Earnings Call Transcript
LOWES COMPANIES INC (LOW)
Earnings Call Transcript - LOW Q1 2025
Operator, Operator
Good morning, everyone, and welcome to Lowe's Companies First 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.
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'll 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 in the quarterly earnings section of our Investor Relations website. Now I'll turn the call over to Marvin.
Marvin Ellison, Chairman and Chief Executive Officer
Thank you, Kate. Good morning, everyone, and thank you for joining us today. In the first quarter, we delivered sales of $20.9 billion with comparable sales down 1.7%, in line with our expectations. Despite ongoing challenges in the housing market, I'm pleased with our team's focus and execution in the face of significant macro uncertainty. We continue to deliver operational excellence combined with value and outstanding service to our customers. This dedication drove an increase in our customer satisfaction scores, and we also earned recognition from J.D. Power, which recently named Lowe's number 1 in customer satisfaction among home improvement retailers. This recognition demonstrates that our investments in technology and our clean and enjoyable stores, along with our friendly and knowledgeable associates, all reinforce our commitment to being the most helpful brand in home improvement. Although we are pleased with our continued progress in customer service, our financial results also reflect ongoing pressure in DIY bigger ticket discretionary demand and a slower start to spring versus last year, with exceptionally unfavorable weather across much of the country in February. As weather normalizes, we were encouraged by our business performance. Customers appreciated our spacious garden centers, great selection of outdoor power equipment and expansive assortment of grills and patio furniture. They also took advantage of our early spring offers, which included special deals for MyLowe's Rewards members. Later in the call, Bill will provide more detail on our approach to spring and the momentum that we're seeing. Before I discuss our Q1 results in more detail, I'd like to spend time discussing our company's commitment to diversify our global sourcing efforts. To provide a better perspective about our global sourcing, roughly 60% of our purchases originate in the U.S. or approximately $30 billion on an annual basis. Over the past several years, we've been partnering with our private and national brand suppliers to diversify our global sourcing efforts. As a result, approximately 20% of our purchase volume is currently concentrated in China. Although we are pleased with this reduced dependency, we're not satisfied, and we're working to accelerate our diversification efforts. Our global sourcing team has identified exciting diversification opportunities in the U.S. and around the globe that we're actively pursuing. We're also using our best-in-class product cost management and sophisticated pricing capabilities while leveraging the strength of our cross-functional teams across merchandising, assortment planning, supply chain and finance. We will combine these capabilities and continue to work with our national and private brand suppliers while using a portfolio approach to ensure we continue to bring value and innovation to our customers. Meanwhile, let me tell you how we're planning to drive sales growth by continuing to strengthen two key pillars of our Total Home strategy, accelerating our Pro and online growth. I'll begin with our mid-single-digit growth in Pro sales this quarter. Since 2018, this leadership team has transformed our Pro product and service offering, with a powerful program lineup, targeted inventory investments and a competitive loyalty program. Now that we've established an effective playbook and a strong foundation of execution to serve the small to medium Pro, we're excited to engage a larger Pro with their planned spend in a new distribution channel. To that end, we announced a deal in April to acquire Artisan Design Group, or ADG, which is a leading provider of design, distribution and installation services for interior surface finishes, including flooring, countertops and cabinets. ADG serves national, regional and local homebuilders as well as property managers. We expect this acquisition to increase our penetration of Pro plan spend and will position us to gain share in a highly fragmented $50 billion market; with an estimated 18 million homes needed in the U.S. by 2033, new home construction is expected to be a major driver of Pro plan spend over the next decade. We've been impressed with ADG's strong leadership team and their customer-centric operating model, reflected in the best-in-class customer satisfaction scores that it earned from top builders in the U.S. The transaction is expected to close this quarter, so we'll provide an update on our progress during our next call. Now let's talk about another key pillar of our Total Home strategy, accelerating online sales. In the first quarter, online sales were up 6%, driven by increases in both traffic and conversion rates. We're pleased with the technology transformation that's making these gains possible. For example, we can now offer an expanded assortment, more value and an even wider extended aisle with our launch last year of the first online product marketplace in home improvement. While we're still in the early days of this initiative, we recently partnered with Mirakl, a global leader in marketplace technology to help us scale even faster. Through Mirakl, trusted marketplace sellers will be able to easily manage their catalogs on lowes.com. This will add new product categories across the home and offer DIY and Pro customers a full spectrum of value and premium products. We can accomplish all of this without having to carry the inventory or invest in new fulfillment centers. As we scale our new product marketplace and unlock its potential, I look forward to keeping you updated on our continuing efforts to drive online growth. Now allow me to transition to how we're leveraging new AI capabilities to better serve our customers. In collaboration with Open AI, we launched MyLowe's, the first AI-powered Home Improvement Virtual Adviser. Since home improvement is inherently complex, MyLowe’s provides step-by-step instructions for any project with any level of complexity from how to fix a leaky faucet to how to build a deck and everything in between. It helps customers find and purchase the right tools and materials for their projects directly on lowes.com or the Lowe's App. We're encouraged by our progress in leveraging AI to streamline the customer experience, and I commend our technology and digital team for their outstanding contributions. Notably, in Q1, Lowe's mobile app earned a prestigious Webby Award and was recognized as the best mobile app for 2025. This is another reflection that our investments in technology and innovation are paying off. Before I wrap, let me update you on our commitment to be a good neighbor in the communities where we do business. Earlier this month, we celebrated our commitments to supporting our communities by announcing our efforts to measure our impact in a new way through our 'Here to Help' initiative with a goal to deliver 10 million square feet of impact nationwide this year. This includes our ongoing efforts to create safe, affordable housing, respond to disasters and revitalize communities like our 5-year $100 million commitment to improve hometowns across the country. This new initiative reflects our commitment to improve the communities where our associates live and work, and we look forward to providing you with updates later in the year. In closing, I want to thank our frontline associates for their continued hard work, especially during this key spring selling season. And with that, I'll turn it over to Bill.
