勞氏公司 (LOW) 2003 Q3 法說會逐字稿

Good morning everyone and welcome to Lowe's Companies third quarter earnings results conference call.

This call is being recorded.

Statements made during this call may include forward-looking statements within the meaning of Section 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 November 17, 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.

Good morning and thank you for joining us.

We're excited to report one of the strongest sales quarters in Lowe's history.

In fact, this quarter marks the first time since 1996 we delivered a double-digit comp and it's our highest comp in over 35 quarters.

A great quarter, driven by dedicated store employees, and operations team that remains focused on the reason we exist, our customers.

Our approach has remained consistent and our focus has not waivered.

Now, for a look at our results.

Sales in the quarter totaled $7.9 billion a 23.5% increase over last year.

Comparable store sales increased 12.4% for the quarter, against year ago comp of 4.1%.

Lowe's achieved many milestones in the third quarter.

First, our store base now exceeds 100 million square feet, made up of a well-positioned young group of stores, and we're confident we have many years of profitable expansion ahead.

Average ticket exceeded $60 for the first time in our modern history.

Testament to the success of our up the continuum merchandise strategy and our customers' desire for more premium products, as well as the efforts by our operational team to drive project sales.

Thanks to our continued growth in gross margin, as well as effective expense control in a ramping sales environment, we achieved record third quarter operating margins of 10.2%, exceeding 10% in the third quarter for the first time.

Earnings per share were 56 cents for the quarter, increasing 30% over last year.

Many signs point to continued strength in the home improvement industry.

First, we're encouraged to see signs that the employment picture is brightening for American consumers.

Lower jobless claims and ultimately a lower unemployment rate has helped consumers gain confidence in their employment prospects, and they remain willing to invest in their homes.

And despite predictions to the contrary, the housing market remains strong, with housing turnover near all-time highs and home ownership rates at their highest level ever, at 68.4%.

Those current trends buttress the longer term sustainable trends I've described for the past several years.

Whether it's the aging baby boomers buying second homes, Gen-Exer's buying first homes at a younger age than the generations before them or the growing immigrant populations unwavering focus on the American dream of home ownership, consumers remain focused on the home and all that it offers.

That focus is not new and is not a result of the current economic conditions.

Rather, it is evidence of America's continued focus on family and the home as its centerpiece.

I'll now turn it over to Robert Niblock to describe some of the operational and merchandising highlights of the quarter.

Robert?

Thanks, Bob.

This morning, I'd like to review our results, highlight a few key drivers of the quarter, and describe how we leveraged our centralized structure to maximize sales in a strengthening economic environment.

As Bob mentioned comp sales were 12.4% for the quarter, on top of a positive 4.1% comp in last year's third quarter.

Our strong sales results are a culmination of many initiatives that are paying dividends today, and will continue to drive our business into the future.

These results are a clear indication that our merchandising strategy with the focus on providing our customers the national brands they know and trust, is working as we continue to see customers shop up the continuum for high-quality merchandise.

Our results also indicate that our store employees delivered outstanding customer service, by ensuring that our stores were well-stocked and appropriately staffed to meet customers' needs and expectations.

There were a few quarter-specific factors that aided sales.

First, favorable weather in the third quarter, especially in the month of August, allowed the continuation of outdoor projects through the late summer and into the fall.

Products like outdoor power equipment, seasonal living, lumber, and building materials benefited from favorable weather.

Second, as many of you know, we experienced significant increases in the wholesale prices of lumber and plywood during the quarter.

According to Random Lengths, structural lumber was up nearly 19% for the quarter in the wholesale markets while wholesale plywood prices increased over 100%.

Those increases translated to rising retail prices.

We estimate that lumber and building material inflation had a 125 basis point positive impact on comp store sales in the quarter.

Third, while it is difficult for us to measure, the stimulative effect of lower tax withholding rates and the tax rebates distributed during July and August undoubtedly aided sales in the quarter.

We continue to be confident that as Americans receive additional disposable income from whatever source, many will choose to use at least a portion of that income to invest in their homes.

