勞氏公司 (LOW) 2003 Q2 法說會逐字稿

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  • Operator

  • Good morning everyone and welcome to Lowe's Company's second-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 August 18th, 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.

  • Please go ahead, sir.

  • Robert Tillman - Chairman and CEO

  • Good morning and thank you for joining us.

  • Today in addition to hearing about our second-quarter financial results from Bob Hull, Lowe's Chief Financial Officer, our President Robert Niblock will review some of the operational merchandising and operating aspects of Lowe's strategy that helped lead to the strong sales and record earnings this quarter.

  • Following highlights for our second-quarter results, I will provide a few thoughts on the economic landscape as it pertains to the home-improvement industry and to Lowe's.

  • First our results.

  • Sales in the quarter totaled 8.8 billion, a 17.2% increase over the last year.

  • Comparable store sales increased 6.9% for the quarter, against a top year ago comp of 6.8%.

  • Thanks to our continued growth in gross margin as well as effective expense control, we achieved a Lowe's record 11.8% operating margin in the quarter.

  • This was the first time operating margin has exceeded 11% in our company's history.

  • Earnings per share was 75 cents for the quarter, increasing 27% over last year.

  • Without a doubt, a great quarter and a clear indication that America's passion for home improvement remains strong.

  • Yet changes in the macroeconomic landscape, specifically the potential reaction of consumers to the rising interest rate environment, and a 10-year high in unemploymement are on the top of mind for everyone.

  • Over the past two years, as a broader economy wavered, interest rates dropped to their lowest levels in over 45 years, bringing about one of the greatest mortgage refinancing booms in history.

  • More so than in past refi cycles, many of those who refinanced reduced their monthly payments and created annuity that freed disposable income for the life of the mortgage.

  • Certainly the home improvement industry benefited from this refinancing activity, but it is important to note that the refi market was not the single driver of our business, nor will increasing interest rates and a slowing refi market mean the end of our growth or the growth of our industry.

  • Our success and the strength of the home-improvement market have been driven by many factors in addition to record-low mortgage rates, an aging baby boomer population, increased immigration, and a strong and growing sense of comfort in the home have led to the highest home ownership rates in history.

  • Home ownership was a cornerstone of the American dream long before interest rates began their decline in 2000, and a focus on the home will remain a part of the American dream as interest rates begin to rise.

  • In fact, the home improvement research institute estimates that home improvement spending will increase at nearly 5% annually for the next several years .

  • It is also important to note that while mortgage rates have increased off the bottom experienced in June, they are still at historically low levels and housing affordability remains high across most of America.

  • The new home market purchase remains strong with purchase applications at or near record levels.

  • Signs of an economic recovery, improving consumer confidence and a brightening employment picture are certainly influencing the rise in interest rates.

  • We are confident that as the economy strengthens consumers will continue to be inclined to invest in their homes.

  • Lower tax withholding rates as well as the tax refunds that consumers began receiving a couple weeks ago will help ensure that consumer strength continues.

  • While concerns about the economic environment continue to capture the headlines, there remains an unwavering desire to improve the home that is deeply routed in the America psyche.

  • Our employees remain steadfast in their commitment to provide their customers with exceptional service and improve the customer experience.

  • That is what will continue to roll customers to our stores and help us make Lowe's the first choice for home improvement in each and every market we serve.

  • I'llnow turning the call over to Robert Niblock to discuss some of our initiatives to improve the experience for our customers.

  • Robert Niblock - President

  • Thanks, Bob.

  • This morning I'd like to review our performance, provide a few details on areas that drove our success and highlight progress we have made on initiatives that will deliver great customer service and strong results in the years to come.

  • As Bob indicated, comp sales were 6.9% for the quarter and that's on top of a strong 6.8% comp in last year's second quarter.

  • Sales in the quarter benefited from improving weather trends in most of the country.

  • As weather improved, consumers were able to initiate many projects that had been postponed because of poor weather in this year's first quarter.

  • Both customer traffic and average ticket improved significantly as the quarter progressed.

  • The key to our success in the second quarter was the fact that our stores were ready for the ramp in sales when it came.

  • Our store employees effectively executed the programs we have in place and most importantly, provided great service to our customers.

  • The results our mid-Atlantic region delivered are perhaps the best example of the improvement we experienced over the first quarter.

  • That region endured very difficult weather comparisons in this year's first quarter and delivered a negative comp.

  • In the second quarter, as weather improved, pent-up consumer demand and a continuing desire to invest in the home led to double-digit positive comps in the quarter.

  • As a further example, our northeastern and New England regions each improved comps by over 1400 basis points over this year's first quarter.

  • Our regions in the western U.S. and deep south, which have been less affected by weather this year, also performed very well in the second quarter.

  • Backing up the strong results these regions posted in the first quarter.

  • And the comp progression throughout the quarter followed the weather.

  • Improving from a slow start in May to close the quarter on a strong note.

