勞氏公司 (LOW) 2004 Q1 法說會逐字稿

Good morning and welcome to Lowe's Company first quarter 2004 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-E of the Exchange Act.

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

Possible risks and uncertainties are detailed in the company's May 7th, 2004 earnings release and the company's filings with the SEC.

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 9:45 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.

I am pleased to be able to report another strong quarter for Lowe's.

I would like to take a moment to highlight some of the drivers of our business and to assess the industry and broader macro environment facing Lowe's today.

The results we posted in the first quarter and for the past several years signify the strength of the home improvement industry and the execution of our dedicated employees.

A 22% sales increase and a 38% earnings increase prior to the effect of adopting EITF 02-16 are results to be proud of.

Yet top of mind for many is a specter of rising interest rates and the impact those rising rates will have on our business.

As I've said before a moderate and measured rise in interest rates and corresponding mortgage rate increases will not have a significant impact on our business.

I'd like to spend a few minutes describing why.

First, and seemingly overlooked by many in the investment community, Lowe's has undergone a dramatic transformation since the last two periods of rising interest rates.

In '94/'95 an estimated 15% of our business occurred with new home builders.

That compares to essentially none of our business today.

Frankly, one of the primary reasons we chose to transform Lowe's was because of the stability that a retail customer offers to the economic cycle.

While the contrast is not as dramatic, Lowe's is still quite different than it was during the 1999/2000 rising interest rate cycle.

During that cycle our transformation was still underway and we were also integrating the acquisition of the Eagle chain.

At the end of 2003 we sold our Contractor Yard business which marked the final step in our decade-long transformation from a commodity focused retailer of lumber and building materials to a company keenly focused on the retail customer as well as a select targeted group of commercial customers.

That change in focus is often overlooked when analysts use our history to describe the perceived vulnerability of Lowe's to rising interest rates.

But you might ask why we feel we're less susceptible to rising interest rates by focusing on a different customer base.

First, a significant portion of our business today is for home maintenance and is nondiscretionary.

The 122 million houses in the U.S. today will continue to age and require routine maintenance and occasional major repairs.

That maintenance is required whether mortgage rates are at 5% or 10%.

And very few Americans will allow the degradation of their single largest asset.

Second, our research shows that as consumers consider a major remodel of an existing home, they also consider the alternative of simply buying a new home that already has the features they desire.

For the past few years, with mortgage rates low, buying a new home has been the more convenient method.

Should mortgage rates rise the balance may shift to conducting major remodels.

Housing turnover may not continue to set new records every year but should remain at historically high levels.

However, should turnover slow, Lowe's stands ready to help consumers complete major projects whether it's with products we offer or the installation services we provide.

Third, in the last decade the American consumer's attention to and focus on the home has increased significantly.

Why do you think media rooms are one of the hottest trends in America?

People are choosing to spend more of their free time at home enjoying the company of family and friends.

In addition, immigration continues to play a key role in household formation in the U.S. as this population is intensely focused on attaining the American dream of home ownership.

And finally, U.S. demographic trends are clearly driving our business.

Those trends include a growing 20-something population who are buying their first homes earlier than their parents before them, as well as a baby boomer population entering their peak second home buying years and driving the construction of more than or some 150,000 second homes per year for the rest of the decade.

Those trends don't stop with rising rates.

So Lowe's is clearly better positioned today with a focus on a less cyclical customer to weather a moderate and measured increase in interest rates.

Also a concern, and the topic of many headlines today is rising gasoline prices.

While obviously a negative for the economy and the American consumer, I'd suggest that the home improvement sector is also somewhat insulated from a negative impact of rising fuel prices.

If a person chooses not to go on a vacation this year because of the high cost of gas, they're likely to spend that time and money at home, perhaps gardening, perhaps entertaining on the deck with a new gas grill or perhaps finally giving the living room a fresh coat of paint.

In any case, Lowe's stands ready to help.

That's not to say that Lowe's doesn't also feel the pressures of rising fuel prices, primarily in the rising cost of distribution, but with one of the most efficient distribution networks in retail today we're confident that we're able to minimize those cost pressures and remain in a position of relative strength versus our competition.

