勞氏公司 (LOW) 2001 Q1 法說會逐字稿

LOWE'S COMPANIES INCORPORATED FIRST QUARTER EARNINGS RELEASE CONFERENCE CALL

Good morning everyone and welcome to the Lowe's Companies Incorporated first quarter earnings release conference call. Today's call is being recorded. Statements by management during this conference may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements to be materially different from any future results, achievements, performance, or anything expressed or implied by such forward-looking statements. Such factors include, among others, those detailed from time to time in the company's filings with the Securities and Exchange Commission. At this time, I would like to turn the call over to the Chairman and CEO, Mr. Bob Tillman. Please go ahead Sir.

Thank you. Good morning and thank you for joining us. Following my opening remarks, Tom Whiddon, our Executive Vice President of Logistics and Technology will provide an update on our distribution network and Robert Niblock, our CFO will wrap up with a detailed look at the numbers. First of all, let me briefly recap our results and provide a perspective on the economy. Sales in the first quarter exceeded $5 billion, an 18% increase over the last year. Comps in first quarter declined 3%, and Robert will discuss some of the factors that influence comp performance. But despite weaker than planned comps, net earnings increased 20% to 225 million. We opened 37 stores in the first quarter matching the most active quarterly opening schedule in our company's history. As discussed last quarter, we opened over 50% of our 2001 stores in the first half of the year, again Lowe's first and a significant change from our back weighted openings of the past. Our total store account at quarter end was 680 with square footage increasing 23% over last year. In the first quarter, we entered several new markets including Boston, Mass, El Paso, Texas and continued our expansion in the western U.S. opening our first store in Portland, Oregon and second in California. We also opened a new distribution center in Perris, California. The six regional distribution centers in our expanding state-of-the-art distribution network, and Tom will cover more details about this strategic advantage in a moment. We continue to look at the future and we continue to build stores and infrastructure that best serve our customers and gain market share. Our recent investments and first quarter results set a strong foundation on which to build a solid year.

The economy rut remains a big question mark, while we have started to see [_______________] of hope. The [_______________] rights and it seems all but assured that a tax cut in some form will soon be approved. They started all the talks of recession, housing activity remained strong, and mortgage rates remained historic at Lowe's. In addition to these macroeconomic factors last quarter, Larry Stone spoke of Lowe's specific issues that should make for strong performance in 2001. And these factors are at the heart while we continue to be cautiously optimistic about the balance of the year. It's important to note that we're not just carrying the current environment. We acknowledge that the economic picture for the near future is cloudy at best, so we will remain focused on controlling expenses and enhancing productivity across all areas of our business. Our expense leverage and strong earnings this quarter approved that we're serious about these initiatives and that we have a team in place to ensure the continued success of Lowe's. Many of you have heard we said before that our logistics may have grown up as part of retailing. In the 21st century, retail becomes a part of logistics. Retailers tend to move products from the manufacturer into the hands and homes of the customer as quickly and efficiently as possible, and at the lowest possible costs will succeed in the 21st century. That point is important of logistics in the retail world. Here's Tom to tell you how our logistics and distribution strategies give us a competitive advantage each and every day.

Thanks Bob, and good morning every one. Just over a month ago, Lowe's achieved a new milestone as we opened our first regional distribution center west of the Rockies, in Perris, California, which is part of the greater Los Angeles area. This is the newest RDC and it reflects state-of-art facility and will ultimately serve 100 stores in the southern California region plus some others. The Perris RDC, a 1.3 million square feet facility, is the latest component of our central inventory replenishment and distribution network that enables us move product to our stores quickly and efficiently, keep product and stock, and most importantly, do it very cost effectively. With the opening of the Perris RDC, our distribution network now includes six RDCs, which handle basic merchandise with dimensions and weights that allow for easy automotive conveyance. Six special distribution centers, which handle non-conveyable products, eight public and five private commodity reload centers responsible for warehousing and distributing vendor consigned products like lumber, boards, plywood, and fencing, and an import center. Also these distributions centers have a total of over 10 million square feet of storage and distribution space. In addition to the six already opened, we have an RDC under construction in Findlay, Ohio that will begin shipping later this year, and in January of this year, we announced the location of an eighth center in Cheyenne, Wyoming scheduled to break ground later this year, and our plan is to build at least one RDC per year for the next several years

