Lowes Companies Stock

Okay. Good morning, everyone. Thank you for joining us for our second day here at the Goldman Sachs Consumer and Retail Conference. It's my pleasure to introduce Lowe's and have with us Marvin Ellison, Chairman and President and Chief Executive Officer. Thank you for joining us today.

Good morning.

We probably could spend most of the time speaking about the macro, although I know there's a lot of other things to talk about. But I wondered if we could start there. I guess the question that I have is in the state of the world we are right now with regards to the housing environment, is there a scenario in which you could see better growth than kind of the flat to up low single digits that you've seen for the last year or so?

No, Kate, it's a good question. I would say for us, we really expect the second half of the year to look a lot like the first half of the year. And again, that's not based on our view that things will get better or things will get worse. We just believe that the year is going to look a lot similar both front and second half.

Having said that, we still believe that we can grow in any macro environment. I'm really pleased by the fact that in spite of the fact that over 60% -- 6-0 percent of our sales is driven by the DIY consumer, we delivered 5 consecutive quarters of positive comps. In addition to that, we've seen really strong growth in our digital channels. For 2 consecutive quarters, we've had growth over 15%.

So even in what you could debate and argue is one of the toughest housing macros we've seen in a very long time, we are finding ways to grow. We're finding ways to take share. But we think the broader macro is going to look similar, front and second half, but we think we can grow irrespective of that.

I think it's come up in a couple of articles I've read that you're seeing -- or the home improvement space is seeing maybe, what maybe I would deem as, like piecemeal reservation -- renovation. So if you're not seeing necessarily the full kitchen renovation or the full bath renovation, you're seeing a vanity replaced or something like that. Is that something you're seeing? And what would a scenario like that kind of look like over time in terms of incremental dollars and growth?

Yes. So specifically to that point, we are seeing homeowners take what we would call smaller, more deliberate projects versus these larger discretionary projects. But let me take a step back and provide some context to that. So if you take a look at our consumer, meaning the Lowe's consumer, it's a homeowner with an average household income north of $100,000 a year, average equity of roughly $400,000, personal disposable income growth, wage growth and someone who has a really good personal balance sheet.

The caveat to that is that consumer is a bit cautious based on all the things you talked about, elevated interest rates and also some of the geopolitical uncertainty that they're seeing that's causing them to just be cautious relative to discretionary larger ticket spend. And one of the largest discretionary ticket you could spend is a kitchen renovation, to your point.

And so because we've done a really nice job in our Total Home Strategy of making capital investments in our physical infrastructure in our stores, meaning kitchen showrooms, bath showrooms, appliance showrooms, flooring showrooms, we're able to get that customer to come in to buy countertops and cabinets. But on certain occasions, we're also seeing the customers come in and do kitchen renovations, but not on the same degree that we had seen in past before this really difficult housing cycle.

But we're really, really optimistic that our Pro customers are incredibly resilient. And our core Pro customer in the store is a small to medium Pro. And because they're resilient, they're finding ways to keep their book of business open. And if they can't do a full kitchen, then they will do countertops. If they can't do a full kitchen, then they will do cabinets. So we're seeing a resilient consumer. We're seeing a resilient customer. And overall, we feel like that we can manage in any environment.

Great. I think you mentioned with regards to market share, I mean, I think overall, the category or some of your competitors are down double digits, but you're not. And so can you maybe talk a little bit about the change you've seen in the competitive landscape with some of the smaller players? And just where do you think you're gaining some of this market share?

Yes. I'll go back again to our Total Home Strategy, which for us is not only a business strategy, but an investment thesis on how we run our business. We're investing in the small to medium Pro. We're investing in our digital channels. We're investing in loyalty. We're investing in key categories like appliances.

And so as we look at the broader total addressable market for home improvement, there is a large belief that we operate in a duopoly. But as you know, this is a really large total addressable market. And if you look at our view of it, it's roughly $1 trillion. And if you combine Lowe's and our largest competitor, we're roughly 1/4 of the total addressable market. So when we think about competitors, it's more than just one company. It's a broader spectrum. And many of those competitors are small regional players.

And so as we think about where we've been able to take share, we've been able to take share in categories like appliances. I mean, we remain the only retailer in the U.S. that can deliver and install a major appliance same day and next day in virtually every ZIP code in the U.S. I mean, no one else can do that, and that is the result of a very deliberate action to build a big and bulky fulfillment network that doesn't exist anywhere in the marketplace.

And so because of that, we have the ability to really grow share in a really, really important category for us. And specifically, if you think about appliances, the #1 area of appliances that's growing is what we call the direct category. In other words, if your refrigerator breaks, it needs to be replaced. And so we are in a position that when a customer has an emergency need, our fulfillment network gives us a great opportunity to take share because we can deliver same day and next day.

And when you are a smaller player in the space, you just don't have the capital -- you don't have the ability to invest capital in a network like we did. And so we're incredibly blessed to have a strong balance sheet. We're incredibly blessed to have a disciplined approach to how we're thinking about the business, not just quarter-by-quarter, but we're thinking about what we will look like when the housing recovery happens because it will have to recover.

I mean, we're right now -- in many estimations, we are 1 million homes short of current demand. There's credible data that shows by the next decade, you're going to need as many as 14 million new homes. And so we know that this market is going to recover. It may recover gradually, but we have built a strategy that we can compete aggressively real time, but we also believe we've built a strategy that when the market recovers, we're going to be in a great position to grow disproportionately.

And the pricing environment, I think, has been harder to navigate lately. You've had this multiyear inflationary backdrop, which was accentuated by tariffs last year and then companies began to see tariff refunds. And especially in Q2, we heard a lot across all of retail about promotions, price investments, flash sales. So could we maybe take a step back and walk through how you've approached the pricing environment as a whole? And how you think about the role of tariff refunds and its impact on pricing in the short term in home improvement?

Yes. Well, obviously, pricing is really the foundation of any retail strategy, and we've invested significant capital in just back-end systems and processes. And so I remember going back in time when I arrived here in 2018 at Lowe's, we had literally no pricing system architecture at all. It was all done manual spreadsheets. And for a company our size, it's hard to believe that's where we were.

Fast forward to today, I would argue we have some of the most sophisticated pricing systems of any retailer in the world. And that's been a very methodical, very deliberate investment strategy to do that. And so for us, Kate, number one, we're always focused on value. That's the foundation. And we're very pleased that we're the only home improvement retailer that has 2 distinct loyalty programs, one for our DIY customers and one for our Pro customers because those customers shop very different, and they have different value propositions.

And so because we have these 2 distinctly different loyalty platforms, we can offer member-only value promotions events without making it a broad promotional strategy. So it gives us a distinct advantage, and it gives us differentiation across that data, and what we learn from the customers' shopping behaviors is incredibly valuable.

But as we think about the tariff environment -- tariff refund environment, what you saw in the second quarter was probably more price reductions and promotional activity in this space than I've seen in my 25 years in the home improvement business. But we believe it's transitory. We believe it's simply the result of companies receiving tariff refunds and trying to find ways to drive business, value and give some of those refunds back to the consumers. So we don't see that as a new normal in home improvement.

But for us, we're going to remain disciplined. We're going to remain focused on providing value. We're going to remain focused on ensuring that whatever we do is going to be first based on serving our customers well, but also based on having fiscal discipline around how we drive profitability and understanding that whatever we do today, we have to comp against that next year. And so making good short- and long-term decisions. But again, we think this second quarter pricing environment was more transitory. We think we'll get back to more of a normal set for the balance of the year, but we're going to be focused always on taking care of the customers from a value perspective.

