勞氏公司 (LOW) 2002 Q1 法說會逐字稿

This is Premiere Conferencing, please stand by. We are about to begin. Good morning, everyone and welcome to the Lowe's Companies first quarter earnings release conference call. This call is being recorded. Statements made during this call my include forward-looking statements within the meaning of Section 27-A of the Securities and Exchange act. The company believes that such statements are reasonable, it can give no assurance they will prove to be correct. Possible risks and uncertainties are detailed in the company's May 20th, 2002, earnings release and the company's filings with the Securities and Exchange Commission. Hosting today's conference will be Mr. Robert Tillman, president and CEO, Larry Stone and Mr. Robert Niblock, executive vice president and chief financial officer. Please note the call will conclude at 9:40 EST. I will turn the call over to Robert Tillman. Please go ahead.

Thank you for joining us. Today after hearing from Robert Niblock, chief financial officer and Larry Stone, we will review the factors that drove our performance during the quarter. The first - I would like to highlight a few items from the first quarter results. Sales in the quarter total $6.5 billion a 22.6 percent increase over last year. Comparable store sales increased 7.5 for the quarter. During the quarter, we experienced widespread sprints across geographic regions and product categories. Our strong results are also a sign that our initiatives like SOS, CBC and installed sales are working to drive incramental sales across our chain. During the quarter, we continued our focus on metro markets and continue to be pleased with the results our Metro market stores are [inaudible], particularly in the northeast and western U.S. For our expansion in the first quarter, more than 50 percent of our stores are in Metro markets, which we define as MSA's with 500,000 people. Our Metro market growth continues this year with nearly 65 percent of our expansion occurring in Metro markets. Highlighting of the items on the income statement, we achieved a record [inaudible] of 29.7 percent, which when combined with effective expense controls drove pre-tax earnings to a Lowe's record 8.5 percent, quite an accomplishment considering the difficulty many others experienced during the first quarter. The results we delivered for the past several quarters certainly adds to our conviction we have a successful model, despite concerns about the economy, the American consumer continues to spend and home improvement customers remain willing to invest in their homes. We approach the balance of the year with optimism, but continue to keep a sharp eye on unemployment, housing trends and the effect these have on the consumer. Our optimism comes from the fact we know we are putting the right stores and the right markets with the right assortments of product and services, all supported with a marketing program driving traffic. We will continue to approach the year with some caution and to the economic pilot climate becomes more clear. Our caution hasn't slowed expansion plans. In the first quarter, we opened 46 stores, including four relocations, while closing 1 older and smaller store, bringing total store count to 785. Square footage increased to 86 million square feet and 19.7 percent increase over the first quarter of 2001. We remain on plan to open 123 new stores this year. However, we won't rest on the success of our first quarter. Our business process improvement teams remain focused on eliminating wastes and inefficiency. We will continue to diligently control expenses, while at the same time ensuring service levels in our stores remain high. We will continue to leverage our distribution and support infrastructure as we drive higher volumes through our big stores. Focus on these initiatives will ensure a better shopping experience and continue improving home improvement for customers. With that, let me turn the call over to Larry Stone.

