勞氏公司 (LOW) 2003 Q4 法說會逐字稿

Good morning, everyone and welcome to Lowe's's fourth quarter and fiscal year end 2003 earnings conference call. This call is being recorded. Statements made during this call may include forward- looking statements within the meaning of section 27 A of the Securities Act and section 21 A of the Exchange Act. Although the company believes such statements are reasonable it can give no assurance that they will prove to be correct. Possible risks and uncertainties are detailed in the company's February 23, 2004 earnings release and the company's filings with the S.E.C. Hosting today's conference will be Mr. Bob 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 9:45AM 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. Following my remarks, Robert Niblock will assess our operational and merchandising performance this year and Bob Hull will review our fourth quarter and fiscal year results. But first, I will briefly highlight a few items from this year's results, discuss the challenges we face during the year and describe some of the opportunities we see for our business in the future. I am extremely proud of the strong results we delivered in 2003, especially considering the difficult start as poor weather in the first quarter led to below planned results. Last year on this call I described 2002 as the best year in Lowe's's history.

Sales growth of 20% and even stronger earnings growth of 44% in 2002 raised the bar for 2003. But sales growth of 18%, earnings growth of 28%, on top of the phenomenal performance in 2002 is even more impressive in my view. I credit Robert and the rest of the Lowe's team for remaining confident that despite the slow start to the year the home improvement consumer remains strong and would return to our stores as weather improved. And our stores where ready when they did. With investments to insure our customers were greeted by trained and experienced staff, with full shelves of inspiring products and overall shopping experience unmatched in our industry.

The result of our continued investment was what, I feel, was among the best two-year performance in all of retail. Sales in the fourth quarter totaled $7.3 billion, up 20.1% from the fourth quarter of 2002. For the year, sales totaled $30.8 billion up 18.1% over fiscal 2002. Comp store sales from continuing operations increased 7.3% for the quarter and 6.7% for the year. Gross margin continues to grow driven not by higher prices, but rather by our merchants's efforts to minimize acquisition costs and our stores' focus on selling up the continuum.

Our commitment to every day low pricing remains strong guaranteeing our customers that they will find the best prices at Lowe's every day. Growth in gross margin, combined with the effective expense control, led to a record 10.2% operating margin for the fourth quarter and 10.7% for the year. Net earnings grew by 27.6% for the quarter and led to net earnings of 6.1% to sales for the year, a Lowe's record. Earnings per share in the fourth quarter increased to 51 cents up 27.5% from the last year's fourth quarter, and to $2.34 for the year, up 26.5% over 2002. In addition, shareholders equity increased 24% in 2003, reaching a milestone of over 10 billion in equity.

We opened 47 stores in the fourth quarter, including one relocation and in fiscal 2003 we opened 130 stores, five of which were relocations. At the end of the quarter, we completed the previously announced sale of the 26 commodity focused Contractor Yard locations. This transaction marks the final step in our transformation to a big box home improvement retailer and hones our focus on delivering great service to our retail and targeted commercial customers. . In 2003 we continue to invest in the business, insuring that we had the right staffing and products in the stores to serve our customers in this strong sales environment.

The investments we made in 2003 in people, infrastructure, inventory and merchandising have enhanced an already solid foundation, and I am excited about our prospects in 2004. Encouraging signs of employment growth, combined with stimulative effect of tax refunds and renewed strength of the equity markets provide confidence for the near term success of Lowe's. Over the longer term, the home improvement industry remains strong and the outlook for the future is bright. Led by American consumers' continued focus on the home, the Home Improvement Research Institute predicts an average of nearly 5% industry growth per year for the next several years. Lowe's stands more then ready than ever to capture that growth.

With that I will I will turn it over to Robert Niblock to highlight a few of the operational and merchandising successes in 2003. Robert.

Thanks, Bob. I agree, 2003 was a great year for Lowe's, especially when you consider that our stores delivered 18% sales growth, a 6.7% comp and 26.5% earnings growth on top of the phenomenal year we had in 2002. This morning I will review our successes in the year, update you on a few initiatives and outline the programs that keep us optimistic about the future. First, regarding store operations. Our employees did an exceptional job serving our customers in 2003.

