家得寶 (HD) 2002 Q4 法說會逐字稿

Good day, everyone and welcome to today's Home Depot fourth quarter earnings conference call.

As reminder, today's call is being recorded.

Beginning today's discussion is Mr. Bob Burton, Vice President of Investor Relations.

Please go ahead, sir.

Thank you and good morning to everyone.

Welcome to The Home Depot fourth quarter and year-end conference call.

As we reported this morning, the earnings per diluted share results were $1.56, a 21% improvement year over year and ahead of our January guidance.

Adjusted for the 53rd week in fiscal 2001, diluted earnings per share increased 24% for the year.

Joining us on our call today are Bob Nardelli, Chairman, President, and Chief Executive Officer of The Home Depot and Carol Tome, Executive Vice President and Chief Financial Officer, together with other Home Depot executives.

Carol will begin the call with the details of the financial results and then Bob will offer his comments and then we'll take your questions.

As a reminder, the question and answer session is available to all interested parties although questions will be limited to analysts and investors.

We will be available for media questions following the call.

This conference call is being broadcast real time on the internet at www.homedepot.com with links on both our home page and under the financial information section.

We will also offer an internet replay of the call for a five-day period and a two-day telephone replay which is available at 719-457-0820 with a confirmation code of 356142.

Before I turn the call over to Carol, let me remind you that our discussion today will include forward-looking statements relating to, among other things, our estimates and expectations for sales and earnings growth, new store openings and gross margin expansions.

These statements are subject to various risks and uncertainties that may cause actual results to differ materially from the company's historical experience and present expectations.

These risks and uncertainties include but are not limited to fluctuations in and the overall condition of the U.S. economy, stability of costs and availability of sourcing channels, conditions affecting new store developments, the company's ability to attract, train and retain highly qualified associates, unanticipated weather conditions and the impact of competition and regulatory and litigation matters.

Undue reliance should not be placed on such forward-looking statements, as such statements only speak on the date on which they are made.

Additional information regarding these and other risks are contained in the company's periodic filings with the Securities and Exchange Commission.

I will now turn the call over to Carol.

Thanks, Bob and good morning, everyone. 2001 was a year of many accomplishments, as well as disappointments.

During this transformational year, Home Depot reported sales growth that fell short of our expectations.

At the same time, we continued to demonstrate financial strength and strong earnings performance.

Let me start by comments with a short overview of the year, and then I will turn to the quarter.

For the year, sales increased 8.8% to $58.2 billion, adjusted for the 53rd week in fiscal 2001, total sales grew by 10.6% in 2002.

As we told you in November and again in January, we are disappointed with the sales growth as it fell short of our initial 2002 sales growth target.

In 2002, our sales growth was driven by 203 new stores and sales from stores that have been open for less than one year.

The sales performance of these stores was in line with our expectations.

Our disappointment rests with comp sales for the year as our comp sales were flat.

Comp sales for the year were impacted by a number of things.

First, we had strength in kitchen and bath, plumbing and paint but the strengths was off set in part by weakness due to price deflation in commodity categories like lumber.

Second, comps were impacted by planned cannibalization.

At the end of the fourth quarter, we cannibalized approximately 21% of our stores and the impact to comps for the year was approximately 4%.

Third, in the first half of the year, we experienced some out of stock due to transitional disruption associated with the implementation of Spy.

And fourth, the customer in our stores was negatively impacted by the merchandising resets we experimented with through out the year.

The this number of resets was unprecedented for us and we experienced a learning curve on this process as the year progressed.

As a result, we believe we are better prepared for the resets we plan to complete in 2003.

For the year, our gross margin rate was 31.09%, a 94 basis point improvement from last year.

When comps are flat, it is difficult to leverage expenses and in 2002, we delevered expenses by 14 basis points.

Given our strong gross margin performance, however, our operating margin for the year was 10.01%, a company record.

Turning to the fourth quarter, total sales declined 2% from the prior year to $13.2 billion adjusted for the #14th week which was not included in the fourth quarter of 2001, total sales for the quarter increased 5%.

At the end of the third quarter, we offered guidance that our fourth quarter comps would be negative in the range of negative 3 to 5% as we decided to not promote aggressively into the fourth quarter, nor repeat the yellow tag clearance event of last January.

November comp sales were at the stronger end of our initial forecast and consistent with our expectation.

December, however, proved to be a very different story.

