勞氏公司 (LOW) 2002 Q4 法說會逐字稿

Good morning, everyone and welcome to Lowe's Companies fourth 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 27A of the Securities Act and section 21E of the Exchange Act.

Although the company believes such statements are reasonable, it can give no assurance that they will prove to be correct.

Possible risks and uncertainties are detailed in the company's February 24, 2003 earnings release and the company's filings with the SEC.

Hosting today's conference will be Mr. Robert Tillman, Chairman and CEO, Mr. Larry Stone, Executive Vice President, Store Operations, and Mr. Robert Niblock, Executive Vice President and CFO.

The call will conclude promptly at 9:45 Eastern Time.

I will now turn the call over to Mr. Tillman for opening remarks.

Please go ahead, sir.

Good morning and thank you for joining us.

Following my remarks, Larry Stone will assess our operational performance this year and Robert Niblock will review our fourth quarter and fiscal year results.

First, I will briefly highlight a few items from this year's results, discuss the challenges we faced during the year, and describe some of the opportunities we see for 2003 and beyond.

2002 was a year marked by a sputtering economy, escalating geopolitical concerns, and declining consumer confidence, yet Lowe's employees delivered what I feel was the best year in our 57-year history.

They did it with the dedication to executing the fundamentals of retailing and never losing focus on serving our customers' needs.

Our strong results led to Lowe's being recognized last week as "America's Most Admired" specialty retailer by "Fortune" magazine, an accolade representative of our employees' hard work and dedication, as well as the outstanding support we received from our vendor partners.

Despite the broader macroeconomic concerns of 2002, the housing sector remained strong, driven by low mortgage rates, a strong refinancing cycle, positive demographics, and psychographic trends as well as an ever-growing immigrant population.

The sale of new and existing homes reached record levels in 2002, solidifying home improvement's position as a sweet spot of retailing.

As the broader economy sputtered, home improvement remained resilient.

Amidst the turbulent backdrop of mixed economic signals, I'm proud the way our stores were able to deliver in the fourth quarter and for fiscal 2002.

Sales in the fourth quarter totaled $6.1 billion, up16.5%, from the fourth quarter of 2001.

For the year, sales totaled $26.5 billion, up 19.8% over fiscal 2001.

Comparable store sales increased 4.1% for the quarter and 5.6% for the year.

We've mentioned for the past several quarters that we've seen balanced performance across all regions of the country.

That trend continued in the fourth quarter.

Encouragingly, that balance speaks to the national strength of the home improvement consumer despite the many concerns that continue to weigh on the economy.

Gross margins reached record levels of 31.65% for the fourth quarter, and 30.3% for the year.

In today's competitive environment where we remain committed to EDLP, our ability to drive gross margins higher is attributable to many factors.

First, our continuing merchandising strategy guided by our customers' desire to make their homes unique and expressive of their individual personalities continues to pay dividends.

Our merchants continue to work diligently to provide great products at a great value across all price points in our lines.

And their success is measured by strong sales, higher average tickets, and growing margins.

In addition, we've continued to capitalize on opportunities provided by our global sourcing office in Asia and other parts of the world.

We see tremendous opportunity to drive margin by increasing our percentage of foreign source products in the years to come.

Gross margin growth isn't only driven by our merchants.

Our store employees also deserve credit for delivering on several key initiatives that drove margin in the quarter.

Larry will highlight these operational successes in a moment.

Through effective expense controls, we experienced slight leverage in total expenses for the quarter and the year despite having record payouts of performance-based compensation this year which Larry and Robert will address.

Strong sales, growing gross margins, and efficient operations led to Lowe's record 10.1% operating margin for the year.

We opened 37 stores in the fourth quarter including six relocations and in 2002 we opened 123 stores, 11 of which were relocations.

Much of the uncertainty that weighed on the consumer in 2002 continues in 2003.

Geopolitical concerns are probably even greater today than in 2002, and consumer confidence is not likely to rebound until some or all of those concerns are resolved or mitigated.

Despite the overhanging anxiety, there remain many positive trends for the home improvement sector both today and in the future.

First, the record strength we saw in the housing market in 2002 continues into 2003.

While mortgage rates are expected to increase slightly from the record lows seen in 2002, economists at the National Associates of Realtors expect rates to remain near these lows in 2003, keeping housing affordable and facilitating continued demand.

Supporting that belief, single-family building permits continue to be issued at record levels.

