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Operator
Good morning, everyone, and welcome to Lowe's Companies first quarter earnings results conference call.
This conference 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 May 19, 2003 earnings release and the company's filings with the SEC.
Hosting today's conference will be Mr. Robert Tillman, Chairman and CEO, Mr. Robert Niblock, President and Mr. Bob Hull, Senior 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.
Go ahead, sir.
Robert Tillman - Chairman and CEO
Good morning and thank you for joining us.
Today in addition to hearing about our first quarter results from Bob Hull, Lowe's Chief Financial Officer, our President, Robert Niblock, will review some of the factors that impacted our performance during the quarter and discuss some initiatives that will drive sales performance over the longer term.
First I would like to highlight a few items from our first quarter results.
Sales in the quarter totaled $7.2 billion, an 11.4%increase over last year.
Comparable store sales increased a disappointing 0.1% for the quarter, but were significantly affected by weather as Robert will detail in a moment.
Encouragingly, even against tough year ago comparisons, in areas of the country unaffected by weather, we continue to experience process sales trends with strength across all product categories very similar to what we've seen for the last several quarters.
While our comp results for the quarter were not what we hoped, we remain confident that home improvement consumers will continue to invest in their homes.
Highlighting other items on the income statement, operating margin driven by strong gross margin growth in the quarter reached a first quarter record 10.32%, quite an accomplishment considering the adverse effects of weather.
Our expansion continues as we open 21 new stores, bringing our total store count to 875.
Square footage increased to 97 million square feet, a 12.9% increase over the first quarter of 2002, and we remain on plan to open 130 new stores this year.
While weather affected sales in the quarter, there are many positive signs that the home improvement consumer will remain resilient.
First, the housing market remains strong, as mortgage rates remain at 40-year lows.
Housing turnover has continued to improve over last year's record levels.
Even existing home prices continue to grow as well, increasing the value of America's single largest asset and providing comfort in the fact that home improvement spending is an investment that can provide both current and future rewards.
But importantly, an environment of low interest rates, housing remains affordable for many Americans.
While the final version continues to be debated, it seems probable that a tax relief package will be signed this year, putting more money in the hands of consumers.
In addition, falling fuel prices are freeing up discretionary dollars, at least a portion which will be spent on home improvement.
Ultimately, a stronger consumer with more discretionary income will lead to increased demand and improved employment picture.
Our brighter outlook for unemployment is one additional weight that will likely be lifted from consumers in the near future.
With the coalition troops' success in Iraq, consumer confidence is on rebound while the CNN effect was difficult to measure during the weeks of war in Iraq, there's no question that with concerns of war behind us, Americans are even more thankful to be able to live the American dream, including home ownership.
Weather is not an excuse we like to use for less than expected results, yet in this year's first quarter, the year over year weather comparisons undoubtedly impacted comp sales in the period.
But through continued gross margin growth driven by merchants, our operators and our logistics infrastructure, we delivered earnings at the high end of our original guidance.
We won't deviate from our long term plan and strategies based on these short term sales results, but we will continue to allow our stores to evolve to ensure we have the products and a shopping environment home improvement consumers demand.
We'll continue to invest in our existing store base.
This year we'll devote over 200 million of our capital spending to existing stores.
This investment is not new for Lowe's.
Over the last several years, we've spent a similar percentage of our capital budget on existing stores to ensure our customers receive consistently inspiring and aspirational environment in which to shop.
We remain committed to our full-time to part-time employee ratio of 70% full time, 30% part-time, ensuring high quality customer service.
We won't look for quick fixes or overreact to the results of the quarter.
A resilient consumer with at least some of the headwinds now removed will continue to invest in their homes.
Our first quarter results are not indicative of a slip in consumer propensity to spend on their homes, but rather predominantly a weather-related phenomenon that we're hopeful will be resolved in the balance of the year.
With that, let me turn the call over to Robert Niblock to discuss in more details the store and merchandising issues we experienced in the quarter.
Robert Niblock - President
Thanks, Bob.
This morning I'd like to review our performance, discuss areas that impacted the quarter, and highlight initiatives we're working on to drive sales and increase the level of service we provide our customers.
While comps fell short of our objectives, several factors impacted our results for the quarter.
First, the weather.
