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Operator
Good morning, everyone and welcome to Lowe's Companies third quarter earnings results conference call. This call is being recorded. Statements made during this call may include forward-looking statements within the meaning of section 27-A of the Securities Act and Section 21-E of the Exchange Act. Although the company believes 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 November 18th, 2002 earnings release and the company's filings with the SEC. Hosting today's conference will be Mr. Robert Tillman, Chairman and CEO. Mr. Perry Jennings, Senior Vice President of Human Resources and Mr. Robert Niblock, Executive Vice President and CFO. Please note, the call will conclude promptly at 9:45 a.m. eastern time. I will now turn the program over to Mr. Tillman for opening remarks. Please go ahead, sir.
- Chairman, Chief Execurive Officer
Good morning and thank you for joining us. As indicated by our release earlier this morning, our results for the third quarter continued the strong performance we delivered in the first half of this year. The home improvement consumer remains resilient and our success is a testament to the continued importance of home and family in America. A key to our current and continued success is great people. Actively engaged in the business and committed to customer service. Even in today's turbulent economic times, you've heard us describe how the American consumer remains willing to invest in their homes because it is, in many cases, their most valuable asset. At Lowe's, our most valuable asset is talented people. And this morning, you will hear Perry Jennings, Senior Vice President of Human Resources, describe the investment we've made in hiring, training and retaining the best people in the industry. Robert Niblock will conclude the formal comments by providing the details of our results for the quarter.
But first, I'd like to provide a few highlights of our third quarter results. Sales in of the quarter totaled $6.4 billion, a 17.6% increase over the last year. Comparable store sales increased 4.1% for the quarter. Quarterly gross margin of 30.64% exceeded 30% for the first time in Lowe's history, driving earnings per share of 43 cents for the quarter, an increase of 34.4% over last year.
You know, there is no question that we are operating in an uncertain macroeconomic environment. However, the housing sector remains strong with housing activity holding at record levels, and despite the ongoing discussion of a housing bubble, median home prices continue to grow and many prominent housing economists are confident that no bubble exists. Mortgage-free financing continues at record levels and the recent move by the Federal Reserve to lower the fed funds rate by 50 basis points would seem to ensure that mortgage rates will remain at or near 40-year lows at least for the near term. Low mortgage rates as well as growth in real earnings have combined to offset increasing home values and keep housing affordable for most Americans.
Despite the mixed economic singles, I remain convinced and our results continue to prove that home improvement is in the sweet spot of all retailing. Even with the uncertainties of the current economic environment, we remain committed to investing our business. Perhaps most obviously through new store expansion. We will open 123 stores this year and we have plans to open 130 stores in 2003 and approximately 140 in 2004. Our new stores are receiving a tremendous welcome in the markets we're entering, from New York to Anchorage and Los Angeles to Orlando. Our stores are generating impressive sales and excitement in neighborhoods across the country.
But our capital investment doesn't stop with our new stores. We invest over $200 million in our existing store base this year to ensure the stores remain fresh, clean and inspirational to our customers. We'll invest even more in our existing stores next year as we're committed to ensure that all of our customers enjoy the best we have to offer in every market. To support these stores, we're building new distribution centers in strategic locations. This quarter, we began shipping from our Cheyenne, Wyoming distribution center. Our 8th in the regional distribution center network. This facility will support stores in the Rocky Mountain states and the Pacific northwest. Our ninth RDC will open in eastern North Carolina early next year.
Our distribution infrastructure provided us somewhat unanticipated advantage in the third quarter as it gave us additional flexibility to address the issues created by the west coast lockout in early October. We were able to reroute product through nonaffected ports and use our RDC network to efficiently float products to our stores. To date, the 10-day lockout has had only a minimal impact on our business and virtually no impact on the in-stock position in our stores.
Another investment, but perhaps not quite as visible, is the investment we're making in technology. We're improving and updating the technology in our stores to provide both a better shopping experience for our customers as well as provide our sales associates the tools they need to efficiently and accurately perform their jobs. Our final investment and perhaps the most important is the investment we're making in our people. As I mentioned earlier, Perry will describe our efforts and successes in this area in a moment.
As we face more difficult sales and earnings comparisons in the fourth quarter and fiscal 2003, we remain focused on the fundamentals of our business that have provided the foundation for the results we continue to deliver. Exceptional customer service is a cornerstone of our operating business plan, and our stores are committed to driving sales, for our special order, installed and targeted commercial business programs, while at the same time, identifying and driving efficiencies through our business process improvement initiative. We continue to be extremely pleased with the success of our new stores in major metro markets as well as the opportunities provided by the small to medium-sized markets across America.