The 2002 year-end total of over 1.4 million easily exceeds the year-ago level.

As the leading indicator of future housing starts, this trend indicates a strong pipeline of new homes on the horizon.

The U.S. housing stock continues to appreciate in value, unlike many other investments today.

Continued appreciation gives homeowners comfort in improving their single largest asset, providing both current enjoyment and the possibility of future appreciation.

That appreciation has given rise to concern over the housing bubble.

The fact is, housing has appreciated in value for 34 straight years, and yet no bubble.

Concerns of a housing bubble are overblown, and as homeownership in the US continues to grow to record levels, support for housing values is clearly present.

Opportunities are plentiful for us.

We'll continue to add stores across the U.S. in both large and small markets that are enthusiastically embracing Lowe's in their communities.

At the end of fiscal 2002, only 22% of our stores were in the top 25 markets of the U.S., where nearly 50% of the home improvement market potential resides.

We'll continue to capitalize on that opportunity by adding some 65% of next year's new stores in the nation's 100 largest markets.

At the same time, the smaller markets of the U.S. allow for additional profitable growth.

Despite lower average sales volume, with a reduced capital investment, a lower operating expense structure, and efficiently managed inventory utilizing our world class logistics network, these markets can provide a tremendous return for our shareholders.

While we are confident that we have years of new store growth ahead, adding new stores is only part of the story.

We expect continued success in growing our comp store sales in 2003.

We're currently conducting tests of an improved install sales model that we're confident will continue to allow us to grow this business.

Building on this year's 50% growth, installation services will be a comp sales driver for years to come.

Our special order business continues to grow as well, up 38% in 2002.

New systems, streamlining an often cumbersome process, is the key to continued growth of special orders in the years to come.

In 2003,we'll add to the work we've already done by rolling out enhanced electronic ordering with e-catalogs and EDI interfaces with our key special order vendors.

Commercial business customers remain an important part of our business as well.

Targeting repair people, remodelers, professional trades people and property maintenance professionals, Lowe's is successfully growing this business.

As we continue to add stores in both new and existing markets, we've become more and more convenient for these customers, whose time is money.

As a final indication of the opportunity that lies ahead for Lowe's, consider this.

Of the17 broad categories of products Lowe's sells, home centers hold a leading share in only five, and over 50% share in only one.

Our opportunity is to continue to gain share in those categories, providing our customers new and exciting brands that make Lowe's a destination store for more and more of the products that we sell.

Despite the continued concerns of the broader macroeconomic and geopolitical environment, we approach 2003 with cautious optimism.

Lowe's is ready to capitalize on the opportunities of a vibrant and growing home improvement market.

Our merchandising organization is experienced and energized.

Our operations team is committed and focused on serving our customers.

Our marketing programs are hitting home with American homeowners in the commercial business who serve them.

All supported by an efficient logistics and distribution system that ensures we have the right products in the right stores at the right time to meet our customers' needs.

With that, I'll turn it over to Larry Stone to highlight a few of our operational successes in 2002.

Larry?

Thanks, Bob.

Today we kick off our annual sales meeting with our management team and field personnel to a year of success in 2002 and make sure everyone understands their plans for 2003 to be even better.

I totally agree with Bob, fiscal 02 was our best year ever, but that's now history and the challenge is to make fiscal 03 our best year ever.

Our theme for this year's sales meeting is raising the bar.

Our message is one that we cannot afford to rest on the success we had last year.

Instead, we must continue to improve our execution and remain focused on serving our customers.

Our results last year were the kind of results we envisioned when we developed our performance based compensation plan.

In a year when it would have been easy to point to external factors for less than stellar performance, our store managers and their teams stepped up, bared down and delivered an exceptional year.

When our stores deliver such great results, we are proud to pay our store managers and their management teams a well-deserved bonus.

This year, over 40% of our store managers will receive a bonus of at least 100% of their base pay, and 15% of our top performers will receive 150% of their base pay.

In total, over 80% of our store managers will receive a bonus check.

We've incentivized our management teams to go above and beyond to deliver the exceptional results that we released today, and I'm confident that this bonus opportunity played a major role in our great results.

There's been a lot of confusion about our performance based incentive program and the effect of these programs on our results.

This morning, I'd like to provide some insight in how these performance programs are structured and why we know it's money well spent.

First, these programs are self-funded.

Each year, every store in the chain receives both a sales and earnings budget.