Thanks, Bob. I would like to talk about sales trends, highlights by Metro market stores, as well as details to the store managers to drive increased sales and productivity out of our store base. First, we were impressed with the quarter. We experienced positive comps in 17 or 18 regions. The only negative region experienced unseasonably cold and wet weather during the quarter, which nipped sales. Our regional sales balance shows consumers are willing to invest in their home, despite the economic environment. We saw a balance across product categories, with no one category driving our performance. In fact, all 17 product categories experienced positive comps in the first quarter. We continue to be please wide above-average comps in appliances. We achieved 12.1 percent share of the appliance market at the end of the first calendar quarter, up from 9.3 percent in the first quarter of 2001. This market share gain exceeded all other competitors and supports our belief consumers prefer offering of premium national brands with 250 SKU's in stock in a bright, clean, shopable environment. We are not resting on our success. Despite our strong market share gains, we continue to invest in our stores. This year, we will remerchandise the appliance areas of 170 of our existing stores. Those stores don't have the newest sets. To provide an even better service to customers. The investment we are making is representative of our continued investment in the future and our dedication to provide customers with the best home improvement stores in the industry. Our outdoor power equipment category also performed well during the quarter. Many of you have heard us describe our intentions to offer well-known brands in this category to exclusive agreements with [inaudible]. Those new brands help drive double digit comps during the quarter and also served to re-enforce our strategy. Lumber, millwork and hardware delivered solid comp increases during the quarter, a sign commercial business initiatives are providing continued success. Our [inaudible] categories remain strong, also delivering double digit comps in the quarter. As Bob mentioned, we are still very pleased with results we are seeing in the Metro markets around the country, especially the strong store performance experienced in the northeast and west. In the second quarter, we will add to Metro store base by opening two stores in the Boston area. We continue to add stores in the Metro markets in California and our plans to store the greater New York city area continue with a new store in Homedale New Jersey and a second store in Long Island, expected to open in the third quarter of the year. While the results we are experiencing grate enthusiasm about expansion, we know that the key to our continued success lies in the efficient and proper alteration of our existing store base. We can't and I won't allow our comp store base to lose sight of the fact we must continue to improve execution in our existing stores everyday. It all hinges on our vision, which is for a customer's first choice store in each and every market we serve. We continue to be focused on the fundamentals of retailing. We challenged our stores to improve on five measures this year. Customer service, inventory strength, employee turnover, inventory turnover and management involvement. Our first quarter results show we are making progress. The first step in building a strong retail foundation is to provide exceptional customer service. We have made great strides in the service we deliver in stores. Independent surveys show we have reached [inaudible] from in the industry. We must strive to be better. As good as is not good enough. We know that we can drive higher volume by increasing the average ticket. Our real focus is to drive more traffic through the stores. This is accomplished by using staffing plans that better match payroll and sales and improve stock programs and clear direction of our cross-merchandising, are just a few examples of new plans we have grown to improve service. This year we completely revamped our customer first program. A program developed a few years ago to promote and measure customer service in our stores. This year's enhancement provide our teams more and better information to help them stay focused on service. Our mystery shop program has been revamped to dig deeper and better understand why we are not achieving exceptional customer service. Through our 800-CALL-LOWES[phonetic] numbers we get instant feedback from customers. Our call-back report tells us where staffing is needed. Our goal is to answer every service call in 60 seconds or less. By using complaint index, we can determine which stores are failing to solve issues at the local store level. Stores we measured against established standards, as well as against other stores. A detailed report will show how each store stacks against other stores, where the store can improve and how each store compares to our standards. All stores receive a quarterly score and detailed action plans will be developed for each store below the standard. First quarter results show our efforts of paying dividends. Average ticket was up and total customer traffic was up 19 percent. The second challenge for our stores in 2002, is controlled inventory stream. By controlling strength, we improved our in-stock position, helped gross margin and helped drive performance of our stores. We added increased focus on technology, to control shrinkage in the stores. We have worked closely with vendors to develop new ways to track the product they supply and ensure merchandise is not walking out of the doors of our stores. Electronic article surveillance tags have been incorporated into many products as part of the process, not just placed on the outside of the packaging. This makes it difficult for shoplifters in our EAS system by removing tags from the products. We know that some thieves will continue to find ways [inaudible] even the best electronic systems. We have challenged our stores to provide the human component to compliment our electronic system to control strength. We will also have greeters at our entrance to help control the thieves that come in empty-handed. We have issued a tough refund policy for customers without a receipt. We will not give cash back, only a merchandise