勞氏公司 (LOW) 2004 Q2 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies' second quarter 2004 earnings conference call.

This call is being recorded.

Statements made by management during this call may include forward-looking statements, as such are provided for by the Private Securities Litigation Reform Act of 1995.

Although the Company believes the expectations, opinions, projections and comments reflected in such statements are reasonable, it can give no assurance that they will prove to be correct.

A wide variety of potential risks, uncertainties and other factors could materially affect our ability to achieve the results expressed or implied by our forward-looking statements.

And those risks and uncertainties are detailed in the Company's earnings release and other filings with the SEC.

Hosting today's conference will be Mr. Bob Tillman, Chairman and CEO;

Mr. Robert Niblock, President; and Mr. Bob Hull, Executive Vice President and CFO.

Please not 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.

Following my remarks, Robert Niblock will assess our operational and merchandising performance for the quarter and Bob Hull will review our second quarter financial results, but first, I want to briefly highlight a few items from the quarter.

An intense focus on taking care of our customers in a quarter marked by somewhat inconsistent sales resulted in a solid overall performance for the period.

A 17% sales increase, including quarterly sales in excess of 10 billion for the first time in our Company's history, and a 19% increase in earnings per share are results to be proud of.

Our comp sales performance of 5.1%, while falling short of our plan, continues a strong run of consistent performance in our existing stores.

At the same time, our new store performance remains robust.

We continue to add stores in new markets across the country, and during the quarter we added our fourth store in the Chicago market and also utilized our 94K prototype to head great stores in several smaller U.S. markets.

On the macro economic front, the housing market remains strong and vibrant, with June's housing turnover setting yet another all-time record.

Mortgage rates, while not as widely noticed as when they were rising, have actually declined and are hovering around 6%, a very attractive rate for buying a home.

In July, homeownership rates in the U.S. crossed 69% for the first time.

In addition, consumer confidence is approaching 3-year highs and employment continues to grow.

These are great signs for continued strength in the home improvement market and they gave us confidence in our future performance.

In the days following the end of the quarter, we opened our 1,000th Lowe's store.

Certainly a momentous occasion in our 58-year history.

But what is much more important than the number 1,000 is that all 1,000 stores, from the oldest to the newest, are very similar with up-to-date merchandising sets and signage, a clean and bright appearance, providing an inspirational shopping environment for our customers.

We'll keep an eye on consumer trends and ensure our stores stay in tune with their preferences, but it is our foundation of great stores and over 150,000 dedicated employees that give me confidence that Lowe's will continue to be the home improvement retailer choice for millions of customers each week.

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

Robert?

Thanks, Bob.

The sales results we delivered in the second quarter, while slightly below our expectations, are reflective of a resilient home improvement consumer.

After a strong start in May, like many retailers, we saw a slow down in sales in late June and early July.

Whether that slowdown was caused by a shift in school calendars, increased vacations, higher gas prices, adverse weather that prevented many typical summer projects or all of the above, we're extremely encouraged by the comp trends we experienced in the last 2 weeks of July and the first 2 weeks of August.

While up against our toughest year-ago sales comparisons, those strong trends give us confidence that the American consumer remains willing to invest in their home, and that we have the programs and initiatives in place to drive great results in the second half of the year.

Tough comp sales comparisons will continue in the third and fourth quarters, but as Bob mentioned, an unyielding and consistent reinvestment our existing stores is key to our ability to continue to drive comp performance.

For example, we're investing in a new Tool World set in all of our stores.

This reset began last year with a test in 17 stores and is now complete in over 500 stores.

The new set makes Tool World much more shopable for our customers by changing what previously could have been described as a segregated department designed to control inventory shrink into a much more open and shopable environment.

This accessibility has led to a significant increase in sales in reset stores and thanks to enhancements in electronic article surveillance technology over the past several years, we've seen very little increase in inventory shrink as a result.

We will continue to reset Tool World in existing stores throughout the year and the resets will be completed in 2005.