Customer traffic slowed abruptly leading to slower sales and traditional gift categories such as hardware and power tools.

Overall, comparable sales for the month declined double digits.

Given December's performance and tough year over year January comparison, we revised our forecast in early January and provided guidance that our fourth quarter comps could be down as much as 10%.

Well, our January sales came back stronger than we expected and as a result, we reported a negative 6% comp for the quarter.

Comps were just slightly negative in January which suggests that the significant fall off in December traffic was a business anomaly.

For the quarter, comparable sales were negative in 10 of 11 selling categories.

In the month of January, 7 selling categories posted positive comps.

Sales growth in our core service businesses, while positive, slowed in the quarter.

Including sales from our newly acquired flooring company, services gained 22% in the fourth quarter over the prior year, for 2002, services grew 26% over the prior year.

As reported, earnings per diluted share for the fourth quarter were 30 cents, flat compared with the fourth quarter of last year.

Adjusted to a 13-week basis, earnings per diluted share increased 11% for the quarter.

During the fourth quarter, we added 61 new Home Depot stores, including two stores in Mexico, bringing our total store count to 1,532.

Of the stores opened during the quarter, we opened 16 in November, 15 in December and 30 in January.

Our plan is to open 200 stores in fiscal 2003, a 13% increase over the end of the fiscal 2002.

In the first quarter of 2003, we planned to open 35 new stores.

As a reminder, our store openings for 2003 are back-end weighted with about 61% of our stores to open in the second half.

Turning to store productivity matrix, selling square footage increased 14% from last year to 166 million square feet.

The average square footage per store of approximately 108,000 square feet declined slightly from last year, reflecting a changing mix in our store format as we size stores to meet the needs of the market.

Customer transactions grew to 268 million for the quarter, up 3.6% on a thirteen week basis.

For the year, we had over one billion customer transactions, an 8.2% increase on a 52-week basis.

In the fourth quarter, our average customer ticket decreased 1.3% to $47.32, while our average ticket actually increased in the majority of our selling departments, softness in our flooring category drove the decline as we did not anniversary the promotional programs of last year.

For the year, average ticket increased 1.6% to $49.43.

Our weighted average weekly store sales for the quarter were $652,000 compared to $723,000 last year.

This decline is due to negative comp sales and continued heavy cannibalization of our most productive divisions.

For the year, our weighted average weekly store sales were $772,000 versus $812,000 last year, reflecting the same factors.

Sales per square foot for the quarter were $312.67 versus $346.99 last year, a decrease of 9.9% on a 13-week basis.

For the year, sales per square foot decreased 4.6% on a 52-week basis to $370.21.

Gross margin for the fourth quarter was 31.95%, 114 basis points ahead of the prior year.

This margin performance reflects the following: A continued reduction in the cost of goods as we rationalize vendors and improve assortment, improved performance in shrinks, lower markdowns as we did not repeat last January's yellow tag clearance events and an increase in our direct import penetration from 7% from the fourth quarter last year to 9% this year.

As we commented at our recent analysts meeting, our expectation for fiscal 2003 calls for only modest gross margin expansion as we anniversaried last year's strong gains.

We continue to invest in our stores and customer service and as a result, we did not leverage total expenses for the quarter.

Selling and store operating expenses increased 123 basis point to 21.28% from 20.05% last year for a number of reasons.

First, we view payroll as an investment in our stores, both in terms of selling associates and store leadership positions.

Continuing the support, even in a soft sales environment, enables better in-stock positions and customer service.

Second, we had experienced higher costs associated with resets and store renovations as we invest in new signage, fixtures and general maintenance.

And, third, we are experiencing continuing pressure in Workers' Compensation and medical expense due in part to medical cost inflation.

Pre-opening expenses were $29 million for the fourth quarter compared with $30 million for the same period last year, which was flat as a percent of sales.

While we opened 18 more stores in the fourth quarter this year than we did last year, our pre-opening cost per store is down approximately 15% due to increased efficiencies in our pre-opening process.

General and administrative expenses for the fourth quarter rose 17 basis points as a percent of sales to 2.16% from 1.99% reflecting the current sales environment.

The effective income tax rate for the quarter was 37.6% compared to 38.6% for the fourth quarter last year reflecting a higher tax credit and a lower state income tax rate.

Fourth quarter 2002 consolidated net earnings totaled $686 million, down 3% from $710 million in the fourth quarter of fiscal 2001.

