Lowe's CEO Discusses Q3 2010 - Earnings Call Transcript

Lowe’s Companies, Inc. (LOW)

Q3 2010 Earnings Call

November 15, 2010 9:00 am ET

Executives

Robert Niblock – Chairman, Chief Executive Officer

Robert Hull – Executive Vice President, Chief Financial Officer

Nicholas Canter – Executive Vice President, Merchandising

Larry Stone – President, Chief Operating Officer

Gregory Bridgeford – Executive Vice President, Business Development

Analysts

Stephen Chick – FBR

Michael Baker – Deutsche Bank

Scot Ciccarelli – RBC Capital Markets

Budd Bugatch – Raymond James

Michael Lasser – Barclays Capital

Brian Nagel – Oppenheimer

Peter Benedict – Robert W. Baird

David Strasser – Janney Montgomery Scott

Presentation

Operator

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Good morning everyone and welcome to Lowe’s Companies Third Quarter 2010 Earnings conference call. This call is being recorded. Please note if you pressed star, one to enter the question queue prior to the start of today’s call, your signal did not register. You will need to press star, one again to enter the queue.

Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management’s expectations and opinions reflected in those statements are subject to risks and the Company can give no assurance that they will prove to be correct. Those risks are described in the Company’s earnings release and in its filings with the Securities and Exchange Commission.

Also during this call, management will be using certain non-GAAP financial measures. You can find a reconciliation to the most directly comparable GAAP financial measures and other information about them posted on Lowe’s investor relations website under Corporate Information and Investor Documents.

Hosting today’s conference will be Mr. Robert Niblock, Chairman and CEO; Mr. Nick Canter, Executive Vice President of Merchandising; and Mr. Bob Hall, Executive Vice President and CFO.

I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

Robert Niblock

Good morning and thanks for your interest in Lowe’s. Following my remarks, Nick Canter will review our operational performance and Bob Hall will review our financial results.

Sales for the quarter increased 1.9% and comparable store sales were slightly positive. Comp traffic and comp average ticket were also positive for the quarter. New store cannibalization reduced comps by approximately 30 basis points in the quarter.

Although the sales for the quarter trended below our guidance, our merchandising strategies helped us deliver 85 basis points of gross margin expansion in the quarter. Nick will provide more details on those efforts in a few minutes.

As detailed in today’s release, we recognized a charge which reduced pretax earnings for the quarter by $50 million and diluted earnings per share by $0.02. The charge was associated with the impairment of long-lived assets and write-offs related to store sites we no longer intend to pursue. Even with these charges, we leveraged expenses for the quarter and delivered earnings per share of $0.29 which was within our guidance for the quarter.

Our third quarter sales were impacted by the continued sluggishness of the economic recovery driven by ongoing uncertainty in employment and housing. As we’ve seen over the past several quarters, consumers are not yet willing to consistently take on larger discretionary home improvement projects. They remain cautious and continue to rationalize the scope of their projects or in many cases delay projects until they have better clarity about their personal financial situations, the value of their homes, and the overall macroeconomic outlook.

In our third quarter consumer survey, homeowners indicated that half of the home improvement projects they have planned in the next six months are discretionary in nature. However, the majority of that discretionary spend is expected to be on projects under $500.

We continue to evaluate our operating model and look for opportunities to work more efficiently and better position Lowe’s for the future. As a result, we closed two regional offices during the quarter. Our districts have been realigned such that we now operate 21 regions in the U.S. versus the previous 23. Although 11 of our 21 U.S. regions generated positive comps in the quarter, the economic recovery continues to bounce along the bottom; however, even in a difficult environment, we are seeing gradual improvement in the fundamentals of the housing market.

Sales were also affected by the prolonged extreme heat across much of the U.S. in August and September, which delayed consumers fall law and garden plans, causing sales of live goods to suffer. However when temperatures began to cool in October, we experienced better performance in our lawn and landscape and nursery categories as consumers restored their lawns.

Throughout the quarter, we saw strength in categories supporting smaller projects such as tools and paint, and we were also pleased with our performance in seasonal living and appliances.

During the quarter, commercial and installed sales exceeded our overall sales trends, continuing to reflect the investment we made in our district commercial account specialist and project specialist exteriors positions. In fact, installed sales produced double-digit comps for the quarter driven in part by categories such as windows, doors and fencing, which are a focus of our project specialist exteriors position.

I’m pleased with our inventory position at the end of the third quarter, which was up only 1.4% year-over-year. You will recall that our inventory position grew earlier in the year due to opportunistic purchases in categories such as appliances and paint. We made those purchases to pursue opportunities to drive sales and capture profitable market share.

We used third party data to gauge our retail market penetration, and on a rolling four quarters basis we gained 20 basis points in total store unit market share with gains in 10 of our 20 product categories, including appliances and paint. We also maintained our unit market share in an additional four product categories.

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