Despite the slow start in a weather affected first quarter, our stores delivered above planned sales and earnings for the year. In the fourth quarter, we continued to see balanced sales across all regions of the country, with 17 of our 18 regions delivering positive comp sales. Despite less than ideal weather in the latter part of January, our stores delivered a strong 7.3% comp in the fourth quarter. We leveraged inventory, which was up only 15.5% compared to our 20% sales growth for the fourth quarter. Our progress continues with our effort to better utilize our distribution infrastructure by moving more safety stock into our RDCs.

We ended the year in great shape from from a inventory perspective ready for the spring selling season and we are confident that we will continue to leverage inventory and our distribution infrastructure in 2004. Our store employees did a great job controlling inventory shrink in 2003, gaining ground on top of the significant improvements we experienced in 2002, which were driven by focused internal initiatives. While we don't expect the same magnitude of improvement in 2004, we are confident that our inventory control initiatives will continue to minimize our shrink results.

On the merchandising front, we also continue to receive tremendous balance across all product categories, for both the quarter and the year every product category had positive comps, testament to the strength of our business and the dedication of our merchants to provide the great products necessary to meet the home improvement needs of our customers. Our major appliance category continues to perform well and track line survey results show we continued to gain market share with an increase of 60 basis points to a 14.3% unit share for the fourth quarter. We experienced a mid single-digit comp for the quarter in major appliances, and for the year, major appliances delivered a high single-digit comp which exceeded the company average.

Inflation in lumber and building materials had a positive impact of approximately 125 basis points on fourth quarter comp results and approximately 50 basis points for the year. Average ticket continues to grow aided by successful rollout of different innovative and inspiring products. For example, in 2003, we launched our signature colors line of premium paint. We are extremely pleased with the customers's response to this new line of paint and we are optimistic it will be a sales driver in the future, since it represented over 10% of our 2003 paint sales.

In 2003 we added our first stores in Chicago as we continue our push into attractive metro markets. We also increased our store count in both California and Florida by adding 11 stores to each of these fast-growing states. With our thorough real estate review process, we are identifying hundreds of sites that we are confident will continue to drive company returns higher. We opened 130 stores in 2003, we have plans for 140 in 2004, and 150 in 2005. In fact, we have already selected and secured locations for all of our 2004 plan and we are currently working sites for 2005 and beyond. Our expansion will be a mix of our 94,000 and our 116,000 square foot prototypes.

With the right balance of sales, inventory and expenses, we continue to be pleased with the rollout of our small market 94K prototype. We ended the year with 32 of these stores open and approximately 25% of our 140 stores planned for 2004 will be 94,000 square feet. From the sales initiative standpoint, our SOS express program is already yielding dividends. This program, designed to streamline fashion plumbing special orders, integrates an electronic catalog with our distribution infrastructure to significantly reduce the processing time and error rates that we experienced with our paper based special order process.

Truly a special order success story, the system is now functional in all stores. Customer satisfaction scores are showing measurable improvement and we are confident we can leverage this infrastructure and other product categories in the years to come. In addition, the rollout of our installed sales model continues. We added 120 stores in the fourth quarter and ended the year with this new program in place in 380 stores. As we have mentioned before, we are extremely pleased with the results this new model has delivered. Sales are up and customer feedback continues to bode well for future success.

In fact, over 90% of the customers that have experienced this new model say they'd use Lowe's for future installation. We will continue to transition stores to this model and all stores will have the enhanced sales and customer service capabilities that the model provides by the end of fiscal 2004. We enter 2004 with optimism. Difficult first quarter weather has proven to be an issue in each of the last two years but we are confident in our plans to get 2004 off to a great start. As Bob mentioned, our industry remains strong and many broader macroeconomic factors are point to go a strong year ahead. Our stores are ready, in the right locations, with the right merchandise and with a customer focus that will allow us to capitalize on the strength of our industry.

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

Thanks, Robert. Good morning, everyone. Before getting into the details of our Q4 and 2003 results, I would like to discuss the sale of the Contractor Yard Locations which was completed on the last day of our fiscal year. The sale allows us to focus on our core retail business, including the commercial business customer currently being served in our 950 plus stores today. The Contractor Yard Locations are reported as discontinued operations.