On a 13-week basis, net earnings increased 7% versus the fourth quarter last year.

During the second half of fiscal 2002, Home Depot completed a $2 billion share repurchase program.

In total, we repurchased approximately 69 million shares during the open window period following our second and third quarter earnings announcement.

This repurchase program had a positive impact on EPS of about a penny for the quarter and for the year.

The diluted weighted average shares for the fourth quarter were 2.309 billion shares compared to 2.358 billion in the fourth quarter last year.

On the balance sheet, cash and short-term investments totaled $2.3 billion compared to $2.5 billion at the close of last year.

This reflects investments in our business, cash spent for share repurchases which were offset by strong earnings and significant improvements in days payable outstanding.

Average inventory per store was $5.4 million, up 8% from the fourth quarter last year as we got our stores back in stock and ready for Spring.

Inventory turn over for fiscal 2002 was 5.3 times compared with 5.4 times last year.

Our day's payable outstanding were 46 compared to 36 days in the prior fourth quarter.

We think we have realized the majority of the benefits from our renegotiated payment terms.

Long term debt at the end of the fourth quarter was $1.32 billion compared to $1.25 billion at the end of the fourth quarter last year and our debt to equity ratio was 6.7%.

The financial strength of The Home Depot remains unsurpassed in retailing.

Computed on beginning debt and equities for the trailing fourth quarter, return on invested capital was 18.8%, an improvement of 50 basis points from the fourth quarter last year.

On a 52-week basis, the year over year improvement was 90 basis points.

Capital expenditures were $2.7 billion dollars for the fiscal year as compared to $3.4 billion last year.

Actual capital expenditures reflect construction cost savings, and a shift in the timing of spending for future store openings.

Our overall capital spending forecast remains at $4 billion for fiscal 2003.

In addition to new stores, the increase in capital expenditures in 2003 also reflects investments in store remodeling, technology and other initiatives.

We now own 1,260 of our stores or 82%.

Our unincumbered real estate position supports our long-term strategy of market dominance and financial flexibility.

Before I turn the conversation over to Bob Nardelli for his remarks, I want to remind you of a change in the company's disclosure practices.

We will continue to give sales and earnings guidance for the year but we will no longer break our forward looking guidance down by quarter.

This change reflects our long-term outlook for the business and should not be interpreted as signaling a change in our outlook for 2003.

As Bob will discuss, our 2003 sales growth guidance is 9 to 12% and our 2003 earnings growth guidance is 9 to 14%.

Thanks for listening and I will now turn the call over to Bob Nardelli for his remarks.

Thanks Carol, and good morning everyone.

I would like to share some thoughts and comments on Home Depot today.

The company's transition that began in 2001, has really evolved into a company transformation, my team is in place and our structure is aligned.

We launched a significant number of changes in 2002 to enhance our customer service, to make our stores a more exciting and certainly an easier place to shop.

We are revitalizing our merchandising assortments and changing our in-store operating models.

The list of transformational activities is a long one.

Let me share a few with you this morning.

We changed our in-store operating model to handle freight at night, it was the right thing to do, we launched and we learned.

The store managers are delivering a much more shoppable experience in and are committed to continually improve our operating efficiencies as a result of Spy.

We centralized merchandising.

We rationalized our product assortment eliminating approximately 19,000 SKUs while, at the same time, adding a similar amount of new SKUs and providing innovation in customer driven merchandise.

We had a number of significant resets in our stores.

These were long overdue in key product categories such as appliances, flooring, faucets and mill work.

We made improvements in technology again, assisting the store managers in the area of simplification allowing our associates to spend more time in transaction with our customers as opposed to tasks.

As Carol said, the operating programs we set in motion a year ago are continuing to show improvement through expanding our gross margin, effective expense control and certainly working capital efficiencies.

Our strong earnings performance and financial conditions are evident from her comments.

But, again, we did not meet our initial sales growth expectation of 15 to 18% for the year and as we indicated, our customer service level was not at the level of expectation throughout the year for The Home Depot.

For 2003, our focus is very simple, it's on sales, it's on service and it's on execution.

Let me share with you why we are excited about this coming year.

Current surveys tell us that customers recognize The Home Depot as the leader in home improvement and shop us most frequently, twice the rate of our nearest competitor.

A recent independent study by the Forrester Research pointed out that women customers enjoy shopping at The Home Depot as much as any other home improvement retailer.

