look at our portfolio and making sure that we understand the price elasticity of our consumers. And as you know, pricing in retail is dramatically different than it was even 5 years ago. Today, it's highly sophisticated with built-in algorithms designed on internal financial targets, competitive scraping and also the understanding of price elasticity around all your merchandising categories and also the customer segments that you're serving. And so when you factor all these things together, you create a dynamic environment where, in some cases, prices go up, in some cases, prices go down.

It's a very dynamic portfolio. But the one thing that we've been committed to is offering the customer value because we think in this environment, customers still respond to a value, and that's been proven throughout the year but also to remain competitive. I mean we're not going to put ourselves in a position where we're going to lose market share in this environment because we're going to be priced inappropriately relative to the competition or inappropriately relative to consumer demand. And as you can appreciate, we're literally tracking this on a daily basis. We're tracking units, and we're tracking overall performance geographically by Customer segment, and it's something that we're going to continue to manage.

We've created really strong systems and analytics that gives us the ability to be agile and dynamic. So we're not locked into a specific point of view as much as we are locked into trying to serve the customers as best we can.

If we can maybe switch over to the balance sheet and capital allocation. I think it's a question that we are getting a little bit more often is if you are shifting your capital allocation strategy?

I would say it's not necessarily a shift as much as it is -- it's an ongoing transformation relative to the needs of the customer and how we believe we can deliver shareholder value. What we've always said is we're going to invest in the business. We're going to offer and continue to increase our dividend, and we're going to have a share repurchase strategy. And so the investments we've made in the last two acquisitions, in our view, is directly tied to continued investments in the business. And we think that, that's going to benefit our shareholders long term. And I'll give you thoughts on that in a second.

We're going to continue to raise our dividend on an annual basis, which we're committed to. And we're going to reenter the share repurchase arena once we're able to continue to pay down debt and get back to our leverage ratio of 2.75x, which we're committed to.

As we ask the question, how do we create more value for our shareholders, do we continue to buy back shares at the rate that we've been buying back shares for the last 5 years? Or do we look at ways to more aggressively invest in the business. We believe strongly that the investments that we're making in ADG and FBM, the two most recent acquisitions, will provide greater shareholder return because it gives us the ability to have more consistent and sustainable growth.

We did a very simple analysis. We asked the question when the housing market recovers, what segments of our business will benefit from that recovery. And I'll just remind you of the data point I shared that you have -- you're going to have 18 million new homes needed by 2033. And the one thing that we quickly determined is that we could identify growth segments throughout our business and areas that we've made investments over the last 5 years. But the one area that was an incredible void was single-family home construction and multifamily because when you have this 18 million home deficit that has to be addressed in this country, it's going to come from single-family and multifamily construction. And we had no meaningful strategy to gain any financial benefit from that.

So in other words, our concern was you're going to have this inflection that's going to happen in housing, and we're going to be on the outside looking in. And so the question was, how do we create a strategy and create a segment of our business that will give us the ability to benefit from this recovery that we believe is going to happen just based on supply and demand and the acquisition of ADG and FBM does that because we're going to design an interior solutions platform where we can go into a large homebuilder.

Think about the large builders out there that we currently do business with ADG, Pulte, Lennar, D.R. Horton as examples. And we'll be able to have a broad portfolio of things that we can offer under one umbrella. Flooring, cabinets and countertops, insulation, ceiling systems, door hardware, appliances, and that can all happen under one umbrella, which takes a lot of complexity away from the project for the homebuilder, and it also gives us the ability to leverage internal capabilities and capabilities of ADG and FBM while making us now a significant player in a $250 billion total addressable market.

So it's just -- it's not a change as much as it is a ratio in how we're spending relative to investing in the business and pausing share repurchases for a period of time, which we have every intention once we get to our leverage ratio to enter back into the share repurchase arena.

That's helpful. Thank you. I wanted to make sure we asked about marketplace because that is something new to the business model. And I think you're approaching it a little bit differently. It sounds very exciting in terms of the product expansion that we can see as a result of it. So could you maybe walk us through where you are in the process of developing this new muscle, if you will, and what you think it will do for the overall Lowe's enterprise?

Yes. So Kate, one of the things that we did a real simple analysis. We looked around the globe and asked a question. If you look at brick-and-mortar retailers that have had the most robust growth in e-com and commerce, what are some traits that we need to identify. And the one common trait we found was the existence of a product marketplace. And so for us, we made the decision really to be the first -- to start the first product marketplace for home improvement in the U.S.

And it started with, number one, identifying the talent required to do this from individuals that have had history and experience doing this in other places. So we recruited a very talented team. They have to put the system in place. And so this Mirakl's operating system is a system widely regarded as a universal system across the marketplace environment. The reason why that's important is because if you're a successful seller in a marketplace, you just want a plug-and-play process where you have a system that you're already accustom to using and the ability for us to partner with Mirakl and to get the system up and going quickly was important. As a matter of fact, they awarded us recently a recognition of having the fastest launch on their platform of any customer that they've ever done business with. And that's just indicative of the level of talent we brought to this team.

So our objective is to have what we call a closed marketplace. So it's not open to any seller who wants to come in. We want to make sure that we protect our brand, and we have a very thoughtful approach to how we're approaching this. Having said that, we're really excited about the early results that we're seeing. We're really excited about the percent of new customers that we're seeing shopping online that never shopped us before because we have a broader assortment of products based on what the early stages of the marketplace has brought us.

And again, I would say, Kate, we're in the really early innings. I'd say probably in inning #1 or #2 in a 9 inning contest. But we have bold aspirations. We have people who have been there done it before, and we are really excited about what we're seeing and the early results are exceeding expectations across the Board, and we're going to continue to build.

And because you're only maybe in inning 1 or 2, it might be too early to ask about this, but the plans for integrating the marketplace with the Lowe's physical stores and using those existing fulfillment capabilities, how -- when does that come along?

Yes. It's something that is on the road map. It's something that is under consideration. And the great thing for us is there are so many great benchmarks around the globe that we can look to and learn. There are also some cautionary tales that we can look to and learn from. And so we're taking a very deliberate approach, but we have a robust project outline. We have an aggressive time line. And we think all those things will come to bear within the right time frame as we continue to learn and ensure that we're doing what's most important is giving our customers what they want and making sure that we're keeping our customers first and how we approach this. But again, we're very excited.

Great. We've been asking the same 5 questions to each company that has sat down with us today. So we're at that part of the conversation. Some of this we've already talked a little bit about. But if we start first with the health of the consumer, more just overall, your expectations for what the health of the consumer will look like in the back half of '25 versus what you saw in the first half. Do you think things will be the same better or worse?

We think things are going to be the same. We don't see any material change in consumer behavior nor are we anticipating any dramatic macro changes. The only caveat to that is, as we mentioned, we're going to probably see more tariff-related price increases across the macro. We're paying really close attention to that. But minus that, we think we're going to see a stable environment, and we think it's going to be consistent with the first half.

When it comes to pricing, and again, we talked a little bit about this when we were discussing tariffs. But are there any pricing actions you've taken so far? And what has been the elasticity response?

Kate, nothing meaningful. The first half did not drive any, what I would call, tariff-related pricing adjustments to any material effect. As we think about the back half, we're going to leverage our portfolio. We've been very transparent from the very beginning, we said that we're going to be price competitive, understanding, as I say often, math is universal. And so the math is the math. But we're also in a position where we have to serve our customers, we have to offer our customers a value and we have to ensure that we are a place where customers believe they can not only get quality innovation, but they can get a competitive price. And so we're going to offer that.

We will have a much better point of view on the pricing environment at the end of this quarter because we think that we'll learn a lot now. And I've said it consistently that this environment was going to become clearer for all of us post Labor Day. And so we're kind of at the beginning of that period. And so we're paying really close attention like every major retailer, we are literally tracking this on a daily basis, understanding how the customer is responding to any changes we make. And the reality is we're going to have prices that will be very dynamic. We're going to have certain categories where we're going to be priced competitively that prices may go down.

We're going to stay in our same promotional cadence that we've always been in, and we just exited Labor Day. And if you looked at our Labor Day promotional cadence is very consistent with last year. And so there are certain parts of the business that we're going to be very consistent because we think that's important to the consumer. But again, we're going to monitor the marketplace. We're going to be very, very conscious of our consumer, and I'll have a much better opinion on what the dynamics will look like as we get through this quarter.

Okay. Our third question is around inventory. Can you talk about your expectations for inventory growth in the back half? And have you or do you expect to see any disruption in shipments due to the global supply chain?

We see nothing that gives us concern about disruption in the supply chain. Most of our second half buys are already completed and landed in the U.S. with the exception of maybe some holiday, but it's well underway. So we feel great about the commitments that we've made from an inventory perspective. Even if you go to spring of '26, most of those decisions are already locked in. And so we have a pretty good corner view on that as well.

Our inventory environment will fluctuate based on consumer demand. If demand goes up, then we will obviously invest in inventory to meet demand. I'm pleased to say that our in-stock position today for both Pro and DIY is as good as it's been in my 7 years with the company. A lot of credit goes to the merchants, goes to our supply chain team and our operations team for a lot of hard work. So we feel really good about our inventory position, and we don't see anything that gives us any concerns about disruptions in the back half of the year.

Our fourth question is around non-tariff margin drivers. So freight, wages and materials. What is your view if those costs will be the better same or worse into '26?

We'll start with the back half of this year. We don't see anything that gives us any concern relative to any expense-related increases. I mean we've been incredibly disciplined as a company. I'd argue that we're one of the best operating retailers in the world relative to driving productivity to ensuring that we are making the right technology investments, at the same time, delivering great service to our customers.

One thing that I'll always say about retail, when you know a retailer is making the right cost-related decisions is if you continue to see costs going down and customer service going up. Anyone can drive cost down at the deficit of customer service. But if you can improve your customer service environment at the same time you're driving cost down, then to me, that's the right equation, and that's exactly what you see in our business.