Our merchandising group is not resting on success of the past year. They're looking for new and exciting products for our customers, creating additional strategic alliances with our vendors and continuing our move up the continuum in each and every product category. Our marketing strategy remains focused and committed to everyday low prices. Our improving home improvement message continues to be refined, but our approach remains clear, guaranteed low prices everyday.
Despite the uncertainties of the macroeconomic environment, we remain committed to investing in the business for the long-term. Our expansion continues. Our success grows. But our focus on serving our customers with great stores, great products and great people remains a driving force behind the decisions we make everyday. And here to describe the importance of human capital and our continued success is Perry Jennings, Perry?
- Sr. Vice President of Human Resources
Thanks, Bob. This morning, I will cover three topics. First, a discussion of employee engagement at Lowe's. Second, our plan for ensuring best in class store leadership talent. Third, an overview of the role HR plays in driving service. Let me start with employee engagement. We've been working with the Gallup Organization for the past four years. Using their quantitative research and best practice insights to drive employee engagement at Lowe's.
Gallup identifies three categories of workers, actively engaged, not engaged and actively disengaged. First, the actively engaged. These people are loyal and productive, more likely to stay with their company. These people love what they do. Company pride shows in their performance. These people create value for the brand.
Second, the not-engaged. These people may be productive, but not psychologically connected to their company. More likely to miss work and more likely to leave, they're on the fence, not yet committed but there is hope.
Finally, the actively disengaged. These people are physically present but psychologically absent. Unhappy with their work situation, they insist on sharing unhappiness with others. These people actively destroy brand value.
Gallup reports that only 26% of the U.S. working population is actively engaged. More disturbing, 19% of the population is actively disengaged. Actively destroying brand value. Our HR goals are clear. Maximize recruitment and retention of highly-talented, actively engaged people, avoid hiring or retaining the actively disengaged. This is critical, a direct relationship exists between employee engagement and customer satisfaction. Our leaders understand, we know how to influence the key drivers of employee engagement at Lowe's. We measure our progress.
We just finished our third year of the Gallup Employee Satisfaction Survey. 93,000 employees completed the survey completed to 65,000 last year. Store managers can review their results online and are held accountable by Larry Stone and his team for improving survey scores and driving higher levels of employee engagement. Store managers meet with their people and develop detailed plans to improve our work environment. These action plans are tracked to corporate. We use the Gallup Path and other research-based concepts in our leadership training at Lowe's. For more on Gallup, you can visit gallup.com.
We are clearly making an impact as employee retention numbers continue to show significant year-over-year improvement for full-time and part-time hourly staff. We are also very pleased that store management tenure, a key internal benchmark, remains stable in the midst of our store opening program. Turning to my second topic, our plan for ensuring best in class leadership for our stores, store managers and assistant store managers, which we refer to as ASMs. A great store manager is the key to driving high levels of employee engagement. One of the most important decisions we make is who we put in charge of a store. We spend a lot of management time and energy on this process.
Store managers at Lowe's require three critical talents. First, they must be passionate about our business. Retailing is a tough business, you have to love it. We know it's not for everyone. Candidates for Lowe's store manager must have a passion for our business, we cannot teach this. We have to measure and select for it. This is our top requirement.
Second, they must have exceptional leadership skills. They will run a business larger than some public companies. Retail is a high touch, people intensive business. We need leaders who can effectively deal with the emotional side of managing large numbers of people. They must be capable of dealing with lots of gray areas everyday. They must be able to relate to and interact with their people on an emotional level. Finally, they must have the intellectual capacity to understand a very complex and dynamic business. They must be able to learn quickly and make good decisions.
Our store manager selection and training process, we believe is one of the most intensive in retailing. Candidates are selected on the basis of scores on written exams and proven performance as ASMs at Lowe's. They bust also pass a corporate assessment before they are accepted into the program. Once selected, candidates spend 11 weeks in our highly structured training program. The final week is spent in our corporate office where they attend training sessions led by Robert Tillman, Larry Stone and others on the senior team. In addition to intensive leadership and operational training, candidates must pass 18 product knowledge exams. Our goal is three qualified candidates for every store manager opening.