In summary, it amazes me when I read about the fear of rising interest rates and hear how it means the end of the road for home improvement and Lowe's.

Think about it for a minute.

Even if mortgage rates rise 100 basis points from last year to an average of nearly 7% for 2004 that will still be the third lowest average annual rate in the last 37 years.

Hardly prohibitive to home ownership and home improvement spending.

But also remember what's driving rates higher.

A brighter employment picture, with more Americans working and with greater confidence in maintaining their job.

Consumer confidence will grow, and Americans will feel better about the future.

With a generally stronger economy, consumers will have more dollars in their pockets, and Lowe's is going to ensure we have the products and services needed to serve them.

Now here's Robert with a detailed look at the initiatives that continue to drive our solid performance.

Robert.

Thanks, Bob.

Our focus on driving sales in a strong home improvement environment allowed to us deliver another strong quarter.

With 22% total sales growth, 9.9% comp store sales, and a 38% increase in earnings, excluding the 16 cent negative impact of EITF 02-16.

We entered the first quarter expecting a strong sales environment and added $57 million of inventory late in the fourth quarter in anticipation.

Despite these efforts demand in some seasonal categories was even stronger than projected.

To compensate we utilized our logistics and distribution capabilities to efficiently and effectively flow product to our stores keeping them in stock and capitalizing on the sales opportunity that presented itself.

The 9.9% comp we delivered in the quarter signifies our success.

Also aiding our ability to serve customers in this high-demand sales environment was a system enhancement and operational initiative implemented last year providing our store employees more authority to adjust minimum and maximum shelf quantities for individual products in their respective stores.

As employees saw demand exceeding budgeted on-hand inventory levels they quickly requested additional product.

Following the initial request our centralized replenishment system automatically supported the new min/max levels.

This enhancement improved our ability to react to seasonal spikes in demand as well as regional demand differences.

The results of these efforts was another quarter of balanced performance with positive comps for all regions and all product categories.

We saw outstanding performance this quarter in our outdoor power equipment category.

Cycling last year's first quarter were tough weather, supply issues, and a manufacturer recall disrupted sales, our merchants worked to create a compelling product line that generated comp sales significantly higher than the company average.

Similar results were generated in our seasonal living categories.

Specifically, our outdoor gas grill line was a phenomenal success in the first quarter.

Building on a great 2003, our merchandising team raised the bar even further, offering our customers outstanding value at all price points in the continuum and driving double digit comps on top of double-digit comps last year.

Our kitchen business was also strong in the quarter driven by sales of cabinets and countertops.

Enhanced product training in this category as well as a very successful reset of the department helped drive sales.

Also aiding this high-ticket business has been the creative launch of new products as well as the success of our new installed sales model.

Finally, we're pleased with the performance of our appliance category.

First quarter results clearly show the continuation of a customer driven shift to the home improvement warehouse channel as the preferred channel to buy appliances.

Great in-stock selection with great prices and knowledgeable sales people continue to drive our strong performance in this category.

The convenience of Lowe's locations as well as the opportunity to buy complete kitchen solutions are key reasons customers are making the channel switch.

Our outlook for this category is as strong as ever and we're confident we'll continue to capture comparable store sales as well as total market share by offering our customers the appliance advantage only Lowe's can provide.

We're continuing to see strong performance in our big three sales initiatives.

Specifically, as we've highlighted the last several quarters our installed sales initiative continues to gain momentum as the new model is rolled out across our store base.

We're continuing to see great acceptance and adoption of the new model by customers, employees, and installers.

We're confident that the model will allow us to efficiently manage the nearly 40% growth we're seeing in installed sales today.

The new model is currently in 521 stores.

We'll add another 130 stores later this month, and we expect to have it in all stores by the end of 2004.

Special order sales also continue to experience significantly higher growth than the overall company average.

We're seeing more and more customers express a desire for differentiation and customization of their homes which bodes well for special order products.

Special order sales growth was aided in the quarter by the rollout of SOS Express, an automated order entry and tracking system in our fashion plumbing category.

The new system prompts employees to suggest add-on sales such as matching towel bars or custom faucet handles leading to complete project sales and higher tickets.

As evidence of our success with this new technology, fashion plumbing special orders placed with the new SOS Express system are carrying a nearly 20% higher average ticket than paper-based special order sales.

