勞氏公司 (LOW) 2004 Q4 法說會逐字稿

Good morning, everyone.

And welcome to Lowe's Companies fourth quarter and fiscal-year 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. Robert Niblock, Chairman, President and CEO;

Mr. Larry Stone, Senior Executive Vice President of Operations; and Mr. Bob Hull, Executive 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. Niblock for opening remarks.

Please go ahead, sir.

Good morning.

And thank you for your interest in Lowe's.

I'm proud to share the results of this quarter, the conclusion of another great year for Lowe's.

Our 6.6 percent comp sales performance for the year, on top of 6.7 percent comps in 2003, and 5.8 percent comps in 2002, is a clear indication that our operational, merchandising, marketing and distribution initiatives are working to drive sales.

These consistently strong results would not have been possible without the dedication and hard work of our 165,000 employees nationwide.

Following my remarks, Larry Stone will discuss our operational performance and update you on a number of initiatives.

Then Bob Hull will review our fourth quarter financial results, and detail the accounting changes described in our release.

But first, I will briefly highlight a few items from the quarter.

Total sales for the quarter were $8.5 billion, a 17.9 percent increase over last year, and total sales of 36.5 billion for the year was an 18.2 percent increase over 2003.

Comp sales of 6.9 percent for the quarter were driven by an improving balance of increasing transactions and average ticket growth.

As I mentioned, for the year, comp sales were 6.6 percent, which reflects increases in both transactions and average ticket.

In the future, our expectations will be to continue to drive comparable store sales by increasing both transactions and average ticket.

We saw widespread strength in our product categories, with every category delivering a positive comp sales for both the quarter and the year.

Of particular note in the quarter, cabinets and counter tops continued their strong performance delivering solid double-digit comps for both the quarter and the year.

The strong performance for the year was driven by the success of our new installed sales model and our ability to offer our customers a great installation option in what's historically been a do-it-for-me category, as well as our improved product offering and well-trained sales specialists.

Appliances also had a strong quarter, delivering high single-digit comps and continuing to gain share.

Our Lowe's appliance advantage, including great brands, knowledgeable sales specialists, and over 250 appliances in stock at everyday low prices are the foundation of our continued growth in the appliance category and give us confidence we will continue to capture market share.

In addition, I'm pleased to announce that the EPA has just named Lowe's the ENERGY STAR Retailer of the Year for a third consecutive year.

This award is recognition of our efforts to educate consumers and employees regarding the benefits of energy efficiency and promote energy efficient products.

Our stores also delivered broad-based regional strength with every region delivering positive comp sales for the year.

As expected, during the quarter, we continued to experience an increase in sales in our Florida and Gulf Coast stores, related to the restoration efforts from last year's hurricanes.

We saw strong sales in all categories, but particular strength in lumber, building materials, and millwork as we assisted our customers in getting their lives and homes back to normal.

In addition to the efforts to assist those in Florida and the Gulf Coast that were impacted by the hurricanes, on January 14, in partnership with Habitat for Humanity International, our more than 1,000 stores became official relief donation sites for those devastated by the Tsunami in the Indian ocean.

In 5 weeks, our customers and employees contributed over $1 million and Lowe's will contribute an additional $1 million to build over 1,200 homes in affected areas.

I'm proud to highlight the generosity of our customers and employees, as well as our efforts to aid those in their time of need both here at home and abroad.

For the year, we exceeded $2 billion in net earnings for the first time in Lowe's history and return on invested capital reached the Lowe's record of 16.4 percent.

A strong quarter and a strong year for Lowe's.

Beyond strong financial results, we've reached several milestones in 2004.

We finished the year with stores in 48 states, adding our first stores in Minnesota, Wisconsin, and Maine this year.

Our initial entry into these states is just the beginning.

We expect to continue to add stores in the Minneapolis/St.

Paul market over the next few years.

Our first stores in Milwaukee will be followed by many more and we plan to add approximately 10 stores in the state of Maine in both large and small markets in the next few years.

There remains a considerable opportunity for Lowe's to continue to add profitable stores across the U.S.

We ended the year with 28 percent of our stores in the nation's top 25 markets and approximately 54 percent in the top 100.

Since these larger metro markets hold over 65 percent of our target market potential, we will continue to add stores in those markets.

In fact, we currently have nearly 400 projects approved through our real estate committee and of those, over 35 percent are in the nation's top 25 markets, and 65 percent are in the top 100 markets.

Clearly evident of the metro market opportunity for Lowe's, in 2005, and beyond.

We will balance our metro market expansion with the opportunities presented by smaller markets, addressable with our 94 K prototype.

Delivering great returns thanks to our world class centralized distribution infrastructure.

We're confident there are hundreds of small single-store markets that Lowe's is uniquely positioned to enter.

While our centralized distribution infrastructure is widely considered one of the best in retail, we continue to refine and enhance our processes to become even more efficient and responsive to our stores.

Our rapid response replenishment, or R-3 initiative, is proceeding well through the implementation change.

We have build inventory in our DCs and we're actively selling through the safety stock in our stores to ultimately reduce our total inventory investment.

We currently have appliances from select manufacturers running through 2 of our distribution centers.

And we expect to add additional manufacturers and additional DC's during the year.

In addition, paint, certain lawn and garden supply, and fashion plumbing are areas of opportunity with deployment well underway.

We've completed the roll-out of our new installed sales model in the fourth quarter.