consistent with our storage expansion plans. Logistics and distribution are competitive advantage for Lowe's. In fact, I would like to speak of five specific advantages to internal distribution through our network. The first advantage is the operating leverage gain because our replenishment process is centralized here at the corporate office. Ordering for a limited numbers of DCs reduces administrative costs. With fewer purchase orders, invoices, and receiving documents, fewer people are required to order, receive, and account for stock. Our organization currently operates with a leverage of one inventory specialist for every three stores. Without our centralized ordering capability, we would need five to eight dedicated people per store, depending on store volume to handle the replenishment process. Also, as volume per store increases, we don't need additional headcount for replenishment, and thus we experience further leveraging of costs. The second competitive advantage is in customer service. RDC network gives us the ability to maintain a higher in-stock service level. Since most product is only one to three days from the store shelves, we can better manage inventory to where it is needed. We manage the price from the vendor's docks all the way to our stores, which results in shorter lead times and enhanced customer service. That brings me to the third advantage, which is improving inventory turns. Shorter lead times, keeping safety stocks in the DCs rather than in the stores, and avoiding minimum ship quantities at the store level give us an advantage on turns. With our state-of-art distribution system in place, we are positioned to capitalize on insufficiencies to increase turns as our volume per store continues to grow. Our expansion in the

metro markets, which are typically higher volume markets, will highlight the effectiveness of our distribution network and allow continued growth in our inventory turn rate. Just as an example, in fiscal 2000, our stores with $40 million or more in annual volume had an average inventory turn of 5.7 times. Continued efficiency gains as well as the leverage gain from increasing volumes per store should result in 20 to 30 basis point improvement in turns each year for the next several years. DCs lower the delivered cost of product, which is the fourth advantage. When vendors' products go through our distribution network, we are their lowest cost customer because it costs them significantly less to ship to a handful of DCs and process only a few purchase orders rather than to hundreds of stores with hundreds of purchase orders, allowing for hundreds of receiving discrepancies that must be reconciled. This gives our merchants tremendous leverage when negotiating price with our suppliers including truck-load quantity discounts, and avoiding LTO freight, which is very expensive as compared to full truck-load shipments. A better way to look at this advantage is flexibility. We're able to evaluate full rate pricing to determine the lowest possible costs whether that be clerk, prepaid, direct to store, or through the DCs. This flexibility allows our vendors who don't have the logistic capabilities or capacity to efficiently supply our 680 plus stores, an effective distribution option. Our centralized distribution system, which significantly reduces their cost and thus Lowe's cost for their products.

We give the vendors options that others can't, and in the few cases where the vendor can deliver LTO direct to the store as efficient as we can through our network, we let them do it. The final competitive advantage and probably the most important comes from our stores perspective. Goods safe receiving reduces labor cost to receive products at the store, and decreases lead-time to the shelf. It also means, we can control delivery day and time, allowing for receiving and stocking during non-peak hours, which frees employees to help customers and keep store house clear, shoppable, and safe. From the cost perspective, centralized distribution means we can be the lowest cost operator and the higher the sales volume, the greater the leverage. Consider what happened between 1996 and 2000. In 1996, we with only three RDCs in place, our distribution costs, measured as distribution expenses divided by the dollar cost of inventory handled, was 4.8%. In 2000, with five RDCs in place, it dropped to less than 3%, which includes outbound freight. So, yes, we've had the capacity and invested capital to do so, but those costs are being leveraged. These facilities are being used efficiently. Recent research report I read on Wallmark, said that they are now experimenting with a new DC concept that utilizes a shipping door for each store served. According to the report, initial results showed these five DCs to be 25% more productive than the rest of their network. But guess what, all of our RDCs utilize this concept.

In the sales volumes per store improved, we get even more efficient. For the past year or so, we've been shipping products from our Texas RDC to our newer stores in the Western US as well as accepting an increased percentage of direct shipments in those stores. Our distribution costs are embedded in the cost of goods sold. So these additional costs have directly affected the gross margin of our west coast stores. We know we have a major opportunity to reduce our cost now that the Perris center is open. Outbound freight is roughly 28-30% of the cost of operating one of these RDCs, whereas fixed costs are only about 13-15%. Eliminating the long hauls we're making from Texas, and shifting products from direct to the Perris facility, reduces cost and improves store service. Last summer, I inherited what was already one of the most efficient and effective logistics and distribution organizations in retail, but we can still get better. So where do we go from here? Our current opportunities fall into four areas. The first is cross-dock enhancements. We have achieved a level where 60% of the product flowing through our RDCs is cross-docked, clearly, the most efficient way to flow product. To get to this level, we cross-dock an entire truck load of a product as it is received, and sometimes that requires sending out products to stores, beyond their immediate need. Up to now, the allocation of extra product was a manual process, which is subject to error. We have put in place a system enhancement, such that now when a truck is going to be 100% cross-docked and it exceeds existing demand,