The next layer of leadership in our stores is the assistant store manager or ASM. We do a lot of research before we make investments in HR programs. Recent research on the needs of our ASMs indicated a strong desire for more effective developmental feedback. How can I do what I do better? This showed up in the research as a strong point of leverage for HR investment. Very high return. In response, we implemented an intensive assessment and development process for all 4500 ASMs. This program is web-based. Data is used to determine individual strengths and developmental needs.
We use this information in two ways. First, to determine the best role in the store for each ASM based on talent. Second, to help each person understand what they can do to improve their overall level of contribution. We will make everyone better at what they do. Each ASM develops an improvement plan based on feedback from their assessment. These plans feature web-based resources for performance coaching and improvement. Details are accessed over the internet by our senior team. We can review the status and measure our progress on 4500 development plans.
Now, my final topic for the day, how HR helps drive service in our stores. First up, the sales specialist. This is our key selling position. We recruit and select only highly talented persons, people for this job. These people are true sales professionals, capable of selling customers the entire project. We have them in key project sales categories such as commercial sales, mill work, building materials, cabinets, flooring, as well as others. Compensation is based personal sales performance. The more you sell, the more you can earn.
We developed a sophisticated incentive system over many years. It affords us tremendous flexibility in paying people based on what they sell. Not once a year or once a month, every two weeks. Very powerful sales tool. Each sales specialist must complete a department-specific certification program and pass tests regardless of their prior experience. We measure certification rates, requirements must be met to receive sales incentives. We measure fill rates for this job, the number of authorized head count versus actual. There is a direct relationship between fill rates and sales performance. Our goal is a 100% fill rate. We continue to see significant year-over-year improvements in retention rates and decreased turnover, fill rates are up.
Now let's talk about the face of Lowe's. The first employee a customer sees becomes the Lowe's brand. We are committed to improving the quality and performance of our front line staff, driving high levels of employee engagement and customer satisfaction. Too to this end, we have re-engineered our employment process to make it easy and intuitive. The best and most engaged people are already working somewhere. We have to make it easy for them to connect with Lowe's. People complete applications at kiosks in the store or over the internet. Store applications this year will be over 1.2 million. We get over 11 applications for every opening. 23% of store applicants apply over the internet. We expect that percentage to grow. We measure in quantity. Weekly reports show applications at the store level. We know who is applying for jobs at Lowe's, how they apply and who we hire.
To see how easy it is, go to Lowe's.com. Click on careers at the bottom of the page, scroll down until you see in-store opportunities, click the apply online link. We've significantly improved store level screening and selection. Quick reject questions screen out people who don't meet our minimum requirements. For example, applicants have to be at least 18, must be willing to take a drug test, must agree to a criminal background check. 7% of applicants are screened out. The system provides detailed interview questions based on applicant input. This attention to detail improves the quality and consistency of interviews across all stores. This saves store HR people significant time, freeing them to focus on recruiting and hiring the best people, putting people in the right jobs, giving people the support they need to be successful. We just added an additional screening tool called the customer service assessment. This test will determine if an applicant has the necessary personal attributes we require for success. We can now predict engagement levels for each person.
My next point, operational excellence, has been a core competency at Lowe's. I work closely with Larry and his team to ensure the highest standards in front end and back end operations, the keys to a well-run store. In '94 we created the Operations Specialist Team. Each district of about seven stores has a dedicated operational expert with an average of over nine years of Lowe's tenure, a total of over 1,000 years of operational expertise. This position has evolved every year for the past eight. Every year it becomes more impactful. This position is filled with seasoned Lowe's operators, an alternative career path for ASMs who choose a career in training over a career in store management.
These people look under the hood of each store to ensure our high standards of operational excellence. Operations experts first and trainers second. These 140 people are stealth bombers. The backbone of Lowe's store training, focused on making sure operational details are right, everyday. Store managers have more time to focus on serving customers and leading our people. This investment is paying off. We are pleased with store audit and shrink results. Two places where our commitment to operational excellence has a clear and measureable impact.
I would like to close by making a few comments about how we leverage our existing store technology to improve HR process. We've invested over the past several years in implementing and updating our store technology infrastructure. All stores have web-based sales terminals, thin client, allowing us to deliver training and job related information to our people on the sales floor. Each store person has access, by the thin client, to a full set of information, such as current company news, departmental news, policy and procedure. Really, anything we feel will be useful to that person in doing their job.