We're pleased with the results the new model has generated to date.

And we're extremely optimistic that we have a leverageable platform on which to support increasing customer needs for installed services.

You will hear more from Larry Stone about our installed sales successes in a moment.

On the marketing front, we continue to sharpen our message to our customers as our programs continue to evolve.

In the second half of the year, we fine-tuned our media message, effectively highlighting all price points in our merchandising offering from traffic-driving opening price points, to idea-generating and thought-provoking premium products.

In merchandising, we added great new products and merchandising sets during 2004 that continued to enhance our offering to our customers.

Our addition of Schuler premium cabinets and exclusive Zodiac engineered stone countertops by Dupont played a large role in our success in cabinets and countertops this year.

Also, the addition of Bosch and Fisher & Paykel is evidence of our continued efforts to improve our appliance offering, providing a wide variety of well-known brands for our customers.

Our exclusive arrangement with Therma-True doors, the most recognized name and preferred brand in entry doors, is an indication to our commitment to add the quality brands that commercial customers demand.

We've taken our own portfolio and harbored these brands to the next level, providing a better selection that offers great design and great value.

Those are just a few examples of of how our merchants enhanced our product offering in 2004 to ensure we remain relevant to our customers.

As a backdrop to the continued success of our many internal initiatives to drive sales and improve productivity, the macro environment remains strong and gives us confidence in our business as we enter the new year.

According to the Blue Chip economic indicators, the employment picture is brightening.

With current estimates suggesting U.S. economy will add over 2 million jobs this year.

Incomes are growing, with real disposable income expected to grow by approximately 3 percent.

In addition, supported by strong demand and an expectation that mortgage rates will remain at historically low levels, the National Association of Realtors expects 2005 to be the second best year on record for housing, on top of 3 record years in a row.

Add to that the fact that demographics and societal trends remain supportive to home improvement and it is clear while we're very optimistic about 2005 and beyond.

I would like to conclude by again recognizing the efforts of our 165,000 employees nationwide.

Next week, we will meet with our entire management team to outline objectives, initiatives, and expectations for 2005 at our national sales meeting.

We're confident we have the infrastructure in place to achieve those goals and we're confident 2005 will be another strong year for Lowe's.

Now, here is Larry Stone to highlight in more detail some of our operational successes for the quarter and the year.

Larry?

Thanks, Robert.

This morning, I would like to update you on several of the sales initiative that drove our performance in 2004.

I will also provide a look at some of our business process improvement projects, which are the plans we have in place to help us drive sales, effectively manage expenses, and continue to deliver great customer service.

Finally, I will highlight our expansion, describe some of the investments we made in existing stores in '04, and share some of the plans we have for 2005.

First, an update on our big 3 sales initiatives of installed sales, special order sales, and commercial business customers.

As Robert mentioned, we completed the rollout of our new installed sales model in December and we continue to be pleased with the success we're seeing in this business.

The feedback we're receiving from our customers is very impressive, with 92 percent indicating they would use Lowe's again for future installation.

Success like this led to a total installed sales increase of nearly 27 percent in 2004.

In 2005, with the new model in all stores, you will see additional category growth in this business.

We will expand into new categories and we're currently testing deck installations, water filtration systems, landscape lighting and more.

In addition, we are excited about the opportunity to market installed sales more broadly, now that a new model is in all stores.

We also plan enhancements in technology behind our install sales process, ensuring easier and more integrated experience from the initial visit to the completed installation.

Our sales specialists and in-store installed sales teams will also have new and effective contact management tools to ensure we follow-up with all interested customers.

We expect this business to continue to grow at a rate faster than our overall sales rate, as our ability to provide our customers an easy and convenient installation option only grows stronger.

Second, our special order sales or SOS initiatives continue to be big drivers of our comp store sales.

In 2004, SOS grew significantly faster than our total sales growth, continuing the trend of strong growth.

A major enhancement in 2004 was the rollout of SOS Express and our fashion plumbing department.

We used our proven M2O software as a backbone of a new system that integrates a warehouse and distribution component to our special order offering.

We've given our sales associates visibility into the inventory in our special order distribution center, allowing them to give customers firm expectations for delivery.

Additionally, the warehouse and the distribution components of SOS Express has significantly reduced lead times, allowing delivery in as little as 24 hours.

Based on the success of this platform, we will evaluate other categories for a similar program in the future.

Another successful SOS project in 2004 was the implementation of an automated identification system to inform customers their SOS orders are available for pickup.

We estimate that this system will save approximately 40 hours per store per week versus the old manual system.

Hours that will be deployed back into customer facing and technology activities.

Technology is the future for SOS.

We will continue to make enhancements that increase selection, make the ordering process easier, drive efficiencies, and speed delivery to our customers.

Our commercial business customer initiative also performed well in 2004.

Confident [ph] rate over twice the Company average and we had double-digit comps in 15 of 18 merchandising categories.

We are encouraged by the fact that our business with this customer has grown across the store, not just in lumber and building materials.

Our relationship with the commercial customers around the country continues to strengthen as Lowe's becomes more convenient for these customers as our store base expands.

That convenience, combined with great products, great prices, and solid customer service, are at the heart of our success with these customers.

In addition to driving strong sales results, we also made significant strides with several store level best practice and efficiency initiatives in 2004.

Our store business process improvement teams implemented over 200 projects last year.