We recognized that both men and women are critical to the home improvement projects.

Our own studies show that about 50% of store visits are made by couples, shopping jointly for projects in home improvement.

We are, as I said at our last analysts meeting, a very inclusive company.

We are not going to become exclusive in our forward strategy.

We are not going to drop a gender to add a gender.

We clearly understand our heritage and we also understand the need to evolve in our decor and fashion area to meet customer-backed requirements.

Now, with the power of our brand, we plan to enhance our overall advertising programs.

On Sunday, during the Grammy Awards, we launched a new advertising campaign, the theme, "You Can Do It, We Can Help."

It's not about good marketing, it's about sharing our history and our commitment and pride for the future.

In 2003, the frequency of our catalogs will increase by a third.

The number of pages contained in each catalog will also grow equally.

In the year, our total rating points will be up more than 50% as we work in harmony with our supplier and vendor base.

We'll improve our competitive position on three fronts: Stores, merchandising and service.

For many years, we invested in building stores to serve large metro markets, we out-stored the competition nearly 2-to-1.

In 2003, we'll build on this convenience advantage, both in the sense of geographic locations and also in the sense of store formats.

We'll build stores to meet the needs of our neighborhoods, both in location and also in merchandising.

We are the market leader in 22 of the top 25 markets and in the three where we are not, we are at parity.

Of the 145 markets where Home Depot competes, our market share ranges from a 3% to a 26% level.

So clearly, you can see that even in our most mature area, we have significant opportunity to add new customers and capture additional business.

For example, in the Northeast corridor alone, we have identified about $60 billion in uncaptured market potential.

On a base of 160 stores between New York and Boston, we expect to open more than 50 stores in the next few years to maintain our competitive advantage, to respond to customer loyalty.

In 2003, we will open 200 stores, not because it's tradition but because of the opportunity to reach more customers and stay competitive in growing markets.

We have developed a new very sophisticated analytical tool that enhances our store site selection and store format process.

We are excited about the data, we are excited about the analysis and the support it will give us on a going-forward basis.

More than a quarter of our stores are over 7 years old and most of them have relatively high annual volume as Carol indicated, over a billion transactions last year alone, all of this compounding wear and tear.

As Carol mentioned and we shared with you at the analysts meeting, we are increasing our 2003 capital spending plan to $4 billion.

Of that, $250 million alone has been committed in support of remodeling programs that will protect and enhance our existing stores in key market areas, blunting competitive in-roads.

Our merchants and our store managers are working diligently to reset more of our stores in key categories, like appliances, decor, mill work and making our stores exciting and fashionable.

We are adding new sign packages and we are improving significantly our point of purchase visual merchandising displays, a significant enhancement for the future.

In 2002, we completed an unprecedented number of major resets across our stores and that will continue this year.

For example, today, Design Place is in 873 stores and we have targeted an additional 556 more.

For example, we are seeing tremendous response in the appliance area last year and another specific example is in our new fashion forward rug resets where we are seeing unit volume increase year over year.

Our pro initiative, which we had talked about, is now in 1,135 stores and really is a unique competitive differentiator.

As I said earlier, we are an inclusive company and we will reflect that inclusiveness on our customer base.

Our tool rental centers are an extension of our pro initiative.

We have tool rental centers in over 600 of our stores.

In the comps in the tool rental centers are 12 times the company average.

We are the largest tool renter provider as measured in number of outlets.

We are very pleased with our performance in our recently acquired flooring companies.

This allows us to enter a whole new --[OUTSIDE INTERFERENCE] I'm sorry, we have somebody on the line.

Our ownership of these new flooring stores represent a tremendous opportunity to participate in a whole new vertical channel for our company from the single home builder to the mass builder and the response has been tremendously positive to date.

Our expanded appliance set is now in 743 stores and we'll put it in an additional 671 stores this year.

We have had considerable market share growth in this category as we broke from the traditional sell it from the rack to a 1,500 to 2,000 square foot lay-down area.

We have moved to the third player in the industry in a relatively short period of time.

We are excited about an even greater relaunch in 2003 with an exclusive arrangement to offer a pro-appliance package.

This will be great products at great prices targeted directly to the professional contractor and will be displayed directly across from our pro desk.

Our central merchandising team has made great strides in building strong partnerships with loyal vendors.

Today's assortments are better balanced than ever before.

Our store managers are in stock and ready for Spring.

Let me give you a few examples of what I mean.

