David M. Denton
Executive Vice President, Chief Financial Officer at Lowe's Companies
Thank you, Joe. I'll begin this morning with a few comments on the Company's disciplined capital allocation program. In Q3, we generated $1.9 billion in free cash flow, driven by better-than-expected operating results. Capital expenditures totaled $410 million in the quarter, as we invest in our strategic initiatives to drive the business and support long-term growth. We returned $3.4 billion to our shareholders through a combination of both dividends, as well as share repurchases. During the quarter, we paid $563 million in dividends at $0.80 per share. Additionally, we repurchased 13.7 million shares for $2.9 billion and have over $10.7 billion remaining on our share repurchases authorization.
And today, I'm excited to announce that we are now planning to repurchase an incremental $3 billion of shares in Q4. This will bring our total share repurchases to approximately $12 billion for the full year, a clear reflection of our commitment to driving long-term value for our shareholders. Our balance sheet remains very healthy with $6.1 billion in cash and cash equivalents at quarter-end. Adjusted debt to EBITDA stands at 2.14 times, well below our long-term stated target at 2.75 times.
Now I would like to turn to the income statement. In the quarter, we reported diluted earnings per share of $2.73, an increase of 38% compared to adjusted diluted earnings per share last year. This increase was driven by better-than-expected sales growth, improved gross margin rate, and SG&A leverage as a result of strong execution across our business. My comments from this point forward will include approximations where applicable.
In the quarter, sales were $22.9 billion with a comparable sales increase of 2.2%. Comparable average ticket increased 9.7% driven primarily by higher ticket sales of appliances and flooring, as well as product inflation. Keep in mind that commodity inflation did not have a material impact on comparable sales in Q3 as deflation in lumber was largely offset by inflation in other categories, including copper. Year-to-date, commodity inflation has lifted total sales by approximately $2.1 billion and improved comp growth by 300 basis points. In the quarter, comp transaction count declined 7.5% due to lower sales to DIY customers of smaller ticket items, as well as lower DIY lumber unit sales. In the quarter, we once again cycled over a period where consumer mobility was limited. So many of our DIY customers were working on smaller home improvement projects.
Comp transactions increased 16.4% last year, which resulted in a two-year comp transaction increase of 7.7%. We continue to gain momentum in our Total Home Strategy, as both Pro and DIY customers alike increasingly look to Lowe's for a one-stop solution to their project needs. We delivered growth of over 16% in Pro, 25% on Lowes.com, and positive comps across all home decor categories. U.S. comp sales increased 2.6% in the quarter and was up 33.7% on a two-year basis. Our U.S. monthly comp sales were down 0.4% in August, up 1.1% in September and up 7.7% in October. Trends improved as we moved through the quarter with stronger weekend traffic post-Labor Day. As Bill mentioned, we are seeing some indications of early seasonal buying consistent with broader retail trends.
Looking at U.S. comp growth on a two-year basis from 2019 to '21, August sales increased 28.4%, September increased 33.3% and October increased 40%. U.S. comp transaction count improved each month of the quarter, ending October up double-digits on a two-year basis.
Gross margin was 33.1% of sales in the third quarter, up 38 basis points from last year. Product margin rate declined 25 basis points. Lumber margins were pressured, particularly towards the beginning of the quarter as we sold through the higher-cost inventory layers after the steep drop in lumber prices in early July. As our Canadian business is more heavily concentrated in lumber, the margin pressure was more acute there than in the U.S. These pressures were largely mitigated by data-driven pricing and product cost management strategies across many other product categories. Gross margins also benefited from 5 basis points of favorable product mix due to a lower percentage of lumber sales versus the third quarter of last year.
In addition, higher credit revenue benefited margins by 60 basis points, while improved shrink contributed 20 basis points of benefits this quarter. These benefits were partially offset by 30 basis points of increased supply chain costs due to higher importation and transportation costs, as well as the expansion of our omni-channel capabilities. We're leveraging our scale in our carrier relationships to minimize the impacts of these higher distribution costs. However, we are not immune to these rising costs and we expect that we will continue to absorb higher cost in our distribution network going forward.
SG&A at 19.1% of sales, levered 230 basis points versus LY due to better-than-expected sales and disciplined expense management. We incurred $45 million of COVID-related expenses in the quarter as compared to $290 million of COVID-related expenses last year. The $245 million reduction in these expenses generated 110 basis points of SG&A leverage. Additionally, we incurred $100 million of expenses related to the U.S. stores reset in the third quarter of last year. As we did not incur any material expense related to this project this year, this generated 50 basis points of SG&A leverage compared to LY. And finally, we generated approximately 50 basis points of favorable SG&A leverage from our PPI initiatives.
We're very pleased with our operating income performance as we are driving solid growth and operating profits, while significantly expanding operating margin rate. For the quarter, operating profit was $2.8 billion, adding $600 million or a 28% increase over last year. Operating margin of 12.2% of sales for the quarter increased approximately 240 basis points over LY, driven by improved SG&A leverage and higher gross margin rate. The effective tax rate was 26.1%. This is above the prior-year rate where there was a timing shift that benefited Q3 at the expense of Q4.
At the end of the quarter, inventory was $16.7 billion, which is $1 billion higher than the third quarter of 2020 when our in-stock positions were pressured due to strong consumer demand and COVID-related supply constraints. Inflation did not have a material impact on inventory levels, as deflation in lumber was largely offset by inflation in other categories, including copper. Our push to land spring product earlier than normal has increased our inventory position modestly. And this approach also limits our ability to significantly improve inventory turns in the near term. However, as both Marvin and Bill have indicated, our relatively strong in-stock positions create a competitive advantage in the current environment given the ongoing global supply chain constraints.
Now before I close, I'd like to comment on our current trends and our improved 2021 financial outlook. We're seeing continued momentum in our business as reflected in better-than-expected results. Month to-date, November, U.S. comparable sales trends are materially consistent with October performance level on a two-year basis as we continue to see early holiday spending trends. Our improved expectations for 2021 include sales of approximately $95 billion for the year, representing two-year comparable sales growth of approximately 33%. This compares to our prior expectations of approximately $92 billion of sales, which represents approximately 30% comparable sales growth on a two-year basis.
We continue to expect gross margin rate to be up slightly versus 2020 levels. With higher projected sales levels and our productivity efforts taking hold, we are raising our outlook for operating income margin to 12.4% from 12.2% for the full year. We expect capital expenditures of up to $2 billion for the year. And as I mentioned earlier, we're now planning to return excess capital to shareholders via an additional $3 billion in share repurchases in Q4. This will bring our total share repurchases to approximately $12 billion for the full year, which is higher than our original expectations of $9 billion due to better-than-anticipated performance.
In closing, we are operating ahead of expectations, expect to benefit from the secular tailwinds over the next several years. I am confident that the combination of our strong operating results and our shareholder-focused capital allocation strategies will continue to drive meaningful, long-term shareholder value. And as Kate announced earlier, we look forward to providing you with our 2022 financial outlook on December 15th.
With that, we are now ready for questions.