Bill Boltz, Executive Vice President, Merchandising
Thanks, Marvin, and good morning, everyone. We're pleased that our first quarter sales were in line with our expectations, driven by broad-based strength in Pro and Online across multiple merchandising categories. Beginning in hard lines, after a slow start to February, our spring season is off and running. As the weather improved, we delivered solid growth in key categories, including patio furniture, fertilizer, grass seed, generators and irrigation. Customers responded to our innovative products and new affordable designs, even for some discretionary purchases. For example, our private-branded Ashton five-piece patio dining set by Style Selections was a big hit at less than $400. We're also continuing to earn DIY customers' loyalty through MyLowe's Rewards. We just marked the first anniversary of this program, which has more than 30 million members who spend nearly 50% more than non-members. We're cultivating their loyalty and using data-driven marketing to engage them with the right message at the right time to convert sales. For example, during our Spring Fest event, we offered members special deals every 2 weeks on lawn and garden products, patio furniture, outdoor power equipment and more, plus member-only doorbusters in-store and online. New this year, in early April, we launched Mulch Madness. During this event, customers saved on 5 bags of Mulch for $10, and for the first time, members also received 5 times bonus points and a free gift. We also brought customers industry-leading innovation this spring with products like the new EGO Line IQ Attachment-Capable String Trim. This product makes it easy to load the trimmer line with the push of a button, and its attachment capabilities mean it can convert into 8 different tools, including an Edger, hedge trimmer, and Pole Saw. This is one of more than 20 new EGO items they're launching this year. We're also in stock with the industry's best brands to help customers complete all their projects, like Scott's Fertilizer, Miracle-Grow Soils, Toro Lawnmowers, along with products from Craftsman and Cobalt. Now turning to Building Products. We delivered positive comp sales in Building Materials and Rough Plumbing with strength in roofing, drywall, plumbing repair, water heaters, and air circulation categories. In Lumber, we delivered growth in siding, treated lumber, and composite decking. In fact, Lowe's has the largest selection of composite decking brands, including the top two with Trex and TimberTech along with an improved offering from Decorator's. Let's talk about Home Core. Our continued strength in appliances helped us deliver growth in both transactions and average ticket, and we saw growth across all major categories, including refrigeration, laundry, cooking, and dishwashers. As the industry leader in appliances, we have the widest assortment of top brands. Using our market delivery model, we can deliver these big and bulky products next day to virtually every ZIP code in the U.S. Of course, our knowledgeable Red Vest associates are always there to help customers choose the right products and highlight new and innovative items that can meet their needs. For example, we're introducing the next step in all-in-one laundry with the new Samsung bespoke AI vented all-in-one combo washer and dryer. This one machine washes and dries, closing just over an hour without having to transfer loads, and it uses the existing 110-volt outlet and dryer venting found in most homes. Our Paint department has become the home center color authority, instilling color confidence in consumers with trusted Sherwin-Williams colors. We're excited to see the new marketing campaign from Sherwin-Williams, which uses their iconic color palette to entice customers to shop Lowe's, including the Pro campaigns, where we continue to gain traction with our compelling value and expanded assortment. While we're energized by new and innovative products, we're also mindful of the current market dynamics. Bigger ticket project spend remains under pressure in interior categories like flooring, kitchens and baths, with many customers still choosing to delay those larger purchases. I'd like to spend a few minutes discussing our approach to spring. Our teams have never been more in sync as we prepared for this important season. Our stores, supply chain, inventory, vendor, and merchant teams have worked hard to ensure that we provide the best service, product value, and innovation to our customers. For this spring season, we are ready with strong in-stocks across our core categories, including our seasonal items, so that we can serve both our DIY and Pro customers with great values on items they are looking for as we head into the upcoming Memorial Day, Father's Day, and Fourth of July holidays. Looking ahead, I'm not only pleased with the great deals and innovation that we have for our DIY and Pro customers, but I'm also excited to see some of the best in-stock positions during my tenure at Lowe's. When you combine this with the outstanding staffing and customer service in our stores, the result was our recognition as number 1 in customer satisfaction among home improvement retailers from J.D. Power. As I wrap up, I want to thank all of these teams as well as our MST associates for their support, partnership, and great execution this spring. And now I'll turn the call over to Joe.