As we've mentioned before, we're also in the process of remerchandising 150 of our older family of stores this year.

Bringing them up to speed with our most current prototype stores.

This project is focused on enhancing cabinets, appliances, flooring and mill work.

Thanks to an experienced reset crew, we're able to remerchandise these stores with only minimal customer disruption.

While only a few examples of the literally hundreds of ongoing resets, its investments like these that keep our stores fresh and shopable for our customers.

Truly differentiating them from the competition and prepares them to deliver comp sales increases for years to come.

We're making investments in people, as well.

Our addition of a professional Human Resource manager in our stores has improved store staffing, enhanced training and ultimately will improve the retention of high-quality employees.

The benefits of this investment have only begun to materialize and our expectation is for better-trained, more highly-motivated customer service-driven employees in each and every store.

In addition, as we roll out our new installed sales model, we're adding on average 2 positions in every store to facilitate the administration component of installations.

This investment in people is critical to the smooth execution of installed sales, as well as necessary to build a leveragable model on which to grow this critical piece of our business.

The rollout of the new model continues to go well.

Installed sales, again, outcount the Company average by a significant margin.

Average ticket continues to grow and our outlook for this business is as bright as ever.

The separation of selling and administrative task allows a focus on project selling by our sales floor employees, while the production staff ensures that the myriad of details related to coordinating the installation are efficiently executed.

The performance of our special order sales program continues to drive strong comps.

Our new SOS Express process continues to exceed our expectations.

Currently available in fashion plumbing, this new, highly-automated approach to SOS orders has greatly increased our ability to provide customers fast and predictable delivery of SOS fashion plumbing.

By the end of this year, items making up approximately 95% of special order fashion plumbing fixtures, accessories and supplies will be available for review and selection online.

Higher average tickets, lower error rates, better communication and greatly improved customer satisfaction have resulted.

We've planned to roll this program into new categories in the coming months.

Our store expansion is going as planned and we're on track to open 140 stores this year.

Our real estate group is solidifying great sites to support years of future growth.

As a quick update on our metro market results, we continue to be pleased with the above-average sales these markets bring and our expansion plans include a large percentage of stores in the nation's largest markets.

The 94K prototype is also posting strong results, with a few of these now in our comp base, we're as encouraged as ever about our opportunity profitably enter smaller markets.

We entered the third quarter in a great inventory position with seasonal product in good shape.

We've executed efficient sell downs of patio furniture and air conditioners in seasonal markets and leveraged total inventory to sales.

Phase I of our efforts to move more safety stock into our distribution centers is already underway.

The leverage of this process is yet to come as we move inventory out of our stores, increase the frequency of delivery from our DCs and reduce total inventory while driving inventory turns and reducing out-of-stocks.

As I mentioned before, our sales trends, both at the end of the second quarter and into the beginning of the third, give us confidence in our performance and our outlook for the future.

I will now turn it over to Bob Hull to discuss the financial highlights of the second quarter.

Bob?

Thanks, Robert, and good morning, everyone.

As Bob indicated, sales for the second quarter were $10.2 billion, representing a 17.3% increase over second quarter last year.

For the first half of 2004, sales increased 19.4% to $18.9 billion.

Comp sales were 5.1% for the quarter.

Comp sales for May, June and July were 8.2%, 3.6% and 3.6% respectively.

Last year, our second quarter comp sales for May, June and July were 2.1%, 7.1% and 12.5% respectively, which totaled 7% for the quarter.

The 7% figure excludes the negative 10 basis point impact from the contractor yard locations that were sold at the end of last year.

The 2-year comp trend increased throughout the quarter and reached 16.1% for July.

For the first half of 2004, comp sales were 7.2%.

Inflation in lumber and building materials resulted in a favorable impact on second quarter comps of approximately 200 basis points, driven by lumber and plywood.

With regard to product categories, the categories that performed above-average in the second quarter include: Millwork, rough plumbing, lumber, rough electrical, outdoor power equipment, seasonal living and cabinets/countertops.