credit card, which can never be cashed out. We have been inputting a better track record for repeat offenders. In some case, we will not issue a new card. New job descriptions and new focus of cashiers are helping. More scan errors are being detected. I know issues with scanning will be greatly reduced with the renewed focus of head cashiers. All are small steps, together, they can deliver large results. In the first quarter, shrink was down 24 basis points to last year, an improvement that drove our gross margin improvement for the fourth quarter. The third challenge is to reduce employee turnover. In our efforts, we challenged our store manages to become more involved in the hiring process. I have told them to spend at least 15 minutes with every potential new hire and not just leave the hiring process to the coordinators in the stores. Store managers are required to participate in new employee orientation. By doing this, new employees better understand standards and the opportunity they have with Lowe's. To help us achieve our goals, we provide our employees with a total compensation package that includes competitive pay, employee discount, medical, dental and life insurance programs, retirement plans and a discounted stock purchase plan. This package has allowed employees, even at entry levels, to see the opportunity and think about their employment not as a job, but as a career. We are finding in many markets people want to work for Lowe's. So far this year, we have received 400,000 applications in our stores, allowing us to become more selective. We know our efforts are working, turnover of hourly employees improved by 18 percentage points in the quarter, continuing a 16-month improvement in turnover rates. Employee retention measured as percentage of people that begin the year and are working with us at the end of the year tells an impressive story, improving seven percentage points in the first quarter. Retention of part-time employees is up over 7 percentage points in the quarter. The challenge we get is to help drive productivity to inventory turnover. Inventory turnover has remained flat. We have not totally leveraged our distribution network and sometimes higher inventory are driven by over zealous managers. Last year we turned inventory 3.3 times. Our goal is to improve by 30 basis points per year. To achieve our goal with initiatives directed toward this issue. First, for the past nine months we worked on a functional effort to improve internal supply chain. One initiative we have adopted and currently implementing is moving safety stock into the network. The network we have in place today, we can maintain safety stocks of many items out of D.C. and reduce inventory in our stores. Should a store have a run on an SKU, we can replenish the store quickly from D.C., most of the time in 48 hours or less. We are evaluating every SKU to see if we will have the opportunity to reduce inventory without sacrificing service levels or sales. We have done an extensive study on manufacturing case quantities to determine what we need to decrease or increase the quantities needed to meet customer demand. The merchant and logistics teams have [inaudible] and to make sure just in time strategy meets demands of our customers. Lastly, we challenged our stores to get involved and manage the assets. We must find the battles between lean inventories and sales, but our managers are aware of the benefit scheme for managing inventory. Our managers must ensure product is pulled down during the recovery process. Inventory discrepancies must be handled immediately to ensure automatic [inaudible] process is supplying the store with the appropriate level of inventory. If the first quarter, inventory increased 16 basis points. In the fifth challenge we have given our operations team is to ensure every member of the management team that is engaged and involved in helping effectively run our stores. In 2001, we added five regions and 16 districts to our operational structure. This new structure was put in place to assure regional vice president and district managers can provide the appropriate level of supervision, guidance and time in the stores they are accountable for. Their expanding regional structure will drive better corporate initiatives and provide consistent and safe shopping environment for customers. As I mentioned earlier, these initiatives are fundamental in retail, but to improve performance, we must improve our execution of these and other initiatives everyday in every store. By improvements, it will allow us to continue our aggressive market expansion. The results we delivered in first quarter are a step in the right direction. Our customer service, measured by independent sources, continue to improve. I will continue to push our stores to excel in this critical area. Inventory strength has helped drive gross margins for the past several quarters and the internal controls should continue to drive improvements in shrink results. The progress we have made in employee turnover and retention has been significant. Not only does that lead to reduced training costs, but better trained and more tenured employees to provide great customer service. Inventory turnover has turned in the quarter and we expect gains in the next several quarters. Finally, the management teams are engaged in successfully introducing Lowe's to millions of new customers every week. For the past 12 to 18 months, our business process improvement team worked to take a deep look at many of our processes; including representatives from operations, logistics, merchandising and real estate, the teams look for ways to improve the basis of activities with the goal of improving efficiency of the whole company, not just one district. While our continued expansion was the focus on the Metro markets provide tremendous opportunity for Lowe's over the next several years, we have the capability to drive our existing store base and help identify and develop in our VPI process. Store directives incorporate some of what these teams have identified and the impact these directives had on first quarter results, mark only the beginning of what we expect to gain through this focus on efficiencies. With that, I will turn over to Robert Niblock to describe financial details in more detail. Robert.