To leverage this investment, we're currently rolling out a web-based customer service training program for all front line staff. A picture is worth 1,000 words. For a demonstration, visit our exclusive technology vendor at easy2.com. In the bottom left-hand corner, click the golf icon. You will learn how to improve your game. Easy2 also creates interactive how-to tutorials for Lowe's.com. Very cool stuff.
We upgraded our HR infrastructure to the latest release of PeopleSoft. The HR system we installed in 1994. The latest version is completely web-based. It allows us to streamline our HR transactions, requiring only a web browser at the store, a thin client to operate. Each store has a dedicated HR person. Technology allows us to significantly improve the productivity of these HR experts, freeing them to spend more time on recruiting, selecting and training great people.
Here's a real-life example of the impact of technology. Every two weeks, we produce and mail 120,000 checks from Wilkesboro to our stores across the country. 45% of our people participate in direct deposit. We still mail copies of their pay stubs. Last week we put pay stubs online. We can eliminate the mailing and distribution of pay stubs for 54,000 people every two weeks. We can eliminate the production and distribution of 1.5 million paychecks per year. Our goal is 100% direct deposit. This is a huge improvement for our store team. They no longer spend valuable time every two weeks receiving accounting for and distributing paychecks.
Our people win. They don't worry about depositing their check or that it could be delayed. And stores struck by natural disasters, hurricanes or tornadoes, we ensure our people are paid. Technology is a big win, better service and training for our people, better productivity for our stores.
I've been part of Lowe's for 18 years. Our top 21 executives, on average, are 49, with 18 years of service. Together we've built this company. I'm confident of our ability to attract, retain and motivate a highly, engaged, highly talented workforce. We possess technology and know-how to ensure the best-trained workforce in our class. We have exceptional store leadership bench strength for the future. We measure everything, we keep getting better. Thanks for listening. Now I'd like to turn the call over to Robert Niblock.
- Chief Financial Officer
Thanks, Perry and good morning, everyone. As Bob indicated, sales for the third quarter were $6.4 billion representing a 17.6% increase over last year's third quarter. Year to date, sales were up 20.9% at $20.4 billion. Comp sales were 4.1% for the third quarter, in line with our guidance of 3 to 5%. And these comp results are on top of a 4% comp in last year's third quarter. Year to date comps are 6.1%. Deflation in lumber and building materials had a negative impact of approximately 42 basis points on third quarter comps. As I indicated at our analyst conference in Boston, we've experienced widespread strength in comps this year. And that strength continued in the third quarter with 15 of 17 regions producing positive comps.
With regard to product categories. The categories have performed above average in the third quarter include: rough plumbing and electrical, hardware, outdoor power equipment, appliances, paint, walls and windows, fashion plumbing, fashion electrical, cabinets, flooring and home organization. In addition, nursery products performed at approximately the overall company average. Gross margin for the third quarter was 30.64%. An improvement of 147 basis points over last year's third quarter and significantly ahead of our guidance of 40 to 50 basis points. On a year to date basis, gross margin of 29.89% is up 140 basis points over fiscal 2001. The primary driver of third quarter margin expansion was better margin rates, driven by a reduction in inventory costs. Other contributing factors include product mix improvements, which accounted for 23 basis points and a significant reduction in inventory shrink as a percent of sales, which contributed 45 basis points of margin expansion.
A year ago, in my comments for the third quarter, I mentioned that we intended to focus on inventory shrink as an area of opportunity because we felt that we could drive better results. Every quarter since that time we've experienced a reduction in inventory shrink. In fact, on a year to date basis, inventory shrink has decreased 25 basis points versus last year. The improvement that we've experienced in inventory shrink is a direct result of additional resources that we've dedicated to this initiative. Those additional resources include: a reduction in our average cycle time between fiscal inventories from 7.8 months in the third quarter of 2001 to 6.2 months in this year's third quarter. An increase in loss prevention personnel. An increase in greeter and head cashier coverage. A stricter policy for returns without receipts and additional focus on some of the behind the scenes processes such as inventories received from third parties.
We've discussed these initiatives on prior conference calls. The point I want to emphasize is, not only do we believe the initiatives are working, but keep in mind that while the reduction in inventory shrink shows up as additional gross margin, the costs associated with these initiatives shows up as additional SG&A. Thus, while these decisions may be contributing to SG&A deleverage, the cost is more than offset by the expansion in gross margin, resulting in enhanced profitability.