And I think that's obviously a very core tenet that you've been very focused on is value. I know job lot quantities and being in stock has been a core tenet as well. But one thing I wanted to ask you about today was the emerging need of speed in the business with just same-day delivery and everything that the consumer is now expecting from all of retail. Could you talk a little bit about the supply chain? Where you are in the supply chain in terms of -- again, how you feel about the speed of that -- of delivery? And just if there's any room that needs to be made for investments to continue to pursue that?

No, absolutely. So for us, in the home improvement space, we're fortunate because of our 1,750-some-odd stores in the U.S., those stores are not only destinations for the conventional traditional customer that comes in and shops, but they are also fulfillment nodes for us for our online and digital platforms. So specifically, if you look at our online business, roughly anywhere between 60% to 80% of our fulfillment comes out of the stores. And that just depends on the category and depends on the time of the year.

So our stores are essential to our ability to provide speed. And a lot of that is buy online, pick up in store, whether you do it at our pickup desk with our lockers or whether we do it from a same-day standpoint. So speed is essential. And what I will tell you is there is no retail CEO in the world satisfied with their current delivery speed. So we're working every day to get faster to make sure that we are having a market competitive advantage by giving the customers what they want and being able to get the customers what they need within the time they need it.

But I'll go back to what I said earlier, we have a distinct advantage in big and bulky because the fulfillment network that we built out primarily for appliances that gives us the ability to do same day and next day in every ZIP code, we can use the same network, and we are using it for other big and bulky categories. I mean, think riding lawnmowers, think grills, think patio furniture. And so what we envision is let's build this for appliances because it's our largest merchandising category, but we also understood that those same rails that we built for appliances could also work for other big and bulky categories.

And so we're doing some really innovative things. We'll speak more specifically about some of the innovative ideas we have coming at our December investor conference because we have some initiatives that I'm really excited about that we've yet to talk about publicly that we will share in December. But to answer your question, big and bulky speed, we're best-in-class, and we'll continue to build on that best-in-class perspective.

From an investment standpoint, we're investing significant capital, not only in the physical infrastructure of our supply chain, but also in warehouse management systems, leveraging AI from a product assortment allocation standpoint. And so we're pleased with where we are, but we have a long road map to continue to get better and to continue to get better, and that's something that's going to be a commitment from us.

I think one area that's changed over the last couple of years is just your focus on increasing the TAM. And with your recent acquisitions of ADG and FBM, you've significantly expanded the addressable market for Lowe's. So -- maybe could you walk through just where you see that going longer term? I know the business itself is under a little bit of pressure right now due to residential construction demand. But maybe we could start with just your longer-term vision and how we should think about that?

No, that's -- and really, Kate, if you're looking at this, to your point, from just a real-time perspective, it's hard to understand the value of those 2 acquisitions. But as I said earlier, we're thinking about this from a medium- to long-term perspective for the company and for our shareholders. If you again come to the realization that we're 1 million homes short of demand today, we're estimating 14 million homes needed within the next decade. New home construction is going to have to come back in some shape, form or fashion.

And historically, Lowe's generated virtually no revenue from single-family, multifamily construction. And we felt with the demand that we knew was going to be in the near term that this was a unique opportunity for us to invest in 2 really good assets. ADG primarily focused on flooring, countertops, cabinets in a very simplistic way. And FBM primary focus is drywall, ceiling systems, insulation.

And so 2 different businesses, but our vision in the acquisition and our vision today is if you could take FBM's competencies, ADG's competencies and combine it with Lowe's' competencies, you create what we call an interior solutions platform. So that is a fancy way of saying we can give a builder virtually everything they need on the interior of the structure. We can give them flooring, cabinets, countertops, drywall, ceiling insulation.

And then on the Lowe's side, we can give them appliances. We can give them faucets and fixtures. And so we're already in the process of running pilots where we're being able to go to a builder and we can take all 3 of the competencies of Lowe's, ADG and FBM and provide this for a builder. For a builder, the key metric that you want is, can I build a structure faster? Can I get to closing sooner? Because the sooner you get to closing is the sooner you get paid.

And so if we can create a value proposition that we can help you reduce your closing time, your construction time, then that's something that is really, really interesting to a lot of builders. And so we're building that competency. And we think that's going to give us pure differentiation. It's going to give us a way to participate in this market recovery that, again, the only way it doesn't happen is that the way of life in America will change because we will have to increase the ability to build new homes because the need is simply there. And so we feel great about the future possibilities.

To your point, short term, we're feeling pressure because with elevated mortgage rates, you're seeing tons of macro pressure on single home and multifamily construction. Having said that, FBM is in a really unique position because roughly 55% of their revenue comes from the commercial construction side. And so what's being built on the commercial side, data centers, sports venues, hotels. A lot of universities are doing lots of capital investments. FBM is getting pieces of all of those business.

As a matter of fact, one of their largest segments for them right now is the build-out of data centers. And so we're participating in a lot of the commercial side, and that's really good for them because it's kind of helping to balance out the pressure they're feeling on the residential side. But still, they're not immune to the pressure.

We're managing it really well. We're adapting to them some of the disciplines we have around Perpetual Productivity Improvement, being very fiscally focused on driving costs. So we're managing that in this really challenging environment, but we feel great about the acquisitions. We feel great about what it's going to do for Lowe's in the future, and we think our shareholders are going to greatly benefit from it.

Do you think there are any other acquisitions you need to make to complement what you have so far? I mean, you said you pretty much have the interior of the home. Is there anything maybe on your wish list that would be additive to what you're offering?

The short answer is we're going to remain opportunistic. I mean, we're going to focus on tuck-in acquisitions, to your point, that supplements this current strategy. We're trying to be disciplined because when you have a great balance sheet, when you have access to capital, yes, you can reach and you can expand too much and you can create a network of businesses that becomes virtually impossible to manage and impossible to integrate.

So we're being very disciplined, focusing on the interior structure. We look outside of this year if the right opportunity presents itself. But for now, we're being opportunistic. And as we think about our capital allocation strategy, we're going to focus first on bringing value to the business and looking for growth, both organically and inorganically.

As we think about growth, we're going to continue to focus on paying down debt as we've committed to that 2.75x leverage ratio, and we think we'll be there at the midpoint next year. And we're going to always take care of our investors with dividend payments. And we're very pleased that we're one of the few retailers that has a distinction of being a Dividend Aristocrat, and we're committed to that.

And we're hoping as we get back to our leverage ratio next year that we will revisit share repurchases and get back into that market as well. But that is our capital allocation philosophy, and that includes, again, growing the business and investing in the business, which will allow us to look opportunistically at tuck-ins.

Great. And maybe just to close the loop on this part of your business. When it comes to competition and market share opportunity, how do you feel about the setup for that?

We feel great. We feel great about it, both on the complex commercial Pro side with FBM and ADG, and we feel great about it just on the omnichannel home improvement retail side with our core stores. And as you mentioned earlier, this total addressable market that FBM and ADG gives us is roughly $250 billion of market opportunity that we had no ability to participate in before these acquisitions. And so we think that we can compete really well in both spaces.

We're being very, very disciplined and deliberate on building out the infrastructures, getting the operating systems in these companies correct. We believe that when you're in a tough macro environment, leveraging your balance sheet is a great competitive advantage because we can make investments in these businesses in spite of the fact that they're feeling some economic pressure knowing that when this market recovers we want to be in a great position.

And we believe that Lowe's will be in one of the most advantageous positions of any retailer in the space when the market recovers because we've invested significant capital in our DIY customers, in our loyalty platform, in the -- just in the interior of our store. If you walk in our store versus any competitor and you look at some of these big ticket discretionary areas, flooring, kitchens and countertops, bath, appliances, our environment is significantly better than any environment out there.