Lastly, our stores in the path of Hurricane Isabel saw a ramp in sales as residents first prepared for the storm, and then dealt with the aftermath.

Offsetting those sales was the fact that we had approximately 35 stores whose operating hours were restricted as the storm made its way up the East Coast.

As is typical with larger more impactable hurricane, the lift in sales from this storm will likely continue for several quarters as those affected receive insurance payments and make plans to repair their homes.

During natural disasters and relate crisis one of our immediate concerns is to ensure that we have an adequate supply of product necessary to meet the needs of those impacted by the event.

Hurricane Isabel was no different.

And even prior to the storm, we activated our command center to flow needed product to the affected areas.

Staffed by dedicated group of Lowe's' employees from various functional areas our command center worked to ensure that products like gas cans, generators, plywood, batteries and flash lights were strategically deployed.

We worked closely with our vendors to get extra supply of needed products and we even expedited a shipment of chain saws from Husquevarna Sweden to aid in the cleanup.

The command center was activated three times during the quarter.

For Isabel, for the black out in the Northeast and Midwest and most recently for the wildfires in California.

However, when you look at our third quarter results, these incrementally positive factors pale in comparison to the importance of the continued strength of the home improvement consumer.

Americans remain committed to investing in the home, and we continue to see balanced performance across all areas of the country.

Every one of our 18 regions delivered positive comp sales.

In fact, 14 regions delivered double-digit comps.

The balance also remains in our 18 product categories.

The comp in our lowest-performing category exceeded 5% and 11 of 18 categories delivered double-digit comps demonstrating that no one product category contributed a disproportionate share of our third quarter comps.

In spite of an increasingly competitive landscape we continue to be pleased with performance of our major appliance category.

According to Track Line, we gained 170 basis points of market share over last year's third quarter, the most of any major retailer.

The comp trend across the months was balanced as well.

Every month in the quarter experienced a double-digit comp.

So the quarter-specific factors I mentioned only aided a strong sales environment.

We've described for years the importance we see in developing the appropriate infrastructure to manage our growing store base.

For fiscal 2004, we'll add a fourth division in the central U.S. and we'll add three additional regions to our store operation structure.

The third quarter results our stores delivered, strong sales, great customer service and high in-stock levels is a testament to the value of that structure.

Our disciplined operating structure allowed us to increase payroll hours to match sales across the entire chain with a controlled and structured model that leveraged those increasing sales but ensures that customer service levels remain hide.

And our state of the art logistics and distribution infrastructure allowed us to keep our stores in stock with the right products without blending inventory.

In the third quarter, inventory grew 20.6% leveraging our 23.5% growth in sales.

We were also pleased with the fact that SG&A expense, including payroll, leveraged for the quarter.

As I mentioned, as our sales increased, we also ramped our payroll hours to ensure that customer service levels in our stores remain high.

Additionally, as our performance continues to exceed our original forecast, we are increasing our projections for performance-based bonuses.

This year, our performance versus plan is accelerating as the year unfolds.

Thus, over the second half of the year we're increasing bonus accruals accordingly.

As a result, the year-over-year comparison in performance-based bonus accruals pressured SG&A in the quarter.

SG&A was also pressured by our decision to offer a 12-month no-interest, no-payment financing program versus our original plan to offer six months.

This was in response to competitive offers and our commitment to maintain our customer franchise.

I'd like to update you on a few of our operational initiatives.

First, at the end of the third quarter, we had 17 of our 94,000 square foot prototype stores open.

We continue to be pleased with the results these stores are delivering.

While we're still early in the rollout of this new prototype, all indications point to returns that will exceed initial projections.

Additionally, our new installed sales program continues its rollout, converting 120 stores to the new model in October bringing the total to nearly 250 stores that have the new model in place.

The rollout of the new installed sales model is scheduled to be complete by the end of 2004.

We continue to be extremely pleased with the early results of this model.

Customers, installers, employees tell us that the model works and ultimately we see the success in improving customer satisfaction scores.

And finally, our CBC business continues to drive strong results.

Delivering comps at a rate higher than the company.

Our commitment to commercial customers remains strong, and we're excited about our growing prospects going forward.