the system automatically allocates the extra product based on days supply on hand for each store of the DC services, which will result in improvement in inventory turns. The second opportunity is to improve our forecasting efforts in sharing critical information with our vendors. We've done very little to generate purchase forecast to share with our vendors in the past. This year we will have in place a new system to create long-range purchase forecast that we'll begin sharing with the vendors. Two major benefits of doing this is reduction of lead times and fewer vendor failures. This will contribute to improved turns and less out-of-stock situations, i.e. increased sales. Also, we have begun a test with 16 major vendors where we allow them access to our information warehouse through our secure Internet B-to-B site that we call Lowe's link. Through Lowe's link, the vendor will have visibility to sales, inventories, and purchase order information regarding their products. It gives them the capability to drill down to the skew level on a per store basis. Giving access to the information to our vendors will again reduce lead times, minimize vendor failures, and give an additional sort of opportunity to help us drive more sales. By yearend, we anticipate all major vendors having access to the Lowe's link. The third opportunity is linked toward large store managed inventory. Bob Tillman mentioned during his fourth quarter conference call, this was one of the ways we are positioning ourselves to withstand a softer economic environment. But the benefits of

store managed inventory are experienced whether economic times are good or bad. We're shifting more responsibility for inventory management and thus ownership from Wilkesboro to our stores. We're doing this to ensure we're market specific in every market, with more of that market's 'A' items on the shelves. This strategy ensures that our store employees, those closest to the customer can influence the inventory offering in their stores to make sure we meet the home improvement needs of all customers. In other words, we are maintaining the best of our sophisticated, centralized infrastructure and combining it with the employees in the stores who constantly interface with our customer. And the final opportunity for us today in Logistics and Distribution, is taking more of a sales focus to our jobs. Up until now, our focus in Logistics has been to drive efficiencies and take those efficiencies to the bottom line, and the results have been impressive. Our new focus is to continue to drive efficiencies, but then re-invest those efficiencies in improved service to the stores to drive sales. For example, our cross-docking is the most efficient way to move inventory. That means we don't have enough safety stock-on-hand in the DCs to meet our store's needs, it's a false economy. Don't get me wrong, we're not backing away from our commitment to cross-docking one bit, but some vendors are more reliable in a just-in-time environment than others. Therefore, we are reviewing those cases where we've had issues, and now stocking safety stocks in the RDCs to make sure the stores don't experience out-of-stocks, the results being increased sales. There also are ways to take new efficiencies and reinvest them in the way we operate the DCs

to increase the service levels at our stores. To put teeth in this commitment to enhance service, incentives pay at the DCs is now partially tied to how well they meet stores inventory needs, not solely on how efficiently they run the DC. My goal, if it's not clear at this point, is to maintain our current outstanding operating ratios and improved service levels to the stores to drive sales, and that opportunity clearly exists. We will also have opportunities for improvement beyond 2001. Three weeks ago, we initiated a major cross-functional business process improvement project regarding the entire supply chain. In addition to having team members from merchandizing, Logistics, store operations, and MIS, we had eight internal BPI professionals dedicated to the project. It is time to go back and take a deep look at the entire process. As I've said earlier, we have one of the best processes in retail today. But the day you start believing you can't get better, you need to find something else to do. Over the past eight years, we've invested over 400 million in DCs and our Logistics capability, and the bottom line on that investment is, it enables us to beat the low cost operator. It allows us to get good returns of our existing store base, and to leverage the heck out of them as we increase our sales volumes per store. Lowe's Logistics is a competitive advantage that has taken years to develop and the one we intend to exploit. It enables us to have the right product in the right stores at the right time with the right price, which is all about improving home improvement for our customers. With that, I'll it turn over to Robert for details on the first quarter numbers.