That's not by accident because we know at some point when this market recovers, that customer is coming back. And we want to be top of mind. Not only have we invested in the physical environment, we've invested significant capital in the IT infrastructure, just the back-end processes, where we've created a more seamless, frictionless process for our customers.

And in addition to that, we've invested a lot of technology to help our associates with product knowledge, service. And so we're positioning ourselves to perform well in the current state, and we've done that with 5 consecutive quarters of positive growth, but we're also positioning ourselves for the future because when this market recovers, we want to be at the forefront of being able to get a disproportionate share of that market when it comes back.

Okay. Maybe if we could just jump back. Digital was an area that you highlighted as being a strength just over the last few quarters, but certainly in Q2, where it grew about 16%. Can you maybe talk about some of the initiatives with regards to digital? Why you see -- why you think you're seeing outsized growth there? And what we should expect maybe for the back half of the year?

Yes. Kate, we're pleased for 2 consecutive quarters we've grown over 15%. And so we're really pleased with that. And we're pleased because we know that we can even get better because we're just now in the early stages of investing in our marketplace. And we're the only U.S. home improvement retailer with a true digital marketplace. And it's early days, but everything we're seeing, we're really excited about it because it's allowing us to serve customers in a much more broad way.

The marketplace gives us the ability to serve a value-oriented customer that's looking for lower-priced items, but it also gives us the ability to serve a luxury customer, a customer that will spend significant amounts of money for a chandelier or luxury appliances or something that's more on the high end that we don't carry in our core assortment. So for us, online gives us the most unique opportunity to service this whole K economy, and we can serve customers for value, we can serve customers with luxury. And we're seeing both occur.

And marketplace, again, is the best way to do it because we don't have to own that inventory. We just have to find the sellers that represent customers in these different categories. So we're really pleased by that. Our mobile app has been voted and reviewed as one of the best in retail. And so we're pleased with that, and we're going to continue to invest in that.

Our fulfillment capabilities are much improved. Our ability to deliver same-day unlock lots of growth for us online, and then, our member-only benefits relative to what you gain from a fulfillment and delivery standpoint is also something that's unique in our space. So overall, we feel great about the fact that we've grown online as aggressively as we have. We feel great about the connection in the store and our ability to fulfill from the store, and it's something that we're going to continue to invest in.

And I'd be remiss if I didn't mention our AI agent, Mylow online, where we received over 25 million questions from customers and associates. And for customers that uses this AI assistant online, their conversion is 3x greater than customers that don't. So that's informing us that when you develop a true agentic connection with customers, then you can see tangible benefits, not theoretical benefits. Any time conversion is 3x better, that's a tangible benefit that we can connect directly to the fact that this AI assistant is giving customers some information that they need.

And when you go to the store, our associates have the same access to that for product knowledge, and we're seeing 200 basis points improvement in customer satisfaction when our associates use the tool. And so AI, both online and in the store, is really helping us, and we think that's going to be a foundational piece of how we continue to grow our online business.

Great. I want to make sure we ask a question around margins and PPI. On the good guy side, you have your PPI, which is always, I know, a company discipline. You have the marketplace, you have the media. And one day, you'll have more leverage to grow those margins. On the other hand, I do believe ADG and FBM are slightly dilutive from a margin standpoint. So can you maybe set the stage shorter term and longer term how we should be thinking about all those items with regards to where you see operating margins?

Well, I would say I'd start out by saying that we will always be a very disciplined company relative to managing expense and profitability. It's one of the hallmarks of what we've been able to accomplish irrespective of the macro environment, irrespective of the top line pressure that we received over past quarters and years, we've always been focused and disciplined on managing the business with a sharp pencil on expenses and driving profitability.

So having said that, we're not immune to some of the pressures that's occurring in the macro, specifically transportation costs. Lowe's, just like any other major retailer, is dealing with those increased costs that we're going to see in the second half of the year, and we're working to do all we can to blunt that with really, really intense focus on our Perpetual Productivity Improvement initiatives, or PPI, as well as other initiatives to try to make sure that we are being really focused on profitability and expenses.

But the commitment that we have is that we're going to continue to operate effectively in trying to deliver profitability for our consumers. We're going to talk more specifically in December about how we view our profit algorithm relative to top line growth based on kind of the dynamics in the marketplace. But as it stands right now, as we delivered -- as we demonstrated in the first and the second quarter of this year, we're going to always be focused on being committed to operational discipline and profitability, and we're going to do all we can to blunt some of the headwinds we're facing in this macro environment.

Okay. Great. Just in the last few minutes, we do ask 4 questions of every company that we talk to on stage here. We've addressed most of them. The health of the consumer, I think we pretty much talked about, so I think we can skip that one. Pricing, though, do you expect prices to be higher, lower or the same in the second half of this year versus what you saw in the first half?

Look, we anticipate them to be virtually the same. Speaking specifically to Lowe's, again, as I stated earlier, we're going to always be disciplined around pricing. We're going to be focused on value, but we're not going to put ourselves in a position where we're going to be overly promotional. So I think what you'll see in the second half will be very consistent with what you've seen in the first half and what you've seen in previous years.

Okay. Margins we just talked about, so we can skip that one, too. But maybe if we could spend a few minutes. You mentioned Mylow before, and so we do have an AI question. This is more on the efficiency side though than the revenue side. But do you expect a significant increase in efficiency as a result of AI in '27 versus '26? And what part of your business will change the most?

I don't know that significant is the adjective I would use. I would say we expect productivity improvement for sure because as we continue to have maturity around some of the AI-related initiatives, we believe that we'll continue to see benefits in our -- from our information technology team. We'll continue to see benefits in planning and allocation. We'll continue to see benefits in our payroll management and payroll allocation, and we'll continue to see benefits in how we leverage these agentic tools to help take friction out for customers, give our associates product knowledge.

One of the largest expenses we have as a retailer is associate training because, as you know, we have a very technical business. It's one thing to work for a traditional mass merchandiser. It's another thing working for a home improvement retailer where a customer comes in and they may have a very specific question about something in electrical, something in plumbing, something in flooring.

And these agentic tools give our associates real-time information that they can ask any question of any technical specificity and they get an immediate response. So we think as we continue to leverage this, it's going to bring our training costs down, and that's going to be meaningful. But again, we will see that as a gradual productivity gain, but we're committed to making that happen.

Okay. That's all I have. Thank you so much for joining us.

Great. Kate, good to be here.

Yes. Thank you.

Good morning, everyone, and welcome to Lowe's Companies Second Quarter 2026 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 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 in 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.

In the second quarter, we delivered sales of $26 billion with comparable sales increasing 0.2%. Despite the heightened competitive landscape as competitors use tariff refunds to lower prices later in the quarter, we're encouraged by the continued momentum in our total home strategy Strong performance in Pro, online and home services helped to offset persistent macro pressures, softer DIY discretionary spend and the challenging weather during Memorial Day weekend.

And I'm pleased with our entire team's ability to effectively manage the business and remain agile in this. Our teams executed at a high level throughout the quarter with compelling value, strong in-stock position and outstanding customer service across stores and digital channels while maintaining a disciplined focus on expense management. This operational discipline enabled us to deliver better-than-expected flow-through while absorbing elevated fuel, transportation, energy and other input costs even when excluding the impact of tariff refunds. Later in the call, Bill will provide more detail on our category performance and the customers' response to our assortment, value and seasonal execution.

So let me begin with Pro, where we delivered another quarter of growth. Pros continue to respond to our differentiated assortment, strong inventory position, dedicated service levels, fulfillment capabilities and tailored digital experience.