I mentioned during our fourth quarter call in February that extreme winter weather was having an impact on February comps.
February delivered the heaviest snow and ice in the Eastern U.S. since 1995.
Probably most impacted in February was our Northern Division, where temperatures averaged 8 degrees colder than last year, and precipitation was over two times year-ago levels.
This weather caused a disruption in consumer buying patterns and significantly impacted sales.
March, on the other hand, brought warmer weather and higher comps, despite areas of our Western Division being blanketed with record snowfall.
These trends confirmed our belief that sales shortfall we experienced in February was weather-driven.
But unfortunately, in April, weather weary homeowners returned indoors as heavy rains and flash flooding tore through the Southeast, significantly impacting outdoor categories.
Adverse weather during the week of Easter also dampened what we had expected to be a positive effect from the holiday shift from March last year to April this year.
In the face of poor spring weather, consumers continued to invest in indoor categories, generating strong sales in areas such as rough plumbing, paint, cabinets, home organization, and walls and windows.
As Bob mentioned, less affected regions such as the West and deep South, continued to post above-plan comps with strong sales in both indoor and outdoor categories.
Sales in these markets were evidence of the consumer's willingness to continue to invest in their homes.
As temperatures continue to warm up, we're confident that sales trends will improve as much of the U.S. is just now seeing the first true signs of spring.
The second area that impacted first quarter sales was our under estimation of the demand for mid-range price points in our out outdoor power equipment category.
While sales were strong in our Troy-Bilt line as well as higher end Cub Cadet and Husqvarna lines, demand for the lower price points principally above Bolens lines was disappointing.
As a result, we've adjusted merchandising and marketing plans and we are confident we will experience strong outdoor power equipment sales for the balance of the year.
Better in-store service from our vendors will aid O.P.E. as well as other categories thanks to the success of our vendor service consolidation program.
At the end of the quarter, vendor service consolidation had begun in all but one category.
To recap this program, Lowe's took a look at its vendor relationships and realized that much of our vendor's time was spent in their cars traveling between stores as each vendor tried to provide coverage to an entire district.
When re-evaluating this program, we decided that our customers, our employees, and our vendors would be best served by reducing both the number of vendor service groups and the number of stores each rep serves.
This allows a rep to provide higher quality service by allowing them more time in the stores, less time on the road, a strengthened relationship with store employees, and a better handle on what products sell, when they sell, and what customers are looking for in general.
This realignment in strategy is a win-win for us and our vendors.
Our vendors like getting more coverage, our customers enjoy easy-to-shop, well-maintained merchandising sets, as our merchandising mix continues to evolve to reflect the needs of the diverse customers we serve, and employee time is better utilized to serve customers.
While weather impacted the quarter more than we had originally anticipated, we're not waiting for things to get better on their own.
We're constantly asking, what can we do better, and how can we better meet customers' needs and expectations?
Even in strong categories such as appliances.
Last year, we re-merchandised the appliance area in 170 of our stores, an effort representative of our dedication to provide even better service to our customers.
Those efforts continue to make appliances a success story at Lowe's, as we continue to gain market share.
According to the most recent Trackline survey results, our appliance offering posted a 170 basis point share gain verses the first quarter of 2002.
Our strategy continues to broaden the choices our customers have without abandoning opening price points.
A key to the success of this program is working with our vendors to introduce new and innovative products, keeping our merchandising mix fresh and appealing to our customers, and driving sales performance.
A great example is our partnership with Jenn-Air to market outdoor gas grills.
Our Lowe's exclusive Jenn-Air grill was recently ranked number one and rated a top pick by a leading consumer magazine.
Consumers appreciate the convenience of a well-built, easy to use product, and when it comes to their homes or items for the home, consumers remain willing to shop up the continuum for value and quality.
In addition, the rollout of American tradition Signature Colors has also been a great success.
I mentioned earlier that paint was one of our stronger categories for the quarter.
Signature Colors was a big part of that.
Combining the highest quality durability and adhesion with a full range of color pallets.
With color and design selections inspired by Laura Ashley, Alexander Julian, Waverly and Earth Elements, our customers are able to meet their needs for self-expression for every room in the house.
Our big three initiatives, special order, commercial and installed sales, continue to provide a sales lift across many categories.