Examples include a delivery routing project that utilized zip codes to schedule the most efficient routing of our delivery trucks, allowed our stores to better estimate delivery distances and appropriate charges.

We also automated our collection and archive process for tax exempt certificates.

Now customers can fill out one exempt form that is good for any store in that state.

The results create a time saver for our store team and a more customer-friendly process.

In addition, last year our VPI teams conducted several fill-based workshops on subjects like receiving, sales incentive programs, scheduling, and expense controls.

This process ensures that centrally developed policies and procedures are constantly applied across our stores.

Our incentive plans continue to set Lowe's apart from the competition.

As we stated before, Lowe's employee compensation is incentive-based.

We pay for performance.

A store manager who exceeds sales plans and earnings by at least 10 percent can earn a bonus up to 150 percent of their base pay.

Clearly, the results we posted on the past several years are a good indication that our pay for performance model is working.

Our employees are focused on customer service, driving profitable sales and generating a great return for the shareholders.

But customer service is a constant objective, and as a result, employee incentive plans are always designed to drive improved service in our stores.

Perhaps the best example is our medals program.

For each store is measured based on customer interviews, mystery shops, and a complaint index, and awarded a gold, silver or bronze ranking.

Renewed focus on these programs in 2004 led to nearly half of our stores achieving medal status.

That status entitles every employee in the store to receive a bonus for their efforts to provide excellent customer service.

We have set the bar high and programs like this allow us to drive and instill a customer-focused culture in every store.

Our commitment is to provide outstanding service to our customers so we will continue to drive customer service focused programs in 2005.

A key to ensure a culture of customer service is creating a well-trained team.

Our training department has worked with the operations team to develop a well trained bench of store managers to support our rapid growth.

We conduct 4 store manager training sessions each year, and we currently have over 200 graduates who are on the bench and ready to manage a Lowe's store.

These well-trained customer-focused employees are the people that will fuel our growth for the future.

Our comp sales results for the quarter and year are clear evidence that our initiatives are working.

As Robert mentioned, improving transaction counts in the quarter show our employees are serving our customers and meeting their needs.

In addition, our focus on solution selling, ensuring our customers have the products they need to complete their projects, contributed to the increase in average ticket for both the quarter and the year.

Store expansion continues.

We added 140 new stores in 2004 in both new and existing markets.

We added our first truly urban store in Brooklyn, as well as many of our 94 K prototype stores in small markets across the country.

We also had our first entries into Minnesota, Wisconsin, and Maine.

We also established the presence in Chicago, with 5 stores now operating, and 5 more to open this year.

We have a huge opportunity to continue to penetrate the metro markets in the U.S. with 116 K stores and our small market opportunity is considerable as well.

We now have 71 of the 94 K stores open and the results overall are meeting their expectations.

Our expansion plans for '05 include 150 new stores in markets across the U.S.

Approximately 80 percent of these stores will be large market prototype and the other 20 percent will be in small markets with the 94 K prototype. 33 percent of the large store expansion will be in the top 25 metro markets across the country.

In addition to new store growth, Lowe's never ending practice of improving our existing stores continued in 2004.

We invested over $400 million in existing stores to maintain, update, and refresh them.

We reset tools in over 700 of the existing stores last year, and response from our customers is very positive.

This makes our tool area very inviting and easy to shop.

We also did a complete remerchandising for 132 of our older stores in '04.

The areas of focus were cabinets and countertops, appliances, flooring, and millwork, as well as other areas as needed to bring these older prototype stores up to our newest standards.

In '05, we plan to invest approximately $600 million to remerchandise another 196 stores to bring them up to our latest standards.

All in all, we're confident that we continue to offer the best shopping environment in the industry, but we're not standing still.

We're working hard every day to make our stores better, easier to shop, and more efficient to operate. 2004 was definitely a strong operational year for Lowe's.

Our big 3 sales initiatives continue to perform well, and were significant contributors to both total and comp sales growth for the year.

Our efficiency initiatives led by our business process improvement teams, as well as our drive to enhance our customer service culture, drove strong earnings growth and solidified our position as a first choice for home improvement.

And our expansion continues.

The 140 stores we added is the most in any single year, and the 56 that we added in the fourth quarter is the most in any single quarter.

Importantly, we had the well-trained staff to fill those stores, and ensure we continued to offer the best experience our customers expect from Lowe's.

The outlook for 2005 is bright.

And I am confident we have operational team in place to implement our new programs and processes designed to make the customer's shopping experience even better than today.

Now, here is Bob Hull to describe the financial results for the quarter and the year.

Bob?

Thanks, Larry.

And good morning, everyone.

As noted in our press release, our financial results were impacted by the adoption of Emerging Issues Task Force or EITF 04-8 and changes in our method of accounting for leases.

The EITF reached consensus on issue 04-8, which requires us to include in our diluted earnings per share calculation our 2001 -- October 2001 convertible debt offering.

This issue is effective for reporting periods ending after December 15, 2004, or our fourth quarter of 2004, and will treat the 10 million shares associated with this offering as dilutive since inception, which reduces our fourth quarter and 2004 earnings by approximately $0.01 and $0.03 per share respectively.

The impact to 2003 and fiscal 2003 is approximately $0.01 and $0.02 per share respectively.

Restatement of prior year results is required by EITF 04-8.

Historically, we have generally depreciated leased assets using comparable useful lives as owned assets, and reviewing this practice, we recognize that we were depreciating assets beyond the initial lease term.