Amounts for all income statement line items have been reclassified to the earnings from discontinued operations line and are shown net of tax one line below earnings from continuing operations. As a result, sales for 2003 and 2002 have been reduced by 425 million and $379 million respectively. The Contractor Yards had 30% comps in Q4 driven primarily by lumber and building material inflation. So removing these sales reduced our comps for the quarter by approximately 30 basis points.

Removing the Contractor Yard sales reduced comps 10 basis points for the year. In addition, the Contractor Yard contributed 2 cents to earnings per share in both 2003 and 2002 as reflected in a discontinued operations line. The gain from the sale was not material and had no impact on diluted earnings per share in Q4 or fiscal 2003. Sales for the fourth quarter were $7.3 billion, excluding sales of slightly more than $100 million associated with the Contractor Yard. Sales for the quarter increased 20.1% over fourth quarter last year, ahead of our 18 and 19% guidance. For the year, sales increased 18.1% to $30.8 billion. Comp sales from continuing operations were 7.3% for the quarter, which exceeded our guidance of 6 to 7%.

Comps were strongest in November and December but trended downward in January due to severe winter weather. Even with the winter impact January comps were mid single- digits. Last year our fourth quarter comps without the Contractor Yards were 4.2%. For the year comps from continuing operations are 6.7% compared with 5.8% comps for 2002, again excluding the Contractor Yards. As Robert noted, inflation in lumber and building materials resulted in a favorable impact of fourth quarter comps of approximately 125 basis points driven by lumber and plywood. The favorable impact for the year is 50 basis points.

With regard to product categories, the categories that performed above average in the fourth quarter including mill work, lumber, outdoor power equipment, flooring, nursery and home organization. In addition, building materials, rough electrical and paint performed at approximately the overall corporate average. Comp sales were positive for every product category. For the year, categories that performed above average include lumber, building materials, outdoor power equipment, paint, flooring and home organization. In addition, MILL Work, hardware, walls and windows, nursery and cabinets performed at approximate the overall corporate average.

Comp sales were positive for every product category and every region. Gross margin for the fourth quarter was 32%, an improvement of 23 basis points over last year's fourth quarter. The improvement was attributable to better margin rates driven by lower inventory costs and a 1 basis point reduction in inventory shrink. These items were negatively offset by 11 basis points associated with product mix due largely to the strength of our lumber category, not from customers trading down to lower price points. For the year gross margin of 31.15% is up 71 basis points over fiscal 2002 driven by lower inventory costs and a 14 basis point reduction at inventory shrink. SG&A leveraged 7 basis points in the quarter, driven primarily by payroll and occupancy.

In addition, bonuses leveraged slightly. These items were partially offset by insurance and stock option option expenses. In the fourth quarter, we experienced increases in our employee insurance, general liability and workers' compensation costs which caused approximately 30 basis points of insurance expense deleveraged compared with Q4 2002. We began expensing stock options in 2003. SG&A for the quarter includes $13 million or 18 basis points for expensing stock options. Stock option expense for the year was $41 million or 13 basis points. For 2003, SG&A is 17.97% of sales, up 6 basis points compared with 2002.

Operating margin, defined as gross margin less SG&A and depreciation increased 28 basis points in the quarter to 10.2%. For the year, operating margin is 10.72% up 57 basis points over 2002. Store opening costs at $45 million leveraged 4 basis points to last year and reflect the opening of 47 stores, including one relocation in the quarter. This compares to 37 stores with six relocations last year. For the year, store opening costs averaged approximately $1 million per store, a slight decrease compared to 2002. Depreciation at 2.8% of sales totaled $203 million and deleveraged 2 basis points. For the year depreciation at 2.46% of sales is up 8 basis points.

At the end of the fourth quarter, we owned 79% of our stores versus 76% at the end of last year. Interest expense totaled $45 million for the quarter and leveraged 13 basis points as a percent of sales. For the year, interest expense of $180 million leveraged 12 basis points versus fiscal 2002. For the quarter, total expenses were 23.04% of sales and leveraged 22 basis points. For the year, total expenses are 21.43% of sales which leveraged 5 basis points to 2002. Pretax earnings are 8.96% sales for the quarter, up 45 basis points over the prior year.