As a matter of fact, we came out of the second quarter with customer service improvements across the Board, large part driven by a really, really effective companion app that we delivered and developed with OpenAI for our associates in the store to improve their product knowledge and give them information about multiple departments they may not even work in. So we feel good about the early trends we're seeing.

As you think about 2026, it's a little early. And what we'll -- we typically do is when we have our fourth quarter earnings call, we give a more perspective. But I can tell you, as it relates to the back half of this year, we don't see anything that gives us concern or pause relative to the expense environment or any operating costs that we think will put pressure on margin. And we are very committed to our perpetual productivity improvement initiatives. We call it PPI. And we got a $1 billion target that we laid out for this year, and we're on track to deliver that.

And then our last question, just in the last couple of minutes here. This doesn't apply necessarily that much to the home improvement industry. But we have seen more in the way of consolidation and store closures and bankruptcies, I think, in the last year than we have in the last few years. Do you think market share consolidation will speed up, slow down or be the same in '26?

It's a good question. What I will say is when you think about home improvement, I want to remind everyone, we have a $1 trillion total addressable market as we see it. And that's split evenly between DIY and Pro. And so if you think about the consolidation that's happening, it's typically happening on the Pro side and primarily on the distribution side. And even with what we've seen in the last couple of months, last 12 months, we still see a very fragmented Pro market place. And that $500 billion in total addressable market, a lot of it is still up for grab. So even though we think there will be additional consolidation, we don't see anything that's going to be accelerated or something that's going to be out of the norm.

Obviously, we're going to pay close attention to it, but we think this $500 billion target total addressable market for Pro is going to remain relatively fragmented. It's going to remain populated with regional players and geographic players that we think will exist for the foreseeable future. And we'll be opportunistic to make sure we're making the right organic and inorganic investments while continuing, again, to get back to our leverage target, which is very important to us. But we think we can do both and that we can continue to create sustainable growth that we think will benefit our shareholders.

Thank you for joining us today.

Great to be here.

Good morning, everyone. Welcome to today's conference call to discuss Lowe's Companies Second Quarter 2025 Earnings Results and Lowe's agreement to acquire Foundation Building Materials or FBM. My name is Rob, and I'll be your operator for today's call. As a reminder, this conference is being recorded. I'll now turn the call over to Kate Pearlman, Vice President of Investor Relations and Treasurer.

Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President of Stores; and Brandon Sink, our Executive Vice President and Chief Financial Officer. As noted in our press release this morning, announcing the definitive agreement to acquire FBM, there are accompanying slides today's comments, which will be referenced on today's call.

I would like to remind you that our notice regarding forward-looking statements are included in our press releases and presentation that 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 2025. 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 on the Quarterly Earnings section of our Investor Relations website. Now I'll turn the call over to Marvin.

Thank you, Kate, and good morning, everyone. This morning, we announced the acquisition of Foundation Building Materials or FBM, a premier distributor of interior building products, including drywall, metal framing, ceiling systems, insulation, commercial doors and hardware and other complementary products. This acquisition represents a transformational move when it comes to advancing our total home strategy and enhancing long-term shareholder value. With the acquisition of FBM, we are strategically expanding our Pro offering to serve the large Pro, especially their plan spin. We're now well positioned to not only continue driving growth with our core DIY in small to medium Pro customers, but this acquisition also unlocks our ability to serve the larger Pro within a $250 billion total addressable market.

The acquisition of FBM strengthens our portfolio diversifies our revenue streams and allow us to capture a larger portion of Pro sales, all of which is expected to deliver significant long-term value to our shareholders. Brandon and I will discuss this acquisition in more detail later in the call, but first, I'll turn to our results for the quarter.

In the second quarter of 2025, we delivered sales of $24 billion with comparable sales up 1.1%. We drove solid performance in both Pro and DIY and strength in seasonal sales as weather improved throughout the quarter. In addition to sales growth, our persistent focus on productivity drove better-than-expected operating performance leading to adjusted diluted earnings per share of $4.33, an increase of 5.6% over last year. And our perpetual productivity improvement or PPI initiatives continue to deliver results we set out to achieve. This is a testament to the culture we built prioritizing continuous improvement throughout the business.

Later in the call, Bill and Joe will share specific examples of these initiatives. Across the board, we're pleased with the results we delivered as we continue to execute against our long-term strategy and invest in areas that position us for sustainable growth. To our Total Home Strategy, we're able to deliver continued pro growth this quarter, stacking on top of strong mid-single-digit growth in Q2 of last year. Additionally, we grew our online sales by 7.5%, partly driven by a more immersive shopping experience and increased traction for MyLowe's rewards, which is helping us increase customer loyalty and drive repeat purchases. We also launched the first home improvement creative network with Mr. Beast, the world's most followed creator among the first to join. This network is aimed at partnering with influencers across social media, as trusted voices to drive brand engagement for our products and services.

We're excited to see how our new creative network will enhance our connection with Gen Z and millennial customers. We're also continuing our marketing partnership with Lionel Messi, widely recognized as the best cycle player in the world as well as our sponsorship of the NFL as the official home improvement partner.

Turning to the macro environment. Homeowners remain financially healthy, supported by strong balance sheets, wage growth and low unemployment. The medium to long-term outlook for the home improvement industry remains positive driven by an aging housing stock, which is at a record high, substantial homeowner equity and the pent-up demand from delayed projects. In fact, industry analysts estimate that there's roughly $50 billion of deferred project demand as many homeowners have delayed larger discretionary projects over the past few years.

At the same time, an estimated 18 million new homes are needed by 2033. Together, these trends point to a healthy pipeline of demand for home improvement and new home construction ahead. That's why we're confident that our most recent investments and acquisitions will uniquely position us to accelerate sales growth when the market turns.

Before closing, I would like to officially welcome the Artisan Design Group, or ADG team to Lowe's. We closed on this acquisition in June, and we believe the future combination of ADG and FBM under the same umbrella will position Lowe's to offer large Pro customers a full complement of interior finishes to meet their needs. I also want to thank our low frontline associates for their commitment to serving our customers day in and day out. I love spending time in the stores where our frontline associates who remain the driving force behind our company.

And with that, I'll turn it over to Bill.

Thanks, Marvin, and good morning, everyone. This quarter, we delivered positive comps in 9 of our 14 merchandise divisions driven by continued growth in Pro and online and a solid recovery in our spring seasonal categories. Starting in hardlines. We delivered positive comps in hardware, lawn and garden and tools with widespread strength in key seasonal categories, especially as weather improved. We drove positive comps in lawn and garden, partly driven by a solid performance in live goods and the support of our growers as we navigated weather challenges early in the quarter.

We also saw strength in Scott's soils and fertilizers as customers responded to their great offers. Turning to tools. We delivered strong performance in power tools and tool storage customers gravitated toward our robust assortment and compelling offers, including buy 1 get 1 free deals from brands like DEWALT, Craftsman and Cobalt. Offers like these demonstrate our commitment to highlighting and delivering value for customers, both online and in store.

Turning to building products. We drove positive comps across building materials, rough plumbing and lumber as we're seeing continuing momentum in repair and maintenance projects. We saw broad-based strength in interior categories like plumbing repair, water heaters and drywall as well as in exterior categories like roofing, and composite decking, where we offer the top 3 brands in Trex, TimberTech and decorators. In home decor, we delivered positive comps in paint, flooring and appliances where we continue to build on our momentum with both positive sales dollars and unit comps this quarter, along with driving sales growth in all major appliance categories.

Lowe's continues to offer unmatched value in appliances with the broadest assortment and next-day delivery available in virtually every ZIP code in the U.S. We're also pleased with our ongoing efforts to build out our powerful Pro brand lineup, making sure that we have the brands and products that are most important to these customers. Over the last few years, we've added brands like Klein Tools, Hubbell, Wallboard Tools and more. And today, we're excited to welcome Dow Tile to Lowe's, which is the best-selling tile brand in the country and the Pro preferred choice for tile across residential and commercial projects. Dow Tile offers direct-to-home and job site delivery, ensuring materials arrive when and where they're needed.

As Marvin mentioned, we remain focused on driving our perpetual productivity improvement or PPI initiatives throughout the business. One example, we have enhanced our assortment planning tools for seasonal buys over the last few years. which is allowing us to better anticipate demand and optimize our inventory allocation. These enhancements have led to improved sell-through and less end-of-season clearance and ultimately improvement in gross margin. This brings me to our approach to managing the global sourcing environment.

I'm pleased that the teams are executing our playbook well and ensuring that we maintain strong assortments and excellent value for our customers with the goal of remaining price competitive. Our merchants are making great progress working closely with our suppliers to help mitigate cost pressures while ensuring a stable supply for our shared customers and accelerating our country of origin diversification to reduce our single country dependency in any given product category.

So as I wrap up, I want to thank our merchant team as well as our MST associates and our vendor partners for their continued efforts to deliver the results. And now I'd like to turn the call over to Joe.

Thanks, Bill, and good morning, everyone. I want to start by thanking our frontline associates for their hard work and dedication. Their extensive knowledge of home improvement, relentless customer focus and willingness to adopt new technology are driving measurable impact across the business. We're seeing that impact in higher customer satisfaction scores with significant improvements in the areas of associate helpfulness and knowledge. These increases coincide with the rollout of Milo companion, our AI-powered app designed specifically to support associates on the sales floor. The app is helping new associates to build competence early while enabling experienced associates to expand knowledge across departments.

For example, a paint department associate in the garden center can use the app to instantly calculate how much mulch a customer needs and recommend the right tools for spreading it. And a hardware associate can help a customer in the appliance department quickly identified the most energy-efficient washer and dryer pair available under $1,500. We're pleased with the strong adoption rate, which has already surpassed our targets. And because the app is powered by AI, it has the capacity to learn from feedback and deliver even more helpful responses over time.