  • We were extremely pleased with the balance of sales in the quarter, each of our 18 regions delivered positive comp sales for the second quarter, and all retail regions now have positive comps for the year.

  • Importantly, we didn't panic because of the tough selling season in the first quarter.

  • Instead, our 57 years of experience told us to stay on plan and once weather improved to expect an unusually compressed spring selling season.

  • Our plann incorporated ramp and our marketing program to match the seasonal ramp in business we historically see in the second quarter.

  • With an appropriate mix of print, radio and TV marketing as well as compelling credit offerings, traffic returned in force to our stores as the weather improved.

  • While it involved some risk, we did choose to ramp inventory in the second quarter to take advantage of the compressed selling season.

  • A great example is outdoor power equipment.

  • This category struggled during the wet and cold first quarter, but as the weather improved in the second quarter and our planned marketing programs took effect, our sales saw a marked improvement.

  • In fact, OPE was our highest comping category in the quarter driven by success across all price points.

  • A second example is found in our paint category, which continues to deliver strong comp sales.

  • Our American tradition Signature Colors rollout continues, and our offering got even stronger with our new Eddy Bauer and Nickelodeon designer brands, both announced in the second quarter.

  • While Signature Paint is currently available in all stores, the rollout of the kiosk and color palettes is still underway and will completed by the end of October.

  • Encouragingly, neither our American tradition nor our mid-price point paints have seen an erosion of strength despite the growth of the Signature series.

  • As a final example, our success in appliances continues.

  • Although the category was affected by significant price deflation in air conditioners in -- by air conditioners in the second quarter, major appliances camped well above the company average.

  • As a measure of our continued strength in appliances, we added 1.2% market share over second quarter last year, the largest increase of any retailer, and exceeded 14% market share for the first time in our history, according to track line survey results published by the Stevenson Group.

  • These are a few examples, but in the end, effective inventory management, compelling merchandising programs, strong marketing initiatives and great store execution drove positive second-quarter comp sales in all of our 18 product categories.

  • Importantly, we're pleased with the sell through of our seasonal categories, and inventory, up only 16.7% year-over-year, is in great shape as we head into the back half of the year.

  • I'm also pleased with the outstanding job that we did in managing expenses this quarter, which allowed us to drive 16 basis points of SG & A leverage.

  • I'd like to take a few minutes to update you on our installed sales initiative.

  • As many of you know, during the second quarter, we were testing a new installed sales model in 128 stores.

  • I'm happy to report that we're very pleased with the results as we've experienced improved installed sales, driven by an increase in both customer count and average ticket.

  • Even more encouraging, we've meticulously surveyed customers, employees and the third-party contractors who participated in the test, and the new model has received approval across the board.

  • Employees are more comfortable with the process, allowing them to better sell installations and better address customers' needs.

  • When surveyed, employees say the new model allows them to do a better job, increasing employee morale.

  • Our installers are also embracing in the new model.

  • As a result, customer satisfaction scores improved dramatically for the stores participating in the test.

  • Ultimately, with empowered and energetic employees utilizing a solid team of third-party installers we've been able to significantly improve the customer experience, driving a 700 basis point increase in the percentage of customers who say they would use Lowe's again for a future installation project.

  • During the third quarter, we'll roll this program out to another 120-plus stores and anticipate having the program in all stores by the end of fiscal 2004.

  • Previously we announced our plans to build approximately 25 smaller stores this year.

  • These stores have a gross selling area of 94,000 square feet and a garden center with an additional 25,000 square feet.

  • To date we have opened six of these stores.

  • These units are hitting plan and each one is producing a positive return on sales.

  • We are very pleased with performance of this store model.

  • We plan to continue to tweak our merchandising mix and staffing plans to gain maximum efficiency as we incorporate this vehicle into our expansion plans.

  • In conclusion, you've heard us talk about balance across product categories and across geographic regions for the past several quarters.

  • But I think it's worth repeating.

  • All categories and all regions comped positive in the second quarter.

  • No single category or region is carrying the load.

  • While we will always strive for continuous improvement, it's this consistency and balance that gives me confidence that we're positioned for years of continued success.

  • We're fortunate to have a solid foundation on which to continue our growth.

  • To take advantage of the opportunity that leads ahead, no radical changes are required.

  • Only the evolution that comes with the desire to better serve our customers' needs each and every day.

  • I'll now turn it over to Bob Hull to discuss the quarter's results in detail.

  • Bob.

  • Robert Hull - CFO and SVP

  • Thanks, Robert.

  • And good morning everyone.

  • As Bob indicated, sales for the second quarter were 8.8 billion dollars, representing a 17.2% increase over the second quarter of last year, significantly ahead of our 13% guidance.

  • For the first half of 2003, sales increased 14.5% to $16 billion.

  • Comp sales were 6.9% for the quarter which exceeded our guidance of 2 to 4%.

  • Last year our second quarter comps were 6.8%.