Joe McFarland, Executive Vice President, Stores
Thank you, Bill. Good morning, everyone. Let me start by thanking our frontline associates for their hard work and dedication during the spring season. Their efforts are paying off with customer satisfaction scores up 100 basis points over last year, as we leverage better technology and ongoing process improvements to enhance the shopping experience. Turning to Pro, in our most recent survey, Pros indicated that project backlogs remain healthy, but they are feeling a little less confident as might be expected, given the uncertain macro environment. Although Pros may be a bit cautious right now, our ability to deliver mid-single-digit growth in Pro sales comp in Q1 is a reflection that our strategy is working. One highlight this quarter, we're really pleased with the successful nationwide relaunch of our Pro Loyalty Program. The updated program now called MyLowe's Pro Rewards allows Pros to earn points from day 1 and is much more intuitive to use. Just one example: Pros only need to provide their phone number and check out, getting them back to the job site faster, and joining has never been easier with the addition of our new Spanish language enrollment option. With a program that's easier to use and understand, we're expecting greater utilization, driving repurchases and higher spend. Another way we're driving momentum is through our new technology, Workbench for our Pro sales associates. They can use this digital tracking tool to quickly identify their leads and prioritize the quotes to close. This drives both a better customer experience and greater associate productivity. As discussed earlier, our planned acquisition of ADG represents a natural step in driving Pro penetration by extending our reach with a new cohort of Pro customers; single and multifamily homebuilders. Turning now to our perpetual productivity improvement or PPI initiatives. In conjunction with the rollout of MyLowe's on Lowes.com for customers, we've also released MyLowe's Companion for our store associates built on the same technology. With immediate access to product details and project advice and inventory information, this AI-powered app gives associates the product and project knowledge to sell with confidence regardless of tenure or experience. Associates across all 1,700-plus stores can access MyLowe's Companion on their mobile devices, marking the first time a retailer has successfully implemented this kind of technology at scale. With this knowledge at their fingertips, our associates can feel confident in answering customers' questions quickly, even if they've just started in the store or been asked to cover a new department. Also driving productivity with our gig delivery network has been an important component of our enhanced omnichannel customer experience. We're now using this capability to help us meet spring demand, specifically during the Mulch Madness event that Bill just mentioned. In the past, this high-traffic event would take valuable flatbed distribution capacity. But this spring, we shifted a portion of the volume to gig delivery, providing an efficient delivery experience for customers buying Mulch, while freeing up capacity to meet the delivery needs of other Pro and DIY customers. We're also pleased to announce that our East Asheville store reopened earlier this month after damage from Hurricane Helene. During the hurricane, the store was submerged in over 18 feet of water. So, we are thrilled that we are now able to reopen it to serve our customers and community. We're on track to open five to ten new stores later this year, in line with what we shared at our analyst and investor conference. Of course, all of this is only possible because of our hardworking associates. As a demonstration of our appreciation, we closed our stores on Easter for the 6th consecutive year, giving associates time on this very special day to rest and recharge with family and friends. I want to take a moment to thank our veterans, including our veteran associates who can be identified without camouflage vests. Lowe's is ranked among the top military-friendly brands in the U.S., which speaks to our company's commitment to the military community. As a marine, I couldn't be more proud of Lowe's efforts to honor those who served, especially as we approach Memorial Day. Looking ahead, with excellent spring staffing levels and ongoing innovation across technology and service, I'm confident that we're offering a best-in-class omnichannel shopping experience for our customers this season. To close, I want to congratulate our store associates for being recognized by J.D. Power as the number 1 in customer satisfaction among home improvement retailers. This is a testament to their ongoing commitment to serving our customers. With that, I'll turn it over to Brandon.
