家得寶 (HD) 2002 Q1 法說會逐字稿

Please stand by. Welcome to today's Home Depot first quarter earnings conference call. This call is being recorded. Beginning today's discussion is Bob Burton, vice president of investor relations

Good morning. Welcome to the Home Depot first quarter conference call. The earnings per share were 36 cents ahead of guidance. With us, Bob Nardell, chief executive officer, and Carol (unintelligible), vice president and chief financial officer, together with other Home Depot executives. Carol will go over the results, and Bob will make comments, and then we will have questions. The question and answer session will be available. Questions will be limited to analysts and investors. This conference is being broadcast real time at homedepot.com. There will be a two-day telephone replay available at (719) 457-0820. The confirmation number is 777100. Before I turn the call over to Carol, let me remind you, our discussion will contain forward-looking statements relating to our expectations. Additional information could cause our actual results to differ materially from our forward-looking statements. Additional information concerning these risks and uncertainties are contained in the companies fillings with the Securities and Exchange Commission, including the companies annual including the companies annual report on Form 10 k. We caution that these statements are (inaudible) as of the date they are made, and actual results made from the present expectations or projections may vary. Here is Carol.

In this choppy economic environment our associates delivered and drove continued improvements in labor productivity. This morning we are reporting the highest first quarter return on sales in company history and the highest first quarter earnings per share gains. Equally important, Home Depot drove a 50 basis point improvement in our key value metric. Return on investment capital - The financial strength of the Home Depot remains unsurpassed. A record 5.2 billion dollars in cash. On a net basis we generated 2.7 billion dollars in cash during the first quarter, driven by significant improvements in working capital. This is more cash than we generated during all of 2001. Over the next few minutes my comments will review the quarter performance in detail and provide guidance for the second quarter of fiscal year 2002. First quarter 2002 net earnings 856 million dollars, up from 632 million dollars from fiscal 2001 diluted earnings per share were 9 cents better than the prior year. Sales for the quarter totaled 14.3 billion dollars up 17 percent from the prior year driven by new store openings and 5 percent comp sales. Our strong comp sales reflects favorable weather as well as merchandising and paint initiatives. Paint, lumber and, lawn and garden reflect an early spring season. The weather-related categories, customers responded to the tightly focused value driven events that drove sales in flooring and kitchen and bath. We continue to see strong performance and stores that are offering special services to the professional customer, what we call our pro initiative. Through the quarter we added 234 stores to the pro initiative. We now have the pro initiative in 769 or 55 percent of our stores. During the quarter, our pro initiative stores outperformed core stores in productivity, operating margins and inventory turnover. We saw an increase in carpet and kitchen installation. In the first quarter, consistent with accounting principals we record these upon completion of the job which results in a sales deferral. This grew by 200 million dollars. We call this to your attention; as our service business grows, this will grow. This is reflected as a deferred revenue liability and will flow into revenue as the projects are completed. Due to the 14th week of the fourth quarter of 2001, first quarter benefited from a seasonal time shift which added 350 million dollars to sales. Based on current economic indicators, as we told you last year we remain cautious in our expectations for the strengthening recovery. Against a 1 percent comp in the second quarter last year, we expect store sales to be positive from 2 to 4 percent during the second quarter. During the first quarter we added 57 new stores and completed the sales of 4 stores in Argentina. That's 1,386 stores made up of Home Depot stores and Expo Design Center stores. Others opened during the quarter, 23 in February, 11 in March and 23 in April. We plan to open 200 stores in 2002, a 15 percent increase over 1333 stores at the end of fiscal 2001. In the second quarter of 2002, we plan to open an additional 48 new stores. Including two Expo Design Centers. Store productivity metrics - Floor store footage increased 151 million. The average store footage was up from 1600 square feet last year. Customer transactions grew 14 percent to 