Thanks Tom, and good morning everyone. As, Tom, indicated sales for the first quarter, which includes the 13-week period ended May 4th was $5.3 billion, an increase of 18.1% over last year's first quarter which included the 13-week period ended April 28, 2000. As you'll recall from our comments on our conference call in February, the calendar shift resulting from fiscal 2000 contained 53 weeks benefited our top line this quarter. This shift first started first quarter of 2001 in February causing the quarter to end in May and pertaining one more week of the spring selling season. Our original estimate, presented on our February 26th call, was that the calendar shift would benefit sales by approximately $160 million. This estimate assumes somewhat unfavorable weather for this week. However, favorable weather in the last week of the quarter resulted in better performance and therefore sales benefit was approximately $200 million. Comp sales declined 30% for the quarter. The week shift, I mentioned earlier, did not affect comp results because the purposes of computing comps weeks 1-13 this year are compared to weeks 2-14 of fiscal 2000. This adjustment properly realigns the mismatch caused by the counter shift. Products performing well for the quarter included appliances, wet plumbing and electrical, interior paints, flooring, and mail work. Products performing below the company average for the quarter included lumber, [_______________], outdoor fashion, and outdoor power equipment. As is evident from slower performing categories, record cold weather in February and March impacted their performance.

However, once the weather broke in April, performance in outdoor related products improved significantly. In addition to the effective weather, deflation in lumber building materials had a negative impact on first quarter comps in excess of 100 basis points. Our Eagle stores, our sales initiatives in store resets are starting to take effect, and as a result, sales in most locations only had a 20-basis point negative effect on first quarter comps. In addition, average ticket at the [_______________] stores continues to grow and continues to improve in the customer account. And finally our contract web vision, which is using more dramatical impact of our lumber deflation in our retail stores. Here we had a 40 basis point unfavorable impact on total company comps. This quarter, as a competitive response, we elected for the first time to open our stores on Easter Sunday. If we had seen that 100% of our Easter sales were incremental, we at the Easter sales would not simply shift it from other days within the quarter those will benefit 57 basis points on comps for the quarter. After taking into account the overtime premium that we paid associates who volunteered the work on Easter Sunday. The additional sales benefited revenues per shares less than one-half cent for the quarter. For the quarter, gross margin increased 37 basis points over the last year, which is slightly ahead of our guidance of 20-30 basis points. The increase in growth margin is primarily attributable to mix shift and cost reductions achieved through the product line within process, actually offset by an increased inventory shrink. SG&A leveraged 25 basis points for the quarter, and we congratulate our sale management team for effectively controlling the expenses in a difficult sales environment. Of late springs, selling season hurt sales

Total costs during February and March were minimized as we waited for the weather to turn. This is in much contrast to last year when, as you might remember, February and March were strong sale months and poor weather in April disrupted our sales momentum. Last year when April sales weakened, our spring staff was already in place reducing our flexibility to control expenses. Even below planned sales as well as increase in health care cost and revenues and prices, we are pleased to have leveraged SG&A. Store opening costs deleveraged for the quarter by 10 basis points. As Bob indicated, we opened a record number of stores in the first quarter, 30 new stores and five relocations versus 13 new and two relocated stores in the first quarter of 2000. Compared to our original business plan, we accelerated three second quarter openings into the first quarter. The significant increase in openings in the quarter is a result of our efforts to open stores more evenly throughout the year. We focused on building for the future and our confidence in our business model and metro market expansion continues to grow. Depreciation was unplanned for the quarter, but de-leveraged 16 basis points due to delayed plant sales. Interest expense increased to $41 million for the quarter as a result of our recent capital market productivity. Our total pre-tax earnings and net earnings each increased 20% over the first quarter of 2000, and earnings per share was ¢58 coming in at the high end of our guidance. Incremental sales from week shift discussed earlier had approximately a ¢5 per share positive impact on earnings for the quarter. For the quarter, diluted shares outstanding total 393.8 million. The computation of diluted shares takes into account the effect of our February convertible debenture