For the year, pretax earnings of $3 billion are up 28.2% to 2002. With regard to income taxes. We increased our tax rate to 38.3% from our prior guidance of 37.8% due to our expansion into higher taxing states and continued pressure from the states attempting to raise revenue with new legislation. For fiscal 2004 we are planning an increase in effective tax rate to 38.4%. Diluted earnings per share of 51cents increased 27.5% versus last year's 40 cents, and exceeded our guidance of 48 to 49 cents. The 27.5% increase in earnings per share for the quarter is on top of 42.9% and 55.6% increases for Q4 in 2002 and 2001 respectively.

For fiscal 2003, diluted earnings per share increased 26.5% over a strong 2002 where diluted earnings per share increased over 42%. Diluted shares outstanding total 809 million for the quarter. The computation of diluted shares takes into account the effect of convertible debentures which increased fourth quarter weighted average shares by 16.5 million. In computing fourth quarter diluted earnings per share, the after tax add back to net income before interest on convertible debentures is $2.6 million. For the first quarter of 2004 the after tax interest add back is also $2.6 million and for projected diluted shares outstanding of 813 million.

In Q4, average ticket from continuing operations increased 6.9% from $55.99 to $59.83, and customer account increased approximately 13%. Now, to a few items on the balance sheet. Our cash position remains strong with $1.4 billion in cash and cash equivalents at the end of the quarter. Inventory turnover was 4.6, an increase of 8 basis points over Q4, 2002. Our debt to capital ratio is 27% at the end of our fourth quarter down from 31% for the same period last year. Return on invested capital measured using beginning debt and equity in a trailing four quarter's earnings, increased 134 basis points for the quarter from 15.14% to 16.48%.

Our fourth quarter performance growth return on assets determined using beginning total assets and a trailing four quarter's earnings to 11.65% representing an increase of 94 basis points. For the year, cash flow from operations exceeded $3 billion, and increased $364 million over fiscal 2002. As a result of our strong cash flows, operating performance and a reduction in our debt to equity ratio, in November 2003, S&P raised our outlook from stable to positive and in December, 2003, Moody's upgraded both our short and long-term debt ratings. Looking ahead, I would like to address several of the items detailed in Lowe's business outlook.

Prior to getting into the numbers, I plan to discuss three items that impact the comparability of our financial statements. The first item is the sale of the Contractor Yards. As I mentioned earlier, income statement figures for the Contractor Yards have been reclassified and are reflected in discontinued operations which totaled 2 cents per share. Our guidance for 2004 and beyond is based on growing continuing operations and excludes the 2 cents per share from the base. The second item relates to expensing stock options. We made the decision to expense stock options beginning in 2003. 2004 will include the expense associated with both the 2003 and 2004 option grant compared with last year which only included the 2003 option grant.

The expected impact is an incremental 3 to 4 cents per share for the year. And the last item is emerging issues task force or EITF 0216. As we've discussed previously, we will be impacted by EITF 0216 in 2004. This regulation impacts funds we received from our vendors and it affects all retailers. Prior to 2004, we were permitted to treat funds from vendors for co-op advertising and in store services as a direct offset to the associated expense. EITF 0216 requires retailers to treat these funds as a reduction of cost of goods so we will recognize the benefit when the inventory is sold which is later than the direct offset method.

There is no impact to the timing of when funds are received or our cash flows but there is an impact to the timing of income recognition. For 2004, this regulation will have the effect of increasing gross margin by approximately 240 basis points, increasing SG&A by about 290 basis points with a difference reducing both net income before taxes and inventory cost. The earnings impact is expected to be approximately 13 cents per share. The one-time earnings impact from this regulation will predominantly hit Q1 2004. The earnings guidance that we provided for 2004 contemplates growing continuing operations, the impact of expensing stock options and the implementation of EITF 0216.

To give clarity to these impacts, we have provided additional information on our investor relations website. Specifically, we have included the income statements for the past eight quarters for continuing operations and separately, the expected 2004 quarterly EITF 0216 impact on gross margin, SG&A and diluted earnings per share. Now, to our guidance. Our first quarter sales increase of approximately 18 to 19% incorporates 29 new stores and no relocations and a comp assumption of 6 to 7% which is expected to generate diluted earnings per share of 52 to 54 cents which is basically flat to the 53 cents from Q1 last year due to the expected 13 cent impact of EITF 0216.