Likewise, our customer satisfaction scores remain strong with the Pro. And as Marvin mentioned, we continue to see year-over-year growth in this segment, building on mid-single-digit gains in the second quarter of last year. In our recent Pro survey, Pros indicated they are confident in their near-term prospects with stable backlogs, putting our perpetual productivity improvement initiatives or PPI. Let me provide an update on one of this year's key initiatives streamlining our freight flow process.

We're using smarter truck organization, improved labeling and redesigned carts, creating a more direct path from truck to shelf. These enhancements reduce unnecessary touch points and footsteps reducing the overall time to complete these processes, which in turn creates payroll productivity. Finally, I'm excited to share that we opened 3 new stores this quarter in key growth markets, North Fort Worth, Texas; Georgetown, Texas; and Maricopa, Arizona. And later this week, we are set to open a location in Braselton, Georgia.

New stores are outfitted with our latest enhancements, including an updated front-end experience, optimized assortment and upgraded technology. To drive awareness and engagement in these new communities, we host Milo's rewards grand opening events where we offer members elusive to accelerate enrollment. I'd like to personally welcome the new teams from each of these stores.

And with that, I'll turn the call over to Brandon.

Thank you, Joe, and good morning. Beginning with our Q2 results, we generated GAAP diluted earnings per share of $4.27. In the quarter, we closed on our acquisition of ADG and recognized $43 million in pretax transaction costs and purchase accounting adjustments. Excluding these impacts, we delivered adjusted diluted earnings per share of $4.33, an increase of 5.6% and compared to adjusted diluted earnings per share in the prior year quarter.

Additionally, in the second quarter of last year, we recorded a pretax gain of $43 million associated with the 2022 sale of our Canadian retail business. My comments from this point forward will include certain non-GAAP comparisons that exclude these impacts where applicable. Q2 sales were $24 billion with comparable sales up 1.1% in the quarter driven by recovery in seasonal categories as weather improved as well as continued strength in Pro, online and appliances.

Monthly comps were down 1% in May, up 0.3% in June. And in July, we delivered positive transactions and comps, up 4.7%. For the quarter, comparable average ticket increased 2.9% and comparable transactions declined 1.8%. Adjusted gross margin was 33.8% in the quarter, up 37 basis points from last year with improvements in both shrink and credit revenue as well as continued benefits from our perpetual productivity improvement or PPI initiatives. And adjusted SG&A of 17.3% of sales deleveraged 6 basis points in line with our expectations.

Adjusted operating margin rate of 14.7% was up 23 basis points versus prior year and the adjusted effective tax rate of 24.1% was in line with prior year results. Inventory ended Q2 at $16.3 billion, down $499 million versus prior year. We continue to manage our inventory replenishment in line with demand trends while also driving strong in-stocks across both Pro and DIY categories. ADG operations did not have a material impact to our Q2 operating results.

We are pleased with our performance this quarter as the organization continued to navigate this uncertain environment while offering compelling value for our customers across our product assortments. The teams leaned into our best-in-class tools and processes to rapidly adjust to changing demand trends through the quarter and deliver on our operating commitments.

Turning now to capital allocation. In Q2, we generated $3.7 billion in free cash flow, inclusive of $495 million in capital expenditures, and we invested $1.3 billion for the acquisition of ADG. We paid $645 million in dividends at $1.15 per share and announced a $0.05 per share increase to $1.20 per share for the dividend paid on August 6. And we ended the quarter with adjusted debt to EBITDAR of 2.96x with $4.9 billion of cash and cash equivalents and delivered a return on invested capital of 29.5%.

Now turning to our financial outlook. Our first half results actualized within our expected range of outcomes. And looking ahead, our expectations for a roughly flat home improvement market and the performance of our core business remain unchanged. The outlook assumes current consumer and home improvement trends persist and our strategic initiatives continue to drive momentum, especially in Pro and online.

Today, we are updating our full year 2025 outlook only to reflect the inclusion of ADG. Taking this into account, we are now expecting sales in the range of $84.5 billion to $85.5 billion with comparable sales in a range of flat to up 1%. We also now expect full year adjusted operating margin in a range of 12.2% to 12.3% and adjusted diluted earnings per share of approximately $12.20 and to $12.45. And we continue to expect capital expenditures of approximately $2.5 billion as we invest in the business and open new stores.

Please note that this outlook does not include any potential impacts related to the acquisition of FBM. On an annualized basis, we expect ADG to negatively impact consolidated adjusted operating margin by approximately 15 basis points. Now to assist you with your modeling, here are a few points to consider for the third quarter. We expect third quarter comp sales to be approximately 125 basis points above the bottom end of our full year guide, and we also expect third quarter adjusted operating margin rate to be down approximately 20 basis points from prior year adjusted operating margin rate, driven by ADG operating mix.

In closing, we are confident our Total Home strategic initiatives are resonating with customers and that we are making the right investments, both organic and inorganic, to position the company for sustainable, long-term sales growth and shareholder value creation.

And with that, I will hand the call back over to Marvin to discuss this morning's announcement regarding the acquisition of FBM.

Thank you, Brandon. Over the last couple of years, we've been assessing potential new opportunities for growth within our industry. we evaluated a number of options, including FBM. Since the beginning of this year, we met with the FBM management team many times and visited several of their sites across the country. We continue to be impressed not only with their industry expertise but also their strong focus on revenue growth, which allowed them to seamlessly integrate multiple product verticals.

In -- we have now identified FBM as a right strategic fit for Lowe's to best complement our Total Home Strategy and continue to position the company for long-term sustainable growth. I'd like to start by highlighting the core strength, and then I'll walk through the strategic rationale for this acquisition. As you can see on Slides 6 and 7, FBM has a proven 14-year track record of growth and a strong reputation with both the residential homebuilder and with commercial pros across new construction and repair and remodel applications.

FBM has a diversified customer base in its commercial business, including hospitals, data centers and office buildings. This mix creates more stability and better insulates the company from the ups and downs of the housing cycle. FBM also achieved scale the right way, both as a disciplined buyer and builder. And since its inception in 2011, the company has successfully integrated more than 60 acquisitions across multiple product verticals and opened more than 50 greenfield locations. The result, a purpose-built, highly scalable, multi-trade distribution platform.

And today, FBM is a leader in drywall, ceiling systems and metal framing with an established presence, loyal customer base and a highly effective sales force that optimizes advanced selling tools to drive engagement and conversion. One of the most compelling aspects of the FBM acquisition is a strategic presence in key geographies such as California, the Northeast and the Midwest, regions where we currently have less of a presence. This provides us with significant growth opportunities to expand our Pro footprint and capture sales in these areas of dense population.

With over 370 branches across the U.S. and Canada, FBM's extensive network is both expensive and highly complementary to our existing operations further enhancing our ability to scale and drive long-term growth. Over the years, FBM has built a strong financial profile with consistent profitable growth. And from 2019 to 2024, FBM drove revenue CAGR of approximately 25% and adjusted EBITDA CAGR of 30% through a combination of acquisitions, organic growth and greenfield expansions. This impressive track record outperformed their public peers and Pro distribution over this time frame.

Now moving to Slide 8. FBM has led by talented industry veterans at every level of the organization. Founder and CEO, Ruben Mendoza, started with a single branch 14 years ago and built an industry-leading platform. He has a proven history of attracting and retaining top talent and a leadership team that's been with FBM for roughly a decade on average. This leadership team brings a disciplined approach to execution and an extensive base of 40,000 Pro customers. And like us, they focus on continuous improvement while always putting the customer first, and we're excited to welcome them to Lowe's and look forward to working with them as they continue to lead this business.

Now I'd like to spend a moment on the strategic rationale for this acquisition. On Slide 9, you can see how this deal strengthened Lowe's position. And while we're so enthusiastic about the opportunity ahead. First acquisition enhances our offering for Pro customers and expands our capabilities in a number of ways. We'll have faster fulfillment for larger deliveries as we use FBM's capabilities to expand job site delivery for Lowe's, and we'll also expand our combined product offerings to both FBM and Lowe's Pro customers as we build on strong vendor relationships across both companies.

In the short run, we plan to add key FBM products, along with their fulfillment capabilities to the Pro extended oil in our Lowe's stores. And we'll bring the catalog of Lowe's key Pro SKUs to FBM's pro customers to drive greater attachment of Lowe's complementary products. And further, we'll strengthen our Pro digital tools by using the FBM mobile app, which offers real-time pricing, ordering and delivery tracking for complex orders and is available in both English and Spanish.

In addition, we plan to use FBM's AI Blueprint take-off technology to enhance our offering at our Lowe's store Pro desk, which will automatically extract material quantities and measurements from digital construction plans, significantly accelerating the speed and accuracy of the estimating process and will enhance our trade credit offering, which will be helpful for Pros shopping our stores for larger projects.

Second, this acquisition gives us the opportunity to create a platform for ongoing growth in pro distribution. Over the long term, we plan to utilize FBM's successful integration playbook, including a rapid transition to a single ERP platform. This will position Lowe's for continued growth across key product categories. Also, as I mentioned earlier, with our recent acquisition of ADG, we're excited to see how quickly both FBM and ADG will allow us to offer our customers a best-in-class comprehensive interior solutions platform as outlined on Slide 10.

With an estimated 18 million new homes needed by 2033, we envision incorporating the products and services from each company to provide large Pro customers with everything from dry wall of ceiling systems, insulation to doors as well as flooring, cabinets and countertops. While we continue to serve our DIY and small to medium Pro customers through our stores and online, we are confident that operating both FBM and ADG under the same umbrella will help us offer differentiated products and services for the large Pros planned spin.

And finally, this acquisition marks the next step in our multiyear strategy to transform our Pro offering, and it helps us deepen our reach with Pro customers. And it unlocks our ability to serve larger pros within this $250 billion total addressable market. It will increase our Pro penetration while allowing us to better balance our DIY and Pro revenue streams resulting in sustainable long-term sales growth.