Gross margin for the second quarter was 33.3%, an improvement of 302 basis points over last year's second quarter.

As required by Emerging 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 309 basis points of the increase in gross margin for the quarter.

Also, margin for the quarter was positively impacted by a 7 basis point reduction in inventory trend.

These items were offset by 15 basis points negative impact associated with changes in product mix.

Year-to-date gross margin of 33.2% is up 250 basis points over fiscal 2003.

The EITF 02-16 impact on gross margin for the first half was 221 basis points.

SG&A deleveraged 300 basis points in the quarter, driven primarily by 317 basis point of EITF 02-16 impact associated with the reclassification of vendor reimbursements I mentioned a moment ago.

Absent the impact of EITF 02-16, we leveraged SG&A by 17 basis points.

This is driven by our credit portfolio, advertising, corporate office expenses, supplies and numerous other expense lines.

These items were slightly offset by deleverage in vendor service group, payroll, utility, fuel and bank card expenses.

The increase in payroll is due to the continued investments in our new installed sales model and the Human Resources manager in our stores.

The utility and fuel deleverage is due to the rise in gas prices and increases in tender mix and interchange rates caused bank card expense to deleverage in the quarter.

Also, SG&A for the quarter includes $23 million of stock option expense compared with $10 million in Q2 2003, which caused 11 basis points of SG&A deleverage for the quarter.

Year-to-date, SG&A is 20.3% of sales.

Operating margin, defined as gross margin less SG&A and depreciation was 11.8% to sales, an increase of 1 basis point over Q2 2003.

The EITF 02-16 impact on operating margin was 8 basis points, which is calculated by subtracting the 309 basis point increase in gross margin from the 317 basis point increase in SG&A.

The EITF 02-16 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 costs leveraged 14 basis points to last year as a percent to sales and reflect an opening of 17 new and 3 relocated stores in the quarter.

This compares to 22 new and 2 relocated stores last year.

Depreciation at 2.1% of sales totaled $216 million and deleveraged 1 basis point.

At the end of the second quarter, we owned 80% of our stores, versus 77% at the end of Q2 last year.

Interest expense totaled $45 million for the quarter and leveraged 8 basis points as a percent of sales.

For the quarter, total expenses were 22.1% of sales and deleveraged 279 basis points, which is driven by the reclassification of vendor reimbursements to gross margin.

Without EITF 02-16, total expenses would have leveraged 38 basis points.

Pretax earnings were 11.2% of sales for the quarter, up 23 basis points over the prior year.

The effective tax rate for the quarter was 38.4% versus an effective tax rate of 37.7% for Q2 last year.

Diluted earnings per share of 89 cents increased 18.7% versus last year's 75 cents.

For the first 6 months of fiscal 2004, diluted earnings per share were up 14.2% over 2003.

Without the 16-cent EITF 02-16 impact, diluted earnings per share would have increased 26.8% in the first half of 2004.

Diluted shares outstanding totaled 796 million for the quarter.

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

In computing second quarter diluted earnings per share, the after-tax addback to net income for interest on convertible ventures was $2.6 million.

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

For the third quarter we're projecting diluted earnings -- excuse me, we've projected diluted shares outstanding of 798 million.

For the year, we're projected diluted shares outstanding of 799 million.

In the second quarter, we repurchased 13.2 million shares at an average price of $53.79 for a total repurchase amount of $712 million.

This completes our $1 billion share repurchase program announced December of last year.

In Q2, average ticket increased 7.8% to $63.82, which compares to $59.21 for last year's second quarter.

Customer count increased approximately 9% during the quarter.

Now to a few items on the balance sheet.

Our cash position remains strong with $840 million in cash and cash equivalents at the end of the quarter.

Inventory turnover was 4.54, an increase of 5 basis points over Q2 2003.

Return on invested capital, measured using beginning debt and equity and a trailing 4 quarters' earnings increased 50 basis points for the quarter from 15.7% to 16.2%.