Later in the call, Joe will provide additional perspective on the initiatives that continue to drive this momentum. Additionally, we're pleased with the integration progress of Foundation Building Materials or FBM and Artisan Design Group, or ADG. Our teams continue to work closely together to share best practices and build solutions for our customers. We believe these acquisition to grow share with our larger Pro customers long term while capturing more planned Pro spend.

Turning to online. We delivered online sales growth of 15.7% this quarter, reflecting the continued benefits of our investments in the digital experience. These investments include tailored experiences on Lowes.com and our mobile app as well as expanded visualization capabilities and the ongoing growth of our online marketplace. The improved user experience along with the compelling value offered by our loyalty programs are driving increased conversion and enabling to dynamic customer preferences. And our online AI agent Mylow continues to add value to digitally engaged customers as they access the tool for help with home improvement projects, product specifications and solutions to fit their needs. Since its inception, Mylow, which also powers our associate AR companion application has supported over 25 million questions from customers and associates, demonstrating the strong adoption and resonance of the tool. In fact, the conversion rate for online customers who use Mylow is triple that of customers who do not use the tool, reinforcing that a well-designed agentic AI experience can be a clear driver in the purchasing decision.

Now to Home Services, we delivered another quarter of growth as do-it-for-me customers continue to engage with the simpler and more convenient experience we've created, especially in replacement projects. The enhancements have improved conversion, cycle time and customer satisfaction, giving us confidence in our position to capture more of these larger projects with homeowners are ready to take them on.

Now let me transition to the macro environment. While the long-term fundamentals supporting home improvement remain intact, the near-term environment continues to be dynamic. Elevated fuel prices, combined with broader economic uncertainty have influenced household budgets. Customers continue to tell us that they're being cautious about their spending and prioritizing where and when they invest in their homes. As a result, discretionary DIY demand remains under pressure. Despite this, we continue to see solid performance from our Pro customers and our do-it-for-me businesses, reflecting the success of our Total Home strategy. Given Lowe's customer mix, the pace and health of DIY demand remains an important driver of our overall performance.

While these external conditions remain uncertain, we remain committed to being a workplace of choice for our associates, providing our customers with a great shopping experience and advancing our strategic investments. This approach has enabled us to deliver 5 consecutive quarters of positive comps, demonstrating the resilience of our strategy across changing economic conditions.

Equally important, our perpetual productivity improvement initiatives, or PPI, continue to advance. This disciplined expense control and focus on optimizing our resources gives us the flexibility to continue investing in our strategic priorities, positioning the company to outperform as market conditions improve.

Before I close, I'd like to thank our frontline associates for everything they do to serve our customers every day. Spending time in stores each week remains one of the most rewarding parts of my job and every visit reinforces the passion, expertise and commitment that our associates bring to Lowe's. Their insights continue to help us improve the customer experience and our dedication remains one of our greatest competitive advantages. And with that, I'll turn the call over to Bill.

Thanks, Marvin, and good morning, everyone. This quarter, we delivered positive comp sales in 9 of our 13 merchandise divisions, demonstrating continued strong execution, a commitment to value and disciplined approach to managing through the current challenging environment. In Building Products, we generated broad-based growth with positive comps in rough plumbing, millwork, electrical and lumber. These results reflect our strategic investments in Pro and ongoing strength in repair and maintenance projects. Within rough plumbing, we drove sales in HVAC, water heaters, and air circulation, supported by trusted brands like A.O. Smith and SharkBite whose solutions make installation fast and simple.

We also delivered positive comps in lumber, specifically in treated lumber, siding and composite decking with leading brands like Trex, TimberTech and decorators. In Electrical, we delivered growth in electrical cable, landscape lighting and fire safety. This quarter, we completed the rollout of Cree within our light bulb assortment, bringing this innovative brand exclusively to Lowe's in the home center channel.

One standout product is Cree's new 6-way bulb, which lets customers easily adjust the color temperature either on the bulb or from the wall switch.

Turning to home decor. We delivered strong performance across our interior categories, including positive comps in appliances, paint and kitchen and bath. Starting with appliances, where we delivered our seventh consecutive quarter of positive comp sales growth as we continue to reinforce our leadership position as the destination for both planned purchases and urgent replacement needs through a best-in-class omnichannel experience, fast, reliable fulfillment and the broadest assortment of leading brands, including LG, GE, Bosch and [indiscernible]. We're also bringing consumers the latest innovations to make life easier like the new GE profile refrigerator with Kitchen Assistant that features the first of its kind, built-in barcode scanning technology. This refrigerator can scan everyday grocery items and automatically add them to a shared digital shopping list that then can be synced to Instacart for quick delivery.

And because speed of appliance delivery is so important during a duress occasion, Lowe's can deliver and install the broadest selection of major appliances next day in virtually every U.S. ZIP code. This is truly the fastest fulfillment in home improvement. Beyond appliances, we saw demand for repair and refresh projects in kitchen and bath across categories like vanities, bathing and toilets. And paint also remained a bright spot with growth in interior paint, sundries and buckets.

Now let's shift to hard lines, where we grew comp sales in lawn and garden and tools and hardware. Our spring seasonal categories performed well throughout the first half of the year as customers responded to compelling value in live goods, hardscapes and landscape products. and our attractive credit offers help support demand in outdoor power equipment as our broad assortment in key brands like John Deere, Toro, Aaron's and Ego remain key points of differentiation.

Tools and hardware also performed well, particularly in metal storage and fastening, where we have one of the strongest brand lineups in home improvement, offering customers both trusted national brands and our own private brands. Craftsman continued to deliver value and innovation with products made in the U.S.A., including a limited edition work bench with a magnetic flag designed to celebrate America's 250th birthday and customers responded to Cobalt's wide range of colors in metal storage, helping them personalize their workspace.

Looking ahead, while discretionary DIY spending remains under pressure, and the K-shaped economy continues to shape consumer spending. We're encouraged by the plans that we have in place to drive demand for both our price conscious and premium customers in the second half of the year. For example, we're expanding our assortment of premium appliances on Lowes.com, giving customers more choices across a wider range of price points and allowing us to unlock additional sales in our largest category. We're bringing that same approach to patio by expanding our assortment of premium outdoor furniture, both online and in our year-round markets.

Together, these expanded assortments position us well to capture more demand from more customers by offering luxury design and innovation to serve customers across a broad range of price points. We're also continuing to strengthen our brand assortment and maintain strong in-stock positions across key destination categories. And we're expanding our selection of power tools, hand tools and storage with hundreds of new products that will appeal to both DIY and Pro customers, including over 150 new DeWalt items, the #1 Pro preferred brand.

And in Bosch and Cobalt, we are adding new 4-volt lifestyle products that help our DIY customers complete household tasks more efficiently. To help customers with landscape projects this fall, we're leaning into our outdoor strengths by offering compelling values and a great assortment to support lawn restoration, fall planning and seasonal cleanup projects, particularly in markets affected by droughts this summer. We're also pleased to welcome Trager to our already strong drilling lineup as one of the leading brands in outdoor grilling, Trager will begin rolling out in select stores and online nationwide later this year, further strengthening our assortment of grills, pellets and accessories and giving our customers even more reasons to choose Lowe's for their outdoor projects.

And as those customers engage with Lowe's, we'll continue to build on the momentum from our MyLowe's Rewards loyalty program. We have more than 30 million members who shop more frequently and spend more per visit than nonmembers. We'll continue to reward that loyalty with exclusive member offers, special events and enhanced same-day fulfillment options, make it even more valuable to choose Lowe's.

Before I wrap up, let me touch on another important driver behind our performance, our perpetual productivity improvement or PPI initiatives. Our teams continue to make meaningful progress supporting our total home strategy by simplifying processes, improving execution and helping our associates spend more time serving customers. One example is the rollout of self watering plant tables in more than 700 stores. This solution removes the routine watering work from our garden centers, reduces plant damage and frees up our MST associates to focus on keeping shelf stocked and servicing base.