  • Looking at the two-year comp trend our performance for this quarter represents our strongest since the fourth quarter of 1999.

  • For the first half of the year, comps were 3.9%.

  • Deflation in lumber and building materials resulted in an unfavorable impact on second quarter comps of approximately 25 basis points, driven by lumber offset slightly by inflation in plywood.

  • With regard to product categories, the categories that performed above average in the second quarter include: building materials, nursery, outdoor power equipment, windows and walls, fashion lighting, flooring, cabinets, major appliances, and home organization.

  • In addition, millwork, paint and hardware performed at approximately the overall corporate average.

  • Gross margin for the second quarter was 30.17%, an improvement of 76 basis points over last year's second quarter.

  • The improvement was attributable to a number of factors including better margin rates, approximately 10 basis points associated with product mix improvement, and a 24 basis point reduction in inventory shrink.

  • Year-to-date gross margin of 30.56% is up 101 basis points over fiscal 2002.

  • As Robert noted SG & A leveraged 16 basis points in the quarter driven primarily by payroll and bonuses.

  • We were fully staffed entering the quarter and the 17.2% sales increase allowed us to leverage the investment we made in our employees in the first quarter.

  • Our bonus programs are performance based, which means achievement levels are predicated on earnings growth.

  • Year-to-date our earnings are up a healthy 25.1% over 2002 however at this point last year net earnings were up 46.6% over 2001.

  • We are therefore planning bonuses at a lower rate in 2003.

  • Also, SG & A for the quarter includes 10 million dollar or 11 basis points for expensing stock options.

  • Year to date, SG&A is 17.18% of sales.

  • Operating margin, defined as gross margin less SG&A and depreciation, increased to 85 basis points to 11.75%.

  • And as Bob mentioned this is a Lowe's record per cent to sales.

  • In addition this was the first quarter where operating margins exceeded $1 billion.

  • So our opening costs at $27 million were flat to last year as a per cent of sales and reflect the opening of 22 new and two relocated stores in the quarter.

  • This compares to 21 new and one relocated store last year.

  • In addition we closed one older, smaller store in the quarter.

  • Depreciation at 2.11% of sales totaled $185 million, and deleveraged 7 basis points.

  • This deleverage was driven by our continued expansion and the increase in percentage of owned locations.

  • At the end of the second quarter we owned 77% of our stores versus 74% at the end of Q2 last year.

  • Interest expense totaled $45 million for the quarter and leveraged 11 basis points as a percent of sales.

  • For the quarter, total expenses were 19.24% of sales and leveraged 20 basis points.

  • Pre-tax earnings were 10.93% for the quarter, up 96 basis points over the prior year.

  • The effective tax rate for the quarter was 37.8% versus an effective tax rate of 37.4% for Q2 last year.

  • Diluted earnings per share of 75 cents increased 27.1% versus last year's 59 cents.

  • For the first six months of fiscal 2003 diluted earnings per share are up 24.5% over 2002.

  • Diluted shares outstanding totaled 804 million for the quarter.

  • The computation of diluted shares takes into account the effect of convertible debentures, which increased second-quarter weighted shares by 16.5 million.

  • In computing second-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 addback is also $2.6 million.

  • For the third quarter we're projecting diluted shares outstanding of 806 million.

  • For the year we're projecting diluted shares outstanding of 805 million.

  • In Q2 average ticket increased 3% to $59.87 and customer account increased approximately 14%.

  • Our 6.9% comp growth wass driven by an effective balance between customer account and average ticket increases.

  • Now, to a few items on the balance sheet.

  • Our cash position remains strong with over $1.5 billion in cash and cash equivalents at the end of the quarter.

  • Inventory turnover is 4.56, an increase of 11 basis points over Q2, 2002.

  • Return on Invested Capital measured using beginning debt and equity and the trailing four quarters earnings increased 100 basis points for the quarter from 14.72% to 15.72%.

  • Our second-quarter performance drove return on assets determined using beginning total assets and the trailing four quarters earnings to 10.87% representing an increase of 90 basis points.

  • Year-to-date, cash flow from operations was $1.7 billion, driven primarily by increased earnings.

  • 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 third-quarter sales increase of approximately 16% to 17% incorporates a comp assumption of 5% to 6% which is expected to generate diluted earnings per share of 50 to 51 cents representing an increase of 16% to 19%.

  • For the year we're estimating comp sales increase of 4% to 5%.

  • Operating margin for the third quarter is expected to increase between 20 and 30 basis points.

  • For the entire fiscal year we're anticipating an operating margin improvement of 40 to 50 basis points.

  • In the third quarter we expect to open 38 stores, including two relocations and store opening costs of $44 million.

  • We are still on track to open 130 stores this year.

  • For fiscal 2003, we expect diluted earnings per share of $2.24 to $2.27.

  • This guidance considers the costs associated with opening 85 stores during the remainder of the year, our 185 basis point margin expansion in the fourth quarter last year, and strong second half net earnings comparisons associated with our 34% and 46% growth for Q3 and Q4 2002, respectively.