We have over 200,000 Deere tractors, in excess of 750,000 walk-behind mowers either in our stores or flowing to our stores.

This Spring will have more color and a broader assortment of goods than we have ever carried at The Home Depot.

We have an exciting new tropical line and we will clearly demonstrate a stronger presence in visual merchandising in our lawn and garden area.

Our assortments emphasize the greatest brands in the business line 3M, American Standard, Black and Decker, Bosch, G.E., Glidden, Maytag, Rubbermaid, Scott, Shaw, and Stanley.

As we shared with you, 85% of our products that are carried in our store carry national brand names, names of choice and preference by our customers.

We are also excited about adding new brands and growing our assortment, for example, John Deere as the excluding home improvement carrier at The Home Depot.

We have developed strategic alliances with national brands and highly recognized names like Anderson, Disney, Ecco, Honda, Phillips, and Toro along with proprietary brands like Bear, Husky, Mill's Pride, Hampton Bay, the best in the industry and are helping us fill out each of these product categories.

Now, as we shared with you our stores and store managers are getting significant improvement in tools that they need to help deliver sales and service and execution for 2003.

As technology frees up hours in our store through initiatives like self check-out and certified receiving, we are committed to redeploy those hours back on to the sales floor for the benefit of our customers where high associate contact is required.

We will again, dedicate over 19 million hours to train our associates in the area of sales and product knowledge.

In addition to merchandising this Spring, we will invest hours in key departments to support seasonal ramp up as evidenced as we have already done in lawn and garden for power equipment.

Finally, we are supporting our store managers and selling associates in 2003 with enhanced compensation packages and exciting new special initiatives.

We have just completed, this week the last of a week long store manager forum.

Every, and I repeat, every store manager in our company has now attended a one-week long leadership forum.

From my participation and conversations with our store managers, I know they are energized.

The meetings were electric and represented a tremendous opportunity to share best practices and to socialize at this event.

At a time when other companies are pulling back on P&L and retrenching from strategy, we continue to be able to forge forward based on the strength of our balance sheet and our commitment to the future.

I am now ready to take questions from the audience.

Thank you.

The question and answer session will be conducted electronically, if you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone.

If you are using a speaker-phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order in which you signal us and will take as many questions as time permits.

Once again, please press star/one to ask a question.

Our first question comes from the line of Bud Bugatch from Raymond James.

Good morning, Bob.

Good morning, Bud.

Your inventory per store is about $5.4 million, I think you said, is that about where you want it now, do you have the inventory where you are comfortable with it?

Bud, we, as Carol indicated average store inventory increased in 2002.

As we were going through the implementation of Spy and going through the resets and Jerry Edwards and his merchants were taking out 19,000 SKUs and adding them back, we do feel comfortable with our inventory and we do believe it will support our sales projection for this year.

I think you said last quarter that in-stocks were running at 97% the way you measure it, any update on where that is now?

Bud, that latest data we reviewed, as a matter of fact, at our weekly QMI call, that in stock position is holding and we are very comfortable with it and obviously we will continue to improve throughout the year.

I guess my last is, transactions per store have continued to fall, I think if my math is right, somewhere just under 180,000 per average store in this quarter, any idea when that metric will start to turn back up on a quarterly basis?

Bud, we certainly would expect that number to come back throughout the year, as we get the resets behind us and working closely with Jerry Edwards and John Costello.

As I indicated, the frequency of catalogs and the page count along with our media coverage, I'm convinced that we'll reposition these stores almost in a new grand opening fashion and get our loyal customers back in to experience these new resets and exciting new merchandise.

Thank you, and good luck on the year.

Thank you, Bud.

And our next question, we'll here from Dan Wewer from CIBC World Markets.

Carol, a couple of questions related to the same-store sales issues.

I think you discussed the impact number deflation and of store cannibalization.

First I was curious, to make sure I understand correctly, are we saying that the cannibalization rate was worse in 2002 than it was in 2001 and that's what was contributing to the weak fourth quarter sales?

Well, Dan, I walked through the drivers of comps for the year with great specificity.

If you would like me, I can go back and review those.

Maybe I'm wrong.

I thought that the cannibalization rate or the hit was 4 points in the previous year.

I wasn't sure if there was a change there or not.

There is really no change.

As we laid out at the analysts conference in early January and early this morning, the results of cannibalization has about a 4% impact to comps.