We continue to work to improve the install sales product for our customers with the roll out of our enhanced installed sales operation model.
Larry Stone mentioned on our fourth quarter call that the initial pilot of this program was conducted in six North Carolina stores in addition to increased install sales, we have seen a marked reduction in complaints in the areas tested.
The enhanced install sales process seeks to proactively manage the entire installation for the customer by providing additional touch points to ensure a satisfying installed sales experience.
Customers will be guided through the entire process, beginning with clearly defining and managing the customers' expectations of the overall installation.
Proactive phone calls from our team will provide consistent support and communication as the job progresses while Lowe's certified installers work to complete the process within a clear timeframe.
The process wraps up with a job site inspection to insure satisfaction and job quality that is consistent with what customers expect from Lowe's.
The new program will allow us to capture a more significant portion of the installation market with the superior installed sales model.
It means less of our sales specialists' time will be spent pulling stock for installers and more time focused on selling.
It means offering our customers a higher caliber installer base and improved ability to scale a business that can deliver on our customers' needs and expectations.
The rollout has begun and we currently have this up and running in 128 stores, representing all areas of the company.
After we evaluate our results for these stores in June, we will continue the rollout district by district.
The phased rollout of all stores is currently scheduled to be completed by July of 2004.
We also set up Lowe's Global Stores in Mexico in the first quarter of 2003.
This expansion, while continuing to help us leverage costs, adds to our established sourcing offices in China and Taiwan, and creates additional opportunities to diversify our product offering to reflect our ever-changing customer base.
LGS Mexico will provide significant opportunities in several areas including ceramic tile, conduit, and ceramic plumbing fixtures.
Expansion of our store base continues.
During the quarter, we opened 20% of our new stores in New York and New Jersey, continuing our successful push into the nation's largest market.
In addition, as some of you know, we have been the first of our 94K prototype store in a small North Carolina market during the first quarter.
These small market stores have lower capital investment than our 116K prototype, and holds 25% less inventory and 25% less SKUs.
We will continue to enhance the productivity of these stores by managing payroll costs and tweaking inventory levels, but to date, our first store is on plan for both sales and profits.
The second 94K will open in this week in our Tennessee market.
As Lowe's continues to expand, these stores provide new opportunities for growth and open up hundreds of additional opportunities in smaller markets.
Home is and will continue to be the focal point of Americans' lives.
Lowe's recognizes the challenges and opportunities as U.S. demographics change, the population becomes more diversified, and consumers' unique tastes and styles evolve to reflect that diversification.
I think Gene Hackman says it well in our commercials, âyour home, your ideas, and the freedom to express them, at Lowe's, we make it easy.â
I'll now turn it over to Bob Hull to discuss the quarter's results in detail.
Bob?
Robert Hull - SVP and CFO
Thanks, Robert.
And good morning, everyone.
As Bob indicated, sales for the first quarter were $7.2 billion, representing 11.4% increase over the first quarter last year.
Comp sales were 0.1% for the quarter, compared with a 7.5% comp increase for Q1 last year.
Our first quarter 2003 sales were impacted by weather and, to a lesser degree, the war with Iraq.
Deflation in lumber and building materials resulted in an unfavorable impact on first quarter comps of approximately 50 basis points, driven entirely by lumber.
With regard to product categories, the categories that performed above average in the first quarter include rough plumbing, building materials, hardware, nursery, seasonal living, paint, windows and walls, cabinets, flooring, and home organization.
In addition, appliances performed at approximately the overall corporate average.
Gross margin for the first quarter was 31.04%.
This is an improvement of 133 basis points over last year's first quarter.
The improvement was attributable to a number of factors including better margin rates, product mix improvements, and a 26 basis point reduction in inventory shrink.
SG&A de-leveraged 58 basis points in the quarter, driven primarily by payroll.
The payroll de-leverage was caused by spring staffing levels that we maintained in our stores.
We hired and trained associates according to plan.
Once we made the investment in these individuals, we didn't feel that it was sensible to pare down staffing, but we waited for the weather to improve and our business to ramp.
In addition, higher energy and snow removal expenses impacted Q1 leverage by approximately 14 basis points.
Also, SG&A for the quarter includes 7 basis points associated with our decision to expense stock options beginning in 2003.
These items were slightly offset by leverage in incentive compensation.