Taken together, these moves will allow us to serve Pros more comprehensively, achieving greater scale through our distribution network and move with greater speed and flexibility than ever before. In closing, we couldn't be more excited about what's ahead for Lowe's as we combine forces with FBM. This acquisition will diversify our revenue streams and allow us to deliver long-term value to our shareholders.

And with that, I'd like to turn it over to Brandon, who will tell you more about the transaction details.

Thanks, Marvin. This is a great day at Lowe's as we announced this exciting transaction that will not only enhance our Pro offering, but also better position the company for long-term sustainable sales and profit expansion. The transaction details are outlined on Slide 11 and include a purchase price of $8.8 billion, which reflects an adjusted EBITDA multiple of 13.4x. The acquisition is expected to close in the fourth quarter of 2025, subject to customary closing conditions, including regulatory approvals.

It's expected to be accretive to adjusted diluted earnings per share in the first full year after closing, excluding synergies. We intend to fund the acquisition through a combination of short-term and long-term debt. We expect that the robust cash flow generation of our core business, combined with FBM's track record of strong cash flows, will allow us to delever quickly down to our target ratio by the end of the second quarter of 2027. We also plan to pause share repurchases until that time. We intend to maintain our solid investment grade credit ratings of BBB+ and BAA1.

Our capital allocation priorities remain unchanged. We will continue to invest first in growth to support our 35% dividend payout target and return excess capital to shareholders through share repurchases. As Marvin mentioned, the FBM team has delivered consistent profitable growth since its founding. In 2024, on a pro forma basis, FBM generated approximately $6.5 billion in revenue and $635 million in EBITDA. And looking ahead, we expect that FBM will continue to grow organically and through greenfield expansion in the near term.

We also expect to drive incremental revenue and EBITDA with the cross-selling opportunities that Marvin outlined through our combined product offering, and we expect to deliver cost savings primarily by optimizing procurement, administrative and logistics spend. In closing, this transaction will strengthen our competitive position, accelerate the execution of our long-term strategy and further position the company for the expected market recovery. This, in turn, will create meaningful lasting value for our shareholders.

And with that, we'll open it up for your questions.

[Operator Instructions] The first question today is from the line of Steven Forbes with Guggenheim Securities.

Marvin, curious if you can expand on Foundation's year-to-date performance in 2025, given it's a pretty impressive growth track record for both sales and EBITDAR. And then comment on what percentage of the 33,000 SKUs will be net new to the broader Lowe's offering?

Steve, those are good questions. On their year-to-date performance, we're not going to get into that level of detail until after we close the transaction. I can tell you, we're very excited, and we're excited about the historical trends in their performance from a sales, EBITDA and profit performance. Again, we think they're the best player in the sector, and it's one of the reasons why we were attracted to them.

Relative to the SKUs, again, a little too early for us to get into that level of detail. But as Brandon and I both outlined in our prepared comments, we see an immediate benefit of Lowe's providing complementary attachment products to their large Pro customers. And through our Pro desk, we just feel like that we have significant opportunities to get their products, their fulfillment capabilities connected to our customers. And we think that's going to give us short-term benefits as we work through this entire process.

Steve, I would just add, on the revenue side, we do believe meaningful synergy opportunities here. We think there's significant cross-selling opportunities. Marvin mentioned FBM has got a broader product offering, certain core categories that they carry, dry walls, ceilings, metal framing insulation, our Pro extended aisle infrastructure that we've been building should allow us to quickly plug that in and access that across our stores, our MSAs. And then on the flip side, Lowe's has a broader product offering in complementary categories that we believe can help FBM drive greater attachment.

And examples there, tools, safety equipment, fasteners. That's a very small percentage of what FBM's revenue mix is today. We think we can expand that further and more meaningfully.

And then as a follow-up, as we sort of explore foundation sort of solutions on their website, it looks like order management, break-free credit offering are some of their highlights curious, Marvin, and just get your initial thoughts on what those sort of solutions or offerings can mean for the broader Lowe's experience among the current Pro customer base.

That's one of the reasons why we selected them as the acquisition target. They have a very effective transformation process relative to how quickly they can convert their own roll-ups on their ERP platform. So they have a consistent company-wide ERP, which makes it a lot easier for us from a synergistic and integration perspective. In addition to that, we talked about their AI-driven blueprint takeoff technology, which is the best I've ever seen. And we think we can immediately plug that in to every Pro desk in our 1,750-plus stores.

And as Brandon mentioned, the ability to get them connected to our endless aisle at our Pro desk from a product and fulfillment standpoint, we think we'll immediately benefit some of our medium Pro customers and some of the large customers that come in, we can't service at a high level. And their MyFBM mobile app is best-in-class. It provides real-time view of pricing, inventory availability, order deliveries, and that's also something we believe we can quickly plug in to our Pro desk. And so the key fast was we really believe that could complement us from a large complex pre-planned Pro, which is where we have capability needs, but we were even more attracted that FBM can help us in our 1,750 store product where our small to medium Pro with some of the capabilities that they have.

Not to mention, as I stated in my prepared comments, when you look at their geographic footprint, they have a dominant presence in California, which is their home base. They have a dominant presence in the Northeast and in the key metro markets in the Midwest. And these are areas that we have the least amount of store density and being able to have a pro presence in these densely populated urban areas is something that Lowe's has been trying to accomplish for a couple of decades. And so we think this acquisition gives us the ability to start to build from there.

The next question is from the line of Peter Benedict with Baird.

I'm going to stay with the core Lowe's business for now. But the first question, you saw that, yes, I mean, you guys do a pro sentiment survey every quarter, you mentioned the stable backlog. But I'm wondering if you can kind of expand on that. Anything else you got from those surveys this time around, anything around labor availability or anything else that you would call out? That's my first question.

Yes. So Peter, I think at a high level, the Pros, again, they reinforce the stable backlogs and that the business and their backlogs are healthy. Over 75% of the pros stated today, we're confident in their job prospects, which again is consistent with what we've heard in past quarters. But they're also advising us that they continue to concentrate on smaller projects, especially repair, remodel and maintenance, which, again, is what we're seeing and in the small to medium Pro, which has been our sweet spot from a customer segment, that's been the pivot for them with this lock-in effect with very low housing turnover.

The only concern they gave us is labor costs are going up for them. And so one of the reasons why Lowe's is one of the champions in the business roundtable of trying to create these skill trade jobs in the country. There is becoming more and more of a shortage of skilled trades and master plumbers carpentry, electricians, and we're starting to see that pop up in different parts of the country. But overall, our Pros feel really good about their prospects for the balance of the year, and that bodes well for us to continue to take share with the small to medium customer.

That's great. That's helpful. My follow-up question is on the flooring category. It was called out as being I think positive in the quarter. Maybe just talk about what's happening in flooring, which is something you're doing, something you're seeing more broadly? Just maybe expand on that a little bit.

Yes, Peter, thanks for the question. We saw strength in our flooring business really across a couple of key segments across carpets, our soft surface business as well as our tile business, adhesives, as we look at our strength with our Pro customer. And so a nice blend of both DIY and Pro business within our tile and flooring program as well as our carpet program. And then we're also excited, as we announced in my prepared remarks of bringing Dow Tile to Lowe's. And so that's a significant brand of tile for us to be able to get access to for both the do-it-yourself or a Pro customer, and we're excited what they bring to our program as we continue to strengthen what we're doing in flooring.

And Peter, I'll just add. We're also very pleased with our central selling. As you can remember, flooring was our first category that we centralized for selling. This has really freed up our Red Best associates to really stay focused on the customer and improving the LTR for installations. So we're making nice progress there as well.

Our next question comes from the line of David Bellinger with Mizuho Securities.

Just on the transformational deal, can you give us some of the customer numbers or maybe the makeup of those customers and what size they are in terms of annual revenues? And then also within that, just is there one specific capability that you see the most opportunity from whether it's delivery or trade credit. Where can that be most exciting for Lowe's especially porting over to the core business?

Yes, David. I'll hit the customer piece first. Really a diverse and highly fragmented base. They have about 40,000 customers, and that's across the U.S. and Canada. And just from a concentration account, no single customer accounts for more than 1% of the revenue. So really, when we look at the base, little to no concentration risk. And I would also mention, we really like the mix of the business overall, it's about 45% residential. So that serves both single-family, multifamily, 55% commercial, which is split between new construction, repair, remodel.

And we believe this balance lends itself to diversification, provides that balance to our overall portfolio and specifically on the commercial side, less cyclicality and more of a sub-end market diversification. So like the mix of the business overall. And again, little to no concentration risk from a customer standpoint. Marvin, I'll toss the second part of that over to you.

Yes. Look, the only thing I'll add, we talked about combination of FBM and ADG, our previous acquisition. And what's interesting is that, in some cases, when it comes to single family construction, they serve the same large customer, but they provide totally different solutions. And so we just have this vision that we can take ADG's core business model, which focuses on countertops, cabinets, flooring, product and install. And then you combine that with SBM, and we just [indiscernible] customer and we think that's going to be incredibly beneficial to the large single-family, multifamily construction company and customer, and we think this comp is something that is one of the reasons why we were attracted to make this acquisition with the hope that we could put these 2 companies together.

Got it. And I also wanted to pivot over to the guidance and what's implied in the back half, a bit of an acceleration in same-store sales growth. Can you just help us understand how much of that is due to pricing? We have noticed some incremental price increases across the store. So is that fully embedded within the back half? Or is that potential upside as we move through Q3 and Q4?

David, let me -- I'll just say the overall second half kind of guidance assumptions overall. I'll start with the macro piece first and really I think expectations there are more the same as we look at the second half of our year. We're still working through some short-term challenges, including elevated mortgage rates, cautious consumers [indiscernible] back in May, we expect the overall home improvement market to be flat for the full year. That expectation continues. When you look at the first half results, we landed roughly where we expected outside some tough weather. Early in Q2, where we started slower through Memorial Day holiday, but it accelerated as we moved through July, really nice almost 5% exit rate there.