We'll continue to add manufacturers' catalogs to the system increasing the percentage of orders that can be processed electronically, reducing error rates and driving customer satisfaction.

We anticipate adding additional categories to SOS Express in the quarters ahead.

Our commercial business also continues to exhibit greater sales strength than the overall company average.

Traditional commercial categories have been boosted by inflation but we're seeing unit strength as well.

These traditional categories of lumber, building materials and rough electrical had some of the strongest comps in the quarter.

With our continued penetration of the nation's largest markets, we're gaining a critical mass of stores in many of those market establishing relationships and a shopping convenience that commercial customers demand.

We continue to be pleased with the performance of our 94K prototype store.

We ended the quarter with 40 of these operating and while the first of these stores has been open just over a year we're gaining increased confidence in the economics of this model and its ability to drive great returns for the company.

Our metro market stores also continue to perform well.

In the quarter, we opened stores in Tucson, Las Vegas and Dallas, and we opened our first truly urban store late in the quarter in Brooklyn.

As our metro presence has expanded our confidence continues to grow, that our processes and procedures are scalable to efficiently support the high sales volumes these stores generate, and we're excited about our success in driving strong comps in these dynamic markets year after year.

The first quarter was a strong quarter.

Our stores capitalized on a strong selling environment and delivered excellent results.

Our merchandising teams continue to provide our customers great product at everyday low prices as we continue to leverage our logistics and distribution infrastructure to efficiently flow product to our stores.

We remain focused on providing great service to our customers and serving their changing needs for home improvement.

I'll now turn it over to Bob Hull to discuss the financial highlights of the quarter.

Bob.

Thanks, Robert.

And good morning everyone.

As Bob indicated, sales for the first quarter were $8.7 billion, representing a 22% increase over last year's first quarter.

Comp sales were 9.9% for the quarter.

Inflation in lumber and building materials resulted in favorable impact on first quarter comps of approximately 175 basis points.

With regard to product categories, the categories that performed above average in the first quarter include millwork, lumber, rough electrical, outdoor power equipment, seasonal living and cabinets.

In addition, tools performed at approximately the overall corporate average.

Gross margin for the quarter was 33.1%.

This is an improvement of 189 basis points over last year's first quarter.

As required by our merchant issues task force, or EITF 02-16 we have reclassified our vendor reimbursements for co-op advertising and in-store service from SG&A to cost of goods sold.

This change contributed 119 basis points of the increase in gross margin for the quarter.

Also, margin for the quarter was positively impacted by better margin rates and a 5 basis point reduction in inventory shrink.

These items were offset by 30 basis points negative impact associated with changes in product mix.

SG&A deleveraged 310 points in the quarter driven primarily by 355 basis points of EITF 02-16 impact with the reclassification of vendor reimbursements I mentioned a moment ago.

Also, SG&A for the quarter includes $18 million of stock option expense compared with $5 million in Q1 2003 which caused 14 basis points of SG&A deleverage for the quarter.

In Q1 we were able to leverage occupancy expense and numerous operating and administrative expense line items.

The occupancy expense leverage was driven by our 22% sales increase which allowed to us leverage rent, property tax and utility expenses.

Operating margin defined as gross margin less SG&A and depreciation decreased 110 basis points to 9.3% of sales.

The EITF 02-16 impact on operating margin is 236 basis points which is calculated by subtracting the 119 basis point increase in gross margin from the 355 basis point increase in SG&A.

The EITF impact to SG&A, gross margin, net income and diluted earnings per share is provided via the pro forma statement included in our earnings release.

Store opening cost leveraged 2 basis points and reflects the opening of 29 new stores in the quarter.

This compared to 21 new stores opened in Q1 last year.

Depreciation at 2.4% of sales totaled $208 million and leveraged 11 basis points.

At the end of the first quarter we owned 80% of our stores versus 76% at the end of the first quarter last year.

Interest expense at $48 million was flat to last year's first quarter and leveraged 12 basis points as a percent of sales.

For the quarter total expenses were 24.6% of sales and deleveraged 283 basis points which is principally driven by the reclassification of vendor reimbursements to gross margin.