Our second quarter performance drove return on assets, determined using beginning total assets and a trailing 4 quarters' earnings to 11.2% representing an increase of 30 basis points.

Year-to-date, cash flow from operations was $1.8 billion.

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

Our third quarter sales increase of approximately 15% incorporates a comp assumption of 3 to 4%, which is expected to generate diluted earnings per share of 65 to 66 cents, representing an increase of 16 to 18%.

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

Operating margin for the third quarter is expected to be approximately flat to last year.

For the entire fiscal year, we are anticipating operating margin decline of 25 to 35 basis points due to the estimated 60 basis-point impact of EITF 02-16.

In the third quarter, we expect to open 33 stores, including 1 relocation, and store opening costs of $35 million.

We are still on track to open 140 stores this year.

For fiscal 2004, we expect diluted earnings per share of $2.69 to $2.71.

Regarding current sales trends, I mentioned earlier that our business outlook for the third quarter anticipates 3 to 4% comps.

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

Last year, we had double-digit comp sales in all 13 weeks of the third quarter.

Also during the quarter, we closed on a new $1 billion, 5-year senior credit facility, this facility replaces our old $800 million facility, which is comprised of a 400 million, 364-day tranche and a 400 million 5-year tranche.

Given the favorable market conditions, we seized the opportunity to structure our new facility that provides us with enhanced terms and greater financial flexibility on a long-term basis.

Lastly, on July 30, Fitch revised their rating outlook on Lowe's from stable to positive.

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, Greg Bridgeford and other members of our management team are present for the question-and-answer session.

Lynn, we are now ready for questions.

At this time, I'd like to inform everyone, if you would like to ask a question, please press star then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

In order to allow questions from as many individuals as possible, please limit yourself to 1 question.

We'll pause for just a moment for the first question.

Your first question comes from Danielle Fox with Merrill Lynch.

Thanks, good morning.

My question is on just the gross margin outlook.

Ex-EITF 02-16 it looks like gross margin was flattish for the first time in many quarters.

I'm wondering if we should view this as an anomaly or is the composition of earnings growth changing a bit over time?

Danielle, this is Robert Niblock, certain things -- if you look back over the past several quarters, we did have some big pickups in inventory shrink, improvements over the past several quarters, we've been saying for a while that as we start anniversaring against that, just being able to maintain those levels of inventory shrink would be something that we'd be very pleased with, particular with putting more and more stores in metro markets.

And I think it only added about 7 basis points of favorable impact for the quarter.

If you look at also the mix of products during the quarter and then kind of the mix within the mix, there were several categories like lumber and building material, outdoor power equipment, gas grills, some of those that had very favorable performance, a lot of those are below the corporate average margin, so you get effected somewhat with the mix within the mix.

And also because of the kind of cooler, wetter summer that we experienced in a lot of parts of the country, we started our clearance on certain lines of merchandise earlier, such as, air conditioners and patio furniture, let's say, and patio furniture is generally a higher margin category so, certainly clearing that stuff out earlier.

As we said all along, our real focus is on driving operating margin and certainly when you get into a quarter like this, where the weather turns against you and you have seasonal programs that you have to clear out.

We have to go ahead and discount those and make sure that we clear out that merchandise.

So, you know, somewhat of an anomaly.

I still think there's great opportunity in the future to drive gross margin with some of the things -- our operating margin, with some of the things we're doing with moving more product into the distribution center and being able to pull some of that product out of the stores, I think that allow us more of the product coming from our distribution center than from truck -- from store-direct from -- from our vendors, and obviously from the receiving point, it's much more efficient for our stores to receive that merchandise from our distribution center than from the vendor.

So, certainly that will add some opportunity there.

Also, on the importing front, we still believe there's great opportunity to continue to drive improvement in imports.

I think we're up about 45% or so in the shipment of imported goods this year over the prior year and we expect that trend to continue over the next several years, we anticipate our growth in imported products to be about 2 times our overall sales growth over the next several years.