284 million for the year. Our average customer ticket increased 3.6 percent - This is a company record and reflects gains in large ticket items like flooring, kitchen and appliances, as well as seasonal power equipment. Our weighted average weekly store sales were $808,000, compared to $807,000 last year. We are pleased with the store productivity. We are reflecting improved in-store execution. Additionally, new store productivity continues to improve. Gross margin for the first quarter was 30.53 percent, 57 basis points ahead of the prior year and the highest first quarter gross margin in company history. This margin performance reflects the benefits of central purchasing in several ways. We're lowering the cost with online auctions. We are rationalizing the inventory across the store, optimizing the product mix, like in lighting and ceiling fans. We are building alliances and key supplier partners. Finally, as we said before, the increase in the number of tool rental centers, continues to provide benefits. At the end of the first quarter we were up from the 381 at the end of last year. We currently anticipate that the second quarter gross margin rate will reflect modest expansion against the second quarter of 2001. In the first quarter, we leveraged total expenses for the third consecutive quarter. Selling and operating expenses decreased 40 basis points to 19.2 percent from last year. The first quarter, first we saw continued gains as a result of initiatives like service performance improvements, or Spy. And while we continue to view payroll as investment and we retain the best associates, we are using new tools to manage wage rates. We experienced no wage rate inflation for the quarter. This was offset by workers compensation and general liability costs which increased against last year. Pre-opening expenses were 25 million dollars for the first quarter compared with 27 million, 4 basis points as a percent of sales. Our pre-opening costs on a per store basis are down 25 percent as we have taken two weeks out of the pre-opening period. The year-over-year comparison reflects timing of store opening. General and administrative expenses were 1.6 percent compared to 1.7 percent last year, a decrease of 10 basis points. This decrease was driven by organizational realignments, including the centerization of purchase merchandising. With the sale of South American organizations and the consolidation of southeast operations, we remain focused on expenses. We expect to leverage expenses in the next quarter. Net interest income was 10 million dollars for the first quarter against 3 million dollars in the comparable quarter last year. As a percent of sales, 9.16, up from 8.44 percent last year. This performance is the first operating return on sales in company sales, and marks the third consecutive quarter of expansion. Reflecting our efforts to optimize our tax position through higher tax credits and by lowering our effective state income tax rate. For the remainder of fiscal 2002, we expect the effective tax rate to be 37.6 percent. Net earnings were 5.99 percent versus 5.89 ,18 percent. That's 36 cents against 27 cents in the prior year. Dilution for the quarter were 2.365 billion shares compared to 2.347 billion in the prior year. Our estimates of weighted earnings per share for fiscal year 2002 are as follows - Second quarter, 2.376 shares, third, 2.383, fourth, 2.390 and for the year, 2.376 billion shares. Now moving on to the balance sheet, as I previously mentioned cash and shorts from investments totaled 5.2 billion dollars compared to last year, driven primarily by significant improvements in working capital. Average inventory $5.4 million, down 13 percent. We are pleased with this performance, but we focus on improving velocity. Inventory turnover was 5.6 compared to 5.1 last year. This is the best first quarter performance since 1994 and reflects continuing strong performance in year-over-year turnover improvement. Our days payable outstanding were 51 compared to 39 days in the prior year as we moved our payment terms towards industry standard. Long-term debt at the end of first quarter was 1.285 million dollars. Return on invested capital is the benchmark we use as a company to measure value creation. Computed on beginning debt and equity, our return on invested capital 19.2 percent, versus 18.7 percent last year. The operating performance improvements we are driving will be reflected in this metric as we move through the year. Capital expenditures were $639 million for the quarter. We own 81 percent of our stores. Our statement for fiscal year 2002, 3.6 million dollars. Based on our guidance given for the second quarter we are comfortable with that and we'll be glad to answer your questions on the quarter. But before we do that, I would like to turn the call to Bob Nardelli.