In addition, we're also investing in new digital tools team for our MST team to help them prioritize the highest impact base, improved sales per square foot productivity and create a better shopping experience for our customers, and we are on track with our expansion of pet and workwear to all stores by year-end as part of our space productivity initiative. These investments make our stores easier to shop and easier to operate. As I close, we remain focused on doing what we do best, bringing customers compelling values, innovative products and brands, along with an outstanding shopping experience.

I'd like to thank our merchants, our MST associates and our supplier partners for their collaboration, commitment, hard work and outstanding execution. Their work is invaluable to delivering an experience that sets Lowe's apart. And with that, I'll now turn the call over to Joe.

Thank you, Bill. Good morning, everyone. Let me start by thanking our frontline associates for their hard work throughout the key spring and summer selling season. During one of the busiest times of the year for home improvement, they remain focused on one thing: Making it easier for our customers to complete their projects. Their commitment continues to make a meaningful difference across our stores. We drove steady momentum in our same-day fulfillment offering during the quarter, as more and more customers take advantage of our delivery options to keep their projects moving.

By giving customers another fast and convenient way to access to our broad assortment same-day fulfillment is becoming an increasingly important part of the Lowe's omnichannel experience. Another way we're delivering a better experience for the customer is through the continued associated adoption of Mylow companion. As Marvin mentioned, this AI-powered resource is being leveraged in a big way by our teams. More associates are engaging with the tool every day as it gives them greater confidence to help customers across departments and enables them to answer questions more quickly and spend more time doing what matters most serving customers.

Turning now to our second quarter performance. I'll start with Pro, where we delivered another quarter of growth driven by our small and medium-sized Pro customers. We know our Pros value 3 things above all else: time, availability and value. And that's exactly where we've focused our investments. Through advancement of initiatives and technology, we're giving Pros even more access to what they need for their jobs and businesses in one seamless shopping experience.

Additionally, our digital Pro business tools, along with the MyLowe's Pro Rewards loyalty offering, continue to strengthen the value we offer to the Pros. These expanded tools support Pros by enabling them to plan, quote, manage and grow their business all within the Lowe's platform. In our recent survey, our core Pro customers shared that their backlogs are steady.

However, they are seeing a homeowner that is more cautious about their spending. This is leading to consistently smaller projects focused on repair and maintenance needs rather than larger remodeling jobs.

Shifting to productivity. We are pleased with the advancement of our PPI initiatives in Q2. The impact of our perpetual productivity improvement effort is evident in our successful transition of all store and field associates to a new centralized communications portal that consolidates several previously separate channels into one efficient platform.

This new tool helps to reduce complexity, enhances clarity and prioritization and results in real payroll productivity. Looking ahead to the second half of the year, we will continue our focus on productivity as we continue to roll out an adoption of freight flow 3.0 and full shale replenishment. Both these projects are aimed at improving in-stocks and inventory accuracy by identifying and prioritizing the highest stocking needs and simplifying the product flow process from truck to shelf.

Not only do these efforts drive labor productivity and customer service they also ensure that customers can find the products they need where and when they need them. As I close, I want to thank all of our associates for their professionalism, care and commitment they demonstrate every day. Their ability to embrace new technology while staying focused on serving customers is what continues to set Lowe's apart. I'm deeply grateful for all they do to support our customers, one another and the communities they serve. With that, let me turn the call over to Brandon.

Thank you, Joe, and good morning. In Q2, we generated sales growth and significant free cash flow, reflecting the resilience and flexibility of our operating model as continued productivity progress and an enterprise-wide focus on execution and cost management enabled us to effectively navigate the quarter and deliver our earnings expectations. Beginning with our Q2 results, we generated GAAP diluted earnings per share of $4.27. 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 $4.40. GAAP diluted earnings per share and adjusted diluted earnings per share both include an $0.11 benefit from IEEPA tariff refunds.

Adjusted diluted earnings per share exceeded expectations even excluding this benefit. My comments from this point forward will include certain non-GAAP comparisons that exclude the impact of non-GAAP charges where applicable. Sales for the second quarter were $26 billion, up 8.3% from the second quarter of last year. Comparable sales rose 0.2% with May down 0.4%, June up 1.7% and July, down 1.2%. Please note the shift in timing of the July 4 holiday drove an approximately 75 basis point comp sales benefit to fiscal June, which was offset by a similar drag to fiscal July.

While we continue to gain traction this quarter in Pro, online and home services, we continue to manage through a challenging home improvement backdrop and soft DIY demand. Comparable average ticket increased 2.3%, reflecting modest price inflation and continued strength in Pro, while comparable transactions declined 2.1% driven by pressure from weather-sensitive outdoor and seasonal categories. For the second quarter, gross margin was 33%, down 80 basis points versus prior year adjusted gross margin, including the dilutive impact of the FBM and ADG acquisitions, partially offset by favorable credit revenue. Gross margin also includes approximately $80 million or 30 basis points benefit from tariff refunds, which were largely offset by elevated fuel and transportation costs during the quarter. SG&A was 17.2% of sales, leveraging 14 basis points versus prior year adjusted SG&A in line with our expectations.

Adjusted operating margin rate of 14% was down 62 basis points versus prior year adjusted operating margin. As Marvin, Bill and Joe mentioned earlier, our PPI initiatives continue to deliver meaningful results this quarter and our disciplined approach to cost management allowed us to manage profitability effectively despite softer-than-expected sales.

The effective tax rate was 24.4%. Inventory ended the second quarter at $17.7 billion, up approximately $1.4 billion versus prior year. The increase is driven by the normalization of prior year tariff-related timing disruptions, investments to support in-stock levels and approximately $500 million from last year's acquisition of FBM.

Moving to capital allocation. In Q2, we generated $3.1 billion in free cash flow and capital expenditures totaled $542 million reflecting our continued commitment to invest in key Total Home strategy initiatives. We paid $673 million in dividends at $1.20 per share, reinforcing our commitment to returning capital to shareholders and our status as a dividend aristocrat. And we finished the quarter with adjusted debt-to-EBITDAR of 3.0x as we progress towards our 2.75x leverage ratio target, which we expect to achieve in mid-2027. And we ended Q2 with $3.2 billion of cash and cash equivalents and delivered return on invested capital of 25.5%.

Today, we are updating our full year 2026 financial outlook to reflect first half results as well as current consumer demand and housing trends. Cross retail home improvement macro pressure like interest rates, inflation and gas prices continue to influence DIY demand. And although elevated mortgage rates continue to express new home construction activity and pressure larger Pros and homebuilders, we remain committed to the investments we are making across our total home strategy and the growth platforms we are building through FBM and ADG. We continue to believe these investments position us well to take share and capitalize on the medium- to long-term opportunity in both home improvement and residential construction.

And at the same time, we are focused on taking actions that strengthen our performance regardless of the environment. The second half sales driving initiatives outlined by Bill and Joe reflect our commitment to investing for future growth and offering our Pro and DIY customers compelling value. We are also committed to driving productivity and managing expenses with discipline and executing the integration actions that we expect will strengthen the business as the market recovers. Based on this, we are updating our full year outlook in line with the bottom end of the previous guidance range.

We expect sales of approximately $92 billion with roughly flat comparable sales and we expect adjusted operating margin of approximately 11.6% and full year adjusted diluted earnings per share of approximately $12.25. We also continue to expect capital expenditures of up to $2.5 billion. The outlook includes the tariff benefits we recognized in Q2, but excludes any potential additional benefits in the second half of the year. We will provide an update on any future tariff refunds received and how those are used on future earnings calls.