So, I think there's plenty of opportunities there to continue to drive expansion and gross margin over the future quarters.

We won't have the tailwind like I mentioned of inventory shrink, so it may not be as dramatic as we delivered in some prior quarters, but I think we still have the opportunity to expand it.

Okay.

And I have just one quick follow-up question.

What do you think was the catalyst for the sales reacceleration in July?

Were there specific things that you did in terms of execution that were different?

And were there any noteworthy trends by category or by region?

Thank you.

No, I think, you know, when we look at, you know, with what all the economists have talked about and we've heard some of the other retailers say, I don't know what caused the temporary slowdown there in late June/early July.

We had a couple of calendar shifts this year in the second quarter, both Memorial Day and July 4th, July 4th falling on a Sunday, so that kind of splits 2 weeks versus being a dominant week that it falls into.

I think it was kind a temporary slowdown.

Maybe people taking vacations and then as school started back up. as things got back to normal, as -- as consumers resumed their ongoing -- or normal activities, I think we just saw the comps pick back up.

So, it's kind of an anomaly there for a couple 3-week period of time that we saw, where we saw a slowdown.

We're just trying to make sure that we're staying focused and executing everyday, making sure that, you know, we've got all at associates in the stores engaged and motivated and making sure that, you know, we're staying on mark with all of our initiatives, so, nothing that we really did dramatically different in the business that started the reacceleration.

Thank you.

Your next question comes from Gregory Melich with Morgan Stanley.

Hi, thanks.

Just a question on the payables versus the inventory and then sort of the uses of cash.

I noticed they didn't grow, but were basically flat while the inventories were up a lot.

Is that a strategy?

Or what do you want to do with the payables?

The decline in the payables leveraged inventories is really due to the fact that our -- our sales did slow in the month of June.

And our purchases accelerated -- decelerated.

As we mentioned in prior calls, we prebuilt inventory both in Q4 for Q1 and in Q1 for Q2.

So we were in a great inventory position coming into Q2, however, with the show sales that we've discussed in the month of June, we pulled back our purchases, which really diminished the favorable benefit we get from the vendors' terms.

Therefore, we owned a greater percentage of our inventory at the end of the quarter than we would have ordinarily liked.

Okay.

So it wasn't a sort of a shift in strategy of terms of gross margin versus payables, terms or anything like that?

We had no dramatic change in terms with our vendors.

Okay.

And then the second question was on the buyback.

Now that the buyback you announced last year was done, where do we stand in terms of thinking about capital structure and -- and where do you want to go from there now that the shares outstanding are going to be growing from all the options, et cetera?

Share repurchase is something we will continue to look at going forward as we take a look at our capital structure.

We will continue to evaluate our cash needs and what we feed to reinvest into the business.

As you know, Greg, we'll invest about $450 million this year in existing stores and $300 million in technology, so, we continue to evaluate means to invest in the business first, and then contemplate opportunities to return cash to our shareholders, both via share repurchase and dividends.

We did announce an increase in our dividends recently, it's our third increase since the beginning of 2003.

So, that's an important part of our returning cash to our shareholders, as well.

So, all of those items are on the table, Greg.

Okay, thanks.

Your next question comes from Wayne Hood with Prudential Financial.

Is Dale Pond there?

I don't know if he is there or not, but I'd like for him talk a little bit about the trend in July and early August with respect to average ticket and customer frequency.

And then it looks like you've got an accelerated 2-year trend as we get into the back half of the year, Dale, and just discuss a little bit about why you expect that accelerated trend in the 2-year rate to pick up; is it ticket or frequency?

And what are you doing to drive that?

Wayne, I am here and I think over the last 3 quarters, the comps were driven largely by average ticket, while transactions have -- the comp transactions have slowed somewhat.

And this quarter, unfortunately was no exception, but we believe the balance is long-term, desirable, gaining some balance in that -- in getting the average ticket and the transactions more balanced.