  • Regarding current sales trends.

  • I mentioned earlier that our business outlook for the third quarter anticipates five to six percent comps.

  • For the first 16 days of the quarter, our comps are exceeding the top end of this range.

  • Also, during the quarter we renewed our $400 million, 364 day credit facility with our bank route.

  • In addition to the 364 day traunch our credit facility also includes a $400 million five-year traunch both of which provide a backstop to our $800 commercial paper program.

  • 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, we are now ready to take questions.

  • In order to allow questions from as many individuals as possible, please limit yourself to one question.

  • To ask a question, please press star, then the number 1 on your telephone keypad at this time.

  • Your first question comes from Bill Sims of Smith Barney.

  • Bill Sims - Analyst

  • Good morning and congratulations on an outstanding quarter.

  • Can you give us an update on your foreign source initiative and what percentage of your mix is currently foreign source, can you remind us if you provided a target for year-end and then how much did foreign source improvement contribute to the gross margin we saw upside in the second quarter?

  • Dale Pond - SEVP of Merchandising/Marketing

  • This is Dale Pond and I'll attempt to give you a perspective on our foreign sourcing.

  • The import programs remain very viable.

  • We are roughly 7%, 7.5% cost of goods today on import and we see that growing over the next couple of years at a fairly robust rate, we continue to look for opportunities and find many within the store.

  • And at this point I would say that that is one of the ways in which we intend to continue our margin expansion over the coming years.

  • Bill Sims - Analyst

  • Thank you.

  • Operator

  • Your next question comes from Dan Wewer of CIBC.

  • Dan Wewer - Analyst

  • Good morning.

  • I had a question on the special order business.

  • If you could discuss what kind of growth we're seeing there.

  • And then second it's my understanding the gross margin rate on SOS has been below the house average, but there are initiatives to turn that around.

  • And if you could update us as to -- you know, what is happening with the margin trend on special order?

  • Larry Stone - SEVP of Operations

  • Dan, it's Larry Stone, I'll start unless other people want to pile in on it.

  • Special orders continue to exceed our comp average for the company and certainly with -- this has been a major focus that we've had for the past several years.

  • We talked about our big-three initiatives.

  • The margin does trail the company average and certainly the programs we are putting in place with electronic catalog, EDI to our vendors and a more concise SOL -- SOS customer base that we're using and vendor base that we're using that the merchants are driving will increase the margin as we go forward into the next few years.

  • But as far as giving you what we think it will be next year, we're not ready to release that publicly yet.

  • Dan Wewer - Analyst

  • Did that have any benefit on the second-quarter margin improvement?

  • Larry Stone - SEVP of Operations

  • A few basis points, but, you know, our margins year-over-year are up some but not up significantly in the special order business.

  • Dale Pond - SEVP of Merchandising/Marketing

  • Dan, one of the things we're doing there is we are consolidating our vendor base considerably in the -- in the SO -- or the special order sales area.

  • And that's partly driven by the fact that we want to make it easier for the stores to be able to conduct the business on behalf of the customer.

  • It also has to do with negotiating better cost on the special order side, an area that we have not spent a great deal of time in the past on.

  • And, finally, one of the things that always seems to affect our margins on the SOS is the freight, because you're bringing in the freight rather than by truck loads or even LPL , you're having to bring it in by the piece in many cases.

  • So we're trying to get, by consolidating more ride along freight, which should drop that rate on the freight as well.

  • Dan Wewer - Analyst

  • Great.

  • Well, thank you and good luck.

  • Operator

  • Your next question comes from David Schick of Legg Mason.

  • David Schick - Analyst

  • Hi, good morning.

  • You mentioned the acceleration of business through the quarter and that business is ahead of your guided range and you also mentioned weather impacting sort of seasonal.

  • I guess what I'm asking is: Catch up, where are we?

  • Are we caught up on summer sales into fall?

  • Are we starting to sell -- give us a sense on how the seasons are playing out and where we are on the early versus late on the seasons and how it impacts your -- your thinking about the fall and also the marketing around the fall.

  • Thanks.

  • Robert Niblock - President

  • This is Robert Niblock.

  • You know, as we came out of the first quarter obviously it was a very weather-difficult quarter.

  • We were low end of the range.

  • We -- I gave -- we had our first-quarter conference call.

  • The weather has been I think one of the big drivers through the second quarter, as we said, we also pushed up inventory a little bit to take advantage of what we felt would be a compressed selling season.

  • We're also in many parts of our trading area last year, we were under a pretty significant drought conditions whereas this year that's not the case.

  • And weather's been much more favorable.

  • So you're seeing great performance in a lot of those outdoor categories.

  • But we're also seeing great performance across the -- continue to see great performance across the interior categories that have been so strong all year long.

  • So we feel good about -- feel real good about the way we came out of the second quarter, our inventory position and the way the third quarter has started out, we feel good about that obviously.