Pretax earnings for the quarter were 8.5% of sales.

Without the $205 million EITF 02-16 impact pretax earnings were 10.9% of sales.

The effective tax rate for the quarter was 38.4% versus an effective tax rate of 37.8% for Q1 last year.

Diluted earnings per share of 57 cents increased 7.5% versus last year's 53 cents.

Without the 16 cent impact of EITF 02-16 diluted earnings per share of 73 cents would represent a 37.7% increase over Q1 2003.

While margins and previously anticipated EITF 02-16 impact is due to an increase in our vendor service group expense and the early inventory ramp to ensure that we were ready for the spring selling season.

The increase in the vendor service group expense is not driven by dramatic change in the utilization of service group but rather a change in how we pay the service vendors.

Previously the majority of service group expense was paid directly from the product vendors to the service vendors.

In 2004 Lowe's is paying service vendors directly.

This gives us greater visibility to the service group expense by vendor, by store and will allow for improved decision making in the future.

But this change has led to an increased EITF 02-16 impact.

Weighted average diluted shares outstanding were 808 million for the quarter.

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

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

For each of the remaining quarters in 2004 the after-tax interest add-back is also $2.6 million.

For the second quarter we're projecting diluted shares outstanding of 808 million.

For the year we're projecting diluted shares outstanding of 810 million.

In December of 2003 our board of directors authorized a $1 billion share repurchase program.

In the first quarter we repurchased 5.2 million shares at an average price of $55.35 for a total repurchase amount of $288 million.

In Q1 average ticket increased 8.7% to $62.56 which compares to $57.57 for last year's first quarter.

Customer count increased slightly more than 12% during the quarter.

Now to a few items on the balance sheet.

Our cash position improved to $1.8 billion at the end of the first quarter.

Inventory turnover was 4.46, an increase of 10 basis points over Q1 2003.

Return on invested capital measured using beginning debt and equity and a trailing four quarters earnings, increased 88 basis points for the quarter to 16.2%.

Our first quarter performance drove return on assets determined using beginning total assets and a trailing four quarters earnings to 10.7% representing an increase of 77 basis points.

Cash flow from operations was $1.2 billion, an increase of $172 million over Q1 2003.

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

A second quarter sales increase of approximately 19% incorporates a comp assumption of 6 to 7% which is expected to generate diluted earnings per share of 89 to 91 cents representing an increase of 19 to 21%.

For fiscal 2004 we expect diluted earnings per share of $2.69 to $2.72.

We do not expect EITF 02-16 to have a material impact on the remainder of 2004 and the total impact for 2004 is expected to be 16 cents per share.

Operating margin for the second quarter is expected to increase between 15 and 25 basis points.

For the entire fiscal year we are anticipating an operating margin decline of 10 to 20 basis points due to the estimated 60 basis point impact of EITF 02-16.

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

This guidance incorporates a comp assumption of approximately 3 to 5% for the second half of the year.

In the second quarter, we expect to open 19 stores, including two relocations.

We are on track to open 140 stores in fiscal 2004.

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

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

Please remember that May is our easiest comp sales comparison from Q2 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, and other members of our management team are present for the question-and-answer session.

Kimberly, 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.

You may now press star one to ask a question, and if you wish to withdraw your question at any time you may press the pound key.

Your first question comes from Bill Sims of Smith Barney.

Good morning.

Congratulations on another excellent quarter.

Can you, I have two questions.

First, can you give us an update on your foreign sourcing initiatives and where they stand relative to plan?

And then separately, in 2002 and 2003 you saw significant improvements from shrink.

Can you give us an update of how your metro market strategy is impacting your shrink result?

Bill, this is Robert Niblock.

As far as the foreign sourcing, what we're bringing in through LG sourcing, that's currently running at about 7%, is about where that's running, but we do have plans in place to continue to ramp that up.

In general if you look over the next several years we'll probably be increasing that at about twice the rate of overall sales growth.

So certainly we'll be ramping that up in various categories.

We've got plans where we've gone in by merchandising category given that direction to the categories where it makes the most sense, so some categories will be growing faster than others, obviously, but it will be an emphasis that we are putting on additional sourcing so you should see that ramp up over the next several years.