Clearly, a very strong quarter for Lowe's.

But despite our success we remain driven to improve.

I mention that all product categories delivered a positive comp for the quarter but we know we can continue to improve.

Merchandising resets continue in our stores in order to make our offering even more compelling.

Our operations team remains keenly focused on customer service, as we add new divisions, regions and districts to our organizational structure to ensure that our national programs and corporate disciplines are consistently implemented in every store in the chain.

Thanks, and I'll now turn it over to Bob Hull to discuss the financial highlights.

Bob?

Thanks, Robert.

Good morning everyone.

As Bob indicated, sales for the third quarter were $7.9 billion representing a 23.5% increase over third quarter last year significantly ahead of our 16 to 17% guidance.

Year-to-date, sales increased 17.4% to $23.9 billion.

Comps were 12.4% for the quarter, which exceeded our guidance of 5 to 6%.

Our comp performance for the quarter was the highest since the third quarter of 1994.

Last year, our third quarter comps were 4.1%.

Looking at the two-year comp trend our performance this quarter represents our strongest since the fourth quarter of 1994.

Year-to-date, comps are 6.5%.

As Robert noted, inflation in lumber and building materials resulted in a favorable impact on third quarter comps, of approximately 125 basis points driven by lumber and plywood.

During our analyst and investor conference in Charlotte we emphasized the importance of balanced performance.

Our balanced performance continued in the third quarter with all product categories and all regions comping positively for the quarter.

With regard to product categories, the categories that performed above average in the third quarter include lumber, building materials, seasonal living, outdoor power equipment, and home organization.

In addition, mill work, cabinets and appliances performed at approximately the overall corporate average.

Comp sales for every product category exceeded 5%.

Gross margin for the third quarter was 31.1% an improvement of 46 basis points over last year's third quarter.

The improvement was attributable to better margin rates driveway by lower inventory costs and a 5 basis point reduction in inventory shrink.

These items were negatively offset by 29 basis points associated with product mix.

The negative mix impact is primarily attributable to the strength of our lumber and outdoor power equipment categories in the third quarter, and not from customers turning down to lower price points.

Year-to-date gross margin of 30.74% is up 85 basis points over fiscal 2002.

SG&A leveraged nine basis points in the quarter, driven primarily by payroll and occupancy, but were offset by higher bonuses, advertising and insurance expenses.

Our bonus programs are performance-based which means achievement levels are predicated on sales and earnings growth, giving our sales and earnings performance in the third quarter 12.4% comps and net earnings gross of 33%, we significantly increased our bonus accruals resulting in approximately 10 basis points of deleverage for this line item.

We expect our bonus payoffs to increase approximately 16% in 2003 compared to 2002.

The advertising deleverage is primarily due to the increase in credit promotions that Robert mentioned, and to a lesser degree increases in television and radio broadcasting.

In the third quarter, we experienced increases at our employee insurance, general liability, and workers' compensation costs.

While this is incorporated in our plan for the year we deleveraged approximately 15 basis points compared with Q3 2002.

Also, SG&A for the quarter includes $13 million or 16 basis points for expensing stock options.

Year-to-date, SG&A is 16.72% of sales, up 11 basis points compared with 2002.

Operating margin, defined as gross margin less SG&A and depreciation, increased 59 basis points to 10.16%.

For the year, operating margin is 10.79%, up 66 basis points over 2002.

Store opening costs at $37 million deleveraged four basis points to last year and reflect the opening of 38 stores, including two relocations in the quarter.

This compares to 18 stores with no relocations last year.

Depreciation at 2.44% of sales totaled $193 million and leveraged four basis points.

The leverage was driven by our 23.5% increase in sales, and was offset slightly by our continued expansion and the increase in the percentage of owned locations.

At the end of the third quarter, we owned 78% of our stores, versus 74% at the end of Q3 last year.

Interest expense totaled $42 million for the quarter, and leveraged 16 basis points as a percent of sales.

For the quarter, total expenses were 21.94% of sales and leveraged 25 basis points.

Year-to-date, total expenses are 20.86% of sales, flat to last year.