Operating margin, defined as gross margin less SG&A and depreciation, increased 49 basis points.
This is significantly ahead of our guidance of 20 to 30 basis points.
Store opening costs leveraged [31] basis points and reflects the opening of 21 new stores in the quarter.
This compares to 42 new and 4 relocated stores last year.
As a sign that our transformation to a chain of big box stores is almost complete, there were no store relocations in quarter.
Depreciation at 2.5% of sales totaled $180 million and de-leveraged 26 basis points.
This de-leverage was driven by our continued expansion, the increase in the percentage of owned locations, and in Q4 2002, we purchased all of our short-term financing leases.
At the end of the first quarter, we owned 76% of our stores, verses 73% at the end of the first quarter last year.
Interest expense increased to $49 million for the quarter, but leveraged 6 basis points as a percent of sales.
For the quarter, total expenses were 21.65% of sales and de-levered 47 basis points.
Pre-tax earnings were 9.39% for the quarter, up 86 basis points over the prior year.
The effective tax rate for the quarter was 37.8%, verses an effective tax rate of 37.4% for Q1 last year.
Diluted earnings per share of 53 cents increased 20.5% verses last year's 44 cents.
Diluted shares outstanding totaled 802 million for the quarter.
The computation of diluted shares takes into account the effect of convertible debentures which increased first quarter weighted average shares by 16.5 million.
In computing first quarter diluted earnings per share, the after-tax add-back to net income for interest on convertible debentures was $2.6 million.
For each of the remaining quarters in 2003, the after-tax interest add back is also $2.6 million.
For the second quarter, we're projecting diluted shares outstanding of 805 million.
For the year, we're projecting diluted shares of 806 million.
In Q1, we had a slight increase in average ticket of $58.26.
Customer count increased 11% during the quarter.
Now to a few items on the balance sheet.
Our cash position improved to $1.6 billion at the end of the quarter.
Inventory turnover was 4.43, an increase of 18 basis points over Q1 2002.
Return on invested capital measured using beginning debt and equity in a trailing four quarters' earnings increased 151 basis points for the quarter from 13.79% to 15.3%.
Our first quarter performance drove return on assets, determined using beginning assets and trailing fourth quarters earnings to 9.91%, representing an increase of 112 basis points.
Cash flow from operations was $1 billion.
This was driven by increased earnings and working capital.
For fiscal 2003, we anticipate being free cash flow positive.
Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook.
A second quarter sales increase of approximately 13% incorporates a comp assumption of 2 to 4%, which is expected to generate diluted earnings per share of 68 to 70 cents, representing an increase of 15 to 19%.
For fiscal 2003, we expect diluted earnings per share of $2.16 to $2.20.
This guidance considers the tough fourth quarter comparison associated with our 46% and 55% net earnings growth for 2002 and 2001 respectively.
Operating margin for the second quarter is expected to increase between 20 and 30 basis points.
For the entire fiscal year, we are also anticipating an operating margin improvement of 20 to 30 basis points.
For the year, we are anticipating a comp sales increase of approximately 3 to 4%.
This guidance incorporates a comp assumption of approximately 4 to 5% for the second half of the year.
In the second quarter, we expect to open 25 stores including two relocations.
We are on track to open 130 stores for fiscal 2003.
Regarding current sales trends, I mentioned earlier our business outlook for the second quarter anticipates 2 to 4% comps.
For the first 16 days of the quarter, our comps were at the low end of this range.
Next, I would like to update you on the forecasted impact of our recent accounting pronouncement issued by the Emerging Issues Taskforce.
As noted in our release, this issue impacts our accounting for co-op advertising.
Traditionally, Lowe's has reduced advertising expense by co-op advertising from vendors.
This 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 products, otherwise the fund should be treated as a reduction of inventory cost.
Beginning in fiscal 2004, we will treat all co-op advertising as a reduction in cost of goods.
The administrative expenses associated with tracking vendor-specific costs for each advertisement would greatly offset the benefit of doing so.
The estimated impact of this change will be a reduction in diluted earnings per share of approximately 12 cents in 2004.
This is a one-time accounting change and has no cash flow impact.
Had we made the change in 2003, the estimated impact would be approximately 11 cents per share.