With regard to inventory shrink I think Bob gave you numbers that we had another 5 basis points or so improvement in this quarter over a year ago.

We continue to see great results in our shrink, really among all class of stores.

Certainly in metro markets you have higher shrink than you would have in some of the smaller markets, but we'll continue to be, as we open more and more of these stores in the market we continue to beat our planned shrink numbers that we're putting out there, so a lot of the initiatives that we've put in place in the past are really working.

We're continuing to rollout our EAS Electronic Article Surveillance in all of our stores.

Obviously in metro market stores we have in that in there from day one.

The procedures we have in place continue to be working well to effectively control our shrink in all stores including the major metro market stores.

Thank you.

Your next question comes from Mark Mandel of Fulcrum Global Partners.

Thanks.

Good morning.

With respect to your expenses, could you discuss, you know, where you're seeing the biggest increases, where you're seeing the biggest variances with respect to your budget?

Sure, Mark.

This is Bob Hull.

As I mentioned in the quarter we had leverage in occupancy expense in a number of other smaller expenses.

Those included corporate office salaries and expenses, store supplies, computer maintenance, forklift maintenance, equipment maintenance, bank service charges.

Those are a number of examples where we had slight leverage in a number of expense line items.

Obviously the big driver of the deleverage for the quarter was the reclassification of vendor reimbursements.

If you look at some of the lines that other retailers have noted, your health care, Workers' Comp, general liability, et cetera, utility expenses, you know, how are those lines fairing?

Utility expenses did leverage for the quarter because of our 22% sales increase.

As we noted in Q3 and Q4 last year we had some pressure on the Workers' Comp general liability expenses.

Those had some slight deleverage in our first quarter but not material.

If I may change the subject for just a minute.

With respect to the decline in refinancing activity are you seeing any changes in the way people are financing home improvements?

No, we really haven't seen, Mark, this is Robert.

We really haven't seen any change out there.

We still continue, as far as the mix of the way our sales are going, we're still seeing about the similar mix to where we've been running.

Obviously, you know, one thing we did this year is we had a little bit more of the time that we were on credit at 12 months no-pay versus 6 months no-pay last year.

So we're on credit this year more of it's either 12 months compared to either 6 or 9 months last year.

And we're still seeing great receptivity to our credit promotions when we run those.

But as far as the mix of the business how the consumer is buying and paying we really aren't seeing any big change in that.

Thanks a lot.

Your next question comes from Dan Wewer of CIBC.

Good morning.

On the forecast of slower same store sales growth 3 to 5% in the second half of the year, is that assuming some moderation in the improvement in the ticket size or in your traffic?

And then also, what will you do on the SG&A management during this cycle of moderating comp store sales growth?

Dan, I'll take the first part of that with regard to the outlook for the second half of the year.

Second half of the year last year we had very strong comps we're going up against from a year ago and certainly particularly when you talk about the third quarter there were a couple of things going on.

If you remember last year we had a tax rebate that came out in third quarter that we thought had an impact on sales.

We also had very favorable weather in the third quarter last year that continued the growing season and really propelled OPE and lawn and garden sales throughout the summer.

And obviously we had quite a bit of inflation in lumber and building materials last year.

As we look out into the future obviously in the crystal ball some of those things are out of control that we just discussed, the weather, tax rebate, we don't expect to have another one obviously, those types of things.

So I think what we're doing is we know we had strong performance last year, we know we're going up against those strong results and it's really just being a little bit conservative.

We still think we'll have a great comp like we talked about, 3 to 5% is our best guess of that right now with the initiatives we have in place to drive the comp but to do anything beyond that with the comparisons that we have in the back half of the year I think we'd be getting out a little bit ahead of ourself at this point.

Certainly if interest rates go up we think they'll only go up because the economy will be getting stronger and any increase in the strength of the economy would more than offset any mitigating effect of a slight increase in interest rates.

So we're very optimistic about the back half of the year but obviously wanting to be somewhat conservative in that outlook given the tough comparisons we're going up against.

Just so I understand.

Do you think those catalysts from a year ago enhanced your ticket more than did it your traffic, and, therefore, the moderation we would see would be on the ticket size improvement?