  • That's what's supporting in our comp guidance of 5% to 6% on top of a 4% comp last year.

  • And overall we're starting to see I think some signs that the overall economy may be picking up some, too.

  • So all those things are kind of driving our optimism.

  • And we feel like it'll be a good exterior -- our outdoor categories for the fall with your nursery and your fall lawn and gardening and I -- as well as we continue to see the inventory categories continuing to perform very well over the balance of the year.

  • Robert Tillman - Chairman and CEO

  • One of the issues, as we said in the earlier comments, this is Bob Tillman.

  • Our top-three comp categories in the second quarter were building materials, nursery and outdoor power equipment all outside weather related, so the second quarter we made up, quite frankly, all of the shortfall that we incurred in the first quarter in those categories which were weather sensitive.

  • So I think the great thing is our performance costs, all categories is pretty consistent at this point in time, which -- which bodes extremely well for the second half of the year.

  • David Schick - Analyst

  • Thanks.

  • Operator

  • The next question comes from Aram Rubinson of bank of America.

  • Aram Rubinson - Analyst

  • I've got two questions.

  • First off, that was a heck of a quarter.

  • Two things.

  • One on the appliance business, you clearly made up -- well, that kind of accelerated along with the rest of the company if not more so in the second quarter and that comes despite what Sears is doing a little different, in terms of spiffing the employees, working the merchandise a little differently.

  • The first question is: Can you just give us a sense what you're seeing out of there?

  • It's clearly not having an impact on your sales but whether that may have some profit implications down the road?

  • Robert Niblock - President

  • I think what you're referring to is are we seeing anything on margin erosion and opening price-point merchandise?

  • Uh, now that I guess that Sears announced a new strategy?

  • The answer to that will be no.

  • We're not seeing any impact of anything in the competitive market that -- on our appliance business, both in -- nor in sales nor in gross margin at this point in time.

  • Aram Rubinson - Analyst

  • The second question is to do with the installed business.

  • If the program is starting off in a promising fashion, has there or will there ever be a discussion about owning the installed business a little bit more than you do today on a strategic basis?

  • Thanks.

  • Larry Stone - SEVP of Operations

  • Larry Stone.

  • At this point in time, the answer's no.

  • We feel real confident with our model, we -- we know now we're getting much more satisfied customers, installers are liking it a lot better, they're on rotations, they know what they can depend from Lowe's in terms of getting their people lined up to do the jobs for us.

  • So at this point in time we're very confident that the model we have in place is the best model and we're just trying to roll it out in a systematic fashion to make sure that we don't roll it out too quick and get all the bugs worked out of it.

  • That's why we've been moving so cautiously on it.

  • As Robert said, we plan another 120 stores starting in October, and we should have the whole company rolled out at the end of '04.

  • Robert Tillman - Chairman and CEO

  • Aram.

  • One thing.

  • Everybody who's tried their own installation services has failed in that endeavor.

  • As you know our CBC business is a very viable and important component to our success in the future.

  • When you're owning a business in a sense you're competing against your CBC customers, as the way we go to market day, we utilize those CBC customers in our install model and that's highly advantageous for us.

  • Robert Niblock - President

  • Aram, this is Robert Niblock.

  • Back to the appliance issue.

  • If you look at the track-line numbers you'll notice that our actual improvement over second quarter of last year was 120 basis points in units but it was 150 basis points in dollars.

  • So certainly part of that is our continuing strategy moving to -- moving the customer up.

  • But it also speaks to the fact that we're not seeing a huge erosion as Bob talked about in the opening price-point merchandise, whereas a lot of the other competitors out there either saw a greater decline in dollars versus units or either not as much growth in their share of dollars versus units.

  • So I think we feel pretty good about the way we're positioned in the appliance category.

  • Larry Stone - SEVP of Operations

  • I think if you also add the fact that we had 250 skews of appliances in stock on our sales force, of which probably less than 25% of those opening price points, versus some of our competitors, that basically 100% of their offering is opening price point, we have less risk on the -- of cannibalization of opening price points and cannibalization of margin moving forward.

  • Operator

  • Your next question comes from Wayne Hood of Prudential Securities.

  • Wayne Hood - Analyst

  • Yeah, congratulations on the quarter.

  • I had a question about the third-quarter projection because you guys are doubling the amount of store openings versus last year and the comp is up stronger.

  • And yet you are only projecting 16% to 17% sales growth.

  • If you would assume that your productivity was at least equal to last year, it would suggest that your revenues would be up 18% to 19% if not more.

  • And are you being conservative or is -- or are a number of those stores opening towards the end of the quarter?

  • And if you could give us some idea how those openings play out in the quarter.

  • Robert Hull - CFO and SVP

  • Wayne, this is Bob Hull.

  • Our square footage growth this quarter is about 14%.

  • We are optimistic about the third quarter.

  • Especially given the current trends.