But that's only part of the story. The real benefit of reduced inventory shrink is a better in-stock position which results in better customer service and increased sales. SG&A deleveraged 75 basis points in the quarter, which exceeded our guidance of slight deleverage. In addition to the impact that our inventory shrink initiatives had on SG&A, above-plant earnings have significantly increased our store and corporate bonus expense. Resulting in 55 basis points of third quarter SG&A deleverage. Year-to-date SG&A of 17.51% is up 23 basis points versus 2001.
Store opening costs leveraged 35 basis points as a percent of sales and reflects the opening of 18 new and no relocated stores in the quarter. This compares to 35 new and four relocated stores last year. In addition, we closed one older, smaller store during the quarter. Depreciation at 2.48% of sales totaled $159 million and deleveraged 2 basis points. On a year-to-date basis, depreciation of 2.25% of sales is up 1 basis point versus last year.
At the end of the third quarter, we owned 74% of our stores versus 71% at the end of last year's third quarter. Third quarter interest expense of $44 million increased only $420,000 and at 69 basis points as a percent of sales, leveraged 11 basis points versus last year's third quarter. For the quarter, total expenses were 22.19% of sales and deleveraged 31 basis points, which exceeded our guidance of slight leverage. For the quarter, pretax earnings increased 36.3% and net earnings increased 35.4%. Year to date net earnings increased 43.1% to $1.2 billion.
Earnings per share of 43 cents increased 34.4% versus last year's 32 cents and exceeded our guidance of 39 to 40 cents. The 34.4% increase in earnings per share for the quarter is on top of an increase of 23.1% in last year's third quarter. Year-to-date, diluted earnings per share are up 42.2%. Diluted shares outstanding totaled $801 million for the third quarter. The computation of diluted shares takes into effect the account of convertible debentures, which increased third quarter weighted average shares by 16.5 million. In computing third quarter diluted earnings per share, the after tax add back to net income, related to interest on convertible debentures was $2.6 million.
Also, for the fourth quarter, the after tax interest add back will be $2.6 million. For the fourth quarter, we're projecting diluted shares outstanding of $802 million. And for fiscal year 2002, we're expecting diluted shares outstanding of approximately $801 million. For the quarter, we saw a 2.4% increase in average ticket from $55.91 to $57.23. Customer count increased 14.9% during the quarter.
Now highlighting a few items on the balance sheet. First of all, our cash position remains strong with $1.3 billion of cash on hand at the end of the quarter. In addition, inventory increased only 6.3% for the quarter compared to sales growth of 17.6%. Inventory turns increased from 4.19 to 4.49. Our debt to total capital ratio has decreased from 37% at the end of last year's third quarter to 32% at the end of this year's third quarter. We expect this trend to continue.
Return on invested capital measured using beginning debt and equity and a trailing four quarters earnings increased 64 basis points for the quarter, from 13.84% to 14.48%. Our strong third quarter performance drove return on beginning shareholders equity, determined using beginning equity and a trailing four quarters earnings to 21.35%, representing an increase of 366 basis points. In addition, year-to-date cash provided by operating activities exceeds $2 billion, representing an increase of over 100% versus last year.
Looking ahead, I'd like to discuss several of the items detailed in Lowe's business outlook, which is included in today's release. A fourth quarter sales increase of 16 to 17% incorporates the comp assumption of 2 to 4%, which is expected to generate diluted earnings per share of 33 cents. Our gross margin guidance for the fourth quarter is 50 to 60 basis points improvement, which will yield a gross margin improvement of approximately 120 basis points for the entire fiscal year.
We expect to open 37 stores in the fourth quarter, comprised of 31 new market stores and six relocations. From a timing standpoint, almost half of the stores scheduled to open in the fourth quarter will open during the last month of the quarter. In addition, with 37 stores opening in the fourth quarter of this year compared to 16 stores in the fourth quarter of last year, store opening costs will deleverage 15 to 20 basis points in the fourth quarter.
Regarding current sales trends, I mentioned earlier that our business outlook for the fourth quarter anticipates 2 to 4% comps. For the first 16 days of the quarter, our comps are within this range. Before I turn the call over to the operator for questions, I'd like to mention that in addition to Bob, Perry and myself, several other members of management are present for the question and answer session. Operator, we are now ready for questions.
Operator
Thank you. In order to ask a question, press star 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Schick with SunTrust.