For 2004 we expect to open 140 stores, including four relocations resulting in an increase in square footage of approximately 14%. Our 2004 store opening schedule is weighted towards the second half of the year with approximately 66% of our stores opening in the last two quarters. We are estimating a comp sales increase of 5.6% and total sales increase of approximately 17%. Operating margins for the first quarter is expected to decline 130 to 140 basis points to last year driven by approximately 200 basis points associated with EITF 0216, offset by planned gross margin expansion and expense leverage.

For the entire fiscal year, we are anticipating an operating margin decline of 20 to 30 basis points driven by an expected 50 basis point negative impact associated with EITF 0216. For fiscal 2004 we expect diluted earnings per share of $2.63 to $2.66 which includes the expected 13 cent negative impact from EITF 0216. Our capital plan for 2004 is approximately $3.4 billion with 300 million being funded by operating leases resulting in cash capital expenditures of approximately $3.1 billion. Cash flows from operations will satisfy our capital needs for 2004. While we don't normally provide two year guidance at the time, due to the onetime impact of EITF 0216 in 2004, we felt it important to provide visibility beyond this year.

For 2005, we expect sales increase of approximately 17%, operating margin expansion of 40 to 60 basis points and diluted earnings per share of $3.29 to $3.34, which would drive a compound annual growth rate of 19 to 20% for the two year period. Regarding current sales trends, I mentioned earlier that our business outlook for the first quarter anticipates 6 to 7% comps. For the first 23 days of the quarter, our comps are exceeding the top end of this range. Please remember that we are only 23 days into the quarter and than February is our easiest comparison from last year. 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, Frank Bridgeford and other members of our management team are present for the questions and an answer session. Operator, we're now ready for questions.

Ladies and gentlemen, we are now ready for questions. In order to allow questions from as many individuals as possible, please limit yourself to one question. If you would like to ask a question at this time, please press star then the number 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Your first question comes from Bill Sims.

Good morning, thank you, congratulations on another solid quarter. My first question, I suppose my only question, is ex EITF first quarter operating margin implies 60 - 70 point basis improvement. Can you help us understand if that is mostly gross margin driven by the up to continuum strategy and the exiting of the Contractor Yards or in fact how much SG&A leverage can you ballpark are we seeing as well.

Bill, you are correct it is about 60 to 70 points positive operating margin expansion, absent EITF impact. Normally we would guide 20 to 30 basis points. However, when you look at the comps for the first quarter, 6 to 7% versus last year's flat comp, we expect most of it to be on both the gross margin line and the expense leverage. So a little bit of both for the first quarter.

All right, thank you.

Thank you

Your next question comes from David Schick.

Hi, good morning. You mentioned that the enhanced installed sales stores, this is, I think, the first time you've mentioned that they had an improved top line impact. Could you detail that a little bit more, if it is in those categories alone or others, and sort of just a little more color on that would be great.

This is Robert Niblock. Installed sales have been performing well all year. I think what I was specifically talking to was the customer satisfaction element of the new installed sales model where I think I mentioned over 90% of the customers say that they would use Lowe's again for an installed project. So we have seen customer satisfaction ramp. In those stores we also have seen the sales increase but overall our installed sales business performed well in our existing stores, stores without the model as well as the stores with the new model. It's been strong in the fourth quarter, strong comp sales as well as strong comp sales (inaudible) year end in installed sales. We do see some tick up but primarily we are seeing an improvement in customer satisfaction which leads to repeat business for that store down that road.

Thanks.

Your next question comes from Danielle Fox.

Thanks, good morning. I just have a question on the SG&A outlook. Given your plans for a fourth division and three more regions as well as some of the higher insurance expenses you outlined should we assume the comp at which Lowe's leverages expenses will be a bit higher in the upcoming year or is the maturing of some of the metro market store openings providing some leverage and then if you could just comment on how you are planning the compensation, the incentive compensation accruals. Thank you.