Pre-tax earnings are 9.16% of sales for the quarter, up 71 basis points over the prior year.

For the year, pre-tax earnings of almost $2.4 billion are up 28.4% to 2002.

The effective tax rate for the quarter was 37.8% versus an effective tax rate of 37.4% for Q3 last year.

Diluted earnings per share of 56 cents increased 30.2% versus last year's 43 cents and exceeded our guidance of 52 to 53 cents.

For the first nine months of fiscal 2003, diluted earnings per share has increased 26.9% over 2002.

Diluted shares outstanding totaled 808 million for the quarter.

The computation of diluted shares takes into account the effect of convertible debentures which increased third quarter weighted average shares by 16.5 million.

In computing third quarter diluted earnings per share, the after-tax add-back to net income for interest on convertible debentures was $2.6 million.

For the fourth quarter, the after-tax interest add-back is also $2.6 million and we're projected diluted shares outstanding of 809 million.

For the year, we're projected diluted shares outstanding of 806 million.

In Q3, average ticket increased 6.8% to $61.41, and customer count increased approximately 16%.

Our 12.4% comp was growth driven by an effective balance between customer count and average ticket increases.

Now, to a few items on the balance sheet.

Our cash position remains strong with almost $1.2 billion in cash and cash equivalents at the end of the quarter.

Inventory turnover was 4.58 an increase of nine basis points over Q3 2002.

Our debt-to-capital ratio was 27% at the end of the third quarter, down from 32% for the same period last year.

Return on invested capital measured using beginning debt and equity and a trailing four quarters earnings increased 172 basis points for the quarter, from 14.48% to 16.2%.

Our third quarter performance drove return on assets, determined using beginning total assets and a trailing four quarters earnings to 11.32%, representing an increase of 119 basis points.

Year-to-date cash flow from operations exceeds $2 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 fourth quarter sales increase of approximately 18 to 19% incorporates a comp assumption of 6 to 7% which is expected to generate diluted earnings per share of 48 to 49 cents representing an increase of 20 to 22.5%.

This guidance considers the cost related to opening 47 stores and our difficult fourth quarter comparisons associated with 185 basis point gross margin expansion, which combined with our 4.1% comp, drove our 46% net earnings growth last year.

For the year, we're estimating a comp sales increase of 6 to 7%.

Operating margin for the fourth quarter is expected to be flat to slightly positive to last year.

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

In the fourth quarter, we expect to open 47 stores, including one relocation and store opening costs of $49 million.

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

For fiscal 2003, we expect diluted earnings per share of $2.32 to $2.33.

Regarding current sales trends, I mentioned earlier that our business outlook for the third quarter anticipates 6 to 7% comps.

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

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.

Christie, we're now ready for questions.

Thank you.

If you do have a question at this time, please press star then the number one on your telephone keypad.

To you withdraw your question, press the pound key.

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

Your first question is from David Schick of Legg Mason.

Hi, good morning.

Just a couple of questions, if I could.

First, realizing you said that as above planned business trends accelerated through the year, so far, that 10 basis points deleverage on the bonus accrual, is that similar to what you're putting into your 4Q thoughts?

And secondly, just a little more color on the installed sales initiative stores, realizing it's too early to tell or you may not want to talk all that much, if you could talk about anything in terms of what you're seeing there in greater detail and the mix, you said customer satisfaction scores are higher, but what is the operating margin rate at those stores, if there's appreciable different in the mix that you could break down for us, it would be helpful.

Thanks.

I'll take the first one, this is Bob Hull.

We did experience 10 basis points of deleverage in the third quarter, we expect some deleverage in the fourth quarter but not to the extent we saw in the third quarter, probably more like five basis points or so.

Dave, this is Larry Stone.

I'll start on the installed sales.

What we're seeing from our model is really in increase in customer satisfaction scores, and nine out of 10 customers that's used our service said they would use Lowe's again to have its products installed with this new model versus about seven out of 10 with our old model that we currently have in the rest of the stores.

As far as margin rates go on the new model, there's no appreciatable difference in margin rates.

And the comps that we're getting out of the new model is right in line with our forecasts which we have not released to the external world.