Hi, good morning. Congratulations. I have three questions. Could you talk a little bit more in terms of details on inventory growth up just 6%. That growth number keeps coming down. Is that point in time issue, why? And in what categories? Second, could you talk about your own and the competitive landscape use of financing as promotions heading into 4Q? And lastly, if you could talk a little bit about the Viking and other high-end brands, the progress as you look across the chain. Thanks.
- Exec. Vice President of Merchandising
This is Dale Pond, David. The inventory is really a reflection of several things. One, we have been diligent in our pursuit of reducing our SKU count in a number of areas and trying to manage down our nonproductive inventory and really clean up the stores in terms of just getting the right stuff into the right stores in the right quantity. So, that's number one. Two, there's been a significant shift in our SOS program as we've highlighted over the course of the last several years, our attempt to shift more of our sales into the SOS area. And that obviously leads to some reduction in the inventory.
So -- and then finally, logistics and our -- our work in that area has had a rather dramatic effect in the ability to manage our inventories through the distribution channel and therefore significantly reduce what we have in store with a slight of the safety -- the safety stocks that we had in the store we shifted more to the DCs which gives us a great ability to further reduce the inventory. So, those really, I think, touch on the key areas on the inventory side.
- Chief Financial Officer
Dave, this is Robert Niblock. On the finance promotional financing area, as you know, typically in the fourth quarter we are on promotion with our promotional financing. As far as any changes or anything we'd want to do, it's not something we discussed, we'd keep an eye on what's going on in the competitive environment, and monitor that on an ongoing basis, but we typically have been out there on promotion in the fourth quarter and we would plan on cycling something similar to what we did last year but keep an eye on the competitive environment. I think you're last question, was on the Viking and the high end brands. I'll ask Dale to speak to that, as well.
- Exec. Vice President of Merchandising
Dave, on that, obviously we continue to push up the continuum. We tested the Viking program and still have it in a couple of stores. But the fact of the matter is, what we're looking for is to get those higher end brands like Kitchen Aid with Whirlpool, the Cub Cadet Program with the MTD program. The Kitchler lighting with -- and tech lighting and the lighting program.
We're looking for higher end brands, not necessarily the extreme higher end, Sub Zeroes and the Viking, but the Jenn Airs of the world. And our grill program for example, is an exclusive at Lowe's. All those kind of brands, that we call in kind of the middle premium line as opposed to the premium premium line. As we get into more special order, it gives us the ability to talk to some of the manufacturers of these extreme or ultra-high line programs and we probably will be pursuing some of those on a special order basis. But in terms of stock programs, we're really looking at what I call the middle premium line.
And how is the performance of those middle premium lines?
- Exec. Vice President of Merchandising
It's been very strong. Very strong. In fact it explains, in large part, our average unit selling price point. It's been consistently up. For example, you know, in the appliance area, I always use appliance as a bell weather for what the economy is doing and how our customers are reacting to the news of the economy. And in that area, it tends to be, I think I've said this before, when you look at refrigeration sales, I mean when a refrigerator goes out, you need a refrigerator, so, people tend to buy what they can afford to buy. Right now, our side-by-side business continues to be up. Our average unit selling price points on refrigeration continues to increase. In fact, in the third quarter it went up again over the second quarter. We're looking at the strengths in a very viable and continuing portion of our merchandising strategy.
Thanks, guys.
Operator
Your next question comes from the line of Bud Bigat with Raymond James.
Hi and congratulations, as well. Can we get a little more color maybe on some of the change, reasons for the change in both gross margin and SG&A Robert? I know you said 55 basis points of the 75 basis points was in SG&A, for example was due to the bonuses accrual. Could you kind of give us maybe what caused the other delta and maybe how much it takes now to leverage SG&A?
- Chairman, Chief Execurive Officer
SG&A, Bud, was 75 basis points, about 55 of that was bonus. The inventory shrink initiatives that I talked about are about 5 or 6 basis points and the increased insurance cost is in that 13 to 15 range. When you add those together, those are the primary drivers of the deleverage in the quarter. As we go into the fourth quarter, if we continue to have a strong margin like we have in the forecast here, we think we will probably still deleverage bonuses going into the bonus expense going into the fourth quarter. So that's why our guidance does call for some deleverage in the fourth quarter, as well. Because our bonus, with a richer bonus program out there for our store managers and as with gross margin up 140 basis points this year, we've got significantly higher bonus costs and, you know, compared to what the top line is up, it is driving some deleverage we expect that to continue into the fourth quarter.