Brandon Sink, Executive Vice President and Chief Financial Officer
Thank you, Joe, and good morning. Starting with our first quarter results. Diluted earnings per share of $2.92 were in line with our expectations. Q1 sales totaled $20.9 billion, and comparable sales were down 1.7%, in line with our expectations as we cycled over an earlier start to spring last year. Comparable average ticket was up 2.1%, with continued growth at Pro and Appliances, somewhat offset by ongoing pressure in DIY discretionary project demand. Comparable transactions declined 3.8%, partly driven by unfavorable weather earlier in the quarter that pressured spring traffic, which makes up a larger portion of our transactions this time of year. Given the poor weather early in Q1, comps were down 5.4% in February, up 1.7% in March, and down 2.6% in April. As our stores are closed on Easter Sunday, we estimate that the later timing of Easter benefited March comps and pressured April comps by a similar amount. Adjusting for the Easter shift, comp sales were down approximately 0.9% in March and up approximately 0.2% in April. Gross margin was 33.4% of sales in the first quarter, up 19 basis points from last year, driven by multiple PPI initiatives as well as some modest improvement in shrink and credit revenue. SG&A of 19.3% of sales de-levered 56 basis points, driven by lower sales volumes, the wrap of incremental wage actions for frontline associates and higher healthcare-related costs. Operating margin rate of 11.9% declined 50 basis points versus prior year, and the effective tax rate was 23.9%, in line with the prior year. Inventory ended Q1 at $18.3 billion, in line with prior year with strong in-stocks across the store, including key spring seasonal items. Turning now to capital allocation. In the first quarter, we generated $2.9 billion in free cash flow. Capital expenditures totaled $518 million as we continue to invest in our strategic growth priorities, including the construction of new stores expected to open later this year. In the quarter, we paid $645 million in dividends at $1.15 per share. In April, we repaid $750 million in debt maturities helping us deliver adjusted debt-to-EBITDA of 2.99 times and our return on invested capital of 31% at the end of Q1. Last month, we announced a definitive agreement to acquire Artisan Design Group for $1.325 billion. We plan to use cash on hand to finance the transaction, suspend share repurchases this year, and repay the remaining $1.75 billion in bonds maturing in September. The transaction is expected to close in Q2, and it's also expected to be accretive to diluted earnings per share in the first full fiscal year after closing. Looking forward to the remainder of the year, today, we are affirming our fiscal 2025 outlook. We continue to expect sales ranging from $83.5 billion to $84.5 billion with comparable sales in a range of flat to up 1%. We expect operating margin in a range of 12.3% to 12.4% and full-year diluted earnings per share of approximately $12.15 to $12.40. We also expect capital expenditures of approximately $2.5 billion as we invest in our Total Home strategic priorities and begin to ramp up new store builds. Please note that this outlook does not include any potential impacts related to the acquisition of Artisan Design Group. To assist with your modeling, here are a few items to keep in mind for the second quarter. We continue to expect comp sales in the first half to be roughly flat with approximately $400 million in spring demand shifting into Q2. As we are cycling particularly poor weather, with strong in-stocks, including in critical seasonal categories as well as visibility up into our supply chain, we're confident that we can meet customer demand this spring. Taking this into account, we expect second-quarter comp sales to be approximately 150 basis points above the bottom end of our full-year guide. We also expect the second-quarter operating margin rate to be approximately 10 basis points above the prior year adjusted operating margin rate. In closing, we remain confident in our team's ability to execute at a high level and manage through this challenging environment, as well as any team in retail. We continue to invest in our Total Home strategy and remain focused on delivering value to our customers and our shareholders. And with that, we'll open it up for your questions.
Operator, Operator
Our first question today comes from Simeon Gutman with Morgan Stanley. Please go ahead with your question.
Simeon Gutman, Analyst
Good morning, everyone, and nice job managing the quarter. My first question is on the relationship of comp to expense leverage or operating leverage for the rest of the year. I guess we don't know each quarter, you gave us a little bit of help with the second quarter, but it looks like that ratio is a little bit higher for the balance of the year, something like 25 basis points of expansion for whatever is left in comp. Is that right? Are you getting more out of the business? Or is it just the timing because we don't know the comp cadence through the year, and it's the same? I think it was 10 basis points of leverage relationship. Thanks.
Brandon Sink, Executive Vice President and Chief Financial Officer
Simeon. Good morning. It’s Brandon. So, as it relates to the specifics on the comp guide, let me kind of break it down in terms of first half and second half. The first half is mainly a weather story. We're expecting roughly flat comps over the course of the first half, and we talked about the shift of the $400 million from spring to play out Q1 into Q2. Q1 played out as expected. As I referenced, expecting roughly 1.5% Q2, we feel like we have strong inventory levels, and we're ready. We have a lot of confidence in Q2 expectations. And then implied in the second half is roughly a plus 1. We expect to continue to see momentum with our Total Home sales initiatives offsetting hurricane pressure. So, that's kind of the shape of the top line. As it relates to margin, we're expecting gross margins to hold roughly flat for the full year. The PPI portfolio initiatives continue to offset cost and inflationary pressures. On the SG&A side, the team continues to outperform there managing a number of lines really well. We got $500 million roughly in OpEx offsetting across a number of pressures that we're seeing. So that kind of gets you to the guide of 12.3% to 12.4%. Again, Q1 roughly in line with expectations, and that's how we're thinking about Q2 to Q4.