That budget is based on many factors including competition within the market, expected growth of the market, and the expectation that we have to continue to drive increased performance out of every store.

Last year, our stores had to drive both sales and earnings at a level 10% above their budgeted amounts to receive the maximum bonus payout.

They had to achieve at least 95% of both sales and profit budgets to receive a minimum bonus.

So the bar was set high, and we demand exceptional performance to receive a bonus.

Here are a few factors that contributed to last year's strong results.

Comp sales of 5.6% for the year measured our store success in driving more project sales to our customers.

Our stores did a much better job of managing inventory to make sure we had the right products in the right stores in the right quantities to meet the demands of our customers.

And as Bob mentioned, our stores’ focus on several corporate wide initiatives helped drive gross margin as well.

At last year's national sales meeting, we challenged our stores to control inventory shrink and they certainly delivered.

Lower shrink results added 28 basis points or $74 million to gross margin this year.

Some other process improvements that drove increased margins involved implementation of new procedures in conjunction with new technology.

This really helped simplify the special order installed sales process which made it more efficient for employees and a better experience for our customers.

Technology also played a major role in our streamline process to return defective products to our vendors.

We challenged our managers to better manage inventory with the objective of increasing inventory turnover, lowering our overall inventory investment, yet maintaining higher in-stock level in our stores by moving out the slow turning products.

With support of our logistics and distribution teams, they met this challenge with an increase in turnover of 32 basis points.

Finally, they were challenged to stay actively engaged in the day to day management of their stores by ensuring the team is in place to drive sales and service their customers in each of our stores every day.

Progress on all these objectives leads to the ultimate goal of exceptional customer service and our external measures on customer service shows we moved the needle -- this played a big role in our success last year.

For the year, strong sales, continued gross margin growths and effective expense management, our stores delivered a 45% pre-tax earnings increase, a performance that's worthy of this new bonus payout.

Looking at 2003 as I mentioned earlier, our theme for the sales meeting this week is raising the bar, and that's exactly what we intend to do.

We only spend about 5% of this meeting congratulating our teams for last year.

Our main focus is to get everyone up to speed on new plans and programs and provide the motivation that will set the pace for fiscal 03.

We will not rest on our success.

In fact, we have raised the bar for our store managers from the 02 results to set the 03 targets.

So those managers who can clear the higher hurdle will be rewarded accordingly.

Despite the broader economic distractions Bob described, we will remain totally focused on serving our customers with great stores ready for business every day in every market we serve.

With that focus, I am very confident we have the plans and the team in place to drive a great performance in 03.

Now I'll turn it over to Robert to review our fourth quarter and fiscal year results in more detail.

Robert?

Thanks, Larry.

And good morning, everyone.

As Bob indicated, sales for the quarter were $6.1 billion, representing a 16.5% increase over last year's fourth quarter.

For fiscal 2002, sales were up 19.8%, at $26.5 billion.

Comp sales were 4.1% for the fourth quarter, achieving the high end of our original guidance of 2 to 4%.

Comps for the fourth quarter were relatively consistent across all three months, with January being slightly better than the quarterly comp and December being slightly weaker.

For the year, comp sales were 5.6%.

Deflation in lumber and building materials had a negative impact on comp sales of approximately 35 basis points for the fourth quarter.

For the year, slight deflation in lumber offset slight inflation in building materials, resulting in essentially no impact to comps.

With regard to product categories, the categories that performed above average in the fourth quarter include rough plumbing, seasonal living, outdoor power equipment, appliances, paint, walls and windows, cabinets, flooring, and home organization products.

For the year, rough plumbing, outdoor power equipment, appliances, paint, walls and windows, cabinets, flooring, and home organization products exceeded overall company comps.

In addition, hardware, fashion plumbing and fashion electrical performed at approximately the average company comp for the year.

Gross margin for the fourth quarter was 31.65%, an improvement of 185 basis points over last year's fourth quarter, and significantly ahead of our guidance of 50 to 60 basis points.

The improvement in gross margin was attributable to a number of factors, including improvements in inventory shrink, better margin rates and product mix improvements, as well as improved execution of the store initiatives that Larry discussed.

For the quarter, inventory shrink as a percent of sales was 38 basis points better than last year.

For fiscal year 2002, inventory shrink decreased 28 basis points as a percent of sales.

Inventory shrink continues to be an area of focus as we strive to deliver better results by focusing on all facets of our business.

