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Lowe's Companies CEO Discusses Q2 2010 Results - Call Transcript

Loweâ¿¿s Companies CEO Discusses Q2 2010 Results - Call Transcript

Lowe’s Companies (LOW)

Q2 2010 Results Call

August 16, 2010 9:00 a.m. ET


Robert Niblock – Chairman and CEO

Mike Brown – Executive VP, Store Operations

Robert Hull – CFO

Larry Stone - President and Chief Operating Officer


Christopher Horvers - JP Morgan Chase & Co

Deborah Weinswig – Citigroup

Michael Lasser - Barclays Capital

Scott Ciccarelli – RBC Capital

Dennis McGill - Zelman & Associates

Colin McGranahan - Sanford C. Bernstein & Co.

Eric Bosshard - Cleveland Research

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Mike Baker – Deutsche Bank

David Strasser - Janney Montgomery Scott

Matthew Fassler - Goldman Sachs Group Inc.

Bud Bugatch – Raymond James

Peter Benedict - Robert W. Baird



Good morning everyone, and welcome to Lowe’s Companies second quarter 2010 earnings conference call. [Operator instructions.]

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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. Michael Brown, executive vice president of store operations; and Mr. Bob Hull, 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, Mike Brown will review our operational performance and Bob Hull will review our financial results. While the economic climate has improved compared to a year ago, ongoing uncertainty in employment and housing continues to weigh on consumers, resulting in a fragile consumer mindset and a sluggish economic recovery.

Over the first half of the year we saw consumers slowly return to more discretionary projects as encouraging economic data reduced their cautious stance. But when data was negative, we saw moderation in customer shopping patterns. As a result, we see the economy bouncing along the bottom in 2010, resulting in a transition year for our industry.

In our second quarter consumer survey, more homeowners indicated that they are spending money on essential, versus non-essential, items. But, more than half of the home improvement projects consumers have planned in the next six months are considered discretionary. This inconsistency further indicates that consumers are uncertain about the macro-environment as well as their personal financial situation. Over the near term, it’s unclear where the next data point will land. As a result, we don’t expect strong industry growth until we experience consistent improvements in the labor and housing markets, which likely will not occur until 2011.

Although sales for the quarter trended below our expectations, with our flexibility and focus on execution we were able to deliver solid results for the quarter, including earnings per share within our guidance. Sales for the quarter increased 3.7% and comparable store sales increased 1.6%. Although gross margin was negatively impacted by product mix due to strong appliance sales, the promotional environment remained rational and we had a slight increase in our gross margin rate for the quarter.

We leveraged expenses in the quarter and delivered earnings per share of $0.58. I would like to thank our more than 238,000 employees for their hard work and dedication, which allowed us to deliver solid earnings for the quarter.

During the second quarter, we continued to benefit from the cash for appliances rebate program, which aided overall comp sales by approximately 25 basis points and helped drive double-digit comps in our appliance category.

Home environment, seasonal living, and rough plumbing categories benefitted from the extreme heat across much of the U.S., as we experienced strong air conditioning, seasonal cooling, and dehumidifier sales. However, extreme heat did negatively impact sales in our nursery category. Seasonal living also benefitted from robust sales in grills and grill accessories associated with the Memorial Day, Father’s Day, and July 4 holidays. Likewise, our Father’s Day tool event was a success, driving above-planned sales and demonstrating that we had the right inventory to meet customer demand.

We were also pleased with our sell-through of seasonal inventory, which has us well-positioned to minimize indices and markdowns. While overall inventory levels were up 5.7% in the quarter, we significantly improved our de-leveraged versus Q1 and expect inventory to only be up slightly at year end.

Comp traffic was down slightly for the quarter, but comp average ticket was up 2.1%. Ticket benefitted from strong sales of appliances, air conditioners, and grills. Certain product categories such as nursery and lawn and landscape, which traditionally drive traffic in the second quarter, were negatively impacted by the extreme heat. Comps for tickets greater than $500 were nearly 2%, while comps for tickets less than $50 were essentially flat.

We continue to be pleased with our performance in Canada. For the quarter we had 2.4% comps in Canadian dollars and over 11% comps in U.S. dollars, contributing 10 basis points to our consolidated performance. Our expansion in this market continues, with our first stores outside Ontario opening in the second half of 2010, and we expect to end the year with 25 stores in Canada.

We remain committed to driving profitable market share gains and we use third-party data to gauge our retail market penetration. On a rolling four-quarters basis, we gained 50 basis points in total store unit market share with gains in 12 of our 20 product categories. Differentiation is an important part of our merchandising strategy, and we’re committed to offering a wide selection of national brand name merchandise.

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