But the strategies that are driving that ticket growth aren't all a bad thing.

In fact, it's somewhat fundamental to our growth strategies.

You know, the installed sales up the continuum special order sales, project selling, commercial business objectives and initiatives.

The marketing focus on the larger ticket items and initiatives, all of that was somewhat pretty well timed when you consider the marketplace over the past couple of years with an unprecedented housing turnover, refinancing, which is fueled by the major remodeling and home improvement spending, as well as the growth of disposable incomes in households of $50,000 and greater.

So, what we've seen and tend to tweak going forward is where our growth has weakened, tickets under $25 comprised about half of our transactions yet represent less than 10% of our overall comp sales.

But tickets over $200 comprised about 8% of our invoices yet represent about 50% of our overall comp sales.

So small-ticket transactions really are the only type that have declined thus far this year, but tickets of $200 to $500 have increased about 8%.

Tickets 500 to 1,000 have increased 11% and tickets over $1,000 have increased by over 40%.

And these 3 segments represent a net -- about 45% of our sales, but again, less than 10% of our transactions, so, much of our ticket growth can be explained by our internal initiatives, but some is driven by external factors as well, gas prices, for one.

Customers are bundling their trips to making fewer and they're also buying a lot of the convenience items that they can pick up in shopping centers and supermarkets and what have you.

So, I think it's fair to say that we know we can drive more traffic into our stores by paying closer attention to our opening price points and making sure that we're competitive with all of our competitors in all of the market.

We're diligently, aggressively assessing our OP -- our opening price points and adjusting them, we're even adding some where we failed to execute the -- to up the continuum strategy properly or maybe simply missed one as we developed the line design.

So I think that gives you some idea of what we're doing.

We can expect to see more of like the ROP or insert that you dropped in July at that opening price point, some acceleration in that?

Or things like that?

I think as market conditions dictate, you will see some of that, if it's, in fact, it's required to drive the traffic.

I mean, as I said, we want to balance that traffic, we want to gain transactions, as well as the average ticket growth.

Wayne, this is Robert.

If you think about it, a lot of key initiatives we've been working on for the past several years are driving that ticket.

Whether it's great performance in lumber and building materials with our CBC initiative, whether it's the great performance we saw in kitchens with our installed initiatives, a great lineup in OP this year that's driving some of those higher average ticket items.

As Dale mentioned, we will make sure we're adequately positioned on all opening price point items from a traffic standpoint to make sure that that customer is aware that we are competitive all the way across the continuum of products we sell.

And certain parts of the country, the Midwest, the Southeast, with the cooler, wetter summer that we had, that did have a negative impact of some sales let's say of like lawn and garden products, which obviously is a traffic category so you would have been hurt in some areas like lawn and garden.

So, you know, we think the strategy is appropriate.

We obviously, you know, like to have a good balance of traffic and ticket and we'll continue to work on that.

I think you mentioned about the tougher comparisons in the back half of the year.

Yeah, they are -- we do have tough comparisons as Bob Hull told you, we have double-digit comps through all 13 weeks of the third quarter.

But based on the performance we've seen to date and comparisons we are going up against, we feel good about our ability to deliver the guidance we've given for the third quarter.

Thank you.

Your next question comes from Dana Telsey with Bear Stearns.

Good morning, everyone.

You just talked a little bit about opening price point adjustments on some categories.

Which categories do you think you will be adjusting and which categories do you assess for changes in the up the continuum strategy?

I think earlier in the year we had talked about raw material cost price pressures.

What have you seen there?

Especially in lumber and the impact on pricing.

How is appliances in the quarter?

And any update on RFID and systems?

Thank you.

Dana, you know, I guess it's just as far as looking at, you know, opening price points and those type of items, and we certainly look -- we always look all the way across the store.

That's why we have, you know, shoppers out there in the marketplace that are constantly making sure that we're priced competitively, so that focus would be all the way across the store.