And in the gross margin arena, you have again, about a 50-basis point improvement in the fourth quarter plans?
- Chairman, Chief Execurive Officer
That's right. I think we gave guidance of 50 to 60.
And what would make it go above that again? Your're starting to anniversary the shrink issue?
- Chairman, Chief Execurive Officer
Well, I mean, yeah, we're starting to anniversary of the shrink issue. Last year in the fourth quarter, we had a 30-basis point improvement, I believe in inventory shrink in the fourth quarter last year over the prior year. So, we wouldn't expect inventory shrinkage to be as high as it was this quarter. We still are expecting a little bit of improvement in the fourth quarter, as well. It's really just going to come down to the weather and the mix of the business that it drives and what kind of performance we have over the balance of the quarter. I mean, you know, you know, maybe it is above 50 or 60 basis points. We think sitting here 16 days in the quarter, to give guidance of 50 or 60 basis points is pretty strong.
I understand. My last question goes to store opening costs per store. Looks like that's gone up a couple hundred thousand dollars per store. Is that fair or not?
- Chairman, Chief Execurive Officer
In the quarter, when you look at it, it really gets into the timing of the issues on store opening costs. When you take just purely the number of stores that were open and divide it, you know, that's true.
But what happens is we have to expense store opening costs as incurred, so, every quarter you wind up with making swing higher or lower one quarter to the other as costs are delayed or so on and so forth. Last quarter -- third quarter, it was one of those quarters where we had cost falling in this quarter that related to other quarters. When you go back to a year ago it was a little bit of an impact going the other way. When you go back a year ago, the actual cost of the stores opened in the quarter didn't vary as much as it did this quarter. Plus you have to look at the fact that we had no relos this quarter versus relos last year. And we spend less money on opening a relo store than we do a new store. So, the timing and the no relos are the drivers of that phenomenon. On an absolute basis, it hasn't changed that much.
Thank you very much.
Operator
Your next question comes from the line of Dan Weaver with CIBC.
Good morning. Home Depot has been mailing out some coupons for 10% off. I was curious, is this something -- I've got laryngitis, I apologize. Is this something that's a new promotion for them, or have they run this in the past? I'm curious if Lowe's matches that type of couponing activity.
- Exec. Vice President of Store Operations
Dan, this is Larry Stone. This is something they've been running for the past several years. We tell our store people to match any competitive price or any competitive promotion such as that. It is nothing new and it's isolated, in a lot of cases to new movers and to opening a new account and things like that. But we do match any promotion that they might run on 10% off.
And Larry, one other question. I know earlier this year you had McKenzie looking at your installation business and how that's operating, and I was curious as to what changes, if any, you've been able to implement since they did their work and if it's had a positive benefit or not?
- Exec. Vice President of Store Operations
We finished the test and we certainly have it in a couple of districts right now. Trying to work through the various components of the test. And as we stated in Boston, our plan is to roll that out chain-wide in 2003. But it will take us all of 2003 to roll it out. But good improvements certainly on the customer side, we have positive feedback from our customers in the way that we go to market now with installation services. It's made it much more streamlined in the stores in terms of lines of accountability to who handles what. We're very excited about the model, we want to be sure we get the rollout plan completed before was we attempt to roll it out to the whole company.
Great, good luck.
- Exec. Vice President of Store Operations
Thank you.
Operator
Your next question comes from the line of Eric Vassard with Midwest Research.
Good morning. Could you talk a little bit about momentum throughout the quarter? You commented that in the 4Q that sales are within your 2 to 4% range. But can you talk a little about momentum in terms of sales momentum? And also have you seen anything within mix? You commented that's been favorable a bit. That's continuing to get better, get worse or any changes there in terms of momentum?
- Chairman, Chief Execurive Officer
Eric, this is Robert. I'll start off then I'll let Larry layer on top of it. As far as mix, if you look at the quarter overall, we went in August from hot and dry to by the time you got into mid-September cold and wet. With that -- as cold and wet as it was over the last half of the quarter, I think it impacted the outdoor categories unfavorably, but the inside categories remain strong throughout the quarter. so I think that was part of driving a richer mix on the margin line, that was 23 basis points was the impact for the third quarter. Overall, net net, I think it was a negative on top line performance, but it was a positive from a mix standpoint. But beyond -- going out and looking at the weather and seeing particular pockets, where you could look at the whether and see the stores affected, I think we felt momentum stayed relatively constant throughout the quarter. I will ask Larry to add his comments on top of that.