While we normally we have option periods that extend well beyond the initial lease term, the renewal of these options is not certain.

We have therefore reduced the depreciable life of our leased assets to generally be the shorter of the economic life or the initial lease term.

In addition, a number of our leases contain rent holiday provisions that relate to the periods in which the store is constructed of up to 1 year.

When calculating our straight line run expense, we did not include this rent holiday period.

We have recalculated our rent expense to include the rent holiday period.

The impact of these changes increases both our depreciation and rent expense, and impacts 2004 and 2003 by $0.02 and $0.04 per share respectively.

The impact on Q4 2004 was less than $0.01 a share.

These changes have no impact on cash flows or the total rent or depreciation expense to be recognized over the lease term.

Our prior period financial statements will be restated to reflect these changes.

Now, let's get into the results of our operations, which do reflect the adoption of EITF 04-8 and the lease accounting changes I just reviewed.

Sales for the fourth quarter were $8.55 billion, an increase of 17.9 percent over fourth quarter last year, ahead of our 16 to 17 percent guidance.

For the year, sales increased 18.2 percent to $36.5 billion.

Comp sales were 6.9 percent for the quarter, which exceeded our guidance of 4 to 5 percent.

As Robert noted, fiscal 2004 comps are 6.6 percent compared with 6.7 percent and 5.8 percent for 2003, and 2002 respectively.

Our comp sales performance, coupled with great new store locations, increased our average sales per store to $36 million this year. 2004 represents the 15th consecutive year that the average sales per store has increased.

As the fastest growing big box home improvement retailer, cannibalization is a reality.

The impact on our comp sales performance from opening new stores has been in the 100 to 150 basis point range for as long as we have tracked cannibalization.

Our well-designed expansion strategy provides for additional storing opportunities with our expectation that the cannibalization impact remain in this historical range.

Our well-trained store employee, great new merchandising sets, and effective marketing campaign, have allowed us to drive comp sales averaging over 6 percent for the past 3 years despite the impact of cannibalization.

Inflation and lumber and building materials resulted in a favorable impact on fourth quarter comps of approximately 75 basis points, driven by lumber and plywood.

The favorable impact for the year is 150 basis points.

With regard to product category, the categories that performed above average in the fourth quarter include millwork, rough plumbing, building materials, rough electrical, hardware, appliances, nursery, and cabinets countertops.

In addition, outdoor power equipment and home organization performed at approximately the overall corporate average.

Comp sales were positive for every product category.

For the year, the categories that performed above average include millwork, rough plumbing, lumber, building materials, rough electrical, hardware, outdoor power equipment, seasonal living and cabinets countertops.

Comp sales were positive for every product category and every region.

Gross margin for the fourth quarter was 35 percent, an improvement of 296 basis points over last year's fourth quarter.

As required by 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 increased gross margin 288 basis points in the quarter.

So without the impact of the EITF 02-16 gross margin increased 8 basis points.

In the fourth quarter, our gross margin was negatively impacted by 10 basis points due to the increase in distribution costs associated with the rapid response replenishment initiative Robert mentioned, which includes adding new programs and safety stock to your distribution centers, reconfiguring racking and implementing new labor standards.

These initiatives are causing a temporary increase in our distribution costs, but with longer term positive implications for our in-stock position, inventory productivity, and SG&A leverage.

Increased fuel costs also contributed to the increase in distribution costs.

In the fourth quarter, product mix and inventory shrink had no impact versus Q4 last year.

For 2004, gross margin of 33.7 percent is up 258 basis points over fiscal 2003.

The annual EITF 02-16 impact on gross margin was 258 basis points.

For the year, product mix and distribution costs negatively impacted gross margin by 14 and 5 basis points respectively.

SG&A deleveraged 238 basis points in the quarter, driven primarily by 292 basis points of EITF 02-16 impact, associated with the reclassification of vendor reimbursements I mentioned a moment ago.

In the fourth quarter, absent the impact of EITF 02-16, we leveraged SG&A by 54 basis points.

This was driven by payroll, advertising, and our credit portfolio performance.

These items were slightly offset by bonus expense deleverage.

For 2004, SG&A is 20.7 percent of sales, up 265 basis points compared with 2003, driven primarily by 316 basis points of EITF 02-16 impact.

Operating margin, defined as gross margin less SG&A and depreciation, was 10.8 percent of sales for the quarter, an increase of 69 basis points over Q4 2003.

The EITF 02-16 impact on operating margin was a negative 4 basis points, which is calculated by taking the difference between the 288 basis point impact on gross margin and the 292 basis point impact on SG&A.

The EITF 02-16 impact to gross margin, SG&A, net income and diluted earnings per share is provided via the pro forma income statement included in our earnings release.

For the year, operating margin is 10.5 percent.

Store opening costs at $51 million leveraged 2 basis points to last year, and reflect the opening of 56 stores including no relocations in the quarter.

This compares to 47 stores with 1 relocation last year.

Depreciation at 2.8 percent of sales totaled $236 million and leveraged 11 basis points.

For the year, depreciation at 2.5 percent of sales leveraged 5 basis points.

At the end of the fourth quarter, we owned 81 percent of our stores versus 79 percent at the end of last year.

Interest expense totaled $43 million for the quarter and leveraged 12 basis points as a percent of sales.

For the year, interest expense of 176 million, leveraged 10 basis points versus fiscal 2003.