Before I turn the call over to the operator for questions, I'd like to mention that in addition to Bob, Robert and myself, Larry Stone, Dale Pond, and other members of our management team are present for the question and answer session.
Operator, we're now ready for questions.
Operator
At this time, I would like to remind everyone, in order to ask a question, please press "star" then the number "1" on your telephone keypad.
If you are using a speakerphone, please pick up your handset before asking your question.
We'll pause for just a moment to compile the Q and A roster.
Your first question comes from Dan Wewer with CIBC World Markets.
Daniel Wewer - Analyst
Good morning.
The appliance same-store sales, if I understood correctly, were flat, and if that's the case, I believe that's probably some of the slowest growth that category has posted in several years.
I'm trying to get a better understanding of what could be contributing to that besides overall weak demand in the industry, and in particular, what you're seeing when your stores are facing the enlarged appliance assortment at Depot.
Robert Niblock - President
Dan, this is Robert Niblock and I'll get Dale to jump in if he has any further thoughts.
You did mention overall weakness in the industry and that certainly is a factor.
The other thing, when we talk about the Trackline results and us being up 170 basis points, that refers to major appliances and excludes air conditioners.
The flat comp you referred to for us for the quarter includes AC's, and with the much colder spring this year than what we had last year, that certainly had a negative impact on sales of AC's quarter to date.
We expect to pick that up over the balance of the year, but I would say probably one of the single biggest driving factors is the negative impact that AC's had on air conditioner comps for the quarter.
Dale, do you have anything else to add?
Dale Pond - EVP Merchandising
Not really.
The only other thing is the Trackline suggests that we're continuing to build the share, and in fact, a pretty impressive share on the last 12 months.
We continue to gain on Home Depot and on Sears in terms of overall share acquisition.
Daniel Wewer - Analyst
Dale, have you looked at your stores that face a Depot thatâs gone through their enlarged appliance program to see how your numbers are affected?
Dale Pond - EVP Merchandising
Definitely, Dan, we have looked at it.
We have not seen any major -- or actually any significant change in the overall performance of those stores.
Daniel Wewer - Analyst
Great.
Thanks a lot.
Operator
Your next question comes from Mark Mandel with Blalock and Partners (ph).
Mark Mandel - Analyst
Thanks.
Good morning everyone.
I just wanted to get a little more clarity on the EITF 2-16.
So this is a one-time effect, in other words, if you look at the guidance you've given in the past, 20% earnings growth, we should take a 20% increase in 2004, then back out a 12 cent impact for this adoption I would assume; is that correct?
Robert Hull - SVP and CFO
This is Bob Hull.
That is correct.
We plan the same earnings growth for 2004 that we've guided in the past less this accounting change.
Mark Mandel - Analyst
Then if we look at 2005 and beyond, we would use that lower base to project 20% growth or whatever rate of growth we assume on a going-forward basis?
Robert Hull - SVP and CFO
That is correct.
It would be a lower base beginning in 2004, growing from there.
Mark Mandel - Analyst
Ok.
I just wanted to double-check on that.
Second question, depreciation of sales, at what point would you expect in the future to see leverage, what and kind of projection should we assume in terms of a basis point increase over the next few quarters?
Robert Hull - SVP and CFO
As we continue to expand our stores, specifically in metro markets, there's higher acquisition costs in those markets, we will probably see some leveling off, hopefully this year or next year, and some potential leveraging beyond that.
Mark Mandel - Analyst
So when we anniversary this change in acquiring the short term leases -
Robert Hull - SVP and CFO
Q4 this year.
Mark Mandel - Analyst
Ok.
Robert Hull - SVP and CFO
What we acquired in Q4 last year, probably get the full effect will be Q1 next Q4 next year to get a full quarter with the appreciation.
Mark Mandel - Analyst
Okay, thanks a lot.
Robert Hull - SVP and CFO
Sure
Operator
Your next question comes from Budd Bugatch from Raymond James.
Budd Bugatch - Analyst
Good morning.
I wonder on the components of gross margin improvement, can you kind of quantify the difference between the product mix and have -- you gave a shrink, but 100 and some basis points is pretty good performance.
Robert Hull - SVP and CFO
This is Bob Hull again.
Mix had a significant impact to our margin performance for the quarter.
Robert talked about the supply and forecast issues associated with outdoor power equipment.