Thanks, very much. It's a strong report and it's a tough act to follow, as well. I would like to add my comments on this record setting quarter, also. First and always, I want to thank you, our loyal, orange-blooded associates who embrace the new initiatives you have talked about, and we've talked to the analysts about for the last year or slightly more. They helped us sell through a conflict-filled economic environment and I want to thank you our loyal long-term customers and the new customers who are joining the Home Depot family. Allow me to highlight some of the record setting accomplishments for the next 5 minutes. I promise all of you we won't look back and we'll leave this call today ready to take on the second quarter with all of the passion and aggressiveness that Carol has highlighted in this report and what we've been sharing with you now for over a year. Let's pause for a moment and think about , we opened 57 stores. That's the highest first quarter store opening in company history and certainly is reflective of the momentum we're trying to gain making sure that our proficiency investments are gaining full-year benefit by opening more in the first quarter, first half. We opened a record 17 stores on a single day on February 7th. We opened our first urban store in Brooklyn and several of you were complimentary in your visits. We are very encouraged with the initial customer traffic. This is proof-positive about our comments about developing a neighborhood family friendly store that represents a market-back approach to our mix and assortment. We're impressed that a significant number of customers early on were in the neighborhood and walked to visit our store. We're encouraged the sales per square foot and the return on capital metrics are strong, strong to the point we continued to look favorably upon two more openings this year - One in Staten Island in the third quarter, and we're excited about entering downtown Chicago, Lincoln Park. I think these new store sets, as we've shared previously, give us many more arrows in our quiver versus a traditional and competitive store strategy we had been on. Think about the first quarter gross margins that reached the highest level in company history and at three percent we delivered the highest first quarter earnings per share gain as Carol highlighted - Six percent. We generated the highest return on sales in company history in spite of an economic environment, um, downward spiraling economy, conflicted economic metrics. Again, I couldn't be prouder of our team as they sold through this environment. Inventory, reached 5.6, the highest first quarter performance since 1994 and the 50 basis points is the best since 1988. At $50.40 our average customer ticket reached record levels. This is attributed to our associates that have embraced, Spy. The comments that Carol made about the pro and cross-merchandising efforts going on in our stores: We are starting to see traction of the initiatives we talked about last year. And let's recognize that the stores have not all comped, if you will, relative to these initiatives. We're seeing the early stages of Spy - Improved shopability, improved customer greets, stores more navigable, easier to access merchandise, favorable feedback from customers and associates. I just completed a 14-day tour visiting every division and holding town-hall meetings with store associates. I talked to over 3500 of our associates in that period of time, and I will tell you, the candor, the entrepreneurial spirit, everything is alive and well as we go through transition between Bernie and I and the transformation in our business plan. Our cash reached a record 5.2 billion, and at times like this, what could be more important than cash and the debt to equity ratio Carol talked about - and an improving return on invested capital. We've talked about this together and separately in our analyst meetings. We continue to be very encouraged that our initiatives are delivering improved performance in shopability, efficiency and productivity. Early spring brought customers in for paint, lumber, lawn and garden products. We're excited relative to some of the new exclusive products unique to our stores further emphasizing the Home Depot as the store of destination in these neighborhoods. We also saw customers respond to great values, unique values in flooring, kitchen, and bath throughout the entire quarter. Carol touched on the centralization of the purchasing. We talk about Spy for merchandising, really bringing the task here to Atlanta and allowing a hybrid organization that allows for focus on sales and service of merchandising in each of our store, districts, regions and divisions. We'll continue to rationalize assortments as well as our Pro and Spy initiatives, making sure we're maximizing sales per square foot to really be able to dial in the appropriate mix for the neighborhood and optimization of our assets deployed. We're reaching out to customers in other ways and we're trying to change the landscape of our business. We're expanding our appliance program by ruling out other areas. JERRY EDWARDSs and Larry Mercer are working to make sure that the 1500 to 2000 square feet in new appliance set with over 150 SKUs really improves the shopability and makes sure we're continuing to drive the female friendly aspect of our store. The new appliance layout will be in all stores and we're - all the new stores we open, plus retrofitted into as many as 200 for a total of 400 by end of this year. And our Design Center Initiative - It's open, quiet, self-contained. It's distinct features will add to the overall atransactiveness emphasizing that we're a destination store for our customers. We are retrofitting 225 stores for the design place initiative this year bringing the total to 510 stores currently. And by year-end we'll expect to reach over 900 stores with this program. You can see many similarities to our pro initiative that we're now applying to our appliance and our design place initiative. Again, we have a champion, we have commonality of roll- out and points of responsibility in each division to embrace this to make sure we're focused on speed and efficiency. We've opened our fourth Home Depot supply store in Mesquite Texas and Milpitas, California. These stores give us an entry to the largest volume purchasers of large contracts being currently supplied