  • However we are only 16 days into the quarter.

  • In addition August is our easiest monthly comparison to last year so we are optimistic about the third quarter but it's still very early.

  • In addition, the new-store openings are back-end weighted within the quarter so that will have an impact on the top-line growth.

  • Wayne Hood - Analyst

  • Are those would you say 30%, 40% of them come at the last month of the quarter, can you give us some color on that?

  • Robert Hull - CFO and SVP

  • I think that's probably a fair statement.

  • Dale Pond - SEVP of Merchandising/Marketing

  • Higher I think.

  • A little bit higher than that.

  • The numbers going open in the third quarter it's probably 50% isn't it.

  • Wayne Hood - Analyst

  • Would be in the last month.

  • Dale Pond - SEVP of Merchandising/Marketing

  • I think that -- we've got --

  • Robert Hull - CFO and SVP

  • In the last half.

  • Dale Pond - SEVP of Merchandising/Marketing

  • Last half, yeah.

  • Robert Hull - CFO and SVP

  • We can get that number and get back to you.

  • Okay, great.

  • Thanks a lot.

  • Operator

  • Your next question comes from Budd Bugatch of Raymond James.

  • Budd Bugatch - Analyst

  • Hi.

  • Congratulations on the quarter.

  • Maybe just to piggyback off of Wayne's questions.

  • Can you kind of go over what are the new store stores versus the comp stores in terms of the productivity of what you're seeing on a sequential basis?

  • Robert Hull - CFO and SVP

  • We're seeing very good new-store productivity and we expect that to continue in the back half of the year.

  • We're seeing a very positive performance in all stores, both new and comp.

  • Budd Bugatch - Analyst

  • Okay.

  • And can you -- maybe you used to do it by class of store or can you give us any feel as to how that's doing in terms of age of stores?

  • Robert Hull - CFO and SVP

  • I'll be happy to go into that in detail in our conference in September.

  • Budd Bugatch - Analyst

  • Okay.

  • And lastly, just on the CBC, any -- any change in the percentage of business?

  • I think you normally say it's around 20%.

  • Larry Stone - SEVP of Operations

  • Uh, Bud, this is Larry Stone.

  • That's -- that still holds true.

  • Comps are still very positive on our CBC initiatives and we still are holding strategies that we've been employing for the last several years.

  • We're still very pleased with the progress we're making and just continue our ramp up business up in all of our stores.

  • And I think Bob mentioned a key point, too, that the CBC customers, a lot of those folks are installers for us as well, which there again gives us that leverage with that very important customer base.

  • Budd Bugatch - Analyst

  • Thank you, congratulations.

  • Robert Hull - CFO and SVP

  • Thank you.

  • Operator

  • Your next question comes from Eric Bosshard of Midwest Research.

  • Eric Bosshard - Analyst

  • Good morning.

  • A question for you on SG & A. You did an impressive job leveraging it this quarter.

  • Can you talk about the expectations for that for the second half of the year and if you're doing anything strategically or tactically to allow you to better manage SG&A.

  • Robert Hull - CFO and SVP

  • This is Bob Hull.

  • We are always mindful of SG & A and looking at ways to leverage it.

  • Our guidance for the third quarter is 20 to 30 basis points operating margin, and that's -- that's as much as we're going to talk about the margin for SG & A performance for Q3.

  • Eric Bosshard - Analyst

  • In terms of what you're doing to better leverage SG & A here in the second quarter, can you talk about if you're doing anything strategically or tactically about that?

  • Larry Stone - SEVP of Operations

  • Eric, this is Larry Stone.

  • Just a couple of things.

  • We've talked about previously.

  • We continue to work on our staffing models in our stores.

  • We continue to tweak the hours that we know it takes to serve our customers in the style and fashion they want to be served in every day, so we're always working on our staffing plans.

  • We're always trying to figure out new ways to do things better by leverage through use and better systems or better technology in the stores and certainly the SOS we talked of earlier is definitely a good way to get leverage.

  • And even the installed model gives us a better leverage because we've got people focused on those projects in the stores versus maybe having to do three or four different things.

  • So we're continuing doing that, we're continuing to work with our suppliers in the way goods are shipped to our stores.

  • We are working with our DCs.

  • There's just a whole lot of initiatives going on at all points in times trying to better leverage the payroll to the stores because that's where all the money's spent on payroll within the company.

  • Eric Bosshard - Analyst

  • Is there any one single area that you would point to?

  • Is it better managed in the hours in the store that is helping SG & A, is there one factor you can point to?

  • Dale Pond - SEVP of Merchandising/Marketing

  • I think -- I think we're doing a far better job of getting higher sales productivity out of our sales specialist, in all the key areas of our business from major appliances to outdoor power equipment, to fashion plumbing, to millwork, we're continuing to drive higher volumes from each of those individuals on a weekly basis.