offering which increased first quarter weighted average shares outstanding by 7.1 million shares, and computing first quarter diluted earnings per share the after-tax add back to net income related to interest in the convertible debentures was $2 million. For each of the remaining quarters in 2001 in computing diluted earnings per share the after-tax interest add back related to the convertible debentures is $2.4 million, and adjustment to shares outstanding is 8.3 million shares. For the quarter, we saw 2% increase in average ticket and $55 and ¢31 to $66 and ¢54. Customer account increased 16% during the quarter. Now, highlighting a few items on the balance sheet. Inventory increased 17.4% for the quarter, slightly less than our 18.1% sales growth. Our merchants and operators have worked diligently with our vendors over the past several quarters to ensure that our inventory position remains under control. During February and March, we kept tight control on inventory as adverse weather patterns resulted in a later than normal spring. As Tom just highlighted, our state-of-the-art distribution system plays a vital role in this process. We were confident that when the weather turned and springtime broke, we have the Logistics infrastructure to put the supply of stores with the new products. Our $600 million of convertible debt issued in February is reflected on our quarter-end balance sheet. While we continue to evaluate market conditions and resulting opportunities, we are comfortable with our current cash position that will allow us to fund this year's capital needs without requiring additional external capital. The term invested capital measured using beginning debt and equity and the current fourth quarter earnings

increased 80 basis points for the quarter. Over the next several quarters, return on invested capital were declined slightly as debt issuances in the second and third quarters of 2000 as well as the February convertible debt offerings well into the calculation. Finally, I'd like to discuss some of the line items details in Lowe's business outlook. The second quarter sales increased 15% incorporating a flat comp assumption. The benefit of the week shift in the first quarter is reversed somewhat and negatively impacts second quarter sales by approximately $100 million. The 15% increase in sales is expected to generate diluted earnings per share of ¢80-82. As we know, in the second quarter, we remained focused on the customer while continuing to control expenses, expand margins, and maximize efficiency. Number five is to start the rebound, in last week, the International Trade Commission said there is reasonable indication that the U.S. lumber industry is being threatened by Canadian lumber companies selling the lumber at low cost than the U.S. Given this development, we're likely to see prices continue to climb here. If this happens, random lengths will show unusual inflation relative to last year's falling prices. This fact coupled with easing comparison variable housing data, and the recent FED activity results in an estimated comp sales increase for the full year in the 3% area. As a result of accelerating three stores in the second quarter to the first quarter, we now expect open 20-25 stores in the second quarter, and then we'll try to open 115 stores in fiscal 2001. Regarding current sales trends, I have mentioned earlier that our business outlook for the second quarter anticipates flat comp. Especially in the first two weeks of the quarter which included difficult comparison against the last year second quarter,

our quarter-date accounts are slightly negative. Before I turn the call over to the operator to begin question and answer, I'd like to mention that in addition to Bob, Tom, and myself [__________], Bill Warden, and Larry Stone are also present for the question and answer session. Operator, we are now ready for questions.

If anyone has a question at this time, please signal by pressing '*1' on your touchtone telephone. We will take your questions in the order that you signal us, and we will take as many questions as time permits. Once again, if anyone has a question at this time, please signal by pressing '*1' and we'll take our first question from Budd Bugatch with Raymond James.

Good morning. Congratulations on the quarter. Just a quick question on the comps going forward, you indicated that lumber you think will now turn positive for the year on net 2% positive comp for the year? What do you figure lumber is as a part of that?

Budd, the lumber, what I said was in random lengths you started to see inflation creep in the lumber, so then obviously that will start benefiting our comps. The 2% number was for what we estimated today all the factors in moving as to what that will do for comps for the entire year. As far as what part of that is lumber, I mean, lumber and building materials, it's been hurting us about 100 basis point totally that will get back to flatter sale in the next quarter and then maybe we will see little bit positive benefit towards the later half of the year, but as far as putting certain basis point around that, I don't have anything to provide to you Budd.

It looked to me like year-over- year, the spot was down about 34% on the average of the first quarter versus this year versus first quarter of last year and if that had an 100 basis point impact on comps then it would seem, right now, it looks like on the average so far in the quarter it's up 9% year-over-year. So you had the turnaround total in the pricing, so it looks like it's probably starting to have a positive impact even in the next quarter?

Well, positive impact only current in the first couple of weeks, the second quarter, and really it was negative. There was still deflation down in the entire first quarter.

Right, I understand. Also, on Eagle do you think that will turn positive in the second quarter?

I don't know to address that.

Budd it's Larry Stone. The stores that we finished first were the Utah stores and the vendor stores and certainly the comps there ... and we felt like as we move into the later part of the second quarter into the third quarter, certainly the Seattle stores will pickup speed, and we will get the comps when need to be which with the data we gave this could slightly positive for the year for the Eagle stores, and I see no reason we won't reach that goal.

Okay, thank you very much.