by supply houses. Our 5th store is planned for Denver. During the quarter, we enhanced our presence in the 12.5 billion dollar Mexican home improvement market with a tremendous response, and we've announced the plans to acquire Gal Norte (phonetic) which will conclude this quarter. This is bringing the stores to loyal customers that have been shopping us on the border for a number of years. We're adding two additional stores that are under construction. We're focused on organic and inorganic growth in this opportunity. In the area of the logistics and supply chain management. Our suppliers are over 300 in transportation and logistics who joined us in the community for a ka-boom build, and then also sharing with them our vision and the mutual partnering that will be required for us to continue to be preeminent in the area of logistics supply and low-cost operations. We're adding three cross dot transit facilities. Orlando, Atlanta and Baltimore. Total today is six with four more expected by the end of the year. We continue to see efficiency generated in the supply chain as a result of cross dot capacity ramp-up I hope you agree that this continuing performance is a credit to the leadership team, and as Carol mentioned at our seasonal peek, 290,000 associates who took on a downward spiraling economy last year, but embraced a whole host of new initiatives is starting to gain traction in the financial reporting today. It's paying dividend compensation. We're excited for the positioning for the balance of the year. It's my belief that most companies would have buckled just from the economic pressure alone without embracing the significant number of challenges that we thought were critical for repositioning, enhancing our business - Enhance, extend and expand. Making sure that we continue to mirror-image a changing economy and landscape, recognizing the demographic shifts and our consumers' buying preferences. You've asked me about the leadership team and about some of the changes that have gone on. As we've gone through transition and now transformation, the first quarter we saw great additions to the management team. We will preserve the Home Depot culture and address business perspective and expertise. JERRY EDWARDSs who had over 40 years in industry and 10 years with Home Depot was named executive vice-president of merchandising. He is the engine in gross margin merchandising and the overall assortment. I would like to reemphasize to be able to have captured Bob Burton, he has a strong background in high volume transactions. He was instrumental in the beginning of saber technology. Bob has been working feverishly with us to make sure our information systems are leading edge in providing the kind of gain changing projects necessary for merchandising, human resources, overall project management. I would like to reemphasize the addition of Frank Blake, our new EVP of business and corporate operations. He was the deputy secretary of (inaudible). He brings broad business experiences, business law and politics. We're excited to have Frank on the team. Millard has joined JERRY EDWARDSs as the senior vice-president of merchandising. Excuse me. He was the CEO of Payless, and had a long stint with Wal-Mart in international operations. Jim Stoddart was named president of Home Depot supply, a new emerging piece of our business that will take advantage of the 19 billion dollars of equity. I'm excited about the team, the new additions, the history that we have on this leadership team. Just to give you a perspective on that let me tell you, in terms of direct respects, they are over 160 years of Home Depot experience, alone. 160 years of Home Depot experience. Add to that industry experience and we're well over 225 to 250 years. That says the average length of service of my direct reports within Home Depot is 8 years and 1 month. That's almost 30 percent of the life of this company - this very new company. So I just want to, again, reinforce that we have a tremendous bench; we have tremendous regard for the culture and the history, but clearly we're transforming for the future. We have not changed our cautious outlook for the economy in the home improvement industry which we shared in November. Carol and I went through a very strong econometric model that highlighted many of the things we're experiencing today which is why Carol and I and the rest of the team remain cautious. Our outlook back then and continues today was for a flat home improvement growth this year, followed by very modest 3 percent growth in each of the extending years for '0 2 and '03. The model that we did, results of our store process, again, continues to indicate that recovery would be modest this year. And I think that's reflected in the conflicted economic indicators that we're seeing today. We saw where the secretary of labor announced unemployment reaching 6 percent and looking to 6 and-a-half percent by mid summer. The April housing starts dropped to the lowest level since October, 5.4 to a rate of 5.6 million units. However sales first quarter annual rate of 5.78 million, is at an historic high. Home ownership climbs as we see an increase in family formation. Home affordability remains unchanged and certainly bodes well for us. Mortgage refinancings are picking up, although uncertain whether they will support ongoing home improvement spending. Financial targets, in a continuing choppy economic environment, you can expect Home Depot to stay on strategy. We did not go off strategy one dollar as we told you we would open 200 stores; we hired 40 thousand new associates; and we would invest 3 billion dollars. We're staying right on target with this year's strategy. We expect to see topline benefits from our initiatives like pro and at-home services and merchandising, and Spy, and certainly appliances and the decor. We're maintaining very strong earnings leverage as we deliver on productivity and efficiency investments throughout the year. We continue to be comfortable in our earnings guidance as Carol mentioned for 47 openings for the second quarter. I hope you feel a sense of confidence as we transitioned through the prior year and now clearly are on track as a result of our store initiatives, again strategic, operating and resource deployment. At this point, I would like to turn it back over to Bob Burton and we'll be ready to take questions you might have.