Simeon Gutman, Analyst
Okay. And then shifting gears, maybe for Marvin, I wanted to ask about the larger Pro, Artisan Design Group. I guess, is the deal signaling that you're planning to move quicker here if opportunities present themselves? How do we think about that in relation for Lowe's? And then can you talk about how quickly the business is growing organically? Or whatever that growth rate of the business looks like?
Marvin Ellison, Chairman and Chief Executive Officer
Yes. We feel really good about the acquisition. We've been really disciplined with how we've managed our capital. So, any time we decide to make any acquisition, it is well thought out, and we have a lot of confidence in it. I think the best way to answer your question is as we think about capital allocation, it really remains the same philosophy, and that's we're always going to invest in the business. We're always going to think first about how we can get the healthy return that's going to be long-standing and sustainable. Having said that, we also believe that it's important to find ways to grow. As we look at ADG, we think that they are perfectly positioned for the recovery that has to happen over the next decade in housing. We know we're in a repressed period, but as I mentioned in my prepared comments, there are 18 million new homes needed by 2033, and Artisan Design Group is number 1 in their marketplace from a perspective of service and overall business. We think we have some really attractive adjacencies that we can add to that portfolio. Also, during a very fragmented environment, which means that they have a healthy pipeline of potential targets to continue to grow through acquisition. We're going to allow them to continue to follow a really best-in-class process to pursue those potential targets within their pipeline. We're not changing our strategy. We've just been opportunistic. We feel like we've created a really nice playbook and execution model for the small to medium Pro. The data reflects that with mid-single-digit positive comps this quarter, but this acquisition gives us an opportunity to broaden our Pro portfolio and have the ability to be in a separate channel with a $50 billion total addressable market that just gives us additional opportunities to grow when the market continues to recover.
Brandon Sink, Executive Vice President and Chief Financial Officer
And Simeon, this is Brandon. Just specifics on financials. ADG delivered $1.8 billion in sales in '24. As I mentioned, we expect EPS to be accretive in the first full fiscal year. That would be fiscal '26, and we're going to hold off on giving anything more specific. We expect to close in Q2, and we'll be prepared to talk more in August.
Simeon Gutman, Analyst
Okay. Thanks. Good luck.
Operator, Operator
Our next question is from the line of Steve Forbes with Guggenheim Securities. Please proceed with your questions.
Steve Forbes, Analyst
Good morning, everyone. Brandon, I think in your commentary, you mentioned a percentage of transactions being sort of spring transactions more elevated in the first half of the year and maybe potentially more elevated in the second quarter this year. So, any sort of context to help us better understand sort of how reliant right or how relevant spring is in terms of percentage of transactions first quarter versus second quarter?
Brandon Sink, Executive Vice President and Chief Financial Officer
I don't know that I'll get into the specifics, Steve, on Q1, Q2. I'll just say Q1 average ticket was up just over 2%, driven by strength in Pro and also momentum in Appliances. We also saw some benefit from storm recovery projects. As you referenced, comp transactions down 3.9%. This is driven by fewer smaller ticket seasonal transactions and ongoing DIY pressures that we're seeing in the business. Large ticket for us was slightly positive. Again, that's Appliances and Pro strength, and that's a continuation that we saw from Q4. But I would say as you look out at Q2, and for sure, over the balance of the year, we continue to expect average ticket to be the primary driver of comps, and we would expect to see transactions recover specifically in Q2 as the business starts to get momentum.
Steve Forbes, Analyst
And then Marvin, just a quick follow-up. One of the initiatives that wasn't mentioned in the prepared remarks is localization discussed during the Analyst Day and so forth. Any updates on the localization strategy? How that's progressing? How many stores you're touching? How much of the opportunity is still ahead for Lowe's?
Marvin Ellison, Chairman and Chief Executive Officer
Yes, Steve. I'll speak about it more from the standpoint of space productivity because we've integrated localization into a broader initiative on just improving productivity, both in our physical space in our stores and virtually online. So, I'll let Bill talk a bit about some of the key initiatives like workwear and pet that we're really excited about and what our plans are to continue to expand that and how we think that's going to give us an opportunity to just continue to have more productive space in our stores.
Bill Boltz, Executive Vice President, Merchandising
Thanks, Marvin. Steve, we're well underway with all three of those initiatives. We'll have Rural completed here at the end of second quarter, early Q3. Workwear, we're well down the path of having roughly more than 1,000 stores complete by the end of this year and wrapping up early next year for the remainder of those. We continue on the same track with our Pet initiative, and we're excited about that continuing to learn and adjust as we go as we roll out these stores and put these products in. We're really pleased with the results of all three.
Operator, Operator
Next questions are from the line of Robbie Ohmes with Bank of America. Please proceed with your questions.
Robbie Ohmes, Analyst
Good morning. Thanks for taking my questions. The first question is just I was wondering if we could get a little more on tariffs in terms of pricing impacts that you guys might be expecting? And the impact on the private brand part of your business versus vendor announced price increases, and just color on how you're managing that there? And then I have a follow-up.