  • I think the other thing that's giving us -- gave us improved leverage in the second quarter is the major organizational change we made in the first quarter had some minor disruption to overall business and I think that's starting to give us some real traction today and I think that traction will continue into the remainder of this year and into next year certainly.

  • Robert Niblock - President

  • Eric, this is Robert Niblock.

  • As you recall from Bob Hull's comments he did mention that last year we were paying record bonus levels last year and while we're having a great year this year, our performance isn't to the level it was last year over the first half of last year, so certainly the level of bonus activity, even though it will be a great number this year, won't be as strong as last year.

  • If you remember to go back and listen to all the quarters last year we talked about the pressure of the bonus program put on leverage of expenses last year, that's a turnaround and we kind of got the reverse of that.

  • So that is driving a little bit of leverage this year on the bonus line.

  • Eric Bosshard - Analyst

  • Great.

  • Thank you.

  • Operator

  • he next question comes from Colin McGranahan of Stanford Bernstein.

  • Colin McGranahan - Analyst

  • Good morning guys, two quick questions here.

  • First on gross margin.

  • Nice job with another 76 basis points of improvement.

  • However, relative to the first quarter it looks like the improvement came down a little bit.

  • I think it was 132 basis points in the first quarter.

  • Can you give us a reminder of what improvements you're beginning to anniversary now and what impact any kind of promotional activity like -- is there a percent appliance may have had on gross margin here in the second quarter?

  • Robert Hull - CFO and SVP

  • Allan, this is Bob Hull I'll take the first -- and let others chime in.

  • The mix of the business changed a little bit from Q1 to Q2, that had an impact.

  • In addition, for the back half we're anniversarying some very difficult shrink comparisons, we're still very happy with our shrink performance, but do not expect to get similar benefit in the back half of the year.

  • Colin McGranahan - Analyst

  • And on promotions?

  • Robert Tillman - Chairman and CEO

  • This is Robert, Colin.

  • The cost of those promotions doesn't wind up in the margin line.

  • So -- if you're talking about 0% financing promotions, that doesn't wind up in the margin line.

  • Colin McGranahan - Analyst

  • Or any other promotions you ran during the quarter.

  • I noticed a little bit more promotional activity than what we saw in the first quarter.

  • Robert Tillman - Chairman and CEO

  • I'll let Dale comment on that, see what his thoughts are.

  • But you also got to remember, too, that a lot of the categories that we sold heavily in the second quarter, your lumber and lawn and garden and nursery and OP, a lot of those more exterior categories were negatively impacted in the first quarter, so you had -- you had mixed improvement in the first quarter, then part of that turned around on you in the second quarter as you skew more heavily towards those categories, particularly in an unseasonal manner versus what we saw last year during the second quarter.

  • I'll see if Dale has anything on any other --

  • Dale Pond - SEVP of Merchandising/Marketing

  • Clearly the mix is part of that with the building materials, nursery, power equipment and appliances, obviously mix is down.

  • But, with respect to the promotional side of it, I mean, we -- we did spend additional advertising dollars -- in the spirit of partnership our -- our vendors obviously participated in that -- that program with us, so that helped some of the expense side down, but from the margin standpoint, we did a bit more aggressive in the types of promotions we did, which are principally in credit and lumber-building materials, and millwork, we took a very strong position on some of those.

  • So there was a little bit of that mix shift again driven through -- through the promotion.

  • But in terms of margin rate, we did not see a drop in the margin rate.

  • Colin McGranahan - Analyst

  • One -- one just quick second question here.

  • You said I think 700 basis points' improvement on the installed sales business and other people who would use Lowe's again.

  • Robert Niblock - President

  • That was the customer satisfaction.

  • Those test store saw that 700 basis points improvement.

  • Colin McGranahan - Analyst

  • Can you give us the base line?

  • Off of what number, what percentage sai they'll use Lowe's again.

  • Robert Niblock - President

  • When you're looking at those are the test stores you're getting 90% area.

  • Colin McGranahan - Analyst

  • Okay.

  • Thanks.

  • Nice quarter.

  • Robert Niblock - President

  • Okay.

  • Operator

  • Your next question comes from Matthew Fassler of Goldman Sachs.

  • Matthew Fassler - Analyst

  • Thanks.

  • Two questions, if I could.

  • The CBC business, can you address how your pro business tracked during the second quarter.

  • Larry Stone - SEVP of Operations

  • Mat, it's Larry Stone.

  • The comps were a little bit ahead of the company average for the second quarter if you factor in all the different things we measure in terms of -- procurement cards and business cards and two internal programs, the Lowe's business card and the Lowe's accounts receivable program.

  • So like I said earlier, we feel very good about that program and -- and the continued support from our store folks taking care of those customers.

  • Matthew Fassler - Analyst

  • Got you.

  • And the second question.

  • You talked about the nice turnaround that you saw in the northeast and New England which I know are becoming increasingly important to you.

  • Those of us who live in this part of the country have faced rain more or less every weekend and the comment is interesting and a little counter-intuitive.