For the quarter, total expenses were 25.3 percent of sales and deleveraged 213 basis points, which is driven by the reclassification of vendor reimbursement to gross margin.

Without EITF 02-16, total expenses would have leveraged 79 basis points.

For the year, total expenses of 24 percent of sales deleveraged 242 basis points, which is driven by the reclassification of vendor reimbursements to gross margin.

Without EITF 02-16, total expenses would have leveraged 74 basis points.

Pre-tax earnings are 9.7 percent of sales for the quarter, up 83 basis points over Q4 2003.

For the year, pre-tax earnings of $3.5 billion, are up 20.1 percent to 2003.

With regard to income taxes, our tax rate was 38.5 percent for both the fourth quarter and fiscal 2004.

For fiscal 2005, we are planning for an effective tax rate of 38.5 percent.

Diluted earnings per share of $0.64 increased 30.6 percent versus last year's restated $0.49.

For fiscal 2004, diluted are earnings per share of $2.71 represents an increase of 18.9 percent over 2003.

Without the impact of EITF 02-16, diluted earnings per share would have increased 25.9 percent.

Diluted shares outstanding averaged 805 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 26.5 million.

When computing fourth quarter diluted earnings per share, the after-tax interest add-back to net income for interest on convertible debentures was $3.4 million.

For the first quarter of 2005, the after-tax interest add-back is also $3.4 million.

Last month, our Board of Directors authorized a $1 billion share repurchase program.

In the fourth quarter, there was no activity under this authorization.

In Q4, average ticket increased 6.3 percent from $59.76 to $63.55, and customer count increased approximately 11 percent.

Now, to a few items on our balance sheet.

Our cash position remains strong with over $600 million in cash and cash equivalents at the end of the quarter.

Inventory turnover was 4.41, a decrease of 19 basis points over Q4 2003.

The distribution initiatives I noted a moment ago added approximately $300 million in inventory in the the quarter, contributing to the decline in inventory turnover.

Our debt-to-capital ratio is 24 percent at the end of our fourth quarter, down from 27 percent for the same period last year.

Return on invested capital measured using beginning debt and equity in the trailing 4 quarters earnings was 16.4 percent, an increase of 5 basis points to Q4 last year.

Return on assets determined using beginning total assets and a trailing 4 quarters earnings was 11.6 percent representing a decline of 3 basis points.

Without the $129 million reduction in net income associated with EITF 02-16, return on invested capital and return on assets would have increased 97 and 66 basis points respectively.

For the year, cash flow from operations exceeded $3 billion for 2004.

As a result of our strong cash flows, operating performance, and a reduction in our debt-to-equity ratio in December 2004, S&P upgraded our long-term debt rating from A to A-plus.

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

Prior to getting into the numbers, I wanted to highlight that our fiscal 2005 will include an extra week in the fourth quarter for a total of 53 weeks.

Lowe's fiscal year ends on the Friday closest to the end of January.

This means we have a 53-week year about every 5 years. 2005 will be a 53-week year for Lowe's.

Our last 53-week year was in fiscal 2000.

For the year, we estimate that the 53rd week will increase total sales by 1.5 percentage points and earnings per share by $0.02.

Now, to our guidance, our first quarter sales increase of approximately 15 percent incorporates 28 new stores, including 2 relocations, and a comp assumption of 5 to 6 percent.

We plan to open 10 stores in February, 5 in March, and 13 stores in April.

Operating margin for the first quarter is expected to grow by approximately 130 basis points, to last year, driven by -- largely by the comparisons against an EITF 02-16 depressed gross margin in Q1 2004.

The sales growth and operating margin expansion I described is expected to generate diluted earnings per share of $0.75 to $0.77, which represents an increase of 31 to 35 percent.

For 2005, we expect to open 150 stores, including 3 relocations, resulting in an increase in square footage of 13 to 14 percent.

Our 2005 store opening schedule is weighted towards the second half of the year, with about 60 percent of our stores opening in the last 2 quarters.

We're estimating a comp sales increase of approximately 5 percent and a total sales increase of approximately 17 percent.

On a 52 versus 52-week comparison, we would expect total sales growth of 15 to 16 percent.

For the entire fiscal year, we are anticipating an operating margin increase of approximately 20 basis points.

For 2005, we expect diluted earnings per share of $3.25 to $3.34, which includes the expected $0.02 positive impact from the 53rd week I previously noted.

Our capital plan for 2005 is approximately $3.7 billion, with $300 million being funded by operating leases, resulting in cash, capital expenditures, of approximately $3.4 billion.

Cash flows from operations will satisfy our capital needs for 2005.

Regarding current sales trends, I mentioned earlier that our business outlook for the first quarter anticipates 5 to 6 percent comps.

For the first 25 days of the quarter, our comps are exceeding the top end of this range.

Please remember that we are only 25 days into the quarter, and face tough comparisons as we posted 9.9 percent comps in last year's first quarter.

Before I turn the call over to the operator for questions, I would like to mention that in addition to Larry, Robert and myself, other members of our management team are present for the question-and-answer session.

Christi, we are now ready for questions.

We are now ready for questions. (Operator Instructions).

Your first question is from Gregory Melich of Morgan Stanley.

Good morning, Greg.

Good morning.

On this new R-3 initiative, it is now 300 million of inventory that's been increased year-over-year?

That's correct.

Okay.

And when should we expect that to end?

Or when will the ultimate reduction inventory result?