Marvin Ellison, Chairman and Chief Executive Officer
So, Robbie, I'll take the pricing part, and I'll let Bill just provide a broader perspective on tariffs in general. I think for us, as always, we're going to take a portfolio approach to pricing. We're pleased we've built best-in-class tools for price management that help us navigate any environment, and we have great elasticity data across products and geographies. The key for us is the merchants have been cultivating and developing wonderful relationships with suppliers for the last 6 years. This is when those relationships start to pay off. Before I hand it to Bill, the key point for us is that we're going to be really competitive in the Home Improvement channel, like we always are. We're not in the habit of donating market share to the competition, and in this environment, we will remain keenly focused on competing on price and think we can do that while still delivering on the financial commitments that Brandon outlined in his prepared comments. So, I'll let Bill talk a little bit more about the overall global sourcing philosophy we have here.
Bill Boltz, Executive Vice President, Merchandising
Thanks, Marvin. I think it's important that everyone understands how we look at global sourcing. We look at it really from two lenses, a direct and indirect perspective. Direct being where we direct import, where Lowe's is the importer of record and then indirect, where we purchase from suppliers, and then they are the importer of record. Currently, as Brandon said in his remarks and Marvin said in his, roughly 60% of our purchases are out of the U.S. The next largest is China sitting at roughly 20%. You can understand where some of those categories fall. A lot of holiday trim, ceiling fans, small appliances, tools, etc., make up that 20%. We've been working really hard over the last four to five years to diversify, just as everybody has, and partnering closely with both private and national brand suppliers to find sourcing locations to do that. We're also trying to accelerate that as it relates to our private brand portfolio and doing the same with our national brands. As Marvin said, it all comes down to relationships, and we're really pleased with the relationships that we've built over the past 6-plus years, and we feel like we have a strong track record of managing our assortments and managing the cost. We will continue to run our playbook as it relates to that.
Robbie Ohmes, Analyst
That's really helpful. Just a quick follow-up for Marvin. Marketplace, what's the dream for us here? How big could this be? And how important could this be?
Marvin Ellison, Chairman and Chief Executive Officer
Well, I can tell you that we're excited about it. The partnership with Mirakl is important because it's the number one technology platform for large marketplace sellers. It becomes easier for them to transition to Lowes.com in addition to our digital team to load their catalogs efficiently and timely. We have high expectations. We've looked at the entire retail landscape, and we see that brick-and-mortar retailers that have demonstrated the most effective omnichannel strategies and sustainable growth share a correlating factor in having a marketplace. We're pleased to be the first product marketplace in home improvement. We have high expectations that not only can we manage core home improvement, but we now with a marketplace environment, can manage premium and value products without adding capital-intensive fulfillment centers and without adding additional inventory to our balance sheet. So early days, but we're excited about the progress and the number of world-class sellers that are eager to join the marketplace. We look forward to updating you as this becomes a more mature initiative.
Operator, Operator
The next question is from the line of Scot Ciccarelli with Truist Securities. Please proceed with your questions.
Scot Ciccarelli, Analyst
Good morning, guys. Given the softer trends you continue to see in bigger ticket products. First, how much of that mix do you think that generally represents? I know just changes quarter-to-quarter, but kind of on an annualized basis? And then second, what do you think you need to see to unlock greater activity in that segment? Is it improved consumer confidence? Or is it lower interest rates? Because presumably, those are post scenarios? Or is it something else entirely?
Marvin Ellison, Chairman and Chief Executive Officer
So, Scott, I'll take the first part, then I'll let Brandon and Bill join in to add any additional commentary. From an overall consumer perspective, we feel like our overall consumer remains healthy from a balance sheet perspective. Looking at the historic demand drivers of our business, they still remain positive, and I've repeated them in the past. Home price appreciation, aging housing stock, personal disposable income is now growing faster than inflation. Overall, we see rising real income and lower debt. So overall, our consumer is in great shape. But we still, as we said in the prepared comments, have the DIY customer pulling back on large big-ticket discretionary purchases. That is the issue we are dealing with. We believe that part of that is elevated mortgage rates and mortgage rates not falling perceived by many in the marketplace. We’re managing that as best we can. So, I'll let Brandon and Bill provide any additional perspective after just giving you a view of what we see the consumer.
Brandon Sink, Executive Vice President and Chief Financial Officer
Scott, I would add, as Marvin mentioned, the consumer overall is very healthy. But for us in home improvement, especially big ticket, the affordability challenge remains the primary concern. Inflation rates, as Marvin mentioned, hover around a 30-year mortgage around 7%. We’ve yet to really see at scale the consumer reengage in larger discretionary categories, still mainly sitting on the sidelines. The good news is the trends aren’t getting any worse. You referenced the greater than $500 ticket sentiment has softened a little more recently, but we haven’t necessarily translated that into consumer behavior. So for us, we look for sustained increases in discretionary projects and DIY traffic for the inflection point. We don’t have that necessarily expected or baked into ’25. It’s sort of expected to be more of the same at this point.
