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Lowe's Companies (LOW)

Q4 2010 Earnings Call

February 23, 2011 9:00 am ET

Executives

Robert Niblock - Chairman, Chief Executive Officer and Chairman of Executive Committee

Robert Hull - Chief Financial Officer and Executive Vice President

Gregory Bridgeford - Executive Vice President of Business Development

Larry Stone - President and Chief Operating Officer

Analysts

Gregory Melich - ISI Group Inc.

Eric Bosshard - Cleveland Research Company

Matthew Fassler - Goldman Sachs Group Inc.

Deborah Weinswig - Citigroup Inc

Dennis McGill - Zelman & Associates

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Presentation

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Operator

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Good morning, everyone, and welcome to Lowe's Companies Fourth Quarter 2010 Earnings Fiscal Year Earnings Conference Call. [Operator Instructions] 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. Larry Stone, President and COO; 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, Larry Stone will review our operational performance, and Bob Hull will review our financial results. We delivered solid results for the quarter, including earnings that exceeded our guidance, and I would like to thank our more than 234,000 employees for their hard work and dedication.

Sales for the quarter increased 3.1%, and comparable store sales increased 1.1%. Our domestic comparable store sales increase was 1.3%. Our fourth quarter sales benefited from a strong start to the holiday season resulting in great sell-through of seasonal products. However, difficult winter weather negatively impacted performance in the month of January. Comp average ticket was up 1.9% in the fourth quarter, but comp traffic was down slightly. New store cannibalization reduced comps by approximately 35 basis points in the quarter.

We continue to be pleased with our merchandising strategies and seasonal sell-through, which helped us deliver 60 basis points of gross margin expansion in the quarter. We also leveraged expenses and delivered earnings per share of $0.21, an increase of 50%, which exceeded our guidance for the quarter. We used third-party data to gauge our retail market penetration. From a rolling four-quarter basis, we maintained our total unit market share with gains in 10 of our 19 product categories, including strong gains in hardware and tools.

I'm pleased with our inventory position at the end of the fourth quarter, which was up less than 1% year-over-year. Since the end of the first quarter, we have carefully managed our purchases, driven exceptional seasonal sell-through and rationalized our assortments. Most importantly, we were able to accomplish this without sacrificing in-stock levels.

Overall, while growth in household spending picked up late in the year, it remained constrained by higher employment, modest income growth, lower housing wealth and tight credit. And, while consumer confidence rose in February to its highest level since February 2008, it remained close to the lows of the prior recession and near historical lows.

According to our fourth quarter consumer survey, fewer homeowners feel the economy will get worse before it gets better. But the number of homeowners who feel the recession is not over remains high, and approximately 45% of those homeowners tell us that they do not anticipate changing their spending plans as they move into 2011, evidence that consumers at large remain cautious.

Now let me address some of the management changes from the past few months. We were proud to have one of the deepest and most experienced leadership teams in retail. But with the long-tenured team, there will be retirements and rotations from time to time. In mid-November, Nick Canter, Executive Vice President of Merchandising announced his retirement after 37 years with the company.

At the end of January, Larry Stone, President and Chief Operating Officer, announced his retirement after 42 years of service. Both have enjoyed long and successful careers at Lowe's making many important and lasting contributions. Though we knew this day would come and our thorough succession planning process had us prepared for the changes, we do not plan to fill the President and Chief Operating Officer position after Larry's retirement. So Larry and I will work together over the coming months to ensure a smooth transition and reporting structure for his direct reports. Bob Gfeller, an 11-year veteran of Lowe's, has assumed the role of Executive Vice President of Merchandising. Mike Brown, a 26-year veteran of Lowe's, has been appointed Executive Vice President and Chief Information Officer. And Rick Damron, a 30-year veteran of Lowe's has assumed the role of the Executive Vice President, Store Operations. We're fortunate to have a skilled and talented leadership team to make these rotations effective and seamless.

At our analyst conference in November, we shared our belief that we can grow by focusing on the opportunity we have with existing customers by growing a greater share of wallet. We also reviewed the steps we've taken to begin the transformation from a home improvement retailer to a home improvement company. Our commitment is to deliver better customer experiences by pulling together the best combination of possibilities, support and value for customers. But to deliver on this commitment, we must remain focused on cost effective and efficient operations. At the end of January, to further align parallel hours with customer demand, we restructured our store management roles and implemented weekend teams. Larry will provide more details about these changes in a few minutes.

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