And now we move to next, Matt Fassler with Goldman Sachs.

Thanks a lot and good morning. One followup on Eagle, if you could detail the impact of Eagle on earnings per share this quarter compared to a year ago.

Matt, one thing I will tell you is that our entire western division which is the Eagle [_______________] stores as well as the new stores we have opened out there, if you look at on the store contribution line, they were profitable for the quarter.

How did that contrast with a year ago, Robert?

A year ago, we were in a loss, slight loss in the first quarter. It gotten worse obviously as the year went on and we were remerchandizing [_______________] stores.

Fair enough. Second question if I may, if you could just talk about the progression of comps through the first quarter? Give us a sense of any changes in turn you might have seen.

Basically we started out early in February as our number was flattening against a year ago. We had a rough weather, so we have first few weeks of positive, the month of February was slightly negative and whole comps turned ugly in March as weather pattern was the worst against last year, and then the comps in April turned around and we ended the last couple of weeks of April with real strong comps against last year.

Fair enough, and then my final question just a detail financial question. It looks like the percentage change in depreciation year-to-year accelerated a bit from what you have been showing recently. What kind of year-to-year growth do you expect in depreciation as we go through the year?

For the entire year, depreciation is probably in the 25% area for the entire year.

Just any particular reason it gets bigger than the increase in the square footage?

The increase in ownership is forced and also the DCs. 00:35:5 ATT FASSLER: Okay, got you that's helpful. Thank you very much.

And now we have question from Dan Wewer with Deutsche Bank Alex Brown.

Hi, good morning. Question for you Bob or Dell. On the product line reviews, are you finding that you're getting a bigger bank for the box given that the vendors must be really discouraged by the demise of home base and speculation that pay less, may or may not survive in its current format, but they have fewer doors to sell to and therefore you're leveraging the product line reviews more than you have in the past or more than what you may have expected?

Dan, I think it would be fair to say that the product line reviews continue to be a very important part of our ongoing program in terms of refining our assortments and lowering our costs and openly getting a better mix, but I don't know that I could say that it's improved significantly over the last few months. I think we've seen the obvious consolidation going on for years now and I think it's a continuing evolution.

Dan, it's like the other thing that Bob Tillman might add is that as I have said many times the biggest problem we had in year 2000 was the diversion of focus [_______________] Eagle and it really put our merchandizing group behind and doing the as many [__________] moment we do within a calendar year, I think we're just making up some of the lost time.

Okay, one followup question. Robert, I understand correctly that the shrink rate was up and which could be a bit surprising given how lean the inventory levels were typically you would see the shrink leverage not a problem with this kind of inventory growth?

Shrink was just slightly over planned in terms of dollar for the low plant sales as a percent of sales, and Dan, we forecasted over the next couple of years, constantly putting new initiatives in place, but it probably will inch-up a little bit and it's just merely a factor of going into more and more metro markets, half percent of our stores being in the metro markets, so that's just a fact of life we won't be facing.

Lowe's is at the store level not at the distribution center?

Absolutely.

Got you. Thanks a lot.

Susan Quilty with Morgan Stanley has our next question.

Thanks, good morning everybody. Looking at the new store productivity numbers that looked extremely strong this quarter, I know to some extent that's distorted by when you opened stores and maybe some of the counter shifts going on, but can you tell us what you saw in the productivity this quarter that might have showed such an acceleration from some of the recent quarters?

I don't know anything particular other then, obviously, we talked about the week shift out there Susan, in fact we've got another week of spring selling season in here. So if you're looking at frail financial numbers from last year that would certainly have a positive impact because we've got a one week of spring in there versus last year we would have had a different counter shift, but certainly as we opened up more and more stores in metro markets and in all of those metro market stores we're getting higher volumes and what was officially seen in the past I think it's the combination of those two things that you're seeing out there and that'll certainly give you more stores open early in the quarter.

Okay, looks like if you adjust for the 200 million, you'll sell out 500 or 600 basis points on your store productivity. Question also for Tom on the distribution side. We've heard a lot of news from the suppliers about sales weakness that seems to be well in excess of anything that you guys and your major competitor are reporting, and I am wondering if there is something you see going on in the system that might account for that, is there a kind of destocking going on back to the suppliers or is it just you guys getting more efficient in distribution process, any thoughts on that discrepancy?