However, given the strong improvement in inventory shrink in all four quarters of 2002, we anticipate less improvement in 2003.

For the year, gross margin of 30.3% is up 150 basis points over fiscal 2001, and represents the first fiscal year in Lowe's history that we've achieved a gross margin in excess of 30%.

SG&A leveraged three basis points in the quarter.

For the year, SG&A deleveraged 16 basis points.

As Larry discussed, Lowe's incentive compensation plans are performance-based and are designed to leverage as a percent of sales.

However, anomalies can occur such as 2002, where gross margin expansion far exceeded our original plan, resulting in above-plan incentive compensation and expense deleverage, but produced significantly higher earnings.

To help put the impact of incentive compensation in context, in 2002, Lowe's employees earned approximately $230 million in incentive compensation compared to approximately $100 million in 2001, representing an increase of 130% compared to a sales increase of approximately 20%.

However, even after the additional bonus expense in 2002, we still delivered a 45% increase in pre-tax earnings, which we believe is a winning formula.

Store opening cost at 67 basis points deleveraged four basis points as a percent of sales and reflects the opening of 31 new and six relocated stores in the quarter.

This compares to 13 new and three relocated stores in the fourth quarter of last year.

On an annual basis, 2002 store opening costs averaged just over $1 million per store.

This is down slightly from the fiscal 2001 average of approximately $1.2 million per store.

Depreciation at 2.76% of sales totaled $169 million and deleveraged 11 basis points in the quarter.

For the year, depreciation at 2.36% of sales is up two basis points.

At the end of the fourth quarter, we owned 75% of our stores versus 72% at the end of fiscal 2001.

Interest expense decreased to $44.7 million for the quarter, and at 73 basis points as a percent of sales, leveraged 15 basis points versus last year.

For the year, interest expense of $182 million leveraged nine basis points versus fiscal 2001.

With regard to income taxes, we increased the effective tax rate for the year to 37.6% from our prior guidance of 37.4%.

This increase in effective tax rate equated to an incremental tax expense of $5.2 million, which is reflected in the income statement for the fourth quarter and the year, and was necessary as a result of the significant amount of above plan earnings we achieved in 2002.

For fiscal 2003, we're budgeting an increase in effective tax rate to 37.8%.

This increase is primarily driven by continued expansion into states with higher tax rates.

For the quarter, pre-tax earnings increased 49.6%, and net earnings increased 46.2%.

For the year, pre-tax earnings are up 45.2%, and net earnings are up 43.8%.

Fourth quarter diluted earnings per share of 40 cents increased 42.9% versus last year's 28 cents, and exceeded our original guidance of 33 cents.

The 42.9% increase in earnings per share for the quarter is on top of an increase of 55.6% in last year's fourth quarter.

Diluted shares outstanding total 801 million for the fourth quarter.

Computation of diluted shares takes into account the effect of convertible debentures which increased fourth quarter weighted average shares by 16.5 million.

In computing fourth 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 first quarter of 2003, the after tax interest add-back will be $2.6 million.

For the first quarter of 2003, we're projecting diluted shares outstanding of 804 million.

For the year, diluted earnings per share were $1.85, up 42.3% compared to fiscal 2001.

For the quarter, we saw a 3.2% increase in average ticket from $54.91 to $56.66.

Customer count increased 13% during the quarter.

Now I'll highlight a few items on the balance sheet.

First of all, our cash position remains strong with $1.1 billion of cash and short term investments on hand at the end of the year.

In addition, inventory increased only 9.9% for the quarter, significantly less than our 16.5% sales growth.

For the quarter, inventory turns increased 32 basis points from 4.28 to 4.60.

Also, during January 2003, we elected to purchase all remaining real estate locations which previously had been held under short term financing leases.

This transaction totaled approximately $262 million and included four regional distribution centers and 14 retail store locations.

All these properties are now reflected on the company's ending balance sheet.

Our decision to purchase these properties and terminate the financing arrangement was driven by our above-plan cash flow and strong cash position.

Given our strong financial position and our anticipated future cash flows, we no longer find it necessary to rely on these types of arrangements to meet our financing needs.

Our debt-to-total-capital ratio has decreased from 36% at the end of last year to 31%.

We expect this trend to continue.

Return on invested capital measured using beginning debt and equity and a trailing four quarters earnings, increased 139 basis points from 13.75% to 15.14%.