A portion of July comp was driven by the seasonal shift, but we also saw solid performance in both Pro and DIY in Q2. So as we turn the page to the second half, our outlook really is unchanged since the beginning of the year. The range implies flat to 2.5% comp. We expect that to be split evenly across Q3 and Q4. And we expected gradual improvements in the underlying business as we move through the year, and that's both on a 1- and 2-year comp basis.

And then we continue to expect to see benefits from our Total Home initiatives, Total Home Strategy as that ramps across the back half of the year, and that's both in the Pro space and the DIY space.

And David, this is Marvin. Specific to pricing, we said in our previous earnings call that we would maintain a portfolio approach, we would be price competitive, and that's exactly what we've done in Q2. That's what we're continuing to do in the back half of the year. Prices in retail will always be dynamic. Prices will fluctuate up and down through various categories based on competitive responses, internal algorithms. It's not like the old days where you're manually changing prices. A lot of this is systemic, and we feel like we have best-in-class tools to manage that exceptionally well.

And we've been very transparent about that and that's how we're going to manage it. We feel good about our promotional strategy as well. You look at some of the things that we were able to do with Bill's team for July 4. We were promotional. We drove great footsteps. Bill talked about the positive unit comps and appliances as well as positive sales. And again, you can look at that and said it was a great value oriented environment. And we think that's going to be more of the same for us for the back half of the year.

The next question from the line of Christopher Horvers with JPMorgan.

So I'll follow up a bit on the weather question. You talked about $400 million potentially shifting into the second quarter from the first quarter. Did all of that happen? And is it fair to say that weather was net neutral? Or do you think it was maybe a tailwind or a headwind in the second quarter, especially if you think about the strength in July?

Yes, Chris, I would say we realized the large majority of that $400 million. If you go back to the beginning of the year, the way we cadenced out Q1, Q2, we plan for more normal weather Q2, we expected the seasonal shift of about $400 million. I would say, with the exception of the couple of weeks around Memorial Day, where it was slower because of the wet colder weather as we got into June and July, very much played out as expected. So really happy with engagement that we saw. We had [indiscernible]

[indiscernible]. My question is, is there sort of a secondary investment cycle that emerges in the core Lowe's supply chain as you build out larger Pro fulfillment operations to perhaps get ahead of the future revenues for the pro plan purchase. Asked another way, does these acquisitions, do you sort of like the investment in fulfillment and branches and warehouses grow with the business? Or do you see the need to take this $2.5 billion of CapEx and make a step up to become more aggressive and get ahead of future growth?

It's a really good question. As we look at it now, we're going to work on integrating and getting this deal closed. We do see in the future some smaller tuck-ins on specific verticals, but we don't have anything in our current site to do another large acquisition like this one. But we do see a continuous investment in this platform. This is, in fact, a platform that we purchased. One of the reasons why we chose FBM is because we would love the ERP system. We love the verticals that they're in. As I mentioned, we love their geographic presence. We love the fact that they want the best technology platforms for a small company that I've ever witnessed, including their -- how they embrace AI and how they're leveraging that in a way to simplify the job and drive some efficiency.

And so we believe that we can take this platform and we can leverage our annual CapEx spend, and we can continue to build this out to create something that we think is going to be a very dominant long-term, sustainable revenue driver for us.

Our next come from the line of Simeon Gutman with Morgan Stanley.

This is Zach on for Simeon. Does the comp inflection signal a turn in home improvement market overall? Or is it more of a weather and seasonal balance at the end of the quarter?

Yes. So again, Zach, we're not expecting any sort of inflection from a macro standpoint. I mentioned more of the same as we look in the second half of the year, similar challenges to how we build our guide at the beginning of the year, what we reinforce course in May. That's still what we're seeing now again. Second half, we always had a bit of a gradual improvement baked in. And then we also expect to see momentum and expect to take share in the second half as we scale our Total Home Strategy initiatives. So that's really the difference in the expectation first half versus second half.

Got it. And then just as a follow-up, I appreciate all the color on some of the strategic commentary. Maybe bigger picture, can you comment on how low strategy is changing? It seems you're making a more concerted pivot into building products distribution first with ADG and now with FBM. What is the vision here? And what makes this pivot so compelling in your view, especially now?

So Zach, this is Marvin. I think specifically for us, we start it out with a focus on what we call retail fundamentals. 7 years ago, this company had a great balance sheet and a balanced strategy. And so we've been working really hard with a great leadership team and some really, really dedicated associates to get the foundation of this business, shore up and create efficiency. And I would argue that we are now one of the best operating large retailers in the world.

But as we look forward, and we look at our Total Home Strategy, which this acquisition and these 2 acquisitions totally support. The question was really simple. When housing recovers, where will the inflection happen and what category and what parts of the business do we think we'll see the greatest growth from that inflection. And as we researched this in great detail, we believe that we had some strategic deficits in how we could take advantage of the inflection that we think will be coming in housing. We talked about these pent-up demand and projects. We talked about 18 million homes needed by 2033.

We were not positioned as a company to take advantage of that, and we didn't want to be sitting on the sidelines. And so the 2 acquisitions that we may tie perfectly into what we are projecting will be the inflection point for housing, home improvement in this overall macro environment, and that is single-family, multifamily construction in addition to repair and remodel and having these capabilities to do this in a very efficient way. And so it's not a change in strategy. It's an evolution and strategy and our Total Home Strategy basically outlined that [indiscernible].

The next question is from the line of Michael Lasser with UBS.

Marvin, it seems like this Pro plan purchase segment of the market is in the early stages of consolidation. And Lowe's is bringing together several assets combined with the power of its existing platform to gain its fair share of that market. In your mind, is that sufficient enough to be able to harvest a very suitable return on these investments that you've been making? Or do you think these assets combined with Lowe's need to have a differentiated strategy, a differentiated position in the market as this consolidation unfolds in order to earn a compelling return?

Well, Michael, thank you for the question. I think for us, we believe the combination of FBM and ADG does, in fact, create differentiation. We're excited about the possibility of leveraging both of these platforms. When you combine them together, it gives us a real opportunity to go after this $250 billion total addressable market. As I mentioned before, we have a vision that we'll be able to go to a customer and provide them everything from drywall, ceiling systems, insulation, doors, flooring, counters and countertops. There's no other player they can walk into a large single-family home builder, a large multifamily homebuilder and create that type of proposition and do it with advanced technology.

And so it is our expectation and our goal that we're going to build out an offering and a solution and fulfillment capabilities that will allow us to have differentiation in the space I just outlined.

Got you. And my follow-up question is if we are on the precipice of this recovery in home improvement, how does Lowe's ensure that all of the heavy lifting associated with integrating these assets that are being brought together does not interfere with Lowe's ability to harvest the recovery or gain its fair share as the recovery unfolds?

No. Look, Michael, it's another very fair question. I think it just comes down to organizational structure and commitment to execution. We have separate integration teams that will be working -- that all working on ADG and FBM. We have separate teams working on the strategic initiatives that will create the synergies that Brandon outlined. We're not going to get distracted in the core business. Everyone sitting at this table and everyone on the senior leadership team at Lowe's understands how we create shareholder value.

And so we're going to be really focused on those Total Home Strategy initiatives that we talk so much about on our PPI initiatives that you hear us update you on every quarter. And so my commitment to the shareholders is that we're not going to get distracted. We have separate teams managing these 2 exciting acquisitions, but we also have the core team focused on the Lowe's business, which we know is the key to our success long term.

The next questions come from the line of Brian Nagel with Oppenheimer.

Congratulations. My first question, I guess, just on the trend of business. So clearly, comp sales accelerated as the quarter progressed, we discussed that. But I guess the question I want to ask is, was there anything notable geographically maybe to help us break out break apart the benefits of normalizing or improving weather through the period versus maybe some true underlying improvements in underlying demand?

So Brian, I would say geographically, the only anomalies that we saw were hurricane overlaps, which creates some degree of negative comps in certain geographies in addition to weather. Brandon mentioned and as Walt noted that memorial selling period was not great from a weather perspective, but it impacted certain geographies worse than others. Other than that, as you can imagine, we're paying really, really close attention to all things macro, all things housing, all things governmental policies determine if we're seeing any material impacts to certain geographies. And to date, there's nothing material that I can speak to.

That's helpful, Marvin. Then my second question, I guess, bigger picture, broader, just with respect to tariffs of trade. So if I hear you correctly, I mean, when you're saying that Lowe's is managing the business, you take a portfolio gross to price and you're doing what you have to do. Are you know is there anything changing competitively? I mean -- and I guess the question I'm trying to ask is, the Lowe's is obviously one of the key scale players within the space. But as these price adjustments are taking hold, these tariffs are taking hold, do you see an opportunity for Lowe's to be able to take even more market share than it had historically given its position as a scale player?

Brian, it's a good question. As you can imagine, it's something we spend a lot of time talking about. I think if you look at this at a really high level, it comes down to the customer segment that you're serving and how you can best serve that customer segment in this current environment. We have done, in my estimation, an excellent job of working cross-functionally relative to looking for diversification. I mean, right now, roughly 60% of the goods we source are coming out of the U.S. And it wasn't that way 7 years ago. And China is at 20%, but it was a lot higher than that 7 years ago.

And Bill's team, they're taking methodical, really, really business-savvy steps to just keep us from being so overly dependent on one country of origin. Having said that, as I said earlier, pricing is incredibly dynamic. And it's driven a lot by a set of business rules that we have internally based on competitive pricing and based on our own internal data on elasticity. And so we understand what our customers want and what they don't want, and we understand the breakpoint on units when you start to price in a way that you see demand go down. And so we're managing this literally real time because this is uncharted waters. But because we dealt with this before years back when we didn't have great data and systems, the team is really efficient at managing it now that we have superior systems.

So that's a long-winded answer that may not have given you a direct response to the question, but it's a dynamic environment we're paying close attention to it, and we are absolutely trying to take share. We think what we were able to do in the second quarter when the weather improves is an example that we are taking share and that we're making the smart decisions that can give customers a reason to shop loss versus the competition.