We would expect traffic to continue to be up but certainly, yeah, if someone gets a tax rebate and they go in and spend that I think they may be spending incremental on that trip than what they would be without that incremental money in their pocket.

And certainly when you have inflation in lumber and building materials your ticket goes up certainly in that instance as well.

We'll see how that holds out for the rest of the year.

Then as far as on the SG&A management anything special that you do in light of this more conservative top-line forecast?

Dan, I don't think there's anything special we do.

We always forecast sales and try to ensure that we've got the right staffing levels and the right resources to transact business with our consumers, so we really don't do anything special, we're just cognizant of the forecast levels and manage expenses accordingly.

Great.

Thank you.

Your next question comes from Bud Bugatch of Raymond James.

And my congratulations, too.

Just two quick questions.

One, are you seeing inflation in anywhere else in the store in terms of what your vendors are needing?

Obviously we're seeing commodity inflation in a whole number of areas.

And secondly, can you give us maybe the market share in appliances?

Yeah, Bud this is Dale Pond.

On the inflationary issue, there are a number of pressure points in that not the least of which has been, not so much today, but over the first quarter, copper, which obviously has a bearing in some of the brass products, the faucets and things of that nature.

The obvious ones, lumber, building materials, plywood in particular and stainless steel has been a pressure point for us in both the appliance area as well as in the grills, but generally speaking we've held the line pretty hard on the manufacturing side, and, therefore, have really not seen that retail, have not seen that translate to the retail side as much as you might.

Second piece?

On the appliance market share, Bud, if you look at it in units, for the first quarter we were at 14.5%, which is up 70 basis points from the first quarter year ago as reported by Track Line.

As far as dollar share we were at 12.8%, up 80 basis points from a year ago as reported by Track Line.

Thank you Robert, thank you Dale.

Your next question comes from Eric Bosshard of Midwest Research.

Good morning.

Can you talk a little bit about within gross margin the improvement in the quarter?

I know that you explained a component of it was driven by the EITF change.

But even excluding EITF the gross margin performance was impressive.

I know you're talking about it being still up but less significantly the balance of the year.

Can you give us a little more color within the gross margin strength?

Sure, Eric, this is Bob Hull.

Robert spoke about the growth in our Lowe's level sourcing on our foreign imports.

Our plan for the year is to grow that at twice the rate of top-line sales which we did do in first quarter which increased the mix of LGS as a percentage to the total of about 100 basis points.

That certainly drove a big piece of the margin expansion.

In addition, we did a, had a pretty good job of selling through our seasonal categories in Q1 last year so we had very little carry-over of inventory, therefore had fewer mark-downs first quarter this year than first quarter last year.

And then, lastly, Robert spoke about our special order systems and the improvement in getting the orders right the first time and us not having to eat either the margin impact to liquidate the wrong inventory or return to manufacturer.

So those are three pretty good drivers of the margin increase for the quarter.

Is there anything different through the balance of the year that makes the gross margin guidance more conservative for 2Q through 4Q relative to what you just posted in 1Q?

Well Eric, the only thing is, this is Robert is certainly if you look at a lot of the seasonal categories we still have the sell-through in those seasonal categories.

And while we feel very good about the way the year has started out so far you never know how the weather is going to be so we're always going to be somewhat conservative not knowing exactly how much sell-through we're going to have and how much we're going to take in the way of mark-downs but as you know the second quarter is a big volume quarter, the biggest volume quarter for us for all those seasonal categories.

As you know in the north, the spring is just now starting to break, we're just now starting to see those sales ramp so we'll to have see how strong the second quarter is before we'll know how much mark-down we're going to have to take on the back half.

Your next question comes from Aram Rubinson of Banc of America.

Hey, guys, thanks.

That was a new one.

A couple of things.

It sounded from your commentary that between building inventory after Q4 and still running out in some seasonal categories that there might have been some missed sales opportunities.

Question number one, I was hoping if you would confirm and maybe try to quantify that a little bit.

Hey, Aram, it's Robert.

Certainly as I mentioned, when you look at areas like riding mowers, look at some of the areas like our higher end gas grills, the Jenn-Air line of all stainless gas grills, we've just seen phenomenal performance and performance that's significantly that outperformed our original projection.

So we saw the trends early.