Our performance in 2002 showed return on beginning shareholders' equity, determined using beginning equity and a trailing fourth quarter's earnings, to 22.05%, representing an increase of 342 basis points.

For fiscal 2002, cash flow from operations was $2.7 billion, representing an increase of 67% compared to fiscal 2001.

In addition, in 2002, we achieved a milestone of becoming cash-flow-positive.

As a result of our strong cash flow as well as the improvement in our debt-to-capital ratio, in December 2002, Moody's reconfirmed Lowe's debt rating and changed the outlook from stable to positive.

Looking ahead, I'd like to discuss several of the items detailed in Lowe's business outlook for 2003.

A first quarter sales increase of approximately 15% incorporates a comp assumption of 2 to 4%, which is expected to generate diluted earnings per share of 51 to 53 cents.

Our operating margin guidance for the first quarter is for an improvement of approximately 20 basis points.

We define operating margin as gross margin less SG&A and depreciation.

For fiscal 2003, we're anticipating a total sales increase of 16 to 17% based on a comp assumption of 4 to 5%.

For the year, we're expecting operating margins to improve approximately 20 basis points.

In addition, for fiscal 2003, we expect diluted earnings per share of between $2.16 and $2.20.

Also keep in mind that in 2003, we began expensing stock options.

The earnings guidance that we've provided has been adjusted for the impact of stock options which is anticipated to reduce 2003 earnings per share by 2 to 3 cents.

Our 2003 capital budget is approximately $2.9 billion.

We anticipate approximately $200 million of this need being funded with operating leases, resulting in cash capital expenditures of approximately $2.7 billion.

Cash flow generated from operations is expected to satisfy our capital needs for 2003.

We expect to open 130 stores in fiscal 2003, comprised of 125 new market stores and five relocations, resulting in an increase in square footage of 15 to 16%.

However, our 2003 store opening schedule is weighted towards the second half of the year with approximately two-thirds of our stores opening in the second half of fiscal 2003.

Obviously we would prefer a more balanced store opening schedule, but as we continue to pursue major metro markets, in many instances, the lead time and timing of store openings becomes slightly more difficult to predict.

For the first quarter of 2003, we expect to open approximately 20 stores, representing an increase in square footage of approximately 13%.

Regarding current sales trends, I mentioned earlier that our business outlook for the first quarter anticipates 2 to 4% comps.

For the first 23 days of the quarter, as a result of more extreme winter weather this February compared to a year ago, our comps are currently below our guidance of 2 to 4%.

However, based on the performance we're experiencing in the areas of the country that have not been impacted by extreme weather conditions, we're confident that as spring breaks, sales trends will improve, and we will achieve our comp sales projections.

Finally, I would like to mention a new accounting pronouncement recently issued by the Financial Accounting Standards Board emerging issues task force that will impact our accounting for co-op advertising.

Traditionally, Lowe's has reduced advertising expense by co-op advertising from vendors.

The new accounting pronouncement states that cash from a vendor should be treated as a reimbursement of expense only if it relates to specific costs to sell the vendor's product.

Otherwise, the funds should be treated as a reduction in inventory cost.

Based on transition guidance provided on January 23rd, 2003, this issue will likely impact Lowe's earnings in 2004.

While this change will not impact Lowe's cash flow, it will increase both gross margin and SG&A.

Once we negotiate our vendor agreements for 2004 and determine the impact of the new accounting pronouncement, we will update our 2004 earnings guidance.

Before I turn the call over to the operator for questions, I'd like to mention that in addition to Bob and Larry, several other members of management are present for the question and answer session.

Operator, we're now ready for questions.

Thank you.

At this time, I would like to remind everyone in order to ask a question, please press "*" and then the number 1 on your telephone keypad.

In order to allow questions from as many individuals as possible, please limit yourself to two questions.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Budd Bugatch with Raymond James.

Good morning and congratulations, Bob and Robert and Larry.

My question goes to gross margin.

Can you quantify for us some of the other impacts of gross margin?

I know you gave us 28 basis points from shrink, but 185 basis points, that's fabulous and obviously significantly better than your expectation.

How much of it came from foreign sourcing, how much from other margin rates, how much from mix?

Mix was about 11 basis points in the quarter, Budd.

There would have been a little bit of an impact from foreign sourcing.

It wouldn't have been a great impact.

It was just one of those quarters where we had a great sell-through of seasonal products at the end of the year, everything comes together.

Sales remained stronger than what we -- on the high end of what we had originally projected.