So if you want to ticket out for the year, if this would be helpful to you, we are reporting a flat comp for the year.

If you start at the top, our gross comps were 8%.

We lost 4 points because of cannibalization and we lost 4 points because of disruption due to in stock and resets and number prices, et cetera.

For the year, we are reporting zero.

I wasn't sure if we were supposed to subtract out for the previous year as well and was looking at it that way.

The other question I have, just looking at the lumber.

Just looking at the random links numbers, we are guesstimating that the rate of deflation was maybe a half a point.

Is that consistent with what you are seeing?

For the year, we think the impact to comps was about a point, if that is your question.

And for the fourth quarter, about the same as well?

A little less than that, a little less, yes.

And just the final question I had was on the full scale remodels, the type A remodels.

Is there any situation where Home Depot would consider, you know, increasing the number of the old stores that undergo the major remodels because it looks like the returns on investment could be very very high from this initiative.

Let me jump in and respond to that, Dan.

Our team has really done one heck of a good job in analyzing those stores that we have targeted from a competitive standpoint, from a geographic standpoint, from a leadership standpoint and, certainly, from an age and traffic standpoint, and, again, this is something new for The Home Depot, taking on the number of resets that we targeted.

So I think we really want to focus on about 40 of these major resets.

If they go well, we certainly have other candidates available, but for the time being, we focused on these 40 type As in the back half of this year.

Good luck.

Thank you.

Thank you.

And moving on, we'll hear from Danielle Fox from JP Morgan.

Thanks and good morning.

Can you discuss the timing of P&L investments, things like labor and systems in 2003?

Are they concentrated in any particular quarter or season and what will be determining the pace of the rollout?

Let's start by talking about labor.

As Bob pointed out, as technology improvements occur in our stores, we will redeploy the hours back on to the selling floor.

It is starting to happen now with the self-checkout stations that are being installed in our stores.

But we won't really see the benefit of technology until the back half of the year in that redeployment.

Right now though, Danielle, we are investing hours in our seasonal departments like gardens.

This is an incremental investment that we are making because we think this is the right thing to do for the customer experience in our store.

We are also looking at the labor models in certain select stores to make sure that we have the right management structure and if we deem that we need to make a change in that structure, we'll make that investment now.

Okay, and on the systems side?

The redeployment, as I mentioned, will happen on the latter half of the year.

And then, Bob you mentioned that there is a new compensation package.

Could you just give us a sense of what's changed?

I would be happy to, Danielle.

I have Dennis Donovan in the room.

I would just preface it by saying, as we shared with you at the analysts meeting, the employer of choice survey gave us some tremendous insights into what our associates are looking for, particularly in the stores.

And, therefore, we took that data and have responded in what we think is a very exciting package.

Dennis?

Yeah, as you know, Danielle and I talked about this earlier at our meeting, we made a number of enhancements last year in our bonus plan.

We introduced stock sharing, which is profit sharing throughout all of the stores and we have gone back into this and are enhancing this as we looked forward into 2003.

For example, with our store managers, we are significantly increasing their bonus opportunity, a store manager at a 50% target bonus now can earn up to 65% of their base with this enhanced model.

It's being very well received throughout the entire company with our store managers.

So if they max out, it's going to deliver significantly more dollars, and then with our success sharing plan, what we have done here is put a very achievable threshold so we get a lot of stories in the game.

We focus exclusively and sale this is year.

We have also increased the cap, we have doubled it so we can put more money in the pool and we have migrated this to semiannual payouts so we can get people in the game through the entire year.

We have done a number of other things like 401k eligibility kicking in at an earlier time frame after 90 days with the associates and, as you recall, last year, we did some innovative things with the stock option plan with retirement features so we think, based on Bob's comments with the data that we have seen and the employer of choice survey, this is going to move the needle for us in 2003.

Danielle, we are excited about the payout this year at a number of stores. 95% of our store managers will be receiving a payout and we are not changing from our tradition of having stock options participation down to the assistant store manager level.

We have committed to expense those and we certainly are not going to pull away from awarding store managers all the way down to assistant store managers in the sharing of the success of this company.

And also, too, Danielle, get them looking at share owner interest makes them a big part of the ownership of this company.

Great, thank you.

And our next question today comes from Matt Fassler from Goldman Sachs.

Thanks a lot and good morning.

Taking a look at the gap between the totals and same store sales, it looks like your new store performance was actually pretty strong versus prior quarters.