The next question is from the line of Jonathan Matuszewski with Jefferies.

My first one was on FBM. I wanted to double-click on the faster fulfillment that could be realized here. And just wanted to see if you could frame maybe the improvement in speed that Pro customers may potentially enjoy from FBM and Lowe's joining forces. I wasn't sure if there's a way to understand time to serve today versus what could happen pro forma for this deal. That was my first question.

Yes. So Jonathan, it's one of the things we're really excited about as an example, one, FBM's core competency is drywall, and they sell a lot of it and they can deliver it to multiple floors. If a customer comes into one of our stores today, and we sell just to keep it simple, a flat bed of drywall, getting that sell received and delivered is a really, really painful process. And today, with this partnership with FBM, through our endless as technology, we literally can get that sale sent over denim electronically, they can pick it, fulfill it within 24 hours or less. And so it's all about the geography.

And as I mentioned earlier, one of the most compelling reasons for this acquisition is where geographic footprint is are places where we don't have a dense population of stores, primarily California, the Northeast and these urban areas in the Midwest. This will be critical for us to not only drive pro sales from the physical Lowe's stores in those locations, but to get salespeople on the ground in those locations to drive sales where we just don't have the density and scale right now, but the efficiency and fulfillment is going to be exponentially better.

Understood. And a quick follow-up. You unveiled plans for the marketplace earlier this year. I think the initiative is still early days. But maybe, Brandon, if you could dream the dream, how would you frame the working capital and inventory efficiencies that can materialize over time with a scaled 3P marketplace?

Yes, Jonathan, thanks for the question. I would say, as it relates to our marketplace, continue to be very excited about the progress we're making. We're seeing expanded breadth of product offering across various price points. We're able to offer value to premium. We spoke back in May about the launch of the Miracle platform. We're making really good progress, adding vendors to the platform and very much rolling this out in a pace that meets our expectations. I wouldn't say right at this point in time, we have specific expectations around working capital or anything like that, but expect over the long term beyond 2025 for this to be a meaningful contributor to our online offering and what we're able to do through our Total Home Strategy.

And Rob, with that, we have time for one more question.

That final question will come from the line of Steven Zaccone with Citi.

Congrats on the acquisition. First question was on the margin impact from buying this asset. So given the difference in the business model, what should we expect as a preliminary view of kind of gross margin and EBIT margin rate by adding FBM?

And then bigger picture, how does this impact some of your longer-term financial targets. In the past, you've talked about reaching an operating margin of kind of 14.5% with a line of sight to 15%. Does this signal that margin dollars kind of matter more than margin rate in the next couple of years?

Yes, Steve, thank you for the question. I think as it relates to financial expectations, I'll say first and foremost, we expect the FBM acquisition to help us deliver more sustainable long-term sales growth. And that's going to come with deeper pro penetration, especially in pro plan spend. Marvin talked at length about our ability to access the $250 billion large complex Pro TAM that we really don't get much access to today. That will translate, we believe, to increase operating profit. It's going to continue to support EPS growth over time.

We're not going to specifically get into this point dilution or expectations as it relates to 2026. We're going to provide an update after we close out FBM and the exact timing will depend on that, but we expect to have more of an update there November. As it relates to the second part of the question on the long-term targets. Right now, we're sticking with and focused on '25 and delivering on those commitments, showing our ability to do that to manage profitability really well. And any impacts from FBM on long-term targets, we're going to look forward to discussing that closer to the end of the year and as we start to look ahead to 2026.

Okay. Understood. And the follow-up I had was on the capital allocation side. So we saw that you paused the share repurchases for the second quarter of '27. Marvin, you alluded to the potential for more tuck-in M&A in the future now that you've done this, this acquisition, should we expect share repurchases kind of take a back seat for the next couple of years? And even when you return, we'd see a lower level of share repurchase activity?

Yes, Steve, I'll take that. Very committed as we've continued to reference to our 2.75x target in our existing credit rating we are going to pay down debt aggressively here over the next couple of years to get back to that leverage target. Over the next 2 years, '25, '26, we do expect to temporarily pause our share repurchases, and we expect that to resume in 2027 once we get back to that leverage target. But just more broadly, as we look at trade-offs from this.

Again, our #1 priority is to continue to invest in the business. That's been stated through our capital allocation philosophy. We're going to invest in the business for growth. We believe the FBM acquisition is going to unlock operating leverage, cost synergies, cross-selling opportunities. And over time, we expect this will scale and ultimately drive stronger returns in line with our target range.

And Steve, this is Marvin. Last point, in any tuck-ins that we do will be within our capital allocation framework and within our CapEx commitment for whatever time period that we're in. To Brandon's point, we're excited about this acquisition. We're excited about building out the platform, but we're also committed to paying down debt and getting back to our leverage target.

Thank you all for joining us today. We look forward to speaking with you on our third quarter earnings call in November.

Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.

Good afternoon. Thank you all for joining us. My name is Brian Nagel. I'm the senior equity research analyst here for Consumer Growth and E-Commerce Conference. So again, thank you all for joining us. I am very pleased to have with us our next presenting company, Lowe's, and 3 of the company's executives, CEO, Marvin Ellison; CFO, Brandon Sink; and Investor Relations, Kate Pearlman. So thank you very much for joining us.

Thank you, Brian.

Appreciate it.

So we're going to structure this as an informal fireside chat with me asking questions and Lowe's is answering those questions. To the extent there are questions from the audience, send them through the chat, I'll be happy to work them into our conversation. With that, I'd love to start Marvin and Brandon. Just before we dive into kind of the Lowe's specific question for Lowe's, just given your unique position within the consumer landscape, your thoughts on the overall health of the consumer. What you're seeing from a kind of a consumer demand perspective and how that may have been shifting lately.

Great. So Brian, always great to be with you. I'll take the first part and Brandon can add any additional comments. I would say overall, the homeowner is really healthy. They have a strong balance sheet, strong wage growth, low unemployment, record equity, and for the first time in a while, you have personal disposable income growing faster than inflation. So we feel really good about the homeowner, which is in the general customer that we are targeting in the DIY market. But specific to home improvement, I mean, we still are seeing a bit of headwind. And that headwind is driven almost exclusively by elevated mortgage rates. And as you know, I think housing turnover is at its lowest level since the 1990s, and that's almost exclusively driven by these elevated rates.

Also, short-term borrowing rates are up, and that's putting a little bit of a damper on discretionary big-ticket DIY projects. So we look at those combination of things and it gives us a little bit of a mixed view, but when we take a step back and we look at the medium- to long-term view of the historic demand drivers and home improvement, we actually remain optimistic with things like the age of housing stock, which, as you know, is the oldest since recordkeeping was maintained, you look at things like equity and the amount of equity available and the home price appreciation has occurred post-pandemic.

And then you look at things like personal disposal income, as I mentioned, growing faster in inflation. So we look at all of those things, and it gives us a degree of confidence that the medium- to long-term view for home improvement has positive aspects that we remain confident that our strategy and our focus will allow us to take advantage of it as moment as we start to get a bit of tailwind that we're hoping for. And we hope that, that will occur at some point this year, we're not in the prediction business. I don't know if Brandon has anything on that.

Yes, sure, Brian. I would just add, as Marvin said, consumer overall continues to be healthy, but definitely some near-term affordability challenges just as we look at sentiment rates, inflation and so forth. And then the lock-in effect for us continues to be real, right? We're looking at overall 3/4 of mortgages are at fixed rate below of 5%, I think over 50% below 4%.

So when you look at the state of housing and housing turnover, we're roughly -- we're still bumping along the trough roughly 4 million units turning annually, which if you look back, that's kind of a 3-decade low. New home starts continue to be sluggish. So a number of things just in the suit here, short term, we've worked through, for the most part, anything COVID reversion-related share of wallet shifts from goods to services.

A lot of that has effectively sort of run its course over the last couple of years, and we're dealing with more of these kind of near-term trends and a lot happening just uncertainty around policy and so forth. So a number of challenges, a number of medium to longer-term green shoots and still committed to making investments in the business, and we're all about preparing when we get on the backside of this, preparing for the transition, so we can get back in growth mode.

That's very helpful. So if I heard you correctly, really the biggest wrong back or standpoint, the biggest hindrance this point is rates, both on the longer term and then maybe shorter-term side effect in both mortgage rates and then, I guess, HELOC rates that's correct. .

Yes. I'd say that's fair. Yes, Brian.

So I mean I know no 1 has a crystal ball to know when rates were go lower. But I would love to get your perspectives on are there levels that if rates got to, you would see an unlock in your business. Then the second question I have is we have seen looking back into our most recent quarterly report, there were some bright spots with respect to seasonal products and such. How much better can be -- from a top line perspective, can the Lowe's business get if rates were not to move or to stay here? .

You want to take the rate piece.

Yes. I mean, Brian, as it relates to where we would see unlocks, I don't know that there's sort of an absolute level that we would see. I think coming into the year, and if you were to ask us this kind of this time last year, we would have said, hey, anything kind of closer to 6% was really where we saw some engagement where we saw things change. But I think the longer that we sit 6.5%, 7%, I think you're going to start to get into new life stages, even if rates don't meaningfully move down, folks are going to have to get married by house, transition, add more space. I think it's just going to take longer, and you're going to work through that over time. So I don't know that we're planning for any meaningful step down in rates. I think the thing that gives us a lot of optimism. Marvin said it, there's $35 trillion of pent-up equity and 1/3 of that roughly tappable.

And I think when we look at some of these big-ticket discretionary categories, which for us, we've seen a lot of challenge over the last 2 or 3 years, a lot of not just reversion, but over reversion to the extent when we look at home improvement in the industry as a whole, there's about $50 billion now of pent-up demand because, as you know, home improvement, these projects don't get canceled. They just get delayed. And I think we're now officially in that delay phase where you have this pent-up demand that's happening. You have equities that are there, and we just really need that catalyst and that inflection point, and that's kind of what we're waiting to see within the business.