The outlook also reflects continued pressure in the residential construction end market for FBM and ADG, where softer for longer new home construction is creating heightened near-term pressure on demand. And for the third quarter, we expect comp sales to be in line with our full year outlook and adjusted diluted earnings per share to be approximately 7% below prior year adjusted diluted earnings per share.

In closing, we remain focused on serving the customer, driving productivity and continuing our investments to build a stronger business that unlocks long-term growth and shareholder value. And with that, we are now ready to take your questions.

[Operator Instructions]

Our first question comes from the line of Steven Forbes with Guggenheim Securities.

Marvin, you mentioned competitive pressures to end the quarter. And so I was hoping maybe if you could just expand on that comment, given the July monthly comp. Are there specific regions, categories, channels where those pressures are emerging and then maybe just provide a little more color on how you've incorporated maybe reactive or proactive plans to go back those pressures into the back half of the year?

Yes, Steve, thanks for the question. As I said in the prepared comments, we observed some heightened competitive pressures, primarily in July. We had competitors being aggressive on price, primarily seasonal categories. So think about grills, patio and live goods that probably drove unit and sales performance for them, but obviously, was not very profitable. And so if you look at our July results, you can see that as an impact.

Having said that, our goal is to be very transparent on what we're seeing in the competitive marketplace, but also to be very clear on the initiatives we're working on and how we're trying to drive the business, not only in the second quarter, but in the second half of the year. So let me hand it over to Bill to just outline some of the things that we're doing to stay really focused on providing value, innovation and leveraging the differentiation we have with our loyalty platform and some of the other initiatives to serve customers.

Yes, Marvin, thanks. And Steve, as we look at the back half, we really stay focused. First of all, as we look at Q3, it's really around Labor Day making sure we can have a successful Labor Day event. We're also driving our member events with our Mylowe's Reward members. We've got to continue to do the momentum that we've got in our businesses that are already working, especially for that small and medium-sized pro areas like I called out with rough plumbing millwork, electrical, paint lumber as examples. We've got some great plans in place for Labor Day, as I said, really focused around fall planting, lawn restoration. We set our stores for Halloween and then we'll quickly transition to trim and tree later on in the quarter. We've got a bunch of new products coming that we're excited about, innovation across cobalt, Craftsman, Dewalt. I shared in my prepared remarks, we've got a lot of energy around appliances, 7 straight quarters now of positive growth, but really looking to try to grab some opportunity in this premium appliance space. looking at brands like Bosch, KitchenAid, LG Signature Cafe, line, [indiscernible] all trying to meet the customer where they want to purchase some of this better quality type product.

And then in the flooring category, we'll have completed the rollout of Dow Tile, which we're really excited about. We saw that coming early in the first half, but we'll complete that in hard services in the third quarter. And then I shared around Grills, bringing Trager to the grill lineup is a big advantage for us really adding to the brands we already carry with [indiscernible], Pit boss, Weber, and now the Trager brand gives us some great credibility in that space. We're excited about that. So we've got a lot of energy. And then we've got -- obviously, as we come out of Q4 and get ready for spring. There's lots of stuff coming, but a lot of stuff that we're planned and focused on both online and in-store.

And Steve, look, just one last comment. We're committed to operational discipline as I mentioned and so did Brandon, I mean we dealt with elevated fuel costs, transportation and lots of other cost inputs. But even with that, we stayed really focused on delivering strong flow-through, committed to profitability and efficiency as a management team. That's something that we're pleased with, and that's going to be the hallmark of what we stand for, irrespective of what the macro environment serves up to us.

And maybe just a quick follow-up for Brandon. Curious how FBM and ADG performed during the quarter? And if the revision to full year guide towards the low end of the initial is include a reduction in the planned organic growth for those 2 businesses?

Yes, sure, Steve. So as we think about and, certainly seeing elevated rates more pronounced in residential construction, and we're seeing that suppress both new builds and near-term housing demand. FBM ADG working through these challenges. As a reminder, ADG, 100% exposed FBM about 45% exposed to residential construction as we look at homebuilding, single-family, multifamily, well documented that it's bumping along at multiyear lows. FBM's business, we are and continue to be pleased with the commercial business, which represents 55%. But as I mentioned, the outlook assumes continued elevated pressures in residential construction and that persisting over the second half and that's impacting both top and bottom lines. at FEM and ADG. So teams are continuing to drive meaningful integration benefits. In the meantime, we're pursuing aggressively tuck-in opportunities where those exist, and we expect to emerge on the backside of this as a more scaled player and our longer-term goal is to take advantage of 14 million homes over the next decade.

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

I think your comments about the heightened promo environment and its impact it had on your comp in July is one of the bigger impacts we've seen in quite a long time. So can you maybe comment a little bit about what you're seeing so far in Q3 when it comes to promotions. Can you talk about how you're going to manage that going forward? And do you think that there's any kind of significant change here, if this is the new normal?

Kate, this is Marvin. We don't think it's the new normal. We think it's transitory. We think it's the result of competitors having tariff refund dollars and looking for different ways to use those dollars to drive the top line. And so we don't see this as something that's going to shift. Historically, as you know, home improvement tends to be a very rational and predictable promotional and price environment. We believe we're going to get back to that in the second half of the year. Quite candidly, we're going to be very disciplined around how we come to market. One of the reasons why we have a DIY loyalty program is so we can offer differentiated value to loyalty customers, and we could do it in a very consistent, very profit-driven coherent way and that's something that we continue to do.

However, we have some really exciting things that we're going to be driving in the second half of the year so that we can remain competitive. And I'll just let Bill outline some of the things we're really committed to that we think will drive value for our customers, and we'll continue to show up in a way that customers will put us at the top of the list.

Yes. Thanks, Marvin. I shared a couple of these examples in the first question, Kate. But we've got -- we'll also finish our rollout with pet and workwear in the back half. We're excited about what those categories are doing. If you remember, that was an opportunity for us around our perpetual productivity initiatives, which is all about making space work harder inside of our stores and online. And so we're excited about that. We've got a lot of innovation. I rattled off a number of those with over 150 new tool items across multiple brands in the back half that will help drive our gifting time frame. We've got a lot of new stuff in our holiday set this year that we're excited that we know drives traffic to the store, some new characters that you can put in your front yard and a lot of things that we're excited about as well on the Pro side, where we've got just a lot of energy around millwork and some of these businesses that have just had a really nice run with consecutive quarters of performance.

We've had rough plumbing with 6 straight quarters of positive growth. You know, paint, electrical, millwork, all 4 and 5 consecutive quarters of positive growth. So we're going to continue to drive that. And then as we touched on in the first question, Labor Day for us is really first and foremost. And it's all about taking care of the folks that want to get into fall planning, shift into that fall season, put those pumpkins on the porch, do those things that decorate their house and get it started for fall.

And Kate, this is Brandon. And one last thing I'll mention. We are seeing an emerging trend of just increased take rates during the promo periods as customers seek out and respond to value, we are making recent investments to enhance our back-end promotional tools that are -- and continue to better inform our promo strategy. But as Marvin and Bill both mentioned, leaning in to member offers, in-store events, enhanced fulfillment and believe our second half guide reflects all of these dynamics from a comp standpoint, from a traffic standpoint, from a margin standpoint.

Next question is from the line of Christopher Horvers with JPMorgan.

My first question is a bit of a geographic question. We've heard from a number of home-related retailers and the strength the coastal housing markets versus pressures or underperformance in the South, and you're certainly seeing that in home prices relative to home price performance in many of those markets. So can you talk about regional performance and how you think about maybe that affects your business versus some of your peers?