From a competitive standpoint to say we're looking heavier in one category than another, that's not something -- you just have to rely on us that we're going to appropriately manage our business and manage the pricing of our products so that we are competitive in delivering great value to our customers everyday.

With regard to anything on RFID, Steve Stone, our Chief Information Officer, is in the room.

I'd like to have him address that and then we'll come back to some of your other questions.

On RFID, we completed a field test in the second quarter that was a field test in both our distribution centers and in our store.

We did learn some new lessons around both the way RFID interacts with the various products we carry, as well as things we have to do with RFID in the DC environment, the store environment and particularly in product packaging, very sensitive to where the tag is placed.

We are working with some new technologies and as you know, RD technology is changing roughly on the course of 4 to 6 months quite dramatically, so we're looking at some new technologies that we hope would make the opening investment more attractive to us at this time.

But we have some field test, again, planned for the second half of the year to really determine that.

The -- a couple of other things you had then were on both steel prices and appliances.

Steel prices pretty much moderated so we're not hearing as much concern from the vendor community on issues there with steel prices.

With regard to appliances, I will let -- I'll ask Dale Pond to respond to your question there.

Yeah, Dana, one other thing on the up the continuum, you'd asked about that.

You know, I've said every time I've ever spoken about up the continuum, that it's not about abandoning the opening price point, it's about offering our customers exponentially more value as they move up that continuum and that each successive price point has to deliver our customers substantially greater return and satisfaction, of course, for their investment.

So, if it's properly applied, if that up the continuum is properly applied, we will drive traffic in competitive prices -- with competitive prices on the opening price point product and once the customers visit the stores and are exposed to that full line of product, they'll recognize the opportunity to trade up to a better value with products of better features and higher-quality attributes and so forth.

So, that's assuming, of course, that we've got well-trained and appropriately incentive associates and we've merchandised the products sensibly and displayed them logically and coherent signing and good packaging and so forth and that we fought through the price point progressions and married them to real and relevant features and benefits.

So, opening price points are important to drive traffic, up the continuum is important to raise average ticket.

On appliances, you know, I think it's fair to say that we were disappointed with the -- the results of our appliances to date and -- on the quarter, but most of the shortcomings really were in 3 areas, they were air conditioners, refrigerators and freezers.

And air conditioners is really nothing more than a function of the weather.

We had a great lineup, Whirlpool branded, Energy-Star certified, priced competitively with the nonbranded less energy efficient products that our competition and then feature for feature, a better value, but it really never got hot in a lot of the country.

And then refrigerators is somewhat weather related, but mostly it's self-induced, the compressors tend to go out with greater frequency as the weather heats up, but in this case, we couldn't, in fact, we still can't, in some cases get the product, our back to the campus program was severely affected with vendor failures, related to the small cube, the small 1.6 cubic foot refrigerators, and our side by sides and even some of our stainless top-mounted side by sides have been difficult to get from a couple of key vendors.

And then freezers just continue as the business declined with side by sides now priced so economically, you find a lot of customers simply don't feel the need to invest in the separate unit to store their food.

But I guess despite our admitted and unacceptable shortcomings, we still managed to pick up some pretty impressive shares, while some others have lost -- have lost some pretty significant share.

Overall, as you -- I don't know whether you subscribe to Track Line or whether you see it, but, you know, our share, we actually had about a 0.8% gain in the majors where as the major competitor in -- in that category of major appliances actually declined share by about 1.8 points.

So, you know, we're still gaining share, just not to the extent that we would like to this last quarter.

This coming quarter we've got some pretty good things going on.

We've got introduction of some new product, we've got some new brands that we brought in, Bosch.

We've had dishwashers, but we're bringing in some other products in the Bosch line, which is a more upscale product, better quality and so forth.

We have Fisher/Paykel dishwashers, which you may or may not know is the drawer dishwasher, it's a very unique product.

And innovation sells appliances more than anything so that's an important aspect.