Okay, maybe I could ask something as a follow-up.

In years past if you've seen or in just breakdown markets or stores, if you see a store or group of stores go up in that satisfaction rate that you just mentioned from, let's say, they went from five to seven instead of seven to nine, what's been the reaction for the following four or eight quarters?

What is that movement to nine out of 10 predict for us?

I think it predicts there's a tremendous growing market for installed sales and certainly the biggest problems we've always told the street is the problem with installed sales is the customer satisfaction part of it.

We think -- we can't give you basis points in terms of sales increase that it's going to produce, but certainly satisfied customers are repeat customers, and longer term that's the reason we rolled out the model as we know the do-it-yourselfers are becoming do it for me.

So that was the whole purpose of a new model that we can gain more share as we go forward with it and certainly that's what we're after today.

Thanks very much.

Your next question is from Bill Sims of Smith Barney.

Good morning.

I have two quick questions.

One, since your investor day last September, have you seen a noticeable change in how consumers are spending their money and your outlook for the economy, and if so, has that impacted your fourth quarter guidance in any way?

There's been a lot of discussion this morning focused on guidance in terms of have you become more conservative or not.

The second question is with regards to your promotional environment, the 12% of your interest financing.

Is this financing tied to appliances and seasonal in nature or tied to some of your competitor offerings?

And should we expect this to be sustainable throughout next year or should we see this financing change quarter-to-quarter?

This is Robert Niblock.

As far as the overall macro environment, you know, obviously with the overall everything's happening in the home improvement industry, total housing turnover continues to be strong, interest rates continue to be low.

We've seen unemployment kind of leveling off, consumer confidence tick back up.

So all those are signs that make us feel good about the fourth quarter as well as looking early into next year.

Obviously when you're talking about the fourth quarter, any time we give guidance of 6 to 7%, meantime we're going out with guidance of that nature in a competitive environment, we think that that's adequate guidance to be only 16 days in the quarter and giving outlook over the quarter.

In particular when you layer on top that have that we did have a positive comp, 4.1% in last year's fourth quarter and on top of that, the fact that the fourth quarter's our most weather-sensitive quarter.

We can have a great November, we can have a great December and we can get to January and if you have a tremendously tough winter, you can lose a lot of the ground that you make those first couple months.

Sitting here 16 days in the quarter, we think it's a reasonable outlook over the balance of the quarter and we feel good about that.

As far as the promotional environment, every year we build a promotional calendar and it has various events in there.

We go in and try and see what we did last year, how we're going to comp up against those same events we ran, is there something that's going to be more meaningful to the consumer in the current environment versus what they responded to last year and we also have a contingency fund that we keep in place out there so that if there are competitive environment is a little bit more robust than what we had seen on the promotional offers, that we have an opportunity to go out and match some of those offers to maintain our customer franchise.

That's a little bit of what we did in the third quarter.

The fourth quarter, we think we've got an adequate plan in place that will continue to maintain our customer franchise, continue to allow to us drive great traffic into the store and be able to deliver another great quarter as we get to the end of the quarter.

I know that was kind of a high-level look.

I don't know if -- Dale, did you have anything else from the promotional environment?

Yeah, about the only other things I'd add is the credit programs really affect more than appliances.

It's really a flooring issue, OPE or outdoor power equipment, it also affects the kitchen cabinet business.

So really, in a sense, the promotional programs we put into place with the credit really is driving the big project and big-ticket items.

All right.

Thank you.

Your next question is from Dan Wewer of CIBC.

Bob, you had indicated that mix changes adversely impacted gross margin and talking about lumber, I was curious if you look just at the lumber category, if you were able to increase your retail prices as quickly as your wholesale prices were rising?

And then also, could you remind us how many lumber-only stores that Lowe's operates and how they perform financially in this kind of cycle?

Sure.

As far as the mix impact on margin, obviously the retail marketplace, the consumer's much more receptive to declining prices than rising prices.

So we've not been able to raise retail commensurate with the rising cost that Robert described.

The other piece of that is just increase in mix.