We're ready for questions.

Signal us by pressing the star key and the 1 on the keypad. We will take the questions as time permits. We have Matthew with Goldman, Sachs and Co.

k you. Good morning. Two questions: if I may, if you could give us a sense as to how the tone of business might have evolved through the quarter and how that might influence your comp guidance for the second quarter. And just to state the second questions - Your cash balance has risen to astounding levels and my sense is that you're actively thinking about that, and I'm asking what your thought process is about what you want to do with the cash?

Those are two good questions. I highlighted that basically our comp forecast or guidance for the second quarter was somewhere around two to four percent. And again, Matt, I think while we're seeing conflicted economic metric, and we're seeing, you know, certainly their ability across the country. I mean, one of the wonderful advantages we have is our geographic reach, and one of the disadvantages is the seasonability and the weather. We aren't seeing much difference in what you've heard other retailers reporting. Not to make this a Weather Channel report, but we're still waiting for spring up in the northeast. I'm certainly tickled to death to be living in Atlanta versus upstate New York that had snow the other day, putting a damper on the seasonality. We're comfortable with the guidance that Carol highlighted for the quarter, up two to four percent. If you think about the second question on cash, it's a credit to the team here who have embraced, in particular, a tough economic environment, the importance of cash. We read - we hear a lot now as cash being one of the key metrics to really validate the health of a company. Because it really is, um, reflective of what he coming in. As I've said before, we are and have been and will continue to look at opportunistic acquisitions. We think there's a lot of opportunity out there. Frank Blake and the leadership team will be working closely together. Total homes acquisition in new Mexico are proof positive on how we will redeploy the cash; cash that will give us geographic persons, bring us into markets for new vendor and merchandising sources and the logistics and the adjacencies that it brings us along with the close relationship of the leadership team. We're excited about it. And I think there will be other opportunities resulting in acquisitions.

We will get a return on capital of 19.2 percent.

Fair enough. Thank you.

Moving now to take our next question from Maureen (inaudible) at State Street Research. Maureen?

I was wondering if we could talk about the increase in the tickets, which is up. How much of that is driven by the pro business and what's happening with the average retail customer? And what if any correlation does this have to the shift of more projects in the mix? As you mentioned, there's deferral in that, as well.

I would like to give a few comments and I'll turn it over to Carol for the specifics. As we announced a year ago, and we looked at the demographic shifts, we saw two things that really drove our strategic initiatives - At-home services to make sure that when loyal customers were moving from the do-it-yourself to do-it-for-me, we could extend the product from in the box to out of the box; and in that shift, some would go to repair, remodel and contractors. So we needed the duality of at-home services and pro. We asked Tom Taylor who was running one of our divisions to come in and he's reflective of how we're running it today, he's putting highly regarded champions into position. You heard the number of stores, over 500 last year and 900 this year with pro set. We're seeing seasoned associates on the desk. Our pros are telling us they like the stability of having licensed plumbers, general contractors, licensed electricians. We're seeing cross merchandising, and the professional shopping the entire store. So we think this initiative is really providing a tremendous base for improving our average ticket. Carol, you commented earlier.

When we look at the pro initiative, the average ticket is higher than the core DIY stores. The real driver between the 3.6 percent increase we posted was an increase in large ticket items, flooring, kitchen and appliances, and seasonal power equipment. And the new Toro line. Jerry?

We have had a successful season and the new Toro line, exclusive line to us, in the home improvement industry has been remarkably successful in the mid range price points. This has helped our outdoor power equipment sales.

The other thing - Larry Mercer, I would like to have him comment - who is the father of Spy and who has really, not only driven this thing from a launch, but also the fact that we now have metrics in place that are monitoring the actual Spy implementation, to make sure we're getting the traction.

We're really seeing in the first quarter of this year a real productivity shift in terms of the staffing on the floor and it's part of the Spy platform, and even though we haven't comped it yet in all stores across the country, we're seeing a lift in terms of our average ticket and better staffing on the floor. As Bob mentioned, we have a very rigid 30-day measurement of every store in the Home Depot and we're able to look at the opportunity of customer demand versus actual staffing. It's been a challenge that Home Depot has been continually improving on. And we're pleased with what we're seeing off of the two-year build up of Spy

That's great. Thank you.

Moving on, we'll take a question from Dan Weaver, at Deca Bank (phonetic).