Chris, this is Marvin. As you can imagine, we look at this on a weekly basis. And candidly, there is no material difference in geographies other than weather impacts. We had some drought-like conditions in certain parts of the country. We've had some traumatic conditions in the Midwest. But when you look at all the other housing-related factors, we look at it closely, but from a materiality standpoint, weather continues to be the biggest driver and geographic performance.

Understood. It's a great segue. I mean, obviously, Memorial Day weekend was tough for everybody, just rain on -- a lot of rain. But as you think about last year, I think you did have a bath tub benefit into the second quarter from the first quarter, and that showed up a lot in July. So can you talk about the weather dynamics year-over-year? And as you think about July on a 1-year basis, negative ex the -- even with the adjustment. But on a 2-year basis, you saw a strong improvement. So I guess maybe try to wrap the weather around how you're thinking about July and what that would suggest going forward with the business?

Yes. Chris, this is Brandon. I think, as Marvin said, the main weather headline was really around Memorial Day, Memorial Day weekend. It was one of our biggest DIY events of the year, kind of, drug on the full quarter results. And I think as you look at even that on a 2-year stack, we were cycling a really tough Memorial Day last year. So you're mentioning some of the 2-year trends. I think the 2-year trends for May negative because of that dynamic, but we were actually encouraged. I mentioned the 75 basis point shift on monthly results just during the holiday. But if we look at 2 years pure as we moved through May, June, July, they actually accelerated as we moved across the quarter. So from a 2-year standpoint, we exited July at plus [ 3, 4 ]. So comfortable and confident, again, kind of, teasing out the weather that business is on a good trajectory just as we turn into Q3.

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

My first question is on the second half outlook. Can you elaborate on anything that changed? Did your initial outlook have a, I guess, upward tilt in the back half that upward tilt is no longer in existence? Or has the consumer just gotten worse or maybe a mixture of both?

Simeon, this is Brandon. I think when we look at the outlook, first half results second half current DIY trends and pressures on residential construction. Those are really the 2 things that we're projecting out into the second half. We also continue to expect strength and momentum in our Total Home strategy. So the areas that we've highlighted where we had strength in the first half. We expect those to continue Pro online loyalty home services. But if I just look at the -- if I unpack that and just look at the cadence Q3, as we mentioned, is expected to be flat, and that reflects, again, a very similar demand environment than what we just saw here in Q2. So status quo and more of the same there. And then as we push out to Q4, it is implied negative.

Really, it's similar expectations on, kind of, mix of our business and the momentum as what I just said for Q3. And the 1 big difference there is the winter storm that we're cycling last year that came through in January, and that's going to create about a 50 basis point drag for us in Q4 this year. But overall, when we look at the second half outlook, it is based on expectations and normal weather trends, and we're not baking anything in terms of expected event. So this is really in Q4 just all about what we're cycling.

Simeon, this is Marvin. The only final comment I'll make is we don't anticipate that we're going to run into additional macro pressure or we're going to have any overlap other than the weather brand cited in Q4. We're just trying to be prudent and we're trying to just take a view of the first half and basically make the assumption that the second half is going to look a lot like the first half.

Now if the macro environment gives us any type of tailwind or we're able to have accelerated performance and some of the initiatives that Bill outlined, we'll be very pleased with that. But we felt like that it was the disciplined thing to do to just look at the second half and basically carry the first half performance into the second half?

Okay. And then my follow-up, as you think about allocating capital to each side of the business, DIY or allocating investment does anything change? Does this, kind of, stagnant housing market make you push one way or the other? Do you lean in where your sales exist today? Or do you push much harder into where your Pro segment where you have less exposure?

So look, I'll take that one. I think from a philosophical perspective, we have a great balance sheet, and so we're going to always invest in the future. We're not running the business quarter-to-quarter, we're not running the business with a short-term point of view. What we do know when you look at John Burns Real Estate Consulting as an example, to estimate there's anywhere between $20 billion and $50 billion of pent-up deferred project demand in home improvement. And so we know that this environment we're in is cyclical. It goes down, but at some point, it comes back up. That is the business thesis around investments in ADG and FPM. This is a really difficult single-family and multifamily construction environment, but it's not going to always be that way. We know at some point, we're going to have to build houses in this country. And when we do, we're better positioned today, and we'll be better positioned in the future than we've ever been in the history of this company. And so we're going to look at our capital allocation based on where we believe we can get the best return to our shareholders.

We're extremely pleased that we have one of the best return on invested capital results in all of retail, and we're going to maintain that disciplined focus. And we believe if we do that, we're going to benefit our shareholders over the long term.

Next question are from the line of Greg Melich with Evercore ISI.

I have 2 questions. First, on tariffs. You mentioned there could be more coming. Could you help frame what you think is coming in reference to the size of what you just saw this quarter? And then my follow-up was on the comp trend.

Greg, this is Brandon. So as we highlighted, we recorded a tariff benefit in Q2, $80 million or $0.11. It was largely offset by fuel and transportation pressure. We are moving through the filing process for additional refunds. We don't have any estimates in our outlook in the second half, just purely due to the uncertainty of the timing. And I will say our Q2 refund amount represents a smaller portion of the total IEEPA tariffs that we paid here over the last year to 18 months. So we're pursuing all of that, all that we're eligible to collect and anticipate any further benefits are going to be reinvested in customer facing actions that are going to continue to reinforce our value prop. And as Marvin mentioned earlier, we're going to continue to be mindful of the competitive dynamics focus on taking share in the second half and at the same time, maintaining disciplined margins at the same time. So we'll have more on that as we move through the second half on future earnings calls as it relates to tariff refunds in our plans for how we might leverage the benefit.

That's great. And my follow-up is on the online sales growth. I mean, 16%, a pretty good number. I'd love to maybe just unpack that a little bit. What do you see driving that? Is it speed assortment? What sort of initiatives do you have? And if we were to think about the comp transactions down 2%. Is the split -- is Pro -- are Pro transactions up and DIY down that much? Or how do we think about online and out interact on overall traffic?

Yes. So Greg, I'll take the online question and Brandon will respond to the transaction question. So what drove our performance. It's a combination of a lot of things. But first and foremost, we're pleased to have 2 consecutive quarters of online comps north of 15%. So we saw strength across Pro and DIY in our line. We saw higher traffic and increased conversion. We saw great take rate based on the total improvement in our digital experience. We've had tailored experiences for customers. We expanded our visualization capabilities, and we have really strong adoption of our new fulfillment options. So we're excited that customers really responded to our free delivery and same-day delivery options that we launched early in the year, and that's something that really drove our online business.

Also, I mentioned in my prepared comments that our digital agent, Mylow, has been a very, very nice addition to our online business. So as I stated, we have roughly 25 million questions since its inception. And within that, customers who engage with Mylow, while shopping online convert at 3x greater than customers that don't. And so all of those things are playing a huge role. And it's still early days with our marketplace, and we're excited about what we're learning.

The great thing about our marketplace is that it's given our customers great pricing options, not only on the value side, but on the premium side. And so we're seeing really, really good adoption. So as Bill talked about, that K-shaped economy, online is a great place to really look at that happen in real time because we see premium customers and value-oriented customer shopping. And we believe that we're just getting started. We have lots of of investments planned for online, and we think this is going to be a continued driver of our business. I'll let Brandon talk about the transactions.

Yes. Greg, your second question on the transaction decline. It is largely centered around DIY. The contraction was mainly in transactions that were driven by pressure in weather-sensitive outdoor and seasonal categories, and that was, in particular, in the Southern geographies and kind of centered around that Memorial Day activity that we had kind of highlighted. So that's the main driver of the pressure.