As the lumber business is a greater proportion of our total sales, that's really what's driving the negative mix impact for the third quarter and probably will extend some into the fourth quarter as well.

That had a bigger impact than lumber margins in and of themselves declining?

They were both impactful, but yes, the mix of the business had a bigger impact.

Dan, also, this is Bob Tillman, in a hurricane environment, or disaster environment, Lowe's commitment is to hold the prices.

And we won't raise prices in that environment.

So in an effort to maintain that customer franchise and take care of our customers, we take some impact to margin and that environment on a rising market.

Okay.

I mean on the lumber-only stores that you operate?

Go ahead.

This is Larry Stone.

We have 26 of those stores that we operate today, and the sales would be of minimal impact on the company's numbers and certainly they had great comps for the quarter, but nothing that's going to raise the overall comp base of the company that much for the quarter.

They get caught up in the same issue from the rising prices, they can't move them up as fast, even though the sales ramp up, the profitability of that ramp probably the way you would have liked in the quarter.

And they deal as you know, Dan, with strictly new-home construction customers, new homebuilders, tract builder, and so that's a bid business and one of which is hard to move prices very fast.

Great.

Thank you and good luck.

Your next question is from Budd Bugatch of Raymond James and Associates.

Good morning.

A couple of questions, one on the new stores in the fourth quarter, the 47 of them, can you give us an idea of how they're going to open and what the mix of those will be?

Sure, Bud.

The mix of those stores from a chronological standpoint is 11 in November, 17 in December, and 19 in January.

That will include approximately 1594K stores, the balance being the 116's.

And Bob, how did the new stores perform in the quarter?

The non-comp stores, how did they perform in Q3?

All of our stores in Q3 performed very well comp and non-comp.

We're excited about our new stores, we've got great stores in great markets performing very well.

Okay.

When you look at the SG&A and the operating margin in the fourth quarter, the expectation, can you give us a feel of the difference between -- you had a mind-blowing performance last year in the gross margin which you indicated.

What do you think the gross margin does and what do you think the SG&A does in the quarter, any granularity on that?

I can provide some additional color.

As I said, we think operating margin will be will be flat to slightly positive, we do have a very formidable gross margin comparisons embedded in that as tough shrink comparison.

In fact we thing shrink [inaudible] should deleverage as much as 15 basis points in the fourth quarter which obviously puts pressure on the gross margin line.

We will probably have negative mix impact as well in the fourth quarter.

Stock options is obviously something that we'll have in Q4 this year we did not have last year that continues to put pressure on our SG&A line.

As I mentioned, a moment ago, probably some impact of bonuses in Q4 as well, as well as, again, slight deleverage of insurance costs.

Which we planned it, but it's going to be higher in Q4 this year than Q4 last year.

Okay.

A just a couple of other things quickly.

The lumber expectation in Q4?

As far as?

Effect on comps?

It's a commodity so it's tough to see where prices are going to be over the next 10 or so weeks.

We think because the fact that lumber is typically a lower mix of our business, anywhere from two to 300 basis points historically in Q4, it could be as much as 50 basis points positive impact.

Okay.

Lastly, if Dale could just comment maybe on paint and flooring, they look like they were below average although still terrific at above 5%.

Could you give us any feel on those categories?

Yes.

As a matter of fact, on flooring, we actually continued to pick up share on that but we've gone from about a 13 point share in this unit growth on total flooring back in 2001 to a rolling 12 in 2002, to 14 and again 15.8 in 2003 through the third quarter.

So -- and in paint, the paint sales have been terrific actually.

Overall, again, the share growth has been 11, 13.5 and 15.9 in sales, so we've had very impressive paint growth and that principally has come, that's units, by the way.

And I might add on dollars should be better because our average ticket, our average price point, unit selling price point has been growing pretty dramatically in that area as a result of our signature line that we introduced this year and our American Tradition paint which continues to do extremely well.

And Budd, just a couple of other things.

First of all, in flooring, we have obviously you are going up against some deflation in the laminate category so that would have a negative impact on your retails but obviously on unit basis being up.