Is that something that gets done this year?

This is Mike Mabry.

I will address that.

Now that we're nearing the end of our implementation of R-3, we've got a lot clearer picture of what inventory position will be moving forward.

We are heavy going into our peek season, which we believe is not a bad thing, and are in the process of bleeding down that inventory as Robert mentioned.

In the first quarter, we would expect to deleverage inventory turns, and then in the second quarter, we should be flat to slightly up, the second half of the year should show meaningful inventory leverage, and then on a go-forward basis, we would expect to grow inventory at about half the rate of sales.

So on the second half, we should get back to trend?

Yes.

In terms of sales.

And then --

Greg, this is Robert Niblock.

I will just add a little color to that.

Obviously, as you know, as Bob Hull mentioned, we're area going up against 9.9 percent comps last year, we are going into the spring selling season, and we are changing a lot of the ways in which we replenish our stores with the new R-3 initiative, and just to make sure that we have -- drive the confidence out there from the store side, we got to make sure that as we sell through and start pulling down counter stocks in the store, that we are able to replenish and meet whatever rate of sales that we are seeing out there in the marketplace.

So going into this, I told Mike, Mike Mabry and his team, that if you err, I want to you err on the high side in being able to make sure that we can replenish those stores.

And so based on the results that we've seen so far and the way we ended last quarter and the way we started out this quarter and the tough comparisons that we're going up against, I'm pleased with our ability that we've seen being able to replenish the stores.

As Mike said, we're setting the counter stocks, pull down the counter stocks in the stores, and will be slowly bleeding that inventory down, but we also want to maintain the confidence out there with the operators out there in the field that as they sell through that inventory that it will get replenished quickly, which is what R-3 is designed to do.

So I'm very pleased with where we stand on the initiative.

Yes, we are a little heavy in inventory, but I would much rather be a little heavy than a little short going into the spring selling season.

Is that a reason why your expectations for margins this year -- I mean it is is up 20 basis points, and if you back out EITF it is actually down 20 basis points, is that because you're actually heavy on inventory?

I will let Bob hull address the impact that we're seeing overall for gross margins.

Sure, Greg.

It is not because we're heavy on inventory, it is because the inventory is deployed in the DC, we're better positioned to react to where it's selling, therefore don't anticipate any markdowns associated with being heavy in inventory.

As it relates to operating margin, growth of 20 basis points for the year, the lease accounting impact to 2005 will be $0.04 a share so that is about 12 basis points of operating margin that would not have been contemplated in prior guidance for 2005.

In addition, 2004, we had a phenomenal year from a credit portfolio standpoint. 2005, we expect to have a good year, but not a great year.

With expectations for bankruptcies to increase, that will impact our loss ratio, interest rates will rise slightly, which will impact us somewhat as well.

In addition, we transitioned our Lowe's accounts receivable program to GE mid-year, so we will bear a full year of the outsource cost in 2005, versus a partial year in 2004.

That sum total is about 15 basis points negative impact to operating margin in 2005, versus 2004.

And so if I was to piece it together, the 20 basis points -- the reason the EITF year-over-year impact doesn't take margins up is because of that 12 basis points on leases and then 15 basis points from the credit portfolio and the GE?

That's right.

There is a few other factors as well.

As Larry described, the investment in existing stores continues.

That's something that has always been a part of how we think about things at Lowe's and 2005 won't be any different.

That's going to drive about an incremental 10 basis points between the cost of the projects, the labor, and depreciation in 2005.

That's another impact and some smaller items, distribution cost will have some increased costs in the first half of the year, insurance, and some bank card rate increases will hurt us as well.

Most of this sounds like SG&A a opposed to gross margin.

That's right, Greg.

And the other thing I wanted to mention was that when you look at operating margin expansion over the course of the year, our operating margin, as we said, will be up about 130 basis points in Q1.

It will be down slightly in Q2.

And about flat to the back half of the year.

So when you're building your model you probably want to plug that in.

Great.

Thanks a lot.

Sure.

Your next question from Colin McGranahan of Bernstein.

Hi, guys.

I just wanted to follow up on that margin discussion a little bit.

And specifically your first quarter guidance, doing the same kind kind of math on EITF and apples-to-apples.

It looks like first quarter will be down about 100 basis points, if my math is correct.

So first, if you can confirm that, and then secondly, just give us a view into what Bob just did on the full year on the pressures gross margin, and SG&A and quantify anything that you can there.

Sure, Colin, this is Bob Hull.

The pressures I've mentioned as it relates to credit and distribution costs will be principally felt in the first part of the year, so that is the key difference between the first part of the year and the back part of the year is that the changes we're making in distribution, I referenced it was about 10 basis points in Q4, and we expect that to continue into Q1 with hopefully a slight decline in Q2.

The credit impact is larger in the first half of the year.

So that's why there is relatively flat gross margin in the first part of the year, and somewhat of a decline in Q2.

Okay.

Thank you.

Your next question is from Budd Bugatch of Raymond James.

Good morning.

I would just like to continue to go back on that inventory issue.

The $300 million of R-3 is about, if I did my math right, about 4 percent, which means that inventory rose about 26 percent versus sales growth of 18 percent.

Robert, is that -- is that about right?

Are you uncomfortable at all with the inventory?

Or are we just planning for the first quarter?

Budd, specifically related to R-3 is about $300 million.

If you look totally at the increase in our inventory, we are probably up about -- in the network about $450 million.