I spoke to the lumber deflation.
Both those categories have lower than the company average margins, grew at sales rate lower than the company so that had a compounding impact for the margin mix.
Budd Bugatch - Analyst
So mix is relatively more important than the rate of pricing?
Robert Hull - SVP and CFO
More important, but they both had an impact.
Budd Bugatch - Analyst
On the second question, on the -
Robert Niblock - President
This is Robert Niblock.
Just keep in mind that we're talking about the improvements in product pricing, it's really reductions in costs, not increases in pricing that are driving that side of the equation.
Bob gave you the shrink, 26 basis points or so, mix was around 27 basis points.
When you put those two items together, have you more than 50 basis points accounted just with mix and with shrink in the first quarter.
Then obviously reductions in cost, ongoing efficiencies that we're trying to drive through the process, several things I've talked about over the past several quarters, and more efficient special order process, we'll order more of the product right the first time, have less returns to the manufacturer, less items we have to discount and sell in the stores.
All those kind of behind the scene improvements that we're making are what are also adding to those improvements in the overall gross margin.
Budd Bugatch - Analyst
Well, you've given us two or three, Robert.
Do you want to give us the pricing or the cost improvement in basis points and we'll figure what the other part of that is?
Robert Niblock - President
It's the majority of the remaining difference between the 50-some basis points and the 133, but you understand that costing is a number of these other things just like on special order sales, if we do a better job ordering the right products so we're to the having to discount something and sell the wrong product, then you obviously have a higher margin on everything you're selling, so it all layers into those remaining 70 basis points that are there.
Budd Bugatch - Analyst
Understood.
And great performance on that.
On the EITF, this is a change in accounting principle, so we'll see most of the impact of the 12 cents, Bob, in the first quarter, is that correct?
Robert Hull - SVP and CFO
We'll see the majority of the impact in Q1 2004, that is correct.
Budd Bugatch - Analyst
So and then the balance will just be based on the delta of the inventory quarter over quarter?
Robert Niblock - President
That is correct, Budd.
Budd Bugatch - Analyst
Ok.
And last question I have is on appliances, and on room air conditioners, it looks like air conditioners, at least room air conditioners from the AHAM (ph) date is up significantly year over year, more than 50% year over year if our numbers are right on a unit basis.
Robert, I was kind of surprised you said that was a weakness for you.
What's going on?
Robert Niblock - President
I think you may be looking at shipments not sales, Budd.
Budd Bugatch - Analyst
We are [inaudible] gives us shipments.
So you're saying inventories have gotten a little heavy then?
Robert Niblock - President
We're full of air conditioners.
We're just waiting or the weather.
Budd Bugatch - Analyst
Gotcha.
Thank you very much.
Dale Pond - EVP Merchandising
Budd this, is Dale.
One point on that issue is that last year we have carryover.
This year we have no carryover from last year's air conditioners sales so we did buy heavier into the early part of the season.
Budd Bugatch - Analyst
Gotcha.
Thank you very much.
Operator
Your next question comes from David Schick with Legg Mason.
David Schick - Analyst
Good morning.
Two questions.
First, you mentioned tax relief and looking forward to that, and you also mentioned 4 to 5 comps in the back half.
Is some sort of tax relief function factored in your guidance for the back half?
My second question, around the 94K stores.
Could you talk a little bit more on the details on plans for sales and more importantly, profitability as you're reducing the SKU mix?
Thanks.
Robert Niblock - President
This is Robert Niblock.
As far as tax relief, no.
Obviously we think that would be an additive to the way we built our plan.
We don't specifically build our plan assuming that's going to be there and drive additional sales.
On the four to five comps in the back part of the year that we've given guidance to for the back half, that's really just -- the way we built our plan, our plan is still out there, we still feel good about our plan in the second half of the year, and we know we've had the weather impact in the first quarter and so far to date on the second quarter, so we're not -- our weather forecasting (inaudible) isn't that good for the second half of the year, so we're pretty much staying on plan.
On the 94K stores, as far as when we build our return on investment model, whether it's a 94K store or a 116K store, those stores still have to achieve the same return on investment criteria.