Bill Boltz, Executive Vice President, Merchandising
The only thing I would add is from a positive or a bright spot perspective, our Appliance business continues to be, from a big-ticket perspective, a good news story for us. It's a trend that's been ongoing since really the back half of last year and has trended into Q1. We saw strength across every single major category, including refrigeration, laundry, cooking, and dishwashers. The team has done a really nice job introducing new and innovative products. I spoke to some of those in my prepared remarks, whether that’s all-in-one laundry, whether that’s in cooking or refrigeration. Additionally, we add in what we’ve done from a delivery perspective and the market leadership position that we have to be able to deliver to really any ZIP code within 2 days and same day. These are positives when we look at that part of the big-ticket business.
Scot Ciccarelli, Analyst
Thanks, guys. Good luck.
Operator, Operator
The next question is from the line of Seth Sigman with Barclays. Please proceed with your questions.
Seth Sigman, Analyst
Good morning, everyone. It sounded like Q1 was limited by weather. Can you give a little bit more perspective on what you're seeing in the markets where you've had steadier spring weather conditions? How much of those markets outperformed? Just related to that, if you look at the April adjusted comp, the positive 0.2%, do you view that as the run rate of the business? I guess you're guiding to the first half being flat. Is that how you're thinking about it? Thanks.
Marvin Ellison, Chairman and Chief Executive Officer
Well, the simplest way for me to answer the question is when the sun is shining, our business performs a lot better. When you look at Q1, the variation by geography was driven exclusively by weather. As weather continues to moderate, our business continues to get better, and that's reflected in the adjusted comp number you reflected for April. We feel good about the trends in May, which are consistent with the guidance that Brandon provided and consistent with our expectations. Brandon, I don't know if you have anything else to add?
Brandon Sink, Executive Vice President and Chief Financial Officer
No, I would just add, Seth, just in terms of weather benefit, we did see 50 basis points of impact from hurricanes, Helene and Milton from the back half of last year that translated into Q1 and those were mostly benefited in our Southeast region.
Operator, Operator
Okay. Great. Very helpful. And then as I think about the full year guidance, you talked about the first half being flat. It implies the second half could potentially accelerate in that range. If I recall, the initial guidance suggested that it would be more driven by your own initiatives? I'm just curious, is that still the case? Has your view on the macro for the back half changed at all? Just help us bridge that a little bit more.
Brandon Sink, Executive Vice President and Chief Financial Officer
Yes. I think, Seth, there is no change—the macro assumptions from what we laid out in our guide in February. As I mentioned earlier, we’re working through still a number of short-term challenges around rates and cautious consumer affordability. Those are all things we assumed at the beginning of the year; that’s still the expectation as we move through Q2 and second half. The momentum is really around our Total Home strategy. There is some offset with hurricane pressure in the second half. That was about 100 basis points each in Q3 and Q4. But the benefits from our strategy as we look at both the Pro with loyalty, job site delivery, the momentum with extended aisle, Marvin talked about marketplace momentum, and with DIY in the second half, some of our category accelerators, all of that, combined with the ramp in momentum is what’s included in that second half comp expectation.
Seth Sigman, Analyst
Okay, great. Thanks very much. Appreciate it.
Operator, Operator
The next question is from the line of Steven Zaccone with Citigroup. Please proceed with your questions.
Steven Zaccone, Analyst
Good morning. Thanks very much for taking my question. I want to focus on DIY. Marvin, I'm curious, do you think the environment has gotten more competitive from retailers outside of the traditional home improvement channel? For example, the e-commerce players have gotten bigger in your categories and one is now growing their focus on rural. Do you see this as a threat to your business as you grow your rural market?
Marvin Ellison, Chairman and Chief Executive Officer
No, I appreciate the question. I think that retail has always been competitive. With the ease of e-commerce coming into any type of space with easily parcel-shipped products, it's going to continue to get more competitive. Having said that, there’s a lot to be said about product knowledge, about store environment, and about ease of shoppability in both stores and online. That’s one of the reasons we’ve invested so much in technology and it’s reflected in J.D. Power's representation of Lowe's being number 1 in customer service in the home improvement sector. I’ll let Joe talk a little bit about some things we’re doing to compete with nontraditional competitors based on product knowledge and providing our associates tools to help customers solve problems in their homes. We think that’s going to be the difference between us growing and maintaining share and also taking share from other competitors that don’t have the capital focus or technology platform to continue investing in innovation, which we believe will play a huge role in being competitive.