Thank you, Danielle, this is Bob Hull. I will start, then let Larry Stone add some color. We think we can leverage expenses at just about any comp given the ability to plan for it. We have built our plan every year to leverage expenses, including incentive compensation. To the extent sales and net income grow beyond our expectations we will experience some deleverage in the bonus line. However, we will have an increase in our return on sales. We think there are a number of factors that would contribute to SG&A leverage going forward, payroll, we will see some light leverage we believe in 2004, bonuses are playing at leverage slightly. We will see some slight deleverage again in 2004 with insurance expenses, about 5 basis points or so.

Thank you.

Danielle, I will just add to that, I think you touched on it. As we continue to grow these metro markets, the cost will continue to leverage as we add more and more stores. For example in Chicago we have three stores up and running now. As we continue to back fill that market, certainly, it's going to help on the leverage point in terms of having more experienced and trained people that we can open our stores with. So all in all, we know we can get leverage longer term as we continue to drive into the metro market.

Danielle, this is Rob Waxford, going to five major divisions not four in 2004. We wouldn't be adding that cost if we didn't think that we would generate enough sales to offset that and be able to leverage that incremental infrastructure for the year.

Thanks very much.

Your next question comes from Matthew Fassler.

Thanks a lot. Good morning.

Good morning.

A couple of very quick questions. First of all, as your cash balance builds, I know that you authorized the stock buyback late last year. If you could talk a bit about your thought process for using that cash, whether we could expect interest expense to move and just how you intend to deploy that increasing for cash flow.

Thanks, Matt. This is Bob Hull. We will continue to invest in the business. In 2004 we will invest almost $500 million in existing stores. We will invest about $300 million in technology. I would also like to note that over the next three years we've about $700 million worth of debt maturing so we would like to have the flexibility to pay off that with cash. In addition, we did increase our dividend payments in 2003. Dividend payments were up about 30%, 2003 versus 2002. Lastly, you did mention the share repurchase program. We have not repurchased any shares at this time but we are continuing to monitor the marketplace and will inform you of any future purchases.

And, Bob, if you think about the 500 million going back into existing stores and the 300 million into technology, how do those compare to the numbers you spent on similar uses in 2003?

The number for new stores was about 275 million and it's about 275 million for technology as well.

You meant for existing stores, 275?

That's right. Okay.

And just a quick followup, you talked about February being the easiest to compare of the first quarter. How dramatically do the comparisons toughen up as the quarter goes on?

They are basically flat now after February. We talked about the impact on the fourth quarter call last year of severe weather.

Sure.

Impact on our business, in fact we were below the comp guides at that point in time so they do flatten out past February.

Okay, thank you.

Your next question comes from Mr. Rubinson.

I was waiting to see how she was going to get mine. It is Aram, good morning. Two things. One just to focus on lumber and building materials. Can you talk about from the merchandising standpoint what, if anything, are you doing there to drive that pro business. I know Bob, in his opening remarks, said you targeted initiatives there. And, also, help us figure out if the lumber and building materials category and inflation how that is affecting the average ticket. Thanks.

Aram, I'll start this, this is Robert. Then I'll ask Larry and Dale to jump in. Certainly, as we look at our staffing model and a lot of the initiatives that we have with our commercial business customer, we work on the staffing model to make sure that we are staffed appropriately. From an advertising standpoint, obviously, looking to do an appropriate amount of advertising on that end of the store, using our customer data base to be able to target market directly to those individuals. Last year, you know one of our big initiatives was really stepping up the volume of inventory that we had in our stores. I think stepping up that volume of inventory certainly helped drive that performance. And then we are also, as we've been talking about this year, rolling out our flat bed distribution network. We have 10 of those in place, or the 10th one is getting ready to open. We'll open a couple more in 2004. Having that facility in place certainly does allow us a lot better job in being able to respond to that customer, to be able to get the appropriate merchandise in there to meet their needs, and then little things like we've talked about rolling out M20 in the millwork division. That does a much better job of being able to meet special order needs for those customers, being able to get those orders done on an accurate and a timely basis into the stores. So a lot of little initiatives that we've done along the way that is helping us drive the affiliation with that customer. Plus as you get into major metro markets and you get more and more stores in those markets, you have enough locations that you become reasonably convenient to that consumer because generally that commercial customer is working all over that town. They like enough locations that seem to be reasonably convenient to be able to stop in and pick up supplies when they are in the middle of the job. So I think all of those things are slowly allowing us to gain traction with that customer.