  • Can you just explain how the weather that you saw in this part of the country might have -- might have played into the camp and whether we've, you know, perhaps made too much of it, thinking about its impact on the business.

  • Larry Stone - SEVP of Operations

  • I'll start with -- this is Larry Stone, let others chime in.

  • When you look at the first quarter with the snow and ice and conditions that people could not get out and do anything outside, it really severely impacted our business.

  • Second quarter, you know, the weather improved and certainly we've had a lot of rain.

  • We've had a lot of rain in the Carolinas, but I think people have learned to work around the rain, they find the nice days to do the outside projects and do the inside projects on the rainy days.

  • But you can follow the weather patterns and you can see certain categories drop off, when we have two or three days of solid rain, but quite frankly the interior categories in that part of the company have really done well and things like exterior paint and lawn and garden and products like that when the weather's been favorable they've certainly had great sales increases for us and kitchen cabinets is another great category in that part of the country that we just continue to do well.

  • As you know that is an indoor category that we can do when it is raining.

  • Matthew Fassler - Analyst

  • Got you.

  • And can you give us a sense just in terms of order of magnitude how big those regions are for you now versus where they might have been a year ago?

  • Is it twice the size, 50% bigger, just in terms of store rollout?

  • Larry Stone - SEVP of Operations

  • Yes, store rollout it would probably be that -- the volume as we get stores open - as when we get stores open, the time of the year we open, the regions continue to grow and certainly the -- the north-east region and some of those regions up there are some of the fastest growing regions in the company in terms of store numbers and in terms of total dollar volume.

  • Matthew Fassler - Analyst

  • Got you, thank you so much.

  • Robert Tillman - Chairman and CEO

  • Operator we have time for one more question.

  • Operator

  • Yes, sir and that final question comes from Dana Telsey of Bear Stearns.

  • Dana Telsey - Analyst

  • Good morning everyone.

  • Congratulations.

  • Can you talk a little bit of the results of the vendor services consolidation program and also the new metro market stores, the northeast and the west.

  • What have you been seeing there, how are new stores at all going to be different or adapted from what you've done in the past?

  • Thank you.

  • Dale Pond - SEVP of Merchandising/Marketing

  • This is Dale Pond, I'll speak first to the vendor consolidation program.

  • We have made some great progress over the past 18 months.

  • We actually put -- I think we started talking about this about 24 months ago, and in the last 18 months we've brought it down to approximately one to two vendor service groups that now represent each of the 18 divisions.

  • And so our -- our consolidation with respect to the individual divisions, the 18 divisions, is fairly complete.

  • There's still a little bit of tweaking going on and we have looked and we continue to review each of the performances of those groups, but to date we've had but one vendor consolidated program change in any of the divisions, so we're real happy with the progress we've made.

  • Our next big quest is now putting that into systematizing the program by bringing our system and making it compatible with the consolidated vendor groups so that they're able to use our systems better and work with the analytics, the planogramming and our stores in terms of developing market sorting programs and that is the -- the direction we're taking over the next 12 months.

  • Robert Hull - CFO and SVP

  • Dana, Bob Hull I'll take the first part of your second question.

  • Our metro stores, specifically the stores in the top 25 markets performed above the company average in the second quarter.

  • Larry Stone - SEVP of Operations

  • Dana it's Larry Stone.

  • To add on to it.

  • The biggest thing that we see in the metro stores and it depends on the part of the country but we'll speak to the north-east stores.

  • Certainly the big project categories, such as cabinets, appliances and even millwork and carpet we've had to staff those stores differently than we have some stores in other markets, just based on the sheer number of projects that are going on in those categories.

  • So we're seeing a tremendous amount of product sales out of those stores and certainly we understand the higher volumes in those stores are driven a lot by those project sales.

  • As far as the west coast stores you have a little bit different mix on the west coast.

  • Certainly a better lawn and garden market for us and we have project sales there but a lot more sales come out of the interior categories in those markets say versus the north eastern markets.

  • Robert Tillman - Chairman and CEO

  • I think -- this is Bob Tillman, I think it's fair to say that we get a -- even higher acceptance rate by the consumer in the larger markets than we have even traditionally in our smaller markets.

  • As we moved into the western U.S., particularly in California and northeast, acceptance of our store by the consumers exceed our expectations across the board.

  • Dana Telsey - Analyst

  • Thank you.

  • Robert Niblock - President

  • This is Robert Niblock, before we end the call, I just wanted to clarify one question that we left with Wayne Hood, in the third quarter, two thirds of our scheduled store openings are scheduled to occur in the last month of the quarter, so hopefully that will clarify the top-line growth question that Wayne Hood had asked.

  • Robert Tillman - Chairman and CEO

  • Thanks, Robert.

  • 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 third-quarter results in November.

  • Goodbye and have a great day.

  • Operator

  • This concludes today's teleconference.

  • You may disconnect at this time.