管理層發言
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. 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 initiatives. Although 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. We're seeing strength across all five 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 to fulfill their orders directly to the job site. This expands our product assortment, inventory quantities, and delivery capabilities for larger orders. Secondly, 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 non-members. 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. Lastly, in our Total Home Strategy, we’re 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. As we continue to make strategic investments in our AI capabilities, we're already seeing tangible results. Our virtual assistants, Mylow and Mylow Companion, which are built on the OpenAI platform, are answering nearly one 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 Mylow online, the conversion rate more than doubles, which is clear evidence that AI is simplifying decision-making and driving sales. Additionally, when our associates use Mylow Companion to help customers shopping in our stores, we're seeing customer satisfaction scores increase by 200 basis points. Each 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. 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 roadmap 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. 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. FBM is a leading distributor of interior building products, including drywall, metal framing, insulation, and ceiling systems. FBM's business mix is balanced evenly between commercial and residential. 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. When we consider the impact on Lowe's, this acquisition gives us a more comprehensive product portfolio, expands our revenue streams, and enhances our offering to our Pro customers. Efforts are underway to quickly connect FBM's product catalog to our Pro extended aisle. FBM customers will gain access to Lowe's complementary products like tools, safety gear, and fasteners, allowing them to more quickly and conveniently source everything they need for their jobs. FBM's 370 locations nationwide also strengthen 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 Group creates a comprehensive interior solutions package for our homebuilders, including everything from drywall and insulation to doors, flooring, cabinets, and appliances. 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. homeowner 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 regarding 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. Homeowners today have record levels of equity, roughly $400,000 on average. 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. While the near-term macro backdrop reflects an anxious consumer, the combination of strong fundamentals, substantial home equity, and the potential for lower rates ahead gives us confidence in the long-term health of the home improvement sector. We remain confident that the continued execution of our Total Home Strategy will position Lowe's to win in the short and 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 strong performance across both DIY and Pro, despite lapping hurricane activity last year. Starting with home décor, we delivered positive comps in appliances, flooring, paint, and kitchens and bathrooms. 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. 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 with the durability of stainless steel at 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 broad-based strength across soft surfaces, vinyl, and tile flooring. In carpet, customers are enthusiastic about the benefits of STAINMASTER PetProtect. Its LeakDefense backing helps prevent spills and pet accidents from seeping into the carpet pad or subfloor. STAINMASTER is the most trusted brand in carpet and is exclusive to Lowe's. Touching on paint, we drove broad-based growth across stains, primers, and paint, along with accessories and applicators. We're excited to announce the launch of Sherwin-Williams ProBlock Quick Dry primers, an innovative product that blocks stains and provides outstanding coverage, driving in less than an hour. This new primer is available only at Lowe's and Sherwin-Williams locations, marking the first time 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 baths, 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. 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 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 showcasing everything they needed to build their vertical gardens, along with upgrading a mailbox display and more. The mild weather gave customers more opportunities to tackle outdoor projects, which helped drive extended demand. We're also pleased with a strong start to the holiday season in our tools, Trim A Tree, and décor categories. Shifting gears to tools, where we also delivered positive comps, we saw strong performance in hand tools and tool storage. Customers responded to our value offerings and improved assortments like the Kobalt 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 rollouts 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 focuses 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. 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 multi-year 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, many of which 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. As Marvin mentioned, they can also rely on our AI-powered Mylow 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 annual associate engagement survey, a critical component of our proactive listening 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-trained 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 Pro customers taking advantage of our enhanced digital capabilities as they shift to more shopping online. Looking ahead, we're encouraged that our recent Pro survey shows overall sentiment improvement for small to medium Pro's 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 several product categories, including windows and doors, HVAC, water heaters, kitchens and baths, 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 completed 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 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 outstanding leadership and industry-leading technology. We also focused this year on several perpetual productivity improvements or PPI initiatives in our stores, including our front-end transformation, streamlining our buy online, pick up in-store fulfillment, and the freight flow optimization. We're already working on our PPI roadmap 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 to deliver on our objective of creating 10 million square feet of impact in 2025, I am particularly proud to share that in partnership with Building Homes for Heroes, we have just broken ground on Freedom Hill, a first-of-its-kind community to 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. Additionally, we recognized $24 million in non-GAAP adjustments associated with Artisan Design Group or ADG. 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 0.4%, 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, a mix shift to 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 through 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 invested in sales-driving actions. Adjusted operating margin rate of 12.4% was up 10 basis points versus the 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 the prior year. This 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, combined 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, we are updating our guidance 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 and 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 total sales of approximately $86 billion for the year. We also expect a 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, representing 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're 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 efforts to extract cost synergies 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 expenses. 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.