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

So the risk of -- I know we've discussed this related to the tariff refunds and some of the pricing actions, but I want to further probe that, if I could. So I guess the question are, I mean, you mentioned competitors. Any more color on that is that you have the smaller competitors, your larger competitor? And then I guess as I understand, given the commentaries from Lowe's, did you choose not to match these pricing actions, and as a result, lost -- it was temporarily lost market share? Is that what's happening? Do you stick with that strategy going forward and assuming that maybe some of these pricing actions on the part of your competitors stick?

So Brian, this is Marvin. I think the most transparent way to answer it is, is what I said earlier. We think it's transitory. We believe we had competitors pool that received tariff refunds and decided to take pricing action to either, a, drive units and be to clear our seasonal inventory. And that's what we saw. So that's just giving you a view of the competitive landscape. We did not choose them to match some of those promotions because they were not in our financial plan nor did we think it was financially prudent to match them. It's pretty easy to determine who did what -- just look at their tariff refunds versus their gross margin versus last year, and you can determine pretty much who did what. So for us, we're extremely pleased that we're going to remain disciplined. That's why we are happy with the fact that we dealt with lots of cost pressures like everyone is dealing with, but we were able to leverage our PPI initiatives to ensure that we were able to take the right planned steps to drive profitability to create really good flow-through.

Now we're going to be competitive, but we're going to be rational with our competitiveness. And again, we think this is transitory. We don't see this happening in the second half of the year because we don't see additional tariff refunds coming to competitors in the second half of the year that's going to give them the ability to be this aggressive on price. It was a moment in time. impacted July, and we're just being transparent with what we saw in the competitive landscape.

That's very helpful, Marvin. And [indiscernible], just a follow-up question, bigger picture. So as we step back, obviously, a lot of moving pieces here, tariffs being one of them, weather, et cetera. But as you're looking at this demand dynamic at Lowe's, is it is the consumer getting better or worse, staying the same? How would you characterize the underlying demand dynamic there?

So look, I'll give you a perspective. I'll let Brandon provide maybe some financial analysis around it. Look, in our point of view, Brian, we think the customer is basically the same. I mean, as we've said, numerous times, we feel really good about the overall health of our consumer. Our core consumer is a [indiscernible] income homeowner. They have a strong personal balance sheet. They got real disposable income growth. Their house is getting older and they have increased equity. But the caveat to all of that is that this consumer is being cautious. And it's not just about fuel prices. Fuel prices make up roughly 2% of their annual spend, but it's a combination of fuel prices, geopolitical events and other uncertain things in the macro. And so when you combine all these things together, people are just being cautious with their discretionary spend. Look, as I said earlier, this is -- we think this is cyclical. We do think it's a moment in time. The good news is we've delivered 5 consecutive quarters of positive comps with a DIY penetration north of 60%.

So we feel great about how we are managing our business and arguably one of the most difficult environments. And we know the moment we get any type of macro tailwind that our business is going to perform was going to perform proportionate to that tailwind because we're doing a lot of things right. And so we don't think the consumer is getting worse. We think it's pretty much the same, but we think this is a healthy consumer that's overly cautious based on all those factors I outlined.

Yes. Brian, the only thing I would add is we're looking at the consumer, they do continue to have strong balance sheet, steady job growth, but I think as Marvin was explaining to affordability remains, kind of, the major concern, and that's across rates, it's across home prices, insurance, taxes, and that's really translating to prioritization of repair and maintenance spend and the projects that our consumers are engaging in and this ongoing trend of caution around big-ticket discretionary. We've been talking about that for the last several years that played out in the first half, and our outlook essentially reflects more of the same, and that's going to play out in the second half, and that's what's reflected in our expectations.

Next question is from the line of Seth Sigman with Barclays.

I wanted to focus on the gross margin. So if you back out tariff refunds and the acquisitions this quarter, the underlying Lowe's gross margin was only down slightly in Q2 despite a lot of external cost pressures. So can you just talk about how those cost pressures are impacting the business, how you were able to manage that. And then, Brandon, on the Q3 EPS guide, if there's any more color you can provide on the gross margin implications embedded in that, that would be helpful.

Yes, sure, Seth. I think as you look at gross margin in Q2, we called out the major factors. The tariff refund was the new piece. We also cited some credit revenue favorability and that's largely from loss reserves. But if I back up and just look at the overall operating margin, kind of, flow across the quarters, there are some unique items as we look into the second half. We talked about the tariff refund really in Q2. We don't have anything in the outlook there for the second half. And really, the big item is the pressure from fuel and transportation. So I mentioned that largely offset the tariff refund benefit in Q2. We are now projecting that across the second half of the year, and we're actually expecting it to be a bit more elevated as we start to turn through new cost layers that built up through the first half of the year. So that's mainly what's reflected in the second half that's, kind of, a newly emerged dynamic from the outlook that we had provided earlier in the year.

Okay. That's helpful. And then I guess just a related follow-up. So it sounds like you'll still see a significant amount of refunds in the second half of the year. Is the view that you'll reinvest all of that or could there be upside to the guidance that you just updated since you're already embedding those headwinds to your last point?

Yes, Seth, I'll just reinforce. We'll give you more color on that as we move through the year, Q3, Q4 call. and we're committed to looking at that, looking at opportunities and reinvesting in customer-facing actions that are going to reinforce our value prop. So that was a comment I made earlier. We're going to stick to that, and we'll have more color as we move through the second half of the year.

So Rob, we have time for 1 more question.

The last question will be coming from the line of Chris Nardone, Bank of America.

I had one shorter-term question and 1 longer-term question. First, on the shorter-term one, we talked about this a little bit, but you gave guidance for the third quarter. Just want to see if there's any other drivers in the 4Q guidance outside of lapping FBM that is driving the implied improvement in profitability in the fourth quarter. specifically like any changes in assumptions around supply chain costs quarter-on-quarter.

No, I think, Chris, I just mentioned the supply chain fuel transportation pressure is included and projected across the second half. And the one improvement, just if you're looking at operating margin, just a reminder, we're cycling a Q4 discretionary bonus that was paid out last year. So that's probably the one difference just when you look at the dynamic of Q3 and Q4.

Okay. Very clear. And then maybe for Marvin, as we sit in this relatively frozen housing market for longer, do you think this potentially amplifies the potential upside for longer-term growth the longer-term growth algorithm once the market turns. I believe previously, you said expectations for about mid-single-digit market growth in an accelerated turn, but curious if there could be even more upside torque as pent-up demand continues to build.

Chris, it's a fair question. My short answer would be we're expecting that the housing market is going to recover gradually, but we do believe that there is extreme value in the older homes that our customers are living in. As you know, we have the oldest housing stock on record, and we also have customers living in their houses for the longest duration on record. And what we know is where [indiscernible] happens. The only caveat to all of this is that there's so much happening in the macro in the geopolitical world that customers are just cautious. And again, the good news for us is that these customers are economically healthy. So are we optimistic that the out years can be really strong for us? Absolutely.

One of the things that we're really focused on and Brandon and I both spoke to it is that we're leveraging our balance sheet to make the right capital investments not just for the short term, but for the long term. We believe strongly that Lowe's is a significantly better company than it was pre housing recession, we just haven't had a chance to benefit from that because we have such a high penetrating business in DIY. That may be a bit of a drag on our business today, but we believe strongly that when this market starts to cycle up, although gradually, that's going to be a tremendous benefit for our business because the DIY customer is going to hopefully be the first customer that's going to come out of this with positive growth and all the investments we've made in our e-commerce business and our DIY loyalty platform in our fulfillment capabilities. in our customer service initiatives, all those things will start to bear fruit and pay dividends. So we're optimistic. But again, we think it will be gradual, and we're prepared to benefit from whatever recovery we see here in the short term or the long term.

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 Lowe's Second Quarter 2026 Earnings Call. You may now disconnect.

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.