Susan, I'll take a standby and I'll see what Dell might proceed. He has more interface directly with the vendors, but you know, in our case we've just really not made anything major strives in one direction or the other with regard to just the inventory levels. We are pretty much keeping on maintain what they have been at quarter-end, our comps store inventories were down about 3.3% from a year ago, and just some of the things I have talked about that we've been putting in place, it's helping us to achieve that. Our totals inventory per store is actually up about 1.6% over last year and that reflects the higher inventory levels. We are purposely are going into these new market with to make sure we don't self determine our sales, but try to have plenty of the products there to draw up sales and let the stores get to the level that they ought to settle out at. So, whereas my standpoint it's been business as usual and we did get there, as Robert mentioned I guess, our inventories up about 17.3% and square footage is up 23% which is reflective of just what I told you there but Dell if you got any thoughts about what the vendors are saying versus what they are seeing?

Susan, I think it might go back a little bit to what Dan was asking earlier. Obviously, there is some consolidation occurring and there is some weakness out there. We are acquiring share and as we do that, the vendors have been through enough chapter eleven, to be very cautious about how much inventory they are putting into the hands of those that may or may not make it.

Okay, great, then one last question for Robert if I could, you sound a little bit more cautious about the consumer outlook yet when you talked about the product categories where you saw the weakness, it sounded like it was more seasonal which has broken along the spring. So, I was wondering if there is anything in your business, particularly that you are seeing either average ticket or traffic rates that makes you cautious on the consumer or if you just kind of responding to some of the general macroeconomic concerns out there. Thanks.

It's really more of the general macro issues. The categories that we talked about the outdoor categories, they will hurt more than other categories because in addition to the economic issues you also were hit by the weather issue on top of that during the quarter, but the original guidance for the quarter was flat to slightly negative comps, who came in a little bit below that. For the second quarter, we originally had a guidance of flat slightly positive, we're kind of hopefully trying to concerned with all of that given a flat guidance for a second quarter, so we will know about that, that's merely just trying to be cautiously optimistic as Bob said in his opening comments as we look out at the balance of the year because a lot of the, we've had five reductions in the interest rate for the FED. We really haven't seen whole lot of that showing up yet in our stores. We are about 6 months away from the first one, which is normally about the time period when you would see that. So hopefully, we would start to roll into the stores over the next few weeks and few months. Operator we've got time for one more question.

Our last question comes from Danielle Fox with JP Morgan.

Thank you. It's look like you ended the quarter free cash flow positive and I am wondering if there is any chance that you can end the year free cash flow positive?

We say free cash flow positive, you mean that during that cash flow for the year we'd be able to fund all of our expansion without external capital?

Well, meaning that in the first quarter your operating cash flows exceeded your capex and I am wondering if there is any chance that on a go-forward basis that can continue for the next year?

With the $600 million convertible debentures that's out there, we think we've got enough cash on inventory to fund all of our needs for this year, but we still anticipate bringing in cash in an external capital need position for at least the next couple of years 2002 and 2003 to maintain the growth rate after what we're planning in square footage.

Okay, just one final question. If you could talk a little bit about how the capital cost of opening new stores is changing, particularly as you step up your metro market entries? Are you seeing any changes and how competitive the bidding has become on attractive sites?

Bill [_______________] is here to say that. The question is Bill if you're getting more competitive on the bidding on sites and being able to find attractive sites to fund our expand our expansion plan.

We have seen some increased activity in developers and other people coming to us and saying, some of the other deals have fallen by the wayside and we think we're getting to look at some more properties and perhaps will translate into some decreased counts I can't quantify for you, but we do see some people not as energetic or aggressive in developing projects or expanding that gives us some opportunities. That's a general scene, I cannot quantify it for you.

And is that true for most markets including for metro markets, but across the board or is it typically from the smaller markets?

No these are across the board. I think it sort of a macro economic trend as opposed to any particular place.

Okay, great.

As far as the cost of property that you mentioned Danielle, as a high percentage of our stores get into metro markets that's the real difference in the metro market we are seeing whereas the cost of the land is generally high and higher percentage of our stores every year and the average cost to open up each class of stores is going up a little bit. So we are up a little bit higher when we look at the average class issue of last year, but that was all back into our plans at the beginning of the year and our capex needs as well.

Okay. Thank you.

Thanks Robert, and as always, thanks to all of you for your continued interest in Lowe's, we look forward to speaking with you again when we report our second quarter results in August. Goodbye and have a great day.

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