Thanks and good morning. As Bob indicated, sales were 6.5 billion for the first quarter, representing a 22 percent increase over last year's first quarter and ahead of our guidance of 21 percent. Comp sales were 7.5 percent for the quarter, which exceeded our four to six percent guidance. Comp performance was relatively consistent throughout the quarter. Inflation in lumber and building materials resulted in a favorable impact on first quarter comps of eight basis points. As Larry mentioned, we experienced widespread strength in comps with all, but one region reporting positive comps for the quarter. With regard to product categories, the categories that performed above average in the first quarter include millwork, outdoor power equipment, appliances, paint, windows and walls, fashion plumbing, fashion electrical, cabinets, flooring and home organization. In addition, hardware and lumber performed at approximately the overall corporate average. Gross margin for the first quarter was 29.71 percent, improvement of 140 basis points over last year's first quarter and significantly ahead of our guidance of 20 to 30 basis points. The improvement was attributed to a number of factors, including better rates, product mix improvements and 24-basis point reduction in inventory shrink that Larry discussed. SG and A leveraged 17 basis points in the quarter, below our guidance of 20 to 30 basis points of leverage. The shortfall is attributable to higher than planned incentive compensation which deranged 24 basis points and was driven by earnings which exceeded our plan for the quarter. Store cost leverage 11 basis points and reflects the opening of 42 new and 4 relocated stores in the quarter. This compares to 32 new and 5 relocated stores last year. The decrease in average store opening costs versus last year, derived by providing opening costs in the financial statements by the number of stores open in the quarter is attributable to timing differences since we expense opening cost as occurred. Excluding timing differences our average store opening cost has not changed from last year's first quarter. Depreciation at 2.24 percent of sales total $145 million and leveraged two basis points. At the understand of the first quarter, we owned 73 percent of our stores, versus 16 percent at the end of last year's first quarter. For the quarter we achieved a record EBIT margin of 9.2 percent which represents an improvement over last year's first quarter. Interest expense increased to 47 million for the quarter, with leverage 5 basis points. For the quarter, total expenses were 21.18 percent of sales and leverage 35 basis points, which exceeded our guidance of 20 to 30 basis points with leverage. As Bob mentioned, for the for the, pre-tax earnings were 175 basis points over the prior year. The tax rate for the quarter was 37.4 percent versus 37.3 percent. The increase was driven by above-planned earnings. We are anticipating an effective tax REIT of 37.4 percent for the remainder of the year. Diluted earnings per share of 44 cents increased 51.7 percent, versus last year's 29 cents and exceeded our guidance of 35 to 36 cents. Diluted shares outstanding total 798 million for the quarter. The competition of diluted shares takes into act the effective convertible debentures, which increased first quarter weighted average shares by 16.5 million. In computing first quarter earnings per share, the after tax to net income for interest on convertible debentures was [inaudible]. For each of the remaining quarters of 2002, the after-tax is $2.6 million. For the second quarter, we are projecting diluting shares of 800 million. For the year, projected diluted shares outstanding of 801 million. For the quarter, we saw increase in average ticket to $58.08. Customer count increases 19 percent during the quarter. Now, highlighting a few items on the balance sheet. First of all, our cash position improved to 1.5 billion at the end of the quarter. In addition, inventory increased 11.3 percent, significantly less than 22.6 sales growth. Internal invested capital measured using beginning debt and equity and earnings decreased 28 basis points for the quarter and 14.07 to 13.79 percent. The decrease is attributable to our decision to prefund our 2002 financing needs. For the entire fiscal year 2002, we expect investment capital to increase 10 to 20 basis points. For 2003, we expect return on investment capital to increase 60 basis points, as we currently anticipate being able to fund our 2003 expansion program with little to no external financing. Our strong first quarter performance drove shareholders equity, determined use of beginning equity and earnings to 19.83 percent, representing increase of 244 basis points. Cash flow from operations was $1.2 billion, representing increase of 88 percent, compared to the first quarter of last year. The increase was driven by increased earnings and improved payables leverage. As we have discussed many times before, our process of relocating our older is some smaller stores is almost complete. As a result, for the quarter, our big stores represented 97 percent of total sales and generate 98 percent of operating profits. These percentages will continue to grow. We replace smaller stores with large format stores I would like to discuss several items detailed in the outlook. A second quarter sales increase of 21 to 22 percent incorporates a comp assumption of 4-6 percent, which is expected to generate diluted earnings of 53 to 54 cents, representing an increase of 26 to 29 percent. As a result of our strong first quarter earnings for fiscal 2002, we are now anticipating diluted earnings per share of $1.66 to $1.69, which represents an increase over last year of 28 to 30 percent. Gross margin for the second quarter is expected to increase between 50 to 60 basis points. For the entire fiscal year, we are also anticipating a gross margin improvement of 50 to 60 basis points. For the year, we are estimating a comp sales increase of 5 percent. This guidance incorporates a comp assumption of 4 percent for the second half of the year as we cycle against tougher comp comparison. We expect to open 23 stores in the second quarter and are on track to open 123 in fiscal 2002. Regarding current sales trends, our business outlook for the second quarter anticipates 4-6 percent comps. For the first 16 days our comps are at the upper end of the range. Before I turn over to the operator for inquiry questions, in addition to Bob, Larry and myself, Dale Pond, Bill Warden and Perry are present. We are ready for questions.