My question is regarding the same store sales guidance. If you think about the, um, the two-year comp trend, um, you're coming off of a 2 percent increase in the first quarter and advertising at 3 to 4 percent outlook. And at the same time you are expressing cautious views.

Based on the economic drivers Bob set forth for you. And based on the current stores. We're looking at the initiatives, we have to drive same store sales. We're comfortable with the 2 to 4 percent guidance we've given you.

When you have a 10 k discussing cannibalization - and I would estimate diluted the same store sales by four percentage points from last year. Based on the real estate strategies in place, would that be less or equal to a year-ago trends

That's the ongoing rate of cannibalization. We don't comment on that, because we deliberately cannibalize.

I was thinking if the cannibalization was less it might build more in-store sales.

Let me comment. You're on the fringe of an important area for us. And here's two responses. No. 1, we have changed the format of our store relative to size and location. Let me comment on two things we're doing. You know that we had an additional 120 thousand square foot store and that's the culture and heritage of the store that got us where we are. In going forward we had to re-examine that business model and we have to the point we have the 120 thousand square foot box, 90, 95,000 square foot, and a 60 to 65,000. square feet. We've added an arrow to our quiver. As we look at the markets, we're putting in the right size and assortment to maximize the return on that investment. Carol mentioned new store productivity and inventory. This is not a business, Dan, and you know that, this is not one size fits all. There are places for consistency or uniformity, compliant entrepreneurial. There's also the entrepreneurial spirit; that's alive and well. Geographically, we're making sure that when we reach a point when the store's 120, 125 million dollar stores - can we really take care of the customer? What we'll do is put a store in an adjacent store to better serve the customer base. A portion will peel away from the existing store, but we want to improve accessibility and shopability. We're going to locations that represent net new. And when we sit in the monthly real estate meeting, we're exploring on a geographic basis, not only the need to better serve a customer where we have, you know, where we're being, um, stressed at a high volume, but we're also looking for net new. And this urban concept allows us to reach customers previously we haven't gotten to. We're excited about it. So I think while you're point about cannibalization is correct, our goal would be to stabilize and work through it to a lesser degree as we go forward.

Thanks a lot.

Up next, we'll take a question from Raymond James, Bud Bugash (phonetic).

Good morning. A question on the margin issue. The modest improvement in gross margin. Could you quantify where the shifts in margins are, and did much of that come from increased reliance of imports as acquisitions?

As we talked about with regards to our centralized purchasing groups, going forward, we are projecting modest gross margin expansion. As we continue to look at ways to increase customer value, today our import penetration is 6.2 percent which is the same as the at the end of 2001. We hope to increase that penetration over the next several years, but it is something that takes time to develop those vendor supplier relationships to ensure we're delivering the best quality and best product offerings.

What was that at the end of the first quarter of 2001?

5.2 percent.

It's 100 basis points from this just past - up 57 is more than just modest?

57 is more than modest in my estimation.

Two more. Can you give us a number on accounts payable?

As a percent of accounts payable?

You gave us 51 days. I just wanted to know if you would give us the actual number?

Bob Burton here. I'll call and give you the number.

Peter Caruso.

What happens in this industry is you get comparisons with the major competitors in the industry, that being Lowes. And you know, when you look back over history, you have outcomped each other and sometimes you're in line. I'm not making a big deal with the fact that Lowes is outcomping Home Depot right now. I think there is a merit where they have expanded the classes of trade. And they've taken up the average ticket. Can you and Jerry address your merchandise content within your store, on the consumer side - not the pro side - how you may try to expand classes of trade, and whether you see a merit in taking up the average price point in order to have a better class of goods in some categories within your store?

I think those are fair questions. And we're doing a number of things within our store. I want to, number one - I'm not sure if this was your question or not, but you know gross margin from our standpoint is going to be earned gross margin. We don't see a lot of pricing out there as a way of enhancing gross margin. Quite honestly in our tradition of everyday low prices we think bringing value to the customer is critically important. Point one and two. That's point one and two. I think your other question goes to the point of mix. And what are the opportunities to enhance our mix to help drive, um, the profitability of our stores. I think Jerry can talk about some of the things we've seen in those categories. In those categories, I think lawn and garden represent - I'll let Jerry comment.

