Dive Brief:

• Lowe's gross margins took a stronger-than-expected hit from Black Friday inventory shortfalls and major e-commerce execution problems, but CEO Marvin Ellison insisted on a recent earnings call that the improvements he was brought in to execute are underway. In addition to the Black Friday shortages, executives blamed declining margins on tariffs and increased markdowns to make way for spring merchandise.
• Improving in-stock status is the number one priority for Ellison, who took over in June 2018 and immediately directed the company's focus toward a more effective and streamlined supply chain. Inventory was up 10% in Q4 2018 year-over-year. 
• A replenishment "crack-down" in stores along with piloting Merchandising Service Teams (MST) — a team of roughly eight full-time employees tasked with restocks, which he said are funded by the chain's vendors — are both contributing to much-improved in-stock status, according to executives. 

Dive Insight:

"We still have a lot of work to do," Ellison repeated roughly five times on the call. He emphasized that, retail timelines being what they are, he and the team of supply chain and e-commerce specialists he hired since June continue to serve a meal of someone else's making. 

The MST program is perhaps the most concrete in-store initiative Ellison had to report and the results are encouraging, he said.   

"Early results of our MST pilot show reduction in out of stocks, improved sales productivity and an increase in base service per hour," Ellison said. The program is going nationwide within the first quarter. Lowe's is further empowering store-level roles to reorder high-volume SKUs to improve in-stocks.

Lowe's and it's competitors have the unique challenge of serving two very different customer segments: the DIY hobbyist and the professional. Being in stock for both is a challenge that Ellison has taken on full tilt. 

"We want to have a more intentional focus on the pro because we know that a more intentional focus on pro will improve transactions, it will improve ticket and it will improve overall productivity from a sales and square foot perspective and so it's a balance approach serving both of those very important customer segments," Ellison said on the call. He described as essential the simple act of having larger quantities of the most basic materials in stock so that pros don't always have to order ahead. 

Beyond always being in stock, building a more solid foundation for e-commerce and omnichannel operations is a top priority, especially as the Lowe's site was down for part of the biggest shopping day of the year. 

"The classic example of our shortcomings was evident on Black Friday weekend where we had our failures from a system and service perspective," said Ellison.  In response he hired Mike Amend — who worked with Ellison at J.C. Penney as EVP of omnichannel — as president of online. 

"He's going to work [with Seemantini Godbole], our new chief information officer who actually ran the e-commerce business for Target and they're putting together an aggressive plan, that's going to allow us to get very focused on creating a true omnichannel experience for Lowe's," Ellison said. 

One of the first efforts in terms of omnichannel coming this year is a migration of slower moving SKUs to online-only status.

Lowe's opened a "direct performance center" in the Nashville area in the fourth quarter and Ellison said another is one the way on the West Coast. These centers will relieve the stores of delivery of large items like appliances in "a bulk distribution cross dock strategy," Ellison said.