Thank you. Today's question and answer session will be conducted electronically. To ask a question press the * followed by 1 on the touchtone telephone. That is * 1 on your touchtone telephone. We will take as many questions as time permits. We will pause for a moment to assemble the roster.

Our first question will come from Bill Julian of Salomon Smith Barney.

Good morning. And, congratulations. Your guidance for the gross margin for the back half of the year looks like it is all of 20 basis points of expansion, given what happened in the first half. Yet, when I look at your comparison for the last two years, it is not like they get that much more difficult. Talk about what is driving the slow down.

Bill, this is Robert. We have been consistently saying we expect 20 to 30 basis points per year, that is what we charge the merchants with. If you look over the back half of the year, you are looking at increase in the 20 to 30 basis point range. I think in the fourth quarter of last year we were up one hundred basis points. We are cycling in tough numbers in the fourth quarter and we just want to maintain the flexibility in our business as we look out over the longer term to manage the business the way we think is most prudent. Short-term, we are taking out the guidance once we have seen the performance. Longer term, I want to take up the guidance until we think it is necessary or until we think it is prudent, that is after the second quarter. We think we have a better outlook on the back half of the year. I guess it is wrapped up in our stance we have taken for the past several quarters, which is being cautiously optimistic.

Okay. Did you mention what your level of inventory shrink is today?

We don't disclose that. 24 basis points improvement as an explanation through the 140 basis point increase in margin. The 24 base improvement exceeded our planned improvement in inventory shrink.

Any sense on whether you are above or below industry average, can you give us that much on shrink?

We believe below.

Next, we will hear from Bud [inaudible]of Raymond James.

Hi. My congratulations, as well. I am still perplexed about the guidance on gross margin for the second quarter, up 50 to 60 basis points. It looks like - I am not sure why it wouldn't be better than that or stronger than that.

We are sitting here at the beginning of the quarter. Certainly we will not guide you to more than 50 to 60 basis points in the quarter. We need to maintain flexibility in the business. If we decide we want to get aggressive on pushing through, discontinued or nonproductive inventory, we will maintain flexibility in the business. We will deliver 50 to 60 basis points. Depending on how on the weather, that number could be more. We feel comfortable with 50 to 60 basis points, but will not guide you above that.

Correct me if I am wrong. Doesn't look like mixed [inaudible] change evident in the numbers. If I look historically first to second quarter gross margins, look at them quarter by quarter, year over year, quarter over quarter, looks like relatively stable margin performance in the last couple of years.

It is. In the second quarter of the past three years we had 34 basis points and 45 basis points improvement over the last three years, 50 to 60 is in line with the numbers.

I understand that. Then that looks like where the first quarter came in significantly better than that.

There are several things out there. Inventory shrink and other drivers that we are just - not knowing how you will sell through seasonal categories and not knowing how we will be at the end of the spring season, that inventory to sale through if it doesn't sell through. We are optimistic and will not guide you above that.

Congratulations. Thank you.

Next David Chick of [inaudible].

Hi, good morning. Could you give us a little bit more update on the CBC initiative in terms of progress during the quarter, anything you would release on numbers?

The CBC continues to perform. We had positive comps in CBC for the quarter. We don't have any new, exciting initiatives we have added. We continue to do the things we outlined in the past, making sure we have the right people to take care of our customers and inventory and certainly have the the right folks on all the various key places in the stores, whether the paint deck or CBC desk or millwork deck or whatever. Very pleased with it, still driving positive comps and still on plan based on how we projected 2002.

Thanks.