Would you say that internally that the CBC customer is more important in '04 initiatives than it would have been in years past?

Yes, I would say that's probably accurate.

Thanks, and any impact on the average ticket and then I am done?

Obviously with lumber and building materials going up, it has an impact because that customer buys that on the average ticket. But as far the quantifying that exact amount, I haven't computed it or looked at it that way, Aram. I'll let you off with that, thanks.

Aram, Larry Stone, just to add one thing to it, one thing that we started last year in our stores is to give the stores more responsibility to pull that product versus a push system that we used from all of the products come through the central distribution. Basically we stage orders for the stores and the stores have the ability to pull those orders in quicker versus we push them out there. And we think that had some impact last year on getting more inventory out to the stores to meet the demand. The CBC guide during the week and then on the weekends when our lumber business really picks up for the retail customers. We are going to continue that path this year and add more products to it. We are convinced putting it closer to the stores will keep us in stock better and satisfy those needs of both customers much better going forward.

Thanks a lot.

Your next question comes from Dan Wewer.

Question for Robert or Dale. It looks like the rate of same store sales growth will be slower in the second half of the year than the first. Is that primarily in lumber where you would not get the same benefits of price inflation. Just also quickly, the comment about moving more safety stock inventory into the RDC. If you could perhaps quantify in some way the significance of that strategy.

This is Robert. Really, with regard to the safety stock in the RDC. What we did is last year we probably didn't have enough inventory preloaded into the RDC for the spring selling season so we stepped that up. I think the number is about $57 million worth of additional inventory we pumped into the RDCs at the end of the year to be ready for spring selling season. As well as what we did last year, as far as increasing the inventory levels in the stores, we layered that in on top of that. That will help insure that we are ready for the spring selling season. With regard to the second half of the year, we had very strong comps in the third quarter, I think a 12.4%, then obviously a good comp again in the fourth quarter. Several things happened in the third quarter of last year. We had very favorable weather during the month of August, you had a significant inflation in lumber and building materials and then you had tax rebates that were issued that fell right in the middle of the third quarter last year. So we take all of those things into account. We hope that we have those type of comps again this year but we generally don't build those type of comps into our plans. So, yes, given that comps were stronger the second half of the year in 2003 than they were in the first half of the year, we will build a plan that would have more of those comps baked into the first half of the year and depending on how the economy is doing, how weather is doing, inflation in lumber and building materials, it is hard to get visibility out six, eight months into the year. We'll hope all of those things will be favorable and we hope we'll deliver a great comp but we are not going to build a plan counting on items like that that we can't control.

No, I understood the logic behind a more conservative outlook. Just trying to determine which categories could be most impacted in the second half of this new year.

Dan, this is this is Dale Pond. We have added a number of resets that we've got going on in the first half of the year. We've tried to coordinate those with the operations side to make sure that we get them in the winter months so that when we hit the spring and the summer months, we take advantage of them. Most of our major remerch programs are scheduled for the first half of the year which we should get some of the benefit for the second half. We have loaded that remerch for that eventuality.

This is Robert. Obviously, lumber and building materials, to the extent that there's not inflation there, that there is deflation, that would have a negative impact on top line. Secondly, outdoor power equipment, and a lot of the outdoor categories, just had a phenomenal third quarter last year, late second quarter, early third quarter, all the way through the third quarter, just because the weather was so favorable. Really the growing season and a lot of our trade area never really stopped. So we were selling significant amounts of outdoor power equipment through the entire entire summer and into the fall.

Thanks a lot.

Your next question comes from Mark Mandel.

Thanks, good morning. Freddie Mac estimates that people monetized about $140 billion from their homes last year. I was just wondering what you're factoring into your projections with respect to refinancing activity as we go forward. It's, obviously, going to be a lot less in 2004 and beyond?