Part of that is because we added a new DC last year, and we just opened a new DC in the first 2 weeks of this year.

So obviously that new DC was receiving inventory and hadn't started shipping yet.

So we added several new initiatives out there where we were expanding the overall network and the distribution centers to be able to support our stores.

So -- but as I said, yes, we are a little heavy on inventory in the first quarter, but as I mentioned, going into the spring selling season, and knowing the tough comps we were up against, we did also decide to front load heavier than we did last year, some of our seasonal programs as we're going into 2005, just because we have the tough comp that we're going up against in the first quarter.

So, particularly it has been a mild winter, as we've seen here, and we've had the opportunity in some of those markets where there's -- the weather has been good, where actually some of our spring selling has begun to occur.

So we think we're in a great inventory position to drive a great first quarter.

And then I guess the final point was I think we opened 27 stores in the month of January.

Several of those in the latter part of January, which was up significantly over the number of stores we opened a year ago in January.

So certainly you've got the inventory in those stores that basically right at the end of the year that is driving that inventory level higher.

So there are a lot of kind of one-time factors that are in there driving that inventory level up, but I'm not uncomfortable at where we're at.

I think we've got a great plan in place to pull that inventory down and maintain the confidence level out there with the associates in the stores to be able to make sure that R-3 is successful.

Okay.

And if I could just sneak in one other quick question.

Appliance share, could you review what happened this year and maybe what your plans are for appliances with the addition of a couple of names and are you going to become more promotional in appliances next year?

Yes, Budd, this is Dale Pond.

I think it would be fair to say it wasn't our best year in appliances, but it was a respectable one.

While our major appliance comps didn't meet our plan, we continue to gain dollar and unit share against the largest player in the industry.

Maybe more importantly, I think we're better positioned for the next year given the number of changes we made in the program.

Some as late as in the fourth quarter of this past year.

First in the appliance business, and most other, innovation is what sells product, and that explains the incredible successes that we've seen in the high efficiency laundry products.

And when it comes to innovation, I think most people would agree that Fisher & Paykel was probably one of the all-time leaders, their dish drawer technology and the design is the envy of the appliance business, so we have it.

It is exclusively within our channels.

So -- and another brand that is known in the quality and innovation products of course is Bosch and then again, we have it, it is exclusive within the channel.

So we have Kitchen Aid, we have Whirlpool, and of course, we have great brands like Maytag and GE.

And with 250 of those appliances in stock, and take them home today, we will deliver them tomorrow, guaranteed prices, I think it is a pretty strong selling proposition and it works.

So I think we will continue to see share expansion and hopefully better results this coming year.

Budd, this is Robert Niblock.

When you look at, from let's say the track line numbers, if you look on a year-over-year basis, on how we've performed in the fourth quarter of 2004, versus the fourth quarter of 2003, our unit share was up 50 basis points in the fourth quarter, and our dollar share was up 90 basis points.

As I mentioned I think in my comments, we saw strong performance over the second half of the year with our appliances, much better than we did in the first half of the year, and a lot of the changes that Dale described to you were some of the actions we took over the second half of the year to drive that better performance.

So we're very optimistic going into 2005 with what we think that will continue to gain share in the major appliance categories.

Thank you.

Your next question is from Eric Bosshard of Midwest Research.

Good morning.

A question for Mike Mabry.

Mike, you made the comment that you expect inventory to grow at half the rate of sales once R-3 is done.

Can you talk about, I guess that starts in the second half of this year, and is the expectation, that is a sort of multi-year long-term ability to leverage inventories that well in the system?

Can you just give some clarity on that?

Yes, I would expect to start seeing that in 2006.

And then on a go-forward basis.

The new operating platform should provide us the ability to do that in the out years, on a go-forward basis.

And so for a multi-year period you would expect could grow inventory half the rate of sales.

Yes.

Okay.

And one follow-up if I can on margin, I understand there are some non-operables in the first half with the credit portfolio, and the leases I'm still trying to understand exactly how the comparability of that works, but in the second half of the year, with the comp, it sounds like the 4 to 5 percent range, why would you not get some level of operating margin improvement?

Can you just again make clear why the expectation is where it is for that?

Sure, Eric, the back half of the year, the factors that I've mentioned, the lease accounting, the credit portfolio and the investment in existing stores all have an impact for the full year.

A couple of those items, distribution and credit have a more pronounced impact in the first half of the year.

In addition, there are items like insurance costs, and bank cards that have an impact for all 4 quarters as well.

So all of those things together are having an impact.

Now, we have a lot of -- a lot of initiatives going on from the rapid response replenishment to the business process improvements that Larry described, so to the extent we hit our sales guidance, and execute against our initiatives, I think there might be some possible upside to operating margin.

However, we still need to execute in a highly competitive environment so we're not planning on that today.

Great.

Thank you.

Your next question is from Danielle Fox of Merrill Lynch.

Thanks, good morning.

I have 2 more detailed questions on the guidance.

I'm wondering if there will be any incremental options expense in 2005, since you didn't mention any impact in your prepared comments?

And also, how should we expect lapping the '04 adoption of 02-16 to flow through the year?

In other words, when do you get the majority back?

And does it affect every quarter or just the first half?

Okay.

On the stock options, we would expect no significant change in our expenses of stocking options.

We think our plans going forward to expense options will be comparable in expense as a percentage of sales as we've seen in 2004.