The benefit of a 94K store is you're probably only putting about 10 to maybe $12 million of up front investment verses on average $17 to 18 million of up front investment in a big store, and on top of that, you're only putting about $3.5 million of average inventory across the year in that store verses probably $4.5 to 5.5 million depending on the markets it's in and the volume on the larger stores.
So when you layer all that in, the primary difference in -- the difference in the up front investment is the land cost, obviously the markets these are going in are much lower land cost, lower property taxes, a lower staffing complement, so on and so forth, so as a percent of sales, we would expect these stores so achieve similar percent of sales returns, but just on a lower operating volume than what you would receive in a metro market store based on a similar level of maturity of that store base.
David Schick - Analyst
Thanks Bob.
Operator
Your next question comes from Aram Rubinson with Banc of America Securities.
Aram Rubinson - Analyst
Good morning.
It's Aram.
A couple of questions.
First, you mentioned 20% stores you opened in the first quarter in New York/New Jersey area, I am curious if you might give us an idea what that ratio might look at for the balance of the year.
The second relates to the OPE category.
Obviously Home Depot was out with a pretty big push on the John Deere line.
I'm curious if you think that that is what had an impact or if there is something else, maybe the up the continuum strategy went too far, I am curious if there's any implications for other categories.
Thanks.
Robert Niblock - President
This is Robert.
On OPE, I'll get Dale to answer that and then we'll see if we can get the numbers for the balance of the year for New York/New Jersey for you.
Are you specifically concerned about those or metro markets?
Aram Rubinson - Analyst
New York/New Jersey was I think what you had mentioned so I guess I would love the following couple quarters if possible.
If not, I'll get you later.
Dale Pond - EVP Merchandising
Aram, on the question about our competing against the John Deere introduction or launch, first of all, as you know, or may not know, our share of the OPE business did not suffer in the first quarter, and secondly, our premium riders, the Husqvarna and Cub-Cadet lines, actually had some rather phenomenal double-digit comp growth in that first quarter as did our Troy-Bilt riders, which are kind of the middle of the line.
And those also, I might add, were double digit comps, actually in the 20's.
So when you look at those two top lines, three lines, the Husqvarna, Cub-Cadet and Troy-Bilt, we did not take the hit there.
Where we took the hit was in the lower end, lower priced mothers, the Bolens line of tractors, and in fact in reality, that was more of a function of a recall that we suffered from early in the season when the Bolens line, four of the tractors were actually recalled during that period of time.
Robert Tillman - Chairman and CEO
Aram, this is Bob Tillman.
I think it's safe to say that through the industry, John Deere picked up share in the industry in the first quarter of the year.
The introduction of a lower price point John Deere, a down the continuum strategy of having a $1,500 John Deere tractor, I would say had serious impact on everybody that was selling a similar price range tractor without that national name brand.
And that product was not just available at one retailer, it was available across all the John Deere network, all the John Deere independent dealers have that tractor as well, so I would say a $1,500 John Deere tractor, they took some significant share in the OPE area overall.
We didn't suffer a major share but some other people we know did suffer major share in the first quarter.
I would assume to your question, Home Depot would have picked up some share in OPE as well as all the other John Deere dealers across United States.
Aram Rubinson - Analyst
Last thing, real quick, the weather I would have thought might have affected the categories like building materials, lawn and garden, outdoor living.
Can you reconcile where those were above average performers?
Then I'm done.
Thank you.
Robert Hull - SVP and CFO
Aram, this is Bob Hull.
Our outdoor living category includes seasonal heat.
With the cooler weather we saw significant uptick in the seasonal heat business which caused seasonal living to perform above company average.
Dale Pond - EVP Merchandising
On the building materials area with the severe weather that we've had, actually asphalt roofing, asphalt coatings, polyethylene, gutter products, things of that nature, Aram, did very well.
Robert Niblock - President
Finally on New York/New Jersey, for the balance of the year, looks like about 10% of our stores will be opening in those markets.
Aram Rubinson - Analyst
Thanks so much, guys.
Operator
Your next question comes from Dana Telsey of Bear Stearns.
Dana Telsey - Analyst
Good morning, everybody.
Can you comment a little bit about the current percentage of imports in global sourcing?
How much more improvement is there in the gross margin from this, and where do you see imports getting to?
And lastly, with the sales where they are, in terms of payroll, how are you adjusting payroll in light of the sales and how do you see it going forward?