分析師問答
Our first question comes from Chris Horvers with JPMorgan.
So my first question is about how you're thinking about the trend in the business in light of the performance that you've seen over the past six months and a harder compare, and then into '26. 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 as you think of '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, and then we'll let Brandon share a tiny bit about how we think about '26 because, as you can expect, we're not going to get into a ton of detail about that until our February call, where we'll provide guidance for the year. Relative to November, we're very pleased with the positive comp performance to start the quarter despite storm overlaps from last year. We've seen improvements in the top line since exiting October, and we believe some of the key elements of our Total Home strategy are working. 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 discuss appliances, which we think are key to our performance, not only for the quarter, but for what we're seeing in November.
Yes. Thanks, Marvin. Chris, we're excited about the early start to the quarter, obviously, coming off of October. Strength for us is really broad-based across the store, but particularly strong within our seasonal categories—holiday, Trim A Tree, 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 and poinsettias showing up now as we get ready for next week. We're seeing some early excitement around some key areas of the store. So whether it's 'buy now and install by the holidays' within our flooring and cooking areas, or if you look at Kobalt 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, and Kobalt, 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. In our appliance business, we've had, really since last year, four straight quarters of comp growth and unit growth, which indicates health in that business and that consumers are responding well to the offers and the innovation of the new products that the team has put forth.
And Chris, this is Brandon. I think when I step back and look at the totality of the year, we're now three quarters of the way through, obviously navigating a lot of factors in a very choppy macro environment. When I look at just the trends of the business, I think there's a lot for us to be cautiously optimistic about as we look ahead to '26. We're seeing acceleration on one-year comps when you exclude storm-related activity for Q3, and what's implied in our Q4. We also see two-year comps accelerating nicely as we've moved through the year. There's ongoing strength in Pro online, and Bill just spoke to appliances. We're seeing some early signs of life in our home services business, which is a positive trend. We cited broad-based performance across categories with 10 of 14 categories showing growth, and geographies are broad-based. We're really excited about FBM and ADG as we begin the integration efforts. We're pleased with the bottom-line performance and the ongoing operational discipline that the company has demonstrated. So following three quarters, as we look ahead to 2026, as Marvin mentioned, we'll have more to communicate in February, but those are our 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 Q1 '23. What's changed there? And as you think about it, Marvin, you've talked about how we have a lot of big-ticket items, like kitchen and bath appliances. When we sort of need lower rates to improve that type of big-ticket remodel category, but you are seeing signs of life. Is there a misperception around how remodel-oriented you are amongst investors, or how do you think about that category showing signs that it will inflect positively?
So Chris, I think it's two factors. I'll take the first part, and then I'll let Bill speak about some of the work in resets and new products. I believe this is more about Lowe's taking share in this space. If you can go back to 2018 at our first Analyst and Investor Conference, I presented how we were managing this installed business with binders and whiteboards. It's taken us a while, candidly, to digitize this business with a technology platform that makes the entire process easy for the associate, the installer, and most importantly, the customer. We believe we now have a best-in-class tech stack for this space. We have central selling in place, and what you're observing outside of kitchen and bath—which Bill will address—is reflective of categories like windows and doors, HVAC, and water heaters. These are more replacement categories for customers living in the oldest housing stock in the history of the U.S. Because we now have a better go-to-market strategy, we are capturing market share. Bill, can you discuss the specific categories?
Yes. Chris, I mentioned in my prepared remarks that during the quarter, we had completed our vanity reset across the stores, which has been a bright spot driving our kitchen and bath business. We're also seeing broad-based strength in toilets, bathing, faucets, and disposable kitchen sinks. So it's really broad-based across the categories. We're excited about that. It boils down to the strong performance as well within our central selling organization where the store associates take the lead. We turn it over to our central selling team, and they help close the deal on kitchen cabinets. The strength of Joe's team in the store taking great care of the customer contributes positively. Lots of factors are adding up to the strength of the kitchen and bath business.
Our next question is from the line of Zack Fadem with Wells Fargo.
I wanted to follow up on your comments about improving Pro survey sentiment. Could you provide any additional color on how that's trended through the year? To what extent do you think this is a good leading indicator for your business? And what do you think is driving the recent improvement?
Zack, thanks for the question. At a high level, our small to medium Pro business remains stable. Roughly 75% of our Pro's are very confident in their job prospects. This segment of the Pro consumer continues to work on smaller ticket repair and maintenance projects, which has been consistent with what we've been saying all year. When we talk to our Pros, they feel confident in their business and access to credit, and they feel increasingly confident about their ability to hire and attract labor. We feel great about what our Pros are telling us. I'll hand it over to Joe to discuss the things we are doing in-store to drive this continued growth and market share gain within this specific customer segment.