We worked with our manufacturing partners to garner additional product as quickly as we could and get it into our store but to sit here and say we didn't miss a few sales along the way certainly would be misleading.

So we know we missed some but we don't think we missed that much because of our ability to react quickly to the opportunity to meet customers demand on those items that were really selling and moving quick.

When you think about a seasonal category, Aram, you go into the season, you don't want to be overloaded on it because at the end of the season you want to be sold through that product because you've got different lines and different models coming in the next year so you go in with what we call a reasonable and responsible plan and then monitor it on the front end and try and react quickly to try and take advantage of additional demand that we see out there in the marketplace.

And I think the whole organization from the merchandising team to logistics organization and working with the stores where the customer, where we were seeing customer demand did a great job of executing that this year.

So yeah, we may have left a few sales on the table but we'd much rather be in that position and sell-through quickly than to have overloaded it on the front end, so --

Second question, can you tell us a little bit about usage of the inventory pull system versus a push system, whether that's kind of been adopted chain-wide or if it's just kind of a one-off here and there?

Then I had one last one.

I'll speak from my standpoint then I'll let Larry talk from the store standpoint but what I see when I look at it week to week in the first, let's say, five or six weeks of the year, eight weeks of the year, we saw a great spike in the demand of the individual pulls, but now it's back down.

The number of pulls we're seeing now is similar to what we were seeing last year.

And the reason it would be similar to last year, last year the stores were doing just one-time pulls for additional merchandise in, now they're doing a pull which is resetting the min/max, so once they've done that they don't have to go in and pull again.

So even with more stores out there, the number has moderated down so we're not seeing a tremendous spike because they've gone out, picked those individual categories that are the hot sellers, pulling in, getting the min/max set and the automated replenishment system then takes care it from there unless they have to go in and adjust the demand again.

Larry, I don't know what you're seeing from the store side.

Aram, from the store side, Robert's talking about the enhancement we made last year which goes in and makes the adjustment for the stores instead of stores continuing to pull inventory in and walk in stores and talking to people in the stores in the last couple of weeks demand when the quarter broke and sales were so strong there was more pull-in but now things have leveled off, the adjustments have got in so the inventory is flowing much better than it did say at the first of the season.

So it's one of these things we continue to work, continue to tweak.

And as long as you've got shrink in the stores and you've got counts that get off occasionally, the stores are full before they get all the corrections made in the systems to make sure the product flows better.

But all in all it's flowing much better this year than it did last year.

Last thing for Dale.

Dale, you've always used grills as kind of a category on the uptick continuum.

In your stores lately I've noticed these kind of Jeep grills, which seem, well, Jeep, or cheap, they seem kind of more tinny than some of your other grills.

Just curious what you're doing in terms of the price points there and since that was a leading indicator for other categories if we might see the same here as well.

Aram, we said consistently that the uptick continuum strategy requires that we have a full continuum.

Opening price points are very important to us.

I wouldn't call the cheap Jeep grill as you referred to it.

It's still speced well for the price point that it achieves but the idea really is to give the customer a full range of products at all points along the continuum.

The fact of the matter is that the Jenn-Air grills are such a great value relative to their price that we are able to pull that again up to the top end and our average selling unit price has again increased this year, as has our share of market.

Aram, this is Robert.

That Jeep grill you're referring to that's a specialty grill.

It's intended to be used for tail-gaiting parties, going to ball games and those types of things.

So that's really a specialty grill that the merchants brought in to offer but as Dale described to you, the up the continuum strategy means we offer price points along the entire continuum, but not only offer price points but offer great value along the entire continuum.

And I think why we're seeing such phenomenal success is that that upper end there particularly on our Jenn- Air line we've got three all stainless models out there that are phenomenal values for the customer compared to what's available elsewhere in the marketplace.

We've also partnered with our vendors at Char Broil and brought in a great all stainless grill to 399 price point which has got great success as well in the marketplace.

So really just bringing great value at all those price points to the customer is what's driving the phenomenal results in that category merchandise.

Thanks.

We'll save you one of those Jeep grills.

How about that?

Thanks, appreciate it.

Your next question comes from Danielle Fox of Merrill Lynch.

Thanks, good morning.