And just how is the commercial business during the quarter?
Thank you.
Dale Pond - EVP Merchandising
Well, this is Dale Pond again, first of all, on the LGS, the Lowe's Global Sourcing, we continue to push that agenda, but I will say last year we ended up the year with about a 30% increase in that area.
This year we're running ahead of sales by about twice, but we're still not on pace with last year's increase.
Part of the reason for that is that many of our domestic manufacturers and vendors have really come to the table with some strong programs for us, and we obviously are continuing to focus on brand names, so we see growth continuing in that area, but it will moderate this year and probably remain in the range of 20 to 30% over the next couple of years.
Larry Stone - SEVP, Operations
This is Larry Stone.
On staffing, we're still confident that spring is going to get here in all parts of the country.
In fact, this weekend, where the weather was fabulous, we had fabulous sales this weekend, so we're not to the point that we're in the panic mode on staffing.
We monitor our staffing every week.
We have a staffing department that gets with their district managers, regional vice presidents and we look at all the staffing in every store in the country.
As Bob eluded we 70-30 mix, we're committed to provide a level of service that we need in our stores to sell our products, and certainly as we go into the summer seasons, we always look at staffing and make sure we make the adjustments to meet the sales rates, but right now we're still full force ahead and we know that sales are still out there and certainly we've got to be prepared to take the business.
As far as our commercial business goes, we had positive comps for this business.
Our programs are working.
We continue to enhance the customer that we're after, we call it the commercial customer, which is basically the small repair/remodel customer, property management customers, and these are the customers that we have targeted for the last several years.
So that business is on track, and certainly making plan for the first quarter of the year.
Dana Telsey - Analyst
And any impact, Dale, in terms of SARS and the goods from Asia?
Thank you.
Dale Pond - EVP Merchandising
No, as a matter of fact, we do continue to monitor that pretty carefully, but to date, we've had no impact on product flow.
We have had our people in the offices who have been very sensitive to the idea of traveling overseas, and I will say that at this point, you know, we watch it, but no problems so far.
Dana Telsey - Analyst
Thank you.
Robert Tillman - Chairman and CEO
Operator, we have time for one more question.
Operator
Your final question comes from Michael Baker with Deutsche Banc.
Michael Baker - Analyst
Thanks.
Can you hear me ok.
Robert Tillman - Chairman and CEO
Yes.
Michael Baker - Analyst
Great.
Just following up on Aram's questions in terms of the openings, not just in New York and New Jersey, but can you give us the expected openings for all the metro markets this year, if you look at the top 25 markets or the top 100 markets, if you're still on pace to open 65% of your stores in those markets?
I guess related to that, are you seeing any kind of pipelines or lead times longer to get stores open in those markets?
Is that still the case?
And finally, how many of those 94,000 square foot stores are you planning on opening this year?
Robert Niblock - President
This is Robert Niblock.
On New York/New Jersey and other metros, if you want to call Paul after the call, he can give you a little more detail on some of the areas of the country.
I don't think we have time to go through and label each one of those markets on the call.
Michael Baker - Analyst
Are you still planning on 65% of the--
Robert Niblock - President
As far as 65% of our stores opening in metro markets, that is still the case.
We're still on plan to do that this year.
I think at the end of the quarter, we had about 22% of our stores in the top 25 markets in about 52, 53% of our existing stores in metro market as we define them, but yes, 65% or so of our stores will still open in metro markets this year.
Timelines, yes, in the metro market is a much longer timeline than what you have in the kind of the heartland markets here, but that's all built into our real estate process.
We're now approving stores now that we know today won't open for three or four years in some of those major metro markets, and a lot of the stores we're opening today are stores that we approved three and four years ago, but we've got a good supply of those in the pipeline in those major metro markets that we've approved over the past several years, so we will continue over the next several years to open stores in major metro markets.
Finally, with regard to the 94K stores, we'll probably open about 24 or 25 of those in this fiscal year, so about 24 or 25 of the total 130 stores this year will be those smaller market stores.
Michael Baker - Analyst
Great.
Thank you very much.
Robert Hull - SVP and CFO
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 second quarter results in August.
Goodbye, and have a great day.
Operator
This concludes today's Lowe's Companies first quarter earnings conference call.
You may now disconnect.