- Exec. Vice President of Store Operations
Eric, the only one bearable to Robert's point has been seasonal. You know this past weekend we got a lot of rain up the eastern seaboard. And some more bad weather in New York and Connecticut, but certainly our interior categories have formed very much in line with plan, in fact, above plan in a lot of categories, home decor, appliances, paint, a lot of those categories are really performing, walls and windows and those categories are performing great. So, it's just a shift to Robert's point.
It was so dry this past spring and summer, then all of a sudden it got wet, in fact, in the Carolinas we're almost back to normal in terms of rainfall. They hope the rain holds off a little bit because the ground is so wet. It delays outdoor projects. But certainly of we don't get a lot of real, real cold weather in the next four to six weeks, then certainly those outdoor projects will get started. That way people have the projects ready to do the interior parts of it this winter. The stores are very upbeat. The district and regional folks are very upbeat. The momentum is our side, and certainly we have like we've got a great fourth quarter ahead of us.
And in terms of merchandise and initiatives in 4Q, I know you commented you didn't want to talk about promotions that aren't out there yet. But can you talk a little bit about what you have done to date and how merchandising and promotions look this year versus last year? What you're doing different to try to drive the consumer?
- Exec. Vice President of Merchandising
Eric, this is Dale Pond again. On that, we have just a continuing, you know, our line reviews continue, therefore, we lead the recess, we have a pretty aggressive recess schedule set for the fourth and first quarter. That obviously leads to, hopefully, it has consistently in the past, led to a good, strong comp. It contributes to the comp programs. So, we continue seeing that and probably will be doing that throughout the course of the year.
- Chairman, Chief Execurive Officer
Eric, this is Robert Tillman. When you say merchandising promotions, we believe what drives our sales is merchandising. Promotions are not the driver of Lowe's business. As we're an EDLP retailer and support that concept. So you won't see Lowe's doing some of what we call high/low promotional activity that other retailers are trying to do today. We believe having the best price everyday guaranteed with great merchandising programs are what will drive our business as has done it in the last six or seven years.
Great, that's what I was looking for. Thank you.
- Chairman, Chief Execurive Officer
Operator, we have time for one more question, please.
Operator
Your final question will come from the line of Aram Rubinson with Banc of America.
Hey, guys, it's Aram, hope you're well. Couple of questions actually for Perry. Perry, can you help us understand, when you mentioned that your retention of employees is up. Can you tell us what it costs to turn over employees in terms of the P&L effect of that, number one? And number two, can you talk about the SG&A rate, we know it was up, but where does payroll fit in the mix? Are you paying up to get people that some of your competitors may be losing as a one-time thing to get them in the umbrella.
- Sr. Vice President of Human Resources
I will take the first and then let Larry comment. What -- all the research that we've done on turnover shows that the really -- the huge savings is in improved productivity in the stores, not having to train people, you know, having more tenured people taking care of our customers. The direct costs of hiring people are really not all that great. So, the quantifiable direct costs are not really significant. But when you look at the replacement in terms of opportunity costs, soft costs in the stores, the cost of training, that's really where we see our savings. We don't really say that this is going to save us a lot of money on the bottom line. It's going to improve service and the quality of people in our stores. I will let Larry answer the payroll question.
- Exec. Vice President of Store Operations
Aram, on the average hourly rate, it is up some and certainly any time we have an opportunity to go after qualified people, as Perry mentioned in his remarks, the totally engaged folks, we're going after them. But that's not what's driving the rate up that much. We go into markets that, you know, the higher cost markets certainly would drive it up some. We've always felt we have to pay for performance. If you pay for performance, all the things have been put in place for the past several years, the we pay our sales specialists to the way we incentive-ive our management team in our stores are going to drive a slightly higher average rate. But it's not going out and buying talent that's drove it up.
Okay. Thanks, guys, good luck.
Operator
Ladies and gentlemen, we have reached the allotted time for questions and answers. Mr. Tillman, are there any closing remarks?
- Chairman, Chief Execurive Officer
Thanks, Larry. As always, thanks to all of you for your continuing interest in Lowe's. We look forward to speaking with you again when we report our fourth quarter and fiscal 2002 results in February. Goodbye and have a great day.
Operator
This concludes today's Lowe's Corporation conference call. You may now disconnect.