Quick question on installed sales.

I understand that there's an up-front labor investment.

I'm wondering if there was any dilution from the rollout of the installed sales initiative in the first quarter and if could you just comment on trends in profitability?

And then I have one quick follow-up.

Danielle this is Bob Hull.

As we talked about in the past, we do invest out in front of the installed sales model.

Hiring takes place as much as ten weeks out and then we take about six weeks after it starts before we start seeing some leverage so you've got as much as 16 weeks of impact for the stores affected.

We're still very happy with the model and the results of that model, hence the continued rollout and the completion of that rollout in the end of 2004.

Danielle you had a second question.

I didn't catch that.

Well, the, I'd asked whether or not there was any dilution which Bob Hull just answered and then just comment on trends in profitability.

So have we seen sort of the peak upfront investment for this year or will the rate of investment remain pretty stable throughout the remaining quarters?

Danielle, this is Larry Stone.

To give you an example, the district jobs that we fill we've already posted for.

Our last two waves will be rolled out later this year, so those jobs we've got to get out in front of quicker so you will have a little bit of an uptick in that.

As far as the store jobs there's two to three people hired on each one of the stores as we roll the model out so we're over halfway complete now with that so we've got two more waves to do this year, so I think that will level off and level back down.

The sales improvement has been really above our expectations and certainly the amount of complaints and customer satisfaction, the customer satisfaction went way up and our complaints are starting to trend down, which is the key leverage we were trying to improve, but it's a new model.

One quick follow-up on your comment earlier on the use of financing offers to drive sales.

I'm wondering how higher rates would affect the cost of offering attractive credit offers and how important you feel they are to driving average ticket.

Thank you.

Danielle, Bob Hull.

The higher rates really will not have any impact on Lowe's' ability to offer financing going forward.

We have locked in our financing on our credit portfolio for a number of years therefore the rising rates will have no impact on our ability to offer financing going forward.

Danielle, this is Robert.

As far as the availability of financing to drive higher ticket sales we certainly think that's important.

Many of our customers out there they need credit available to pursue some of the home improvement decisions particularly when you start talking about new kitchens, new cabinets, new flooring, the higher ticket items we think it is important to have that available and be able to offer to our consumers.

As you know the credit is available every day but at certain times of the year we do the no-interest financing credit but as Bob said it really doesn't have an impact, it doesn't change the rate we charge the customer or the amount we pay for the money cost since we've locked in the majority of that cost.

Kimberly, we have time for one more question.

Your final question comes from David Schick of Legg Mason.

Hi, good morning.

I was wondering, sort of a follow-on to the grill question in the sense, could you talk about trends within some of the high-ticket categories other than grills, in particular cabinets and appliances, what are you seeing even intra-quarter and over the last year or so that would lead you to sort of have confidence in the consumer going forward, almost to echo thoughts at the beginning of the call?

Dave, this is Robert Niblock.

On other categories, I mentioned them in my comments, outdoor power equipment we've seen phenomenal success in that category particularly in the riding mowers, which as you know is a high average ticket item, north of $1,000 in most cases.

We're seeing great performance in cabinets and countertops area of the business, running significantly ahead of our plan.

We're seeing great, even in our higher end countertops, the granite-type tops, we're seeing the customer trade up the continuum in many areas of the cabinet and countertop area.

In appliances, we're still seeing customer gravitate towards the higher end, side by side's, duet washers.

I mean if you look at it really in appliances, what's doing well is the high efficiency appliances, your duet washers, those type of things that are high-ticket items that we're seeing great performance in.

As I mentioned our unit sales were up 70 basis points and our dollar share was up 80 basis points from a year ago.

When we look at those categories of merchandise we really aren't seeing the customer pull back at all.

And as you saw great performance in our average ticket up I think almost a little over 8 or 9% for the quarter so.

No, we aren't seeing pull-back at all in any of those areas.

Thanks, that's helpful.

Thanks, Robert.

And, as always, thanks to all of you for your continued interest in Lowe's.

We look forward to speaking with you again when we report our second quarter results in August.

Good bye, and have a great day.

Ladies and gentlemen, this concludes your conference call for today.

We thank you for your participation and ask that you please disconnect your lines at this time.