You hit a couple other, volume rebate levels with vendors -- as you know, to the extent that we have levels like that we're hitting we don't accrue those in advance until we're certain we're going to attain them, so -- and then shrink did come in higher than we thought.

So it was one of those quarters where everything lined up and fell in together.

Dale Pond (ph) is in the room.

I'll ask him if he has anything else to add about margin.

No, from our perspective, it's basically mix, and as Robert said, the seasonal sell-through on both trim a tree and on the seasonal heat was extremely good this year.

Ability of the margins?

Excuse me, Budd, I didn't hear the question.

Same ability of them going forward in your 20 basis points?

Yeah, we think the margin rate is sustainable.

The magnitude of the increase, no, we don't anticipate that level of margin increase, but we do anticipate margins to continue to expand in the future.

On a shrink standpoint, to be quite honest with you, we would be happy as we go into more and more major metro markets to just maintain that level or maybe even get a slight improvement over the great results we achieved in 2002.

And as -- some of the things Larry talked about, some of the technology initiatives that we'll continue to roll out and implement, will help us do a better job of making sure that we get the right merchandise ordered on a special order basis, for example, in the store at the right time so that we don't have return issues that we've got to send back to the vendor or items that we've got to discount and sell at less than the normal price of those products.

So there are a couple initiatives, obviously opportunity in the future for additional job on foreign sourcing, so there's opportunities out there in the future, but we've not built our plan with that type of margin expansion, and we would not guide you to that type of margin expansion because as you know in each and every quarter of the year, there are seasonal products, and we have a policy in place that we have no seasonal carryover, so if we have a great season, we sell through that product at pretty much full prices, we get great performance on margin, but we also leave our self room to be able to discount it and blow through it and manage the business the way we need to for the long term.

And my other question goes to inventory.

Do you think it’s dangerously too low or are you comfortable on inventory?

And what's your forward guidance on inventory?

Our guidance that we gave at the conference was that we would continue to expand inventory by about another 30 basis points in the way of turnover this year.

No, we don't think inventory is too low.

We probably have got some lower volume stores where we've got too much inventory in them, we can pull it out of them.

We think on the high volume stores, we've certainly got the replenishment process, the amount of inventory we need in there to continue to drive and feed our sales, but we've got some opportunity in some of the lower volume stores where we've probably got inventory a little high, and that's probably where we'll get most of that 30 basis point pickup in 2003.

Dale, did you have anything to add?

I was just going to say, that I think our inventories are probably better balanced today than they've ever been, and we've been very aggressive over the last couple of years maintaining a nonproductive inventory sell-through so that we've taken nonproductive inventory on a quarterly basis and gotten it through the system.

So we've got good inventory in place, and then for the seasonal build, we're flowing it, I think, better than we've ever done before.

We're using the RDC's now for a lot of our safety stock as opposed to having it in 800 stores.

We're now putting more of that into the RDC's, so between the sku reductions, the more shift to the SOF and so forth, I think you'll see better leverage on the inventory than ever before.

Your next question comes from the line of Dan Wheeler (ph) with CIBC.

Larry, you had indicated the installed sales were up 50%, I believe for the quarter or for the year, but was that before or after you implemented some of the changes that you had -

Our tests were rolled out in two districts, which would involve about 12 stores last year, so the increase that we got last year was based on using our old model, and we took some of what we learned from the test and we were able to use that in all of our stores.

We plan to do a massive rollout -- in fact, here at the sales meeting we're doing the training with our regional installed sales team as I speak, and we plan a massive rollout one district in every region in the company starting in March, and after we evaluate the test and get all the information back and determine where we need to improve or so forth, we will roll it out to the whole company starting in probably July of this year.

But we'll put it in 125 more stores starting in March.

Larry, does this drive higher sales from the installed program or does it improve the profitability of the program?

Both.

Higher sales certainly is our goal, but one of the biggest issues with installed sales is making sure you've got the customer satisfaction because you're taking customers home and putting subcontractors in there to do work, so the whole process involves getting our arms better around the installers that we use, at the same time being able to take the customer and tie in more projects into that installed sales piece.

The other question I had, just following up on the same-store sales, the strength that we're seeing, is it coming from a disproportionate amount from the new stores in the Northeast and California, or when you look at stores that are more than three years old, are you seeing similar rates of improvement?

It's balanced.

As Robert said, our performance has been so balanced for the last year and a half, we've been so pleased that we're balanced all across the country.