We've also got the extended warranty programs that are kicking in now and we've got Maytag with the 3-door bottom mount refrigerator that's coming on soon and then a double-oven freestanding range that we're launching with Frigidaire, excuse me, that will be exclusive to Lowe's.

So, we've got a lot of new product, a lot of new brands, a lot of what we think of as innovative and new programs that should jump-start those sales again.

Anything on regional sales trends?

I'm sorry, what was the question?

Regional -- well, regional sales trends, you know, we're continuing to see widespread -- this is Robert.

We continue to see widespread strength across all of the country.

Certainly the West Coast continues to perform very well.

The Northeast, Florida, the areas of the country where the weather good, we had outstanding performance, but overall we still had pretty widespread strong performance, other than where we saw the slowdown for the few weeks that I spoke of in the middle of the quarter.

Thank you very much.

Your next question comes from David Schick with Legg Mason.

Hi, good morning.

If you could talk about -- you talked about the months.

What if you created a 4-week month that was the second half of June and the first half of July?

What would that comp look like?

And then as a follow-up, earlier in the year you talked about inventory as an opportunity in the back half that you, Robert, in particular, you talked about certain categories that you could have been better situated in last year in the back half and that was one of the ways you thought you could grow the business this year against tough compares, with changing some of your buying and with the outlook that you now have, even though it doesn't look too much different.

What -- just update us on those thoughts.

Thanks.

David, I guess on the comp thing, we've given your the monthly comps, we've told you where the weakness was.

So any more -- we don't release quarterly comps.

To give you more detail than that we will be back to release the quarterly comps, I'm really not prepared to get into that granular level of detail on a week-by-week basis.

On the inventory in the back half of the year, what we had said was that we put more inventory in our distribution centers as of today and part of that is driven by we really want to start replenishing more of our distribution centers, do a little less cross docking and put more number SKUs into our distribution centers which will allow us to be able to react more quickly.

What that will also allow to us do is previously what we used to have to do is, you know, obviously we would buy and we would try and allocate all the way down to the store level in some of those programs that were cross docked out to the distribution center or that were vendor direct from the -- from the vendors into our stores.

Now what this will allow us to do is aggregate this purchase more to the distribution center level and feed the stores, so, those areas of the country, particularly with the weather-sensitive product that are less or more impacted by the weather, we can channel and feed those products in there and we think drive some incremental comps.

So really it's more about driving incremental sales.

We hope to, you know, at the end of the day, you have to put the inventory in the distribution center first before you start pulling out of the stores.

I think that's why you didn't see as much increase in inventory turns this quarter.

You're probably -- you know, for the year, you're probably going to be on inventory turns, flat, maybe slightly positive, but then as we get the inventory out there and start pulling out of the stores and start driving those sales, we think there's opportunity to drive additional sales and drive inventory turns in 2005, so.

Thanks a lot.

Yeah, I think we have time for one more question, Lynn.

Your final question comes from Aram Rubinson with Banc of America.

A couple of things. 1, can you tell us, as you look forward to the third quarter, what the lumber and building materials ought to contribute to comp from price?

And then I had 1 follow-up.

Aram, this is Bob Hull.

As you know, it is a commodity so it's fairly tough to predict.

Given the current composite pricing, lumber today is about 40% higher than the average for third quarter last year and plywood is about flat, just slightly down from last year.

So, given that setup I think we could have as much as a 50 to 100 basis point positive impact to comps in Q3 of this year.

And just a follow-up on the ticket, I just want to make sure I heard, so, items -- or tickets under $25 or half the transactions and less than half of the comps, I think Dale said.

Is that kind of the dollar sales, is that what you were referring to?

Right.

And so tickets over $200 or 8% of transactions and about half of the comp dollars?

Or half of dollars?

Right.

Okay.

All right.

Thanks.

Thanks, everyone.

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 third quarter results in November.

Goodbye and have a great day.

That concludes today's conference call.

You may now disconnect.

Thank you.