Joe McFarland, Executive Vice President, Stores
And Steven, just to follow up on Marvin’s comments, when I think about the MyLowe app that we rolled out to our associates, that product, project knowledge is right at their fingertips even for brand new associates. The adoption rate is far ahead of schedule, and we’re really pleased with the input associates are giving back to the app. In addition, I mentioned our Gig Delivery Network and how we’re coming to market for things like Mulch Madness for the DIY customer without impacting our Pro customer. We have the Extended Aisle in-store, so really excited about all the different touchpoints we have across the DIY network. As we continue our mode of shifting to compete online—whether the product is in the store, in a warehouse, or a special order—our associates are confident and have access to it at their fingertips today.
Operator, Operator
The second question I had also kind of strategic. The acquisition Artisan Design Group. Do you view this as the first of many, like basically do this acquisition grow some of the capabilities of the business and maybe we could see some more M&A in the future?
Marvin Ellison, Chairman and Chief Executive Officer
No, I appreciate the question. The short answer is we’re just going to be opportunistic. We believe that we’ve done a really nice job being disciplined around looking at potential acquisition targets. Whatever we potentially decide to acquire, we want it tied directly to complementing our Total Home strategy, and we think ADG does exactly that. We still want to get this transaction closed as Brandon mentioned. We think it will be done by the end of this quarter, and we’ll continue to look at all opportunities that allow us to grow, bring returns to our shareholders, and to use our capital efficiently. So more to come on that. We look forward to keeping you updated on ADG and how we believe they can benefit us and how we can benefit them from a category adjacency standpoint. This is going to be incredibly complementary in a marketplace where we currently are generating $0 of revenue and that’s new home construction, with potential growth opportunities over the decade that’s going to be incredibly attractive.
Steven Zaccone, Analyst
Understood. Thanks for the detail.
Operator, Operator
The next question is from the line of Christopher Horvers with JPMorgan. Please proceed with your questions.
Christopher Horvers, Analyst
Thanks. Good morning, everybody. So, my first question is on the Pro business. Do you think there was any impact to the business related to weather in the first quarter? Mid-single digits, very strong. It did moderate from the pace last year. So, was there any impact? And are you seeing improvement in that as the weather has broken?
Marvin Ellison, Chairman and Chief Executive Officer
This is Marvin. The short answer is, it was absolutely impacted by the business in Q1. As the season and weather start to normalize, we did see improvement along those same exact lines. Again, if you do the adjustment for closing in Easter, we had comp improvement each month of the quarter with an adjustment of April being positive. We feel great about our Pro business, and we also feel great about the momentum in that business. We are pleased with the adoption of our updated Pro Loyalty Program, MyLowe's Pro Rewards; the ease of use and the number of new customers joining the platform. We feel like our playbook for the small and medium Pro continues to work, and we have no concerns about the trajectory of our Pro business.
Christopher Horvers, Analyst
And then a follow-up question on the tariff side. Historically, the industry has managed to gross margin rate, especially considering the technology that you referenced, Marvin, and the leverage that you have over vendors. Does that remain your expectation, given where tariff rates sit? Then there's never been so much focus on inventory accounting methods. I think your FIFO. Does that portend some benefits, maybe earlier that you would ultimately just get back later, but a little bit of a sign curve around the merchandise margin? Thank you.
Marvin Ellison, Chairman and Chief Executive Officer
So, Chris, I'll take the first part, and I'll let Brandon join in. From our perspective, the best way for us to think about this is that we have tools that will allow us to manage this and manage this in a way that we're going to minimize impacts to our customers. As I said earlier, we'll be price-competitive, which we feel is incredibly important to our business, and it’s also important for us to maintain market share. We're not donating share to any competitor by sitting back and not being price competitive across any of the categories we’re selling, whether they’re domestic or imported. We believe that through our portfolio approach and some of the work to build pricing strategies with line structures, we’ll be in great shape. We’ve done all the math and based on the current tariff environment, we feel very comfortable delivering the financial guidance Brandon will update. I’ll let Brandon talk about the accounting in our world and how we see that primarily impacting us in the back half of the year.
Brandon Sink, Executive Vice President and Chief Financial Officer
So, Chris, this is Brandon. On the margin and the inventory piece of this, yes, I referenced earlier our expectations for gross margin to be roughly flat for the full year. That's inclusive of any impacts from trade policy. As you referenced, our accounting methodology for inventory is first-in, first-out, or FIFO accounting, which means any incremental cost we see will flow through our margin as we turn through inventory layers. We expect any incremental impact we see to be more concentrated in the second half of our year, and that's baked into our expectations. So as you think about the first half and margin—the margin impact will be minimal.
Christopher Horvers, Analyst
Just to clarify that, meaning like really no FIFO impact early but some headwinds later? Or is it the tailwinds later than the headwinds as you get into '26?
Brandon Sink, Executive Vice President and Chief Financial Officer
Yes. The actual costs will be flowing through in the second half, but all of our mitigation actions and everything Marvin and Bill have outlined, we expect to manage and offset the majority of that.
Operator, Operator
Thanks very much. Have a great spring. This concludes the Lowe's first quarter 2025 earnings call. You may now disconnect.