Can you give us a sense as to new space productivity in the fourth quarter compared to the levels that you saw earlier in the year?

Matt, you are right.

As you look at the numbers, new store productivity was up and we are very pleased with that.

And it tells us that the traction from the new programs that we are putting into the old stores is actually working in the new stores because they are opening up with these new programs.

Fair enough.

Second question, Bob, in your comments, you discussed your plans to open, I think, 50 stores in the Northeast corridor, in the Boston-New York zone.

With that in mind, can you give us a sense, as you consider cannibalization and you consider incremental openings to further penetrate strong markets, how do you think of the economics of the impact of cannibalization on existing stores?

In other words, I understand that you only open stores that would meet your hurdles in and of themselves but how do you aggregate the impact of the very profitable stores, the impact on the very profitable stores that you have in those markets when you think about the returns on that investment?

I will start taking first crack at the question.

When we go to our real estate committees Matt, we look at the stores on a market basis, not on a store basis but on a market basis and we look at the returns on a market basis because it's critically important to us to get the right return on investment, as you pointed out, but you don't want to look at it one store at a time, you want to look at it on aggregate by market.

Frank Blake (ph.)~ is here, maybe he has something to add.

That is exactly right.

We would not be basing it on the individual store, we would be looking at the total impact.

And do you need to see the market ROI stay flat to higher in order to make investment?

We are all about increasing the rate of return on the investments that we make.

Now clearly we give our markets the opportunity to reach the hurdle over time, you don't expect it on day one, of course as you would expect, but over time we need to see that increase.

Matt, let me just amplify, Carol mentioned our monthly real estate executive committee meeting and I am very excited.

I mentioned in my comments, the new tools that Frank and his organization have brought to the table down to the zip code levels that really gives us a better view of the market than what we have had in the past.

It allows us to get very granular in sight selection, we lay on top of that not only the average income per family, the population growth, but then we also add to that, you know, the merchandising assortment in that particular neighborhood.

So we are now, I think, doing a much more sophisticated job in site selection to Carol's and Frank's points, looking at market potential in growth, putting in the most recent census data so I'm continually encouraged with the level of data and technology and sophistication going into this.

Got you.

That's very helpful.

Thank you.

Thank you, Matt.

And we'll hear next from Aram Rubinson from Banc of America.

Aram here.

Hi, Aram.

I have two questions.

One, the average ticket I noticed, ticked down, that does not happen all that often.

I wonder if you could assess the merchandising of the stores, whether you think that's a mix issue or whether your general price points might be down for the prior year and I wonder if you could comment on that and then I have a follow up?

That average ticket was down purely because of flooring.

Flooring is a big ticket category for us.

We did not have very good strength in the flooring category in the fourth category because we are anniversarying programs last year that we did not repeat.

Jerry Edwards is here, he may have a few other comments on flooring.

We were distorted by the effect of flooring.

In fact, average ticket in most other categories was improved over the prior year.

Absolutely.

As you know, Aram, average ticket for the year was up.

Okay, the follow-up question is on advertising, I want a little more clarification.

To get 50 points more of exposure, what does that cost and what do you think advertising is as a percent of sales?

It seems like it would certainly be moving up.

Aram, let me ask John Costello who is in the room and who has recently joined us now in the last three months and responsible for our new campaign to comment on that in general and Carol can certainly reconfirm that everything that I alluded to is in the forecast projection for this year.

John?

That's right.

And those increases were generated by a change in mix and internally generated efficiencies which enabled us to generate that kind of impact in a very efficient way.

I think we have time for one more question.

And that question will come from Theresa Donahue from Newburger Berman.

Good morning, everyone.

I had a quick question on Carol's indication on the SG&A.

I believe you stated that you had some higher costs involved in those resets in terms of merchandise cost fixtures, et cetera, and maintenance.

And I'm wondering what that means for operating margins to go forward as you continue to remodel more stores?

Theresa, the impact of continuing to remodel and resign and reset our stores is in the guidance that we gave for 2003.

Okay.

But that is a net long term embedded negative impact to a slight extent, though?

In terms of dollars, absolutely.

Okay, thanks.

You're welcome.

Okay.

That concludes our fourth quarter conference call.

I'd like to thank everyone for calling.

We do have a replay number.

I will give you that number, once again, it is 719-457-0820 with a confirmation code of 356142.

We appreciate your calling in, have a good day.