And paint, I mean, it's, when you're sitting here with a 12.4 comp you can still have categories that perform very well but yet are below the 12.4 and paint did have a double digit comp, so while it was below the company average, it was still well ahead of our plans.

That's very helpful, Robert.

Thank you and congratulations.

Terrific job.

Your next question is from Aram Rubinson from Banc of America Securities.

Thanks, impressive showing.

It's Aram.

Two things.

One, I know everybody gets focused on lumber when they talk about pricing.

Can you tell us, because usually in lumber pricing moves with unit.

Can you also help us quantify the impact that the accelerated units, if indeed you did see versus the price?

And then also in that same topic, lumber has a negative effect on margins but it's also seems to be a pretty cumbersome item to put away is pretty SG&A-intensive as well.

Can you just help us walk through the P&L impacts below the pricing line?

First of all, your questions are on the unit growth and units were up during the quarter, I don't have the exact number in front of me.

Do you -- as far as the SG&A impact, Larry, do you want to talk about what you think that does to the stores?

Aram, with the unit we're moving, certainly lumber, if you think about the way it's packed and the way we bring in the stores, with the exception of moving the few remaining pieces you might have left over from a bundle, it's just a matter of taking those pieces off, putting a new bundle on and cutting the bands.

The labor on lumber is quite frankly less than a lot of categories that we deal with in the stores.

The labor impact would be very minimal in that particular product in terms of moving through the stores.

Aram, I think on a unit increase in lumber and plywood, real unit increase, not just inflationary increase, I think we had one of the best quarters we've had in the last two years in the lumber unit sales growth and that we captured some additional share in that area.

It's one of the better quarters on a performance basis.

And that's the way we measure, as you know, our performance in the commodities area is on unit growth, not on dollar growth because of the inflation.

Last thing, can you help quantify if there was any P&L impact from the rollout of the installed sales program?

Was that any more than a penny or so?

I can't calculate more than that, but just curious how the benefits and costs weighed out.

No, I wouldn't have thought so because we really didn't roll out the additional 120 stores until the October timeframe so it's really almost an investment that you're putting in that, that you'll get the payback as you start getting the benefits of that incremental model.

So if there was anything, there may have been a slight cost to it because it would not have been the sales associated with those incremental 120 stores that were rolled out during this quarter out.

All right.

Thanks a lot, guys.

Your next question is from Michael Baker of Deutsche Banc.

Thanks.

A couple of questions.

One, if you have more color on the 94K stores in terms of how they're performing in terms of sales per square foot, and operating margins, et cetera what you're seeing there?

Secondly, I just wanted to ask, on the inventories, certainly up less than sales but does the growth in inventories up 20% is one of the highest numbers in a while.

Is that a sign that you're building inventories, looking ahead to a pretty strong fourth quarter?

Those would be my two questions.

Part of it on the inventory, Michael, is building for the fourth quarter.

Part of it, too, will be looking at last year in the first quarter, we were probably a little light on inventory going into the fourth quarter so -- I'm sorry, into the first quarter so we'll probably build a little bit this year going into the first quarter.

Plus we had 37 new stores you opened in the quarter and a number of those were opened during the last, I think we opened 11 the last week of the quarter.

You're layering on the inventory in those stores without the sales associated with them.

I think part of it is a build for the fourth quarter and part of the build going into the early part of next year.

And then you also, obviously, what you see with the inflation that you saw out there in the lumber and building materials area, you wind up with a higher cost in those goods than what you would have seen in prior quarters that we've had out there.

As far as the 94K's, the operating margin is pretty much in line with the company average based on how the age of those stores that would be out there versus similar situated large store.

But when you look at it, I said we had 17 of those open, we opened 11 of them in the third quarter so it's kind of hard.

It's not like we even have a full quarter's worth of operations for over half of them.

But the early indications from the sales versus what we had planned, the early indications on the operating margins versus what a similar store of that age would be, we're very pleased with that versus what our initial projections would be.

As we've said all along, based on the size of that store, you probably, it will have a little bit of a negative impact on overall sales per square foot, there's not enough of them out there yet for it to have that big of an impact, but it's certainly, I think it's a large enough store that we feel like we have to have to go into some of those markets to be able to adequately serve the markets.