And look, on the question about how much better can the business be up? I mean, it's really -- it's a difficult one to answer, but I'll give you some perspective. So I'll be celebrating my seventh year anniversary here in July. And just comparing where we are today versus just back then on what I call just the fundamentals of retail, things like being in stock, having the brands that customers desire and that are -- they are attracted to, having robust loyalty programs for both Pro and DNY, having seamless omnichannel experiences. So a customer can easily pivot between online store, mobile app, some of the recognition we received nationally on some of the things we've done from service to IT infrastructure to our digital platform to the major investments we've made in supply chain and our supply chain transformation. So there's no element of our business that we haven't been working on and investing capital then for the last 5-plus years. And so we are positioned to really respond well when we see just any moderation in the market.

I mean we're not looking for the great days of housing or historic days of home improvement demand, just getting to a normal market, specifically for the DIY customer a homeowner, we think our business is set up to perform really well, and that really drives our confidence.

Are you seeing any -- from a demand perspective, the overall health of your business, are you seeing any noticeable geographic differences across the United States?

Not really. What I will tell you at this time of the year, particularly the greatest correlating factor to our business performance is weather. And as we look geographically, that is almost always the driver of good performance and performance that's under expectation. So other than that, there's nothing really material that we can put our finger on relative to any other factor that's driving overall performance.

Yes. Brian, I would add Helene and Milton late summer, late -- early fall late summer last year, drove demand Q3, Q4, and that's turning into the year, there's expectation we're going to continue to see some hurricane recovery demand. So that is creating some regional benefits as we look at Florida and the Carolinas. But outside of that and just normal weather challenges ongoing. Nothing really from a macro standpoint to Marvin's point that we're seeing influence the business. .

So on the seasonal side, I mean putting aside the impact, as we've discussed, these persistently elevated rates. When the weather is cooperate, either market by market or markets where weather is generally better, that seasonal demand is meeting your expectations?

Yes. It has been for really and Q2. And again, Brian, that, to me, supports the fact that we feel good about our business strategy. When I think about the pressure that we've experienced really for the last 3-plus years with the DIY customer. I feel pretty confident that, that is almost exclusively macro driven. That's that lock-in effect that Brandon talked about with these elevated rates customers choosing to just stay put while they monitor the rate environment and the short-term rates, again, is delaying their decision to do some larger discretionary projects. But from an execution, strategic positioning, we feel really good about where we are.

Another big topic -- another topic that's very much on the mind of investors. I'd love to get your perspectives on is tariffs and global trade policy. Obviously, it's fluid shifting by the day, if not by the hour. So where does the loan stand on what you're seeing from a tariff perspective? Maybe you can discuss the mitigation efforts you've started to put in place.

Yes, Brian, I'll start just with the fact that the team over the last several years has done a tremendous job merchandising, global merchandising specifically, just as we've looked at exposure, supply chain, diversification, really working across the globe to develop new opportunities, new efforts continue to diversify, in particular, out of China.

As we sit here today and probably the biggest risk that we're working around continues to be China. We have about 20% of our cost of goods sold or of our purchases are exposed to China. One point of clarification there. That is both direct, so where we have private brands, and we're importing directly as well as purchases from our domestic suppliers that are importing from China. So it's a combination of both of those. 6, 8 weeks ago, when the tariffs were escalated at 145% we had essentially shut down any and all activity out of China, complete pause. We got the 90-day reprieve, and really have spent the better part of the last several weeks, reengaging and reevaluating what we flow, how we manage the business.

So I would say multi-prolonged efforts across a number of different functions. How can we -- for the categories that we want to stay committed to, how can we continue to diversify and see how quickly we can move to other countries of origin in the back half of '25 and into '26. I would say there's other categories, maybe slower moving or where we have longer tail inventories. Maybe that's a category that we rationalize altogether. So we're going through those efforts. I would tell you, negotiation of where we can share, where we can split and how we can allocate the cost of the tariffs across our supply chain with our vendor base.

And then lastly, as it relates to price, as we always do, we're taking a portfolio approach. We're going to continue to be competitive. We're going to ensure that we're not losing market share as we're continuing to lean into these categories. So a lot of efforts, a lot of engagement across the organization. I would say we've proven in the past that we can manage through this. We've been through tariffs. We've been through other inflationary environments, and we believe we have best-in-class tools, teams, capabilities to manage through this. It's reflected in our expectations for our guidance and over the balance of the year, and we expect to be able to manage through it successfully.

And Brian, also, I know there's been a lot of conversation about competitive positioning and taking market share because certain retailers may be in a more advantageous position. That's just not going to happen in home improvement. There is no special formula for managing this regardless of who you are. If you're a large retailer, we are pretty much dealing with the same set of circumstances, and we feel incredibly pleased with the team that Brandon just outlined from finance, global sourcing, supply chain, merchandising, price management systems, all the work we've done really the last 6-plus years has positioned us to manage this as well as any large retailer in the world. And so we're going to be competitive.

There is no way we're going to sit back and lose market share because there is somebody out there that's going to manage this better than us are going to find a way to have lower prices vis-a-vis us. That's just not a realistic assumptions. So we're prepared to manage this. And our objective is to give our customers innovation and give them value. And to Brandon's point, we'll manage the entire portfolio to make that happen, and we're going to just work and we'll make sure that we continue to have this collaboration across factually that has really served us well in the past.

So with regard to China, that's why where we see most headline sale the trade discussions between the United States and China, and we've got some, I guess, maybe some big announcements today, but what's a manageable level? I mean, Brian, you mentioned it was 145. that's kind of a no go. But is there a tariff level that you view as manageable.

Yes, I don't know that I would put a number on it, Brian. I guess I would say at 30%, it's obviously opened things back off. But I would say still creating challenges at the end of the day, even at that level. So we're working across, as Marvin said, within all of this, we're continuing to ensure that we're providing value to our customers in all directions, innovation, competitiveness, that's through our private brands. through credit through a number of different avenues through our loyalty program. So undoubtedly, a challenge for us, even at 30%.

We do have the benefit from FIFO accounting standpoint, I mentioned this on our earnings call, there's roughly a 1 quarter delay. So just as we're looking across managing this for what we are staying committed and what's continuing to flow over from China with 30%. We're dealing with the majority of that as we get into Q3 and Q4. So that has given us some visibility to just how we approach again negotiations with our suppliers, our portfolio approach and the timing in which we can kind of pull and manage these levers.

So Marvin, I want to talk about -- you mentioned just a moment ago, you're approaching your 7-year anniversary congratulations. Under your leadership, we've seen the Lowe's model improved significantly. A very successful repositioning over the past several years. So the question I want to -- and I know we've had this discussion before, but kind of where are we on that repositioning? Maybe talk about some of the big wins you've had in driving better results for the company and then kind of where do we go from here?

Well, I appreciate the question, and it's really indicative of just a really great team effort. Some of the great transformation initiatives have been driven by individuals -- they need to join me around a 7-year mark who came in after the fact, Brandon has probably been in 5 different roles in the 7-year time spend and then all of them have delivered significant value in different parts of the finance organization. I think it's appropriate to just kind of go back in time and just talk about in 2018 look like, and you had a company that had an outstanding balance sheet, had great frontline associates in our stores that really had no modern strategy to grow in a retail landscape that forces you to be omnichannel. It forces you to have a seamless interaction between digital and physical.

And just as a reminder, for some of the people who may be watching -- that is reflective in having a 30-year old green screen operating system that literally hardwired everything to the store. Supply chain, receiving systems, point-of-sale, e-commerce, everything. And it literally took us over 5 years to retire that system because the risk of some big ERP taking the company physically down to his knees. We did it in phases in a very methodical approach. And now we -- for all intents and purposes, we've totally retired that there operating system, which has opened up lots of opportunities for us to do innovative things from an IT standpoint that we literally just couldn't do as recent as 2 years ago, modernizing our supply chain.

I mean we were selling appliances from our stock rooms of our stores and from storage containers behind our stores. And we transformed our supply chain into a market delivery system where we are best-in-class, not only in having appliances deliver it next day today in virtually every ZIP code in the U.S., but best-in-class in shipping and delivering big and bulky, things like our service initiative, where our labor system was literally manual and driven by revenue of sales. Now we can drive it activity base by day, by hour, by department. And we're pleased that we can drive great reduction in expense and great productivity at the same time be recognized from someone like J.D. Power for being best in customer satisfaction and home improvement.

Doing those 2 things conversely is very difficult, but we're doing it because we're driving productivity the right way. And some of the great work that we've done in merchandising, where in 2018, the previous management had made a decision to go all in on private brands to chase the margin rate and in franchising a significant percent of our Pro customers who are very brand loyal as you know. And so we work really hard under Bill Boltz leadership to get a lot of those national brands back into our assortment. And now that's been one of the reasons why we've had such success with our small to medium Pro initiative.

And so that entire transformation started with just looking at those retail fundamentals of things again that every retailer has to be good at to just get that foundation showed up. And now our total home strategy is designed to allow us to take market share. And as Brandon mentioned, I mean we understand that we're in this really difficult growth environment today in home improvement, but we also understand that this is cyclical. And when we cycle out of this specifically for the DIY customer, we believe that we are going to be really well positioned just based on what our Total Home strategy has allowed us to do, areas like home installation that we know that when the customers start tapping into that $33 trillion of equity we know exactly what projects are going to be first in their list, and we want to be best in class at that.

We want to look at things like e-commerce and how we continue to serve our customers really well in that regard. Our merchandising strategy, our operational excellence and PPI. And so all of these things give us confidence, as I've said, that we've taken the transformation from foundational to now the building blocks to take a market share. So we are positioned really well for growth. But as the old saying goes, there is no finish line. And so the transformation is not completed because as -- the market continues to evolve, as the competitive landscape continues to change, as the consumer gives us different demands on how they desire to shop and what they want to buy, then we evolve and Marketplace is a great example of that evolution on e-commerce.