As an oversight, I think lawn and garden, the merchant, and the whole team have positioned us far better than we've ever been positioned, whether you look at power, power equipment. If you think about the way we've organized now, centrally, to get some of the large buys, but keeping the hybrid of lawn and garden. For the local nurseries. I think we have more color, more vitality. More freshness than we've had in a long time. If you look across the store in flooring and some of the values Jerry and his team have been able to bring, it's evidence if you walk the store, but our customer reaction, certainly on the hard flooring, has been phenomenal. And of course our side, we've been able to gain tremendous leverage for some of the best hard flooring in the industry. You want to comment? We are - we are rolling out a proprietary traffic master. The designs and colors are all unique to Home Depot. And they offer tremendous value as highly competitive price points. This will be a winner as we roll this out in the third and fourth quarter. We have greatly expanded our lighting and ceiling fans. And in Hampton Bay, the largest ceiling fan, we have 7 energy star rated ceiling fans. Nobody else has this. So we're showing tremendous growth in this category this year. We're also rolling out an expanded lamp program, 150 new SKUs' of portable lighting that's beginning to show very positive results for us. And power tools are - Reoby (phonetic) power tool line is showing a lot of growth for us - which is exclusive to us. And we mentioned that Toro and Honda are both proprietary and are showing us good growth this year. Our affiliation, with YOW, allows us to provide next-day delivery at a cost of only $7.50. This will enable us to scale back existing inventory and greatly improve our capability of providing much higher price points of faucets to our customers

When Lowes do come into a Home Depot market, same store sales will decline about 10 percent in the first year and then get back to normal - breaking even in the second year, and get back to normal in the third year. Can you give us an update on that metric?

Geez, Peter, I can't. I'm not familiar with what Arthur was talking about there. What I have seen is both sides of that equation. We've seen, you know, our nearest competitor put up a store right across the street with no impact, quite honestly. Obviously what we've done is, make sure that that store is better prepared than ever. We have seen some stores that have lost some sales - just the novelty effect of a new store in the neighborhood - and we'll come back again. I can't comment on the 10 percent, number.

I will tell you, Peter, they recently went to look at the markets where we're competing against Lowes - Dallas Seattle, et cetera, and I was pleased with what I saw.

I think we have time for one more question. Wayne Hood at Prudential.

I was - you made a comment about improved labor productivity. And that had a positive impact on the sale and in store sales. I'm wondering, what's systemic in that that's preventing you from getting back to those historical levels? Workers compensation or other things?

Several things go into that equation. Things like increased depreciation. If you think about the number of stores we now own versus the number of stores that we owned in the 1998, 1999 time frame. We have higher property tax expense, we have higher utility expenses. There are a number of factors that suggest we can't get back to those levels quickly, but we're driving productivity and a wonderful experience for our customers so we drive that top line

It's almost redundant, but what we're seeing on the measurements, in the second year of Spy, it would indicate a much higher degree of customer demand in the aisles of the store. What we can control on a day-to-day basis, we are pleased.

Retraction, managing the improved profitability, what do you see in the first quarter in comp store sales trends?

Let me comment, Wayne. I know that from the standpoint of previous numbers your term, retraction, but, again, we're talking about doubling over three years, the number of stores that we have. Going from the 40, 44, up to 80 stores. And Carol commented that the number of stores that we opened in the first quarter and we have a few more to go yet this year. I think we've gone through a transformation with Expo. And again, as you know, we have taken what was a separate merchandising organization, and blended it in with Jerry to maximize our buying leverage, so we're buying on a host basis, but have maintained the individuality and the merchant that is unique to Expo. We have re-aligned our labor productivity model and are working closely with Jerry and his team. We have taken a different approach to the roll-out of Expo. It was mirror imaging of putting in a store and get in-fill. We're now looking for geographic reach versus density. And we're starting to see the benefits of that now, Wayne, this year. Now while we changed the strategy, we had commitments for real estate we fulfilled, but we're now starting to see that we also, as you know, have broadened the band of our served market. So by doing that, we doubled the population, the potential targeted population. We're still tuning this thing up and we're still on track as we shared with you in November in the rest of the analyst meeting, the rest of you that were in the analyst meeting. We're not coming off strategy. We're challenging ourselves. It's a unique niche that allows a solution for that particular customer segment

Did they have improved profitability in the first quarter?

We don't break that out Wayne.

You can.

But we don't. (laughter)

We know but we don't share that.

Thank you.

That concludes the question and answer session. Mr. Burton, I'll turn things back to you.

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