Certainly we've said many times, in a metro market that's undisturbed, you've got the same competitors this year as you had last year.

Certainly your comp opportunity is much higher.

But we're also seeing continued strength in our smaller markets throughout the country.

If you were to look at your 97 and 98 class of stores, they're achieving similar rates of comp sales growth?

Dan, this is Robert.

We've talked - (inaudible) the 94 classes going forward, every class of stores comped positively in 2002.

You get back to the 94, 95, they're not comping as high as the 96, 97 because of the maturity of those stores, but every class of stores had positive comps in 2002.

Great.

Thanks a lot.

Your next question comes from the line of Matt Hassler (ph) with Goldman Sachs.

Two questions if I could.

First of all, obviously terrific showing on the cash flow line this year.

It seemed like one item that had a particularly big delta was the other operating liabilities line, and just wanted to get a sense of what the change was there from 2001 to 2002?

On operating liabilities, the real things where you're seeing the change there are just general accrued expenses being up, obviously a larger company.

We've got something we've talked to you in the past called due files, which is a non-completed sale where the product has been sold but not delivered to the customer so we've got a liability until that sale is completed.

That number was up.

We're self-insured on most of our risk out there, obviously our reserves for self-insurance going up.

Gift cards.

Gift cards, when you sell a gift card, you've got a liability out there until that gift card is redeemed, so certainly the gift card liability outstanding, and then accruals out there for property sales and payroll-type taxes, those items going up.

So those are the main drivers.

It's all items, part of the number is from normal business, just for the growth in the business you're seeing out there.

And Robert, most of these changes that we've seen are structural, so they're probably not going to kickback on us in 2003?

That would be correct.

Fair enough.

Second question, looking at your guidance, forgetting about this weather issue in the first quarter, for the first quarter, you're talking 2 to 4.

For the full year, you're talking a comp gain of 4 to 5.

Talk to us a bit, if you would, about the rationale for the implied acceleration as you go through the year.

First of all, you've got slightly easier comparisons in the back half of the year.

We know that starting out the quarter, below our guidance, we're going to be a little bit more cautious than if we were within our guidance or at the high end of our guidance.

So I think what we're doing is being just a little bit more cautious on the first quarter because of where we stand with the extreme weather we've had versus sitting here and really looking at a real acceleration.

It's really just a matter of the weather we've experienced over the past three weeks.

That's very helpful.

Thank you.

Your next question comes from the line of Danielle Fox (ph) with J.P. Morgan.

Thank you.

Given the increase in the high end of the bonus range for store managers in 2002, is it fair to assume that you should be able to leverage a lower comp in 2003, all else being equal?

Danielle this, is Robert.

Yeah, all else being equal, that would be true if you had another year where gross margin got out of balance, certainly that would put some pressure on it, but yes, all else being equal, you would expect that to be the case and that's the way we'll build our plan.

Can you talk about the disruption that Home Depot is having on Lowe's and what your expectations are in this regard for 2003?

I'm a little bit confused.

First of all we're here to talk about us, not Home Depot.

When you say disruption, I'm not sure exactly what your question is.

Well, they're comping negative or they're reporting significantly negative comps.

To what extent do you feel that your new or existing stores are directly benefiting from some of the disruption at the store level there, and are you building in any expectation that Home Depot begins to execute better over the course of 2003?

Well, I think we always go to market and we challenge our store managers to assume that we're always going to have tough competitors out there no matter who it is, because then we want them focused on taking care of the customer every day and they know that they've got to be focused on doing that to maintain that customer franchise.

With regard to your issue about home Home Depot in particular, you've got to recognize that there's still a significant number of markets that Home Depot has stores in that we're not even in those markets yet.

So to be able to draw a correlation between that and our performance, I think is difficult to do.

We're just out there focused on the customer, trying to take care of them everyday and executing our plans with an eye on the competition but not a focus on the competition.

Okay.

Thank you.

Your next question comes from the line of Alan Riskin (ph) with Lehman Brothers.

Couple of questions.

Only about five months ago, your top line guidance was 18 to 19%.

Is the lower guidance that you're articulating today just purely a function of the back-end loading of new stores in the second half?

Or even with your 4 to 5% comp, are you actually taking a more conservative approach today than even five months ago?