Yes, this is Robert. I mean, certainly we don't expect the level of refinancings to continue. I think interest rates ticked up a little bit in the third quarter but then leveled back off. As we've said before, many times a lot of those refinancings that people did last year, a lot of those were refinancing for a lower payment. Yes, there were some that took out some additional cash, but a lot of those were refinancing for a lower payment. That's almost a continuing annuity. We are also expecting a large tax refunds to come in the first half of this year. We've had the tax rebates that came in the third quarter of last year. The second half of that should show up in the refund checks that people get in the first half of this year, certainly planning for that. We are planning for better weather in the first quarter. We think the job outlook will continue to be strong. Yes, interest rates may pick up a little bit during the year, but we wouldn't expect them to move up much, because, obviously, being an election year, we think that there could be some movement but overall we think interest rates will still be in a very affordable range. We think with the jobs growth picking up and the economy picking up that those factors would more than offset any slight movement in interest rate. Obviously, for the stock market, if it continues to perform well to the extent that there is any wealth impact or at least an impact on consumer confidence, consumer optimism and customer outlook, certainly we would think that would aid that if the stock market continues to perform well.

Okay, thanks a lot.

Your next question comes from Greg Melich.

Thanks. A question, two parts, one question. Basically if you look at the stores that go in the metro markets, at your analyst meeting you put up numbers of the number of stores that had reached 45 million and then what that does to your margins and turns, etc. Can you just give us the number of how many stores made it over that hurdle last year and what you think could be this year?

Greg, Bob Hull, here, actually the number was stores was 40 million. The number has increased substantially over 2002. I don't have the exact number, but I think it's somewhere around 228.

About 232 stores, I think.

Versus the 170 or so last year. So that we considered to see positive movement, not just the major metro stores, but all of our stores, top line sales increased.

Okay. And then, second is on the traffic. You mentioned the customer count was up 13%, but I imagine that was total customer count. Does that mean that average traffic was down in the quarter, am I reading that right?

No, our comps for the quarter were a healthy mix of both second and traffic.

Okay.

So comp traffic was up as well.

Thanks.

Operator, we have time for one more question.

Your final question comes from Eric Bosshard.

Good morning. Two questions. First off, from a category perspective can you give us some sense of any categories you saw that slowed through the quarter and any conclusions you have from that. And then secondly, in terms of guidance. When I run the math it looks like the guidance here, including the EITF, is for a 12 - 14% increase and at the analyst meeting that was 14 to 15%. Give us a little bit of perspective on if there is something different you are thinking about or if Contractor Yard changes the math somehow.

On the guidance, I think Bob is talking about, you may not be taking out the 2 cents should be coming off continuing ops when you're looking at the guidance that we are giving for the year. And then the impact of the EITF, I think previously we'd stated at 12 cents to goes to 13 cents. I think if you adjust for those two item, you will get back to the guidance we gave in the fall.

Okay.

Dale, did you have any product categories?

Yes, the two that probably were most affecting us were one, the seasonal living, with the weather we had.

We had a slow start to the Christmas season.

Right. And then two, in our kitchen area, we have furniture and we are in the process of exiting the furniture business. We have been doing that for about the last 18 months, we continue to ramp it down. So that one has reached a point of almost lack of critical mass, I guess, is the best way to say it.

Are there any conclusions to draw from appliances growing mid, single comps? That seems like it's a little softer relative to the overall business versus the past, any conclusions in that category?

I think if you look at what happened in overall industry, I think we performed pretty well. I think we might not have been quite as promotional as some of the other competitors out there in the fourth quarter from the standpoint of 0, no interest, no financing payments for six-months, 12 months, whatever the case might may be. I don't think we were quite as promotional as some of the other retailers were out there. But beyond that, no. We look at the overall growth of the industry and our performance, we still feel good about our appliance business, the fact that we gained significant share in the fourth quarter. We look at a rolling 12 month basis, we really grew great share in appliances on a rolling 12 month basis which kind of takes the whole year in account.

Actually, the rolling 12 in the fourth quarter, we were up about 1.3 share points and that's almost double the next competitor.

Okay, great.

Thank you.

Thanks, Robert. And as always, thanks to all of you for your continuing interest in Lowe's. We look forward to speaking with you again when we report our first quarter results in May. Have a great day.

This concludes the Lowe's Companies fourth quarter and fiscal year end 2003 earnings conference call. You may now disconnect