Great, one follow-up question in terms of the stores.

Any difficulty or delays opening the bigger stores, 116,000 square foot stores in the top 25 markets where you're right now focused?

No we really aren't.

We're still seeing great rollout.

We're seeing, I think to date, looking out to 2004 and beyond, I think we've got about 320 total stores approved through committee.

So our real estate group is working on getting those stores, the closing on the property, getting construction underway on those stores.

As is the case when you start moving into the Northeast and some of the major metro markets, in many cases your talking about assemblages of various properties, you're talking about permitting, you're talking about wetland issues, but most of these stores, we've had so many of them in the hopper for so long, we've had stores that have been in the hopper for three and four years that we've approved, that we've got a great group of them out there that will continue to roll out.

And we've actually got a good base of store managers in training that are out there that have been through the whole process and are ready to take over the stores.

So we think we've got a good base of people out there to help us open those stores and get them open and run the way we expect a Lowe's store to open and perform.

This is Bob Tillman.

I want to add on the inventory that's very important, is our inventory is probably in the best balance and overall condition that it's been in several years.

And we had such a strong selling season the third quarter, that we had almost no seasonal carry-over or anything of that type which sometimes can cause inventory imbalance.

So that 20% increase in inventory is all planned, it isn't that we over-plan in areas that we didn't want to be.

Great.

Thanks for the details.

Appreciate it.

Christine, we have time for one more question.

Your final question is from Dana Telsey of Bear Stearns.

Good morning, everyone, congratulations.

Can you talk a little bit about imports in the special order program, how the vendor consolidations going and the margin impact?

And just lastly, how is your shrink which seems like it's been doing very well, been impacted by opening more stores in the metro markets and how have those metro market stores been performing?

Thank you.

Dana, on the importing, this is Dale.

We continue to aggressively attack that area, we have been building an infrastructure that gives us the ability to really help our merchants overcome some of the difficulties of some of the import issues that we have run into in the past.

Obviously, flow is the biggest one.

When you extend your lead times that obviously makes for a more difficult justification in bringing the product in.

And it can -- it could, if it's not well-handled, negatively impact turns which is one of the things that we measure and incent our merchants on.

So we've made it a point to try to smooth that flow issue out.

I think the big thing on imports is that we continue to be on our plan which is to put us into a double digit against cost of goods sold by the year 2006, 2007.

So we're on that plan, we feel good about where we're going with it, and with respect to vendor consolidation, we continue to see some of that.

That's both planned and some of it's brought on by the fact that the vendors, through mergers and acquisitions are bringing that about as well.

Clearly through our S.O.S. program, consolidation of the vendors and that area, has helped our stores and helped our systems deal with the S.O.S. programs making it more cost effective to deal with the vendors.

Then finally, on vendor consolidation, I also mentioned that our vendor service groups, we continue to make great progress on that and we have roughly, today, about 40 major service groups today that are working with us on the vendor consolidation there.

Dana, this is Bob Hull, I'll address your question on shrink.

Certainly as we open stores in major metropolitan markets we feel the impact of shrink.

Those typically do have higher shrink as a percent of sales.

As you know we spent a lot of time last year talking about the investment we made in people and process and the technology around inventory shrink and that's really paid dividends in our results for the past six or so quarters and now we're cycling against those results.

As we do go into the major metro markets we do plan for higher shrink.

Shrink is not any worse than planned.

It's actually performance to plan is comparable with any other of our stores.

It's something we see but it's nothing unusual.

And Dana, this is Robert Niblock.

On the S.O.S. performance, I continue to be pleased with what we're seeing on our special order sales.

We've got, working on some new technologies, some new infrastructure that will continue to help our stores be able to wait on that customer, take care of the customer's needs in a more efficient and more effective manner.

Specifically with regard to the quarter, our comp sales in the S.O.S. business did exceed overall company average comps.

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 fourth quarter results in February.

Goodbye and have a great day.

Thank you, again, for participating in today's Lowe's Companies third quarter earnings results conference call.

This concludes today's conference.

You may now disconnect.