Yeah, it really is the back-end weighting of the stores in 2003 that we're seeing, Alan, and also, you know, we've probably at the time we gave you that guidance, we probably were more around a 5 comp or so, we pulled that back to the 4 to 5 range for the year given that we're giving 2 to 4 guidance for the first quarter.

So the combination of those two things would be what changed that.

Just a follow-up before I ask my second question.

Is there any risk to the 130 stores for the year?

And then my second question, can you maybe just provide some color, Robert, as to how your store opening expenses are actually going down as you enter more and more metro markets?

On the 130 stores, no, as of today, we don't believe there's any risk.

We still feel good about that opening schedule, we'll get all 130 opened this year.

As far as store opening costs, the primary things you're seeing coming down on that is the advertising component of store opening costs.

With national advertising and more and more stores in metro markets, we're doing a better job of being able to leverage those other vehicles and pull down that cost on a per store basis for those openings.

As we enter more metro markets, we'll pull labor pool from our existing stores which also helps in reducing costs for training new folks for new stores.

Thank you and congratulations, Robert, on your new title.

Thank you.

Your next question comes from the line of Aram Rubenson (ph) with Bank of America.

Hey, guys.

Great job.

Two questions.

One, from being in the stores, it's pretty evident there's been a lot of change over the last 12 months to the merchandise assortment.

You've given us sales by category.

Can you give us a sense as to where you've seen the greatest gross margin increases by category and then I had one follow-up.

Aram, this is Robert.

As far as gross margin, it's really probably coming out of the mix and doing a better job of the technology side of stuff and making sure that we're getting the right products ordered on a special order basis, not as much return to the manufacturer, and when we do have a return to the manufacturer, we're doing a great job through technology of executing that.

It's not really taking up any price in the stores, it’s all from mix issues and what area it comes from.

Being down here in Orlando, I don't have that information in front of me.

Dale, do you have anything to add to that?

No, we've got some of the categories obviously with the higher gross margins where you look at the hardware, rough plumbing, rough electrical and so forth and then the home decor areas, home organization and fashion plumbing, fashion electrical and so forth.

Those were all high margin, but to Robert's point, it's all in the mix.

We've said all along that really when you talk about gross margin expansion, you're going to get it one of three ways.

Either raise the retails, which is completely and totally unacceptable in our competitive environment, or you lower the cost which we continue to work on with our vendors, without lowering the quality, and get it in the mix.

That's really where we focus the program.

I was just curious if it had been hitting certain categories more than others.

And it has.

Again, in the fashion areas of home decor, we've definitely had some real opportunities there.

Even in OPE and major appliances, which are typically low margin businesses, we've taken the margins up as we've looked at the mix within the mix.

Got it.

And the follow-up is this -- One of the retailers' hard tricks over the years has been to balance the productivity loop.

In other words, to, you know, try to put a ceiling on the operating margin structure and I'm curious if since the benefits to the gross margin are coming both from what the customer is taking from your stores, i.e. mix, and also from better sourcing, whether or not the need to kind of limit the operating margins is not like it was maybe years ago?

Aram, I think as long as that growth is coming from driving better efficiency, becoming more efficient the way we distribute products and get them out to the stores, doing a better job in ongoing operation of those stores, as long as it's coming from that, I mean, I think that that's not an issue because a lot of what you're seeing is just driving better efficiency through our operations.

We always have price shoppers out in the market constantly shopping the competition to make sure we are priced appropriately in the market, in delivering great value on each of the merchandising lines.

I was only curious because you hit a new milestone in the operating margin at 10 or 10.1%, whether that kind of gave way to a new line of thinking there.

Obviously it's coming from efficiency.

So I appreciate the thoughts.

All right.

And operator, we have time for one more question, please.

Thank you.

That will come from the line of Don Trott with Jeffries.

Good morning.

Could you give us some insight into what percentage of your stores are now in the 25 largest markets and what percent are in the 100 largest markets?

In the 25 largest markets, Don, a little over 22% of our stores are in the 25 largest markets in the country.

I didn't hear your follow-up.

And what percentage is in the 100 largest markets?

Because you alluded before -

In the 100 largest markets, it's about 52%, and if you look at those 100 largest markets in 2003, probably about 65% of the 130 stores we'll be opening will be focused on the 100 largest markets.

Thank you very much.

Thank you.

I'll now turn the call back over to Mr. Tillman for closing remarks.

Thank you, 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 first quarter results in May.

Thank you, and have a great day.

This concludes today's conference call.

You may now disconnect.