And again, * 1 to ask a question. Next we will hear from Matt Savler[phonetic] of Goldman Sachs.

Thanks a lot and good morning. I want to get another derivative on the gross margin question. Give us more detail on how mixed plays into the gross margin improvement that you saw and whether you would expect changes to sustain themselves through the second half of the year? Your guidance on this?

15 basis points in gross margin in the quarter. We will anticipate mix continuing to be a positive driver over the balance.

Following up, if mix was 15 base points and shrink was 25 that would suggest over one hundred basis points was your original mark-up.

Also, margin REIT is driven by better acquisition cost. It is also driven by what we saw as rational pricing environment in the first quarter. It didn't have to do a lot of discounting or anything like that. A number of things we won't - we don't know what the future holds, we won't count of that much of a REIT improvement over the balance of the year.

Were there initiatives you had on a corporate basis in terms of acquisition costs and were there any reasons to believe those would not be sustained in the competitive environment? It is a wildcard. Look at the areas under your control. DALE POND, EVP Merchandising: We are continuing the process of reviews. We are working with vendors in terms of working with them in lowering the cost of goods. So, that is certainly continuing the initiative. There is mix within mix that has been favorable. Certainly a lot of our reset that we put into play last year are starting to deliver the kind of results we were hoping for within the margin, as well. So, those are some of the issues we have got. Logistics has been a big help in the cost of business, as well. That is part of the way we have lowered the cost through vendors.

Got you. Thank you so much for the details.

Aaron Rubenson[phonetic] of [inaudible].

Thanks, guys. Great job. Robert, your mentioned return capital [inaudible]. I am curious what is embedded in that from a capex standpoint and therefore, square footage?

I think we have given that in '03 square footage would be between 17 percent in '03. As far as capex on a cash capex basis, you are looking at a couple of hundred million for '02. As I said, I think previously we had started out, if you look maybe six months ago, we talked in the neighborhood of needing 500 million of external funding [inaudible]. The max and depending on how well performance goes, the back half of the year, there is a good likelihood we may not need any external financing for next year.

Does that represent a change in psychology internally or natural progression with decelerated square footage growth rate?

It is a natural progression of the growth rate, new stores performing very well, maturity base of the old stores. One thing that is a key driver is inventory turns, if you can imagine that generates a significant amount of cash flow to fund the business.

You don't have a ton of discretionary cash on hand, but you will get there. You do seem to have earnings cushion built in. Do you have an area to invest in more so than you are now, what areas would those be, pricing or people or corporate or what?

We will address those when we get there. We are talking about the balance of this year, we need the cash on the books to fund the expansion plan. We think we will have four or 500 million carry-over if we meet our plan for the rest of the year. That funds the shortfall we otherwise would have next year. Then, we will continue to invest in our logistics and regional distribution and infrastructure in the future. You are looking at real between 2004 and 2005, before you would really be significantly on a cash flow basis beyond your expansion plan. Up to 2005, we have 600 million of debt maturities out there. We could use it. By that point in time, we may have other things we are investing in. We still have time to make that decision.

Thanks.

Thank you. Our final question will come from Daniel of J.P. Morgan

Thank you. Where did the pick-up in accounts payable leverage back to historical levels come from? I am wondering how you were able to team it with such a large gross margin gain with the trade-off between the two in vendor negotiations?

That is Robert. There is no real change in vendor negotiations. At the end of the year, there were timing issue that is drove us down lower than where we had historically been. There was no real change in vendor negotiations and inventory improving drives that leverage up. Between inventory turn and getting back - that helped us get back to that historical level. No real change in negotiation with vendor terms in the fourth quarter.

One final question. This past year you increased the percentage of new store openings in large Metro markets. Are Metro stores comping at a higher rate than non-Metro stores that were open at the same time?

If there is no change in the landscape, they comp at a higher rate. Most of the time in Metro markets, there is a change in landscape, given a static environment, Metro stores will comp higher than stores in a small to mid-sized market.

Thank you.

That will conclude our question and answer session. We will turn the conference back over to Mr. Tillman for closing remarks.

Thanks to you for your continued interest in Lowe's. We look forward to speaking with you again to report our second quarter results in August. Goodbye and have a great day.

That concludes today's teleconference, we thank you for your participation.