As it relates to 02-16, we anticipate, Danielle, the impact will be a negative $0.02 to $0.03 in 2005, which is basically an $0.18 to $0.19 impact offset by the reversal of the $0.16 hit we took in 2004.

The majority of that will be felt in the first quarter, which is driving the 130 basis point operating margin increase.

So really the EITF grows with the growth of the business, as we add new programs, and new products, with new vendor, the impact will grow, but it will grow with the business.

So it is largely a non-event going forward, other than the fact that we are forced to basically capitalize vendor funds in Q1 2004 and didn't get the benefit of those until we sold through the inventory the latter part of Q1 and the remainder of the year.

And those lapping the adoption affect your inventory, the way -- I guess the dollar value of your inventory since presumably when you capitalized those benefits last year, it depressed your inventory levels.

Is there any sort of -- does it inflate your inventories at all this year?

It has no impact on inventory.

Starting first part of 2004, the vendor funds were reflected basically in cost of goods, where it reduced the per unit cost at that point in time, so comparability '05 to '04 should be constant.

Okay.

Thanks very much.

Your next question is from Matthew Fassler of Goldman Sachs.

Thanks a lot.

Just 1 follow-up and for your sake, hopefully the final one in queue on guidance.

Based on Danielle's point, then, it sounds like as we think about the guidance from a year ago, X the EITF you're thinking about $0.73 and as we think about the $0.75 to $0.77 guidance for this year that $0.02 to $0.03 hit from EITF that you're going to feel this year is going to be felt entirely in the first quarter?

I think when we look at the impact of EITF, there certainly a lot of moving pieces.

If we go back to 2003, first quarter 2003, and take a look at the growth rate, we're looking at basically a 50 to 54 percent growth, which is the $0.75 to $0.77 over the restated $0.50 for 2003, so it is an annualized growth rate of 25 percent.

I think when we reported Q1 last year, we didn't necessarily get credit for what a fabulous quarter that was, so when we take a look at growth for the quarter and the year, we try to understand that there are a lot of moving pieces related to EITF 02-16 and try to take a look at the 2-year growth rate.

So that is why we have a 31 to 35 percent depth gross guidance for Q1, it does contemplate the benefit of EITF 02-16 offset by the factors I described previously.

Got you.

And those factors, just to clarify, include another $0.02 to $0.03 hit, so in other words you're not making back the whole $0.16 in Q1, you're making back $0.13 to $0.14 of that hit.

Right.

My second question just relates to the new stores that you've opened in Minneapolis and Wisconsin, obviously your new stores overall have been quite good, and that helped the top line this quarter.

Menards is a significant factor and why you competed with them in many markets those are kind of their heartland, so if you can just talk about the performance you've seen in the Northern Midwest for new stores compared to the rest of the country.

Matt, this is Larry Stone.

The stores that we've opened have done extremely well.

We've been very pleased with our first store in Minnesota, and in fact, been to that location many times and we've gone Menards and Home Depot within a half a mile of that store and we've been extremely pleased in the way that one has come out.

The first store in Milwaukee is beside of a Wal-Mart Super Center, and once again, that store is performing extremely well.

And our first 2 stores in Maine have also been extremely -- sales have been extremely good.

Once spring kicks in, we expect these stores to ramp and once we get more stores in the market and people get better aware of the Lowe's brand, I'm very confident these stores will do extremely well for us.

There's -- the housing density in these markets and the potential is much greater than some of the smaller markets in the Midwest where we go up against Menards and in the 3-way markets, we have more households in some of these markets we just opened.

So we're very confident with these stores in these markets.

Got you.

Thanks so much.

Christi, we have time for 1 more question.

Your final question comes from Dan Wewer of CIBC.

Hi, good morning.

You had indicated the success of using or leveraging your infrastructure to generate high margins in low volume stores.

Curious on the other end of the spectrum, when we look at high volume neighborhoods like Brooklyn, what's been your experience thus far on your store operating margin and return on capital?

Dan, this is Larry Stone.

Brooklyn has exceeded our expectations in terms of sales and operating margin.

We found that the Lowe's brand once again has been widely accepted by the consumers there and the commercial customers.

That store has performed extremely well.

We've done a fabulous job with commercial customer base there.

And once again, this is a store that we spend a lot of time out visiting and talking with the customers and finding out how we can serve the market better, so everything has been better than the original plan on that particular store.

And just as a follow-up, historically your gross margins on your SOS business were below the house average.

I know you have looked at some initiatives to improve the results there.

And yet it is growing at such a rapid rate, maybe you can update us on the margin trends on the SOS component.

Dan, this is Bob Hull.

The margin on SOS products, the product itself is typically a comparable margin.

The challenge we had was on the freight costs of shipping an individual unit versus shipping full truckload to the stores.

With the SOS Express facility that Larry described, we think we found a better mousetrap to handle SOS items going forward, and as Larry indicated, we are going to test other product categories going forward.

So we think that is an opportunity for us to be much more efficient, minimize the freight costs on the SOS products, and get to more comparable fully-loaded margin which encompasses the freight costs.

Okay.

Great.

Thank you.

I would now like to turn the conference back over to Mr. Robert Niblock for closing remarks.

Thanks, Christi.

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 first quarter results in May.

Thanks and have a great day.

This concludes today's Lowe's Companies fourth quarter and fiscal year 2004 earnings conference call.

You may now disconnect.