So again, I could go on and on and on, but we feel like that we have put ourselves in a great position that when we see recovery in this DIY market, that we are very well placed to take advantage of that.

So specifically on the -- I guess, on the DIY side. On topic, we've discussed a lot, but I think it's still one more interesting aspects to me the segmentation. You've been able to look at your different groups of stores and really decipher what the key productivity initiatives for those specific stores. Maybe you can just talk about that and kind of where we are in that effort? .

Yes. I'll give you some thoughts. I'll let Brandon jump in if he has anything to add. I think for us, again, if you go back in time, the only segmentation we have was every store looked like there was in North Carolina, because we design everything based on the local market because our systems were so rigid that we couldn't have any localization. We couldn't have any differentiation from an assortment standpoint, from a store layout from a pricing perspective.

And so now that we've modernized our assortment planning, our pricing, et cetera, we're able to take a step back and focus on rural customers in a more specific way to focus on urban customers in a more specific way and then be very specific in those categories. I mean, one of the big successes that we've had with the rural customer is the introduction of workwear. I mean, that's a growth category for us. That's performing exceptionally well to the point where it started in rural America, and now we're expanding it to other markets. And as I've said before, one of our best-performing workwear stores in the company is Brooklyn, New York. And we never would have known that if not for the continued iteration of the strategy.

Another one is pet that kind of was borne out of this segmentation strategy and listening to what the customers are saying that they wish they could buy in one trip from Lowe's versus having to go to multiple locations. And we continue to learn and iterate that as well as many other categories that fall under that rural initiative, we continue to expand.

And on the urban side, I mean, I never forget walking into my story in Philadelphia with Joe McFarland, Bill Boltz and seeing a patio set with 12 chairs and riding lawnmowers. And we can imagine what happened to that product in Brooke, I mean, in Philadelphia got marked out. and basically clearanced out because we had no ability to sort our urban stores in a way that serve those customers. So -- we spent a lot of time working on getting those stores sort of the right way, making sure that we have the right staffing levels.

And so it's been an iterative learning process, but we have gained lots of benefit. And again, we're well positioned for the market to turn. And the lessons we've learned over the last 5 years in this segmentation has given us a lot of confidence. And our loyalty program with the DIY customer, having roughly 30 million members gives us a whole different level of customer data and customer shopping patterns and customer information that allows us to serve those customers even better beyond just the segmentation in our stores.

And Brian, on the localization initiatives, in particular, we've been very methodical and disciplined over time, as you know, as we've rolled these out, but excited to say, by the end of this year, roughly 500 stores in total, we have the rural set. Marvin mentioned workwear not just limited to the rural initiative. But going to be in roughly 1,000 stores. So just financially, as we look at space productivity, sales per store, sales per square foot, Gilroy, some of those things, really pleased with the results and what we've seen and excited to be able to get these at scale by the end of the year.

Brandon, on that point, I mean, maybe using the baseball analogy, what you need to be in here as far as seeing the benefits from segmentation?

Yes. I would say just as we assume the rollout is going to be largely complete by the end of the year, just based on what we saw through the early test stores. I mean it takes 12 to 24 months, I would say, from rollout to really -- so the customer sees, they understand you have a different set. They understand you have a different shopping experience. So I think just as we look beyond into '26 and '27, I still think there's a decent amount of upside in these new stores where we continue to roll these initiatives out.

So I want to jump over to Pro. Marvin, you mentioned a moment ago, this -- the refocus, if you will, upon having branded products in stores and to the extent that allowed you to connect much better with your professional customers. So Kind of where are we on for right now? What are the other big unlocks? And then maybe you can discuss the acquisition -- the acquisition you recently announced? .

Yes. I mean we're -- we've been really focused on the small to medium customer. That's been our core pro customer for a couple of reasons. Number one, we believe that we had the capacity to serve that customer really well, and we believe that customer was being ignored in the marketplace. And so that was our focal point. And the brand transformation that I talked about bringing some of those national brands back an example be client tools back into the assortment and those initiatives really start to give us credibility back with the customer to work we've done on fulfillment and job site delivery has been significant.

The work we've done on our loyalty program and the relaunch of it to simplify it and give that small to medium customer a way to earn points faster, so that we can take advantage of the fact that their spend level may be different from a larger customer and give them the incentive to shop with us more frequently. And also, this whole endless aisle initiative that we've rolled out that now gives us the ability to have a seamless digital catalog for some of these really large pro suppliers, and in many cases, not only do they give us great volume pricing that we have access to 7 days a week, but they also can deliver directly to the job side of our customers. So that small to medium Pro remains our focal point, and we believe that within that $500 billion target market that, that Pro represents that we still have significant share we can gain.

But then we took a step back and actual question, how do we more diversify our portfolio and how do we find a way to start to build a presence in the planned Pro spend, and that led us to the ADG acquisition. The analysis we did was pretty straightforward, and that is the real estate market is a little depressed now. I think we've all shared the data. But the question is when this recovery happens, where will it happen? And we believe, based on the data that tells us that you're going to need roughly 18 million homes by 2033, we want to be positioned in this planned pro spin area that we virtually today do $0 in revenue and that's a $50 billion target market in residential construction and multifamily, and ADG gives us a really nice foothold in that space. And we were very diligent in deciding who we would target it.

We felt like that their best-in-class brand position. They're one of the market share leaders as well gives us a great entry into this planned Pro spin space. And I'll let Brandon add any more.

Yes. Brian, really excited about the transaction just closed on it last week. So just now welcoming ADG in the Lowe's family. As Marvin said, I mean we're looking at this as a broader comprehensive interior solutions platform for us to go after the homebuilder. So I think as we look a number of synergies there today in roughly 18 states, 60 individual markets, a lot of parts of the Sunbelt that are high-growth areas and geographies. But I think our opportunity is additional fill-in as we look more nationally to take the platform. We bring a number of relationships and expertise in other categories as we look to add that potentially to the interior solutions platform and then just as we leverage vendor relationships and as we introduce potentially private brands.

So new type of customer, $50 billion TAM. Able to diversify and potentially get into a larger plan Pro spend and really excited about what this brings, what we can learn and how we can grow it going forward.

So I want to -- I know, we time starting to wind down here, but 2 other -- a couple of the comments I want to address. One store growth. I mean how do you think about growth in the United States and elsewhere -- and then also maybe I'll take another question on that. Marvin, you had mentioned on the e-commerce strategy and the improvements Lowe's made there. So how do we think about the growth in terms of stores, growing stores and then that e-commerce backbone to serve customers.

Brian, I'll speak to new stores. Really excited. We mentioned space productivity initiatives, getting Pro penetration now to 30%. I think that gives us a renewed focus around just the ability to drive additional market share, customer base, sales, ROI through new stores. We've essentially been out of that business for the last 5. I think we've opened less than 10 stores in the last 5 years. So we've looked at population shifts, geography shifts, demographic changes over the last 5 years, and there's a number of strategic markets where we believe we can add a presence. There's also markets where we want to continue to protect and defend -- so we're looking at that as a continued opportunity. We have that in our capital plans over the next several years. We expect to open 10 stores this year, and then we're on a run rate of 10 to 15 over the next several years. So excited to see what we can do in some of these new geographies and Marvin speak to the online piece.

So look, online has been another growth opportunity for us. When I arrived, almost 7 years ago, it was about 4% of our revenue. Now we're around 12%, and it's been an effort. I mean, just to give you a perspective, One of the first request I made in 2018 was the need for e-receipts because we couldn't even do e-receipts. 7 years ago, if you can imagine that. And now, I mean, we have wanted to be hot regarded online sites, mobile apps, not only in retail, but just in the industry-wide due to great work by our digital and our IT team.

As we analyze how do you grow online and what are some of the correlating factors just around the globe for retailers that have had exponential online growth, we found the presence of a marketplace was almost exclusively combined to the traditional e-commerce site of a retail company. And so we felt like that we are now in a position with great performance of our or app, great performance of our site, much improved UX, much improved search functionality that the marketplace would be now the key area to have accelerated growth. And so our recent partnership with Miracle, the best online integration system for marketplace sellers. We felt like that this would be a great opportunity for us to create accelerated growth online. And so we're eager and happy with where we are. This partnership with Miracle was just announced and we're in the early stages of it, but we have high hopes for what our online business will continue to do and how we believe it's going to continue to be a growth vehicle is in the foreseeable future.

Yes. Brian, I would also add just heavy investments on the fulfillment side of the house on the online experience as well. Marvin mentioned market delivery appliances is our biggest online category. The ability now to have that nationwide and what that's been able to do for that category as well as big and bulky categories. We've enabled our gig network to offer same-day delivery. Uber, Instacart, we have our own integrated platform through One Rail. And then over 50% of our online orders are fulfilled through our stores. So we've had our front-end transformation. Our ability to offer a unique customer experience to pace and speed in which we can pull pick and stage and enable that experience. So that's been a big investment and a big contributor, I think, to the online success, and we continue to be excited about that looking forward as well.

So last topic, line, the -- I think it's really one of the big key positives among many of the Lowe's story is the capital generation, capital allocation. So any kind of update or you want to get there?

Yes, sure. Brian, really no change to the priorities. They've been consistent through the last several years. We're going to continue to invest in the business, organic and inorganic, we're going to continue to target 35% dividend payout ratio, and we're going to funnel remaining excess cash through share repurchases. I think a couple of nuances. We have paused on share EPO for this year to finance through cash, the ADG transaction. So digesting that, we continue to be focused on our 2.75x leverage target. We're committed to our BBB credit rating, and we're going to continue to manage the business through that. We have about $2.5 billion of debt that we're going to pay off and is going to come due this year. We're not going to be issuing or refinancing any of that. So Again, those are our priorities, and they continue to remain unchanged. .

Well, once again, I very much appreciate the time. Thank you for the participation here. Congrats on the ongoing success.

Awesome. Thanks, Brian.

Thank you.