Thanks for the question. We're pleased with the flywheel effect resulting from the transformation of the Pro offering. Think about where we have been headed with MyLowe's Pro Rewards. The relaunch there has given us an enhanced digital experience that the Pro extended aisle supports. We've made investments in fulfillment. Over the past three years, our Pro inventory investments are starting to pay off. The order modifications, fulfillment flexibility, and the in-store experience are seeing improvements. We're confident that when this market rebounds, we are well positioned to capture share.
Zack, I'll just add that we are in the process of adding FBM to our Pro extended aisle platform. This will be a significant development for us, as it has been challenging to fulfill a large order of something like drywall to a customer job site efficiently. We're working on transitioning that fulfillment process to a company that's best-in-class in it, and we believe this will benefit FBM, Lowe's, and more importantly, our customers. We see this as a sustainable growth strategy and feel great about our work thus far.
I appreciate that. 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 a scenario where perhaps we see some benefits from tax stimulus and low rates?
Yes, Zack, I'll just briefly touch on margins for the FBM and ADG transactions. For 2025, we're projecting roughly 20 basis points of dilution, approximately split even between the two transactions, 10 from FBM and 10 from ADG. As we approach 2026, that will rise to a total of 50 basis points of dilution on an annualized basis. I won't provide further details regarding the base business or run rate, but that gives you an idea of the initial expectations stemming from these transactions as we move forward.
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 where it just stays at this treading water position for 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 share my thoughts, and then I'll let Brandon provide any additional insights. The way we see it is this: mortgage rates are obviously elevated longer than any of us anticipated. But the one key difference is that homeowners are healthy financially, with $33 trillion in equity within the system. We estimate that between $11 trillion to $13 trillion of that is accessible. This 'lock-in effect' is significant because customers like their sub-3% 30-year fixed mortgage rates, they enjoy their neighborhoods, and they have excess equity in their homes. We believe that HELOCs could drive discretionary remodel big-ticket projects, which is a plausible scenario for the future. However, we're not going to try to time this or build it into our forecasts. That would be reckless. We believe that this could counter the bear case. Brandon, do you have anything to add?
Simeon, I'll add that, as Marvin mentioned, the mortgage rates are expected to remain elevated at least for the near-term, around 6% to 6.5%, which continues to pressure both existing home sales and new home starts. As we look ahead into 2026, we're not anticipating meaningful near-term improvements. But we are optimistic about what could happen with the funding coming from home equity. We've seen a 150 basis points cut from the Fed over the past 18 months; the consensus suggests further rate cuts might come. We've seen HELOC rates drop from about 10% to 12% down to 8% to 10%. That's presenting opportunities regarding project backlogs, particularly when you consider $50 billion of projects that have been delayed or deferred. This equity situation could become a significant funding mechanism, and if we do see further near-term rate reductions, it could serve as additional stimulus. We're investing in our Total Home strategy to be prepared for such an environment and are excited about the potential upside as we transition into 2026.
My follow-up pertains to the medium-to-large Pro market. Marvin, can you delineate Lowe's strategy in that regard? We've discussed various pieces of it. Will you maintain supply chain separation? Are there specific categories that you deem essential for addressing that customer base, whether it be in existing home remodel or new home builders? And will you cross-sell that customer using the rest of the Lowe's asset base?
Yes. Simeon, we feel very confident about our current strategy focused on small to medium Pros. We have seen quarter-over-quarter growth. I believe the success hinges on our MyLowe's Pro Rewards loyalty platform, which is resonating well with our customers. It is enhanced by the products that Bill's team brings to market every day, a huge gap that existed for us seven years ago but no longer. We also believe it's crucial to maintain a competitive credit portfolio. Our best-in-class 5% off every day for Lowe's credit cardholders also extends to Pro customers, and that strategy resonates well. We intend to leverage FBM for fulfillment, connecting the roughly 40 million FBM Pro customers to complementary products and projects at Lowe's. We see a specific void in the marketplace that we can address for small to medium Pros. Our approach allows us to focus on that customer segment effectively in both brick-and-mortar stores and online through Lowes.com. We have a robust strategy and platforms with FBM and ADG that we can utilize concurrently. A key reason we emphasize FBM's commercial business is its countercyclical nature; when housing is down, that commercial business tends to outperform, and that's what we're observing currently. Overall, we believe we can cater to both sectors, and our data indicates that our strategy targeting small to medium Pro is effective.
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.