勞氏公司 (LOW) 2005 Q4 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies fourth quarter and fiscal year 2005 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. Nick Canter, Executive Vice President of Store 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.

This morning, I will review our fourth quarter results, the conclusion of another great year for Lowe's.

Our 26% sales growth, 7.8% comp and 37% earnings growth, on top of the phenomenal fourth quarter we had last year, are strong indicators that our operational merchandising, marketing and distribution initiatives are working to drive sales.

These strong results and our consistent performance for the past four years would not have been possible without the dedication and hard work of our 185,000 employees nationwide.

Following my remarks, Nick Cantor will review our operational performance and update you on a number of initiatives.

Then Bob Hull will review our fourth quarter and year-end financial results.

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

Sales for the quarter were $10.8 billion, a 26% increase over last year and sales of $43.2 billion for the year increased 19% over 2004.

Comp sales of 7.8% for the quarter reflect an increase in transactions and average ticket.

Despite the slow start in a weather-affected first quarter, we ended the year with comps of 6.1% on top of comps of 6.6% in 2004, 6.7% in 2003 and 5.8% in 2002.

Our physical 2005 comp of 6.1% was driven by increases in both average ticket and transactions.

Fourth quarter earnings per share of $0.87 increased 36% versus last year.

And for 2005 earnings per share increased 28% to $3.46, exceeding our upwardly revised guidance of 3.37 to 3.40 at the end of our third quarter.

As a result of our strong performance, we reached a milestone.

Our annual operating margin exceeded 11% for the first time in Lowe's history.

We remain committed to driving sales and controlling costs in order to expand operating margin.

Additionally, I'm pleased to announce, because of our strong 2005 performance, qualifying Lowe's employees who participate in the Company's 401(k) plan will receive company-matching contributions of up to 9% of eligible pay for fiscal 2005.

Also, in January Lowe's was named the best managed company in retail by Forbes Magazine, which recognizes the outstanding efforts of our entire management team.

Our big three sales initiatives remain an integral part of our sales growth.

They continue to drive traffic and sales in our stores and deliver comps well above the Company average.

Nick will provide an update on these initiatives in his comments.

For the quarter, 19 of 20 categories delivered positive comps.

Our seasonal living category experienced negative comps as an unseasonably warm fourth quarter led to soft sales for heating products.

For the year, we saw positive comps in all product categories.

This speaks to the strength of our innovative product offering.

Also we continue to gain market share in key categories previously dominated by other channels, including appliances, outdoor power equipment, and cabinets and countertops.

Our appliance category continues to perform well.

For the quarter, appliances delivered a comp in line with the Company average on top of a high-single digit comp for the fourth quarter of 2004.

For the year, appliances delivered a double-digit comp.

Independent measures of market share show Lowe's gained 140 basis points of unit share in major appliances for the fourth calendar quarter versus last year.

Our success is a function of great brand selection and knowledgeable sales specialists.

The recent introduction of Samsung digital appliances is evidence of our commitment to enhance our brand selection and competitive offering.

Outdoor power equipment remains another strong category, delivering a high-single digit comp for the year.

For the quarter, performance was solid, but slightly below the Company average because of weakness in snow blowers and a tough generator comparison from last year's winter storms.

Lowe's continues to enhance its portfolio of outdoor power equipment.

The addition of John Deere, one of the most recognized brands in the world, is another way Lowe's offers great value and quality products.

Our relationship with John Deere is already showing strong results.

Since the introduction of John Deere motors in January, we've already sold more than 4100 units.

We will continue to enhance our OP offering and as the competitive landscape evolves, with see opportunity to gain market share.

In fact, according to independent measures, we increased OPE unit share by 180 basis points for the fourth calendar quarter versus last year.

Cabinets and countertops also continue to be a strong performer, delivering double-digit comps for both the quarter and the year on top of high teen comps last year.

Continued success in this category has been driven by our emphasis on offering great products in the latest styles, including Diamond Reflection cabinets and Zodiac countertops by DuPont.

Our installed sales model also plays a key role in driving cabinet and countertop sales.

Looking at performance geographically, 20 of 21 regions delivered positive comps for the quarter and 18 of 21 regions had positive comps for the year.

As expected, we continue to experience strong sales in Florida and the Gulf Coast regions as customers repair the damage caused by last year's hurricanes.

For the year, we experienced negative comps in two northeastern regions, that got off to a slow weather-affected start in the first quarter and never fully recovered.

In addition, certain areas of our north central division suffered from headline-making layoffs and plant closings and underperformed for the year.

But we're optimistic our stores in these regions will experience improved performance in 2006, driven by strong programs and relatively easy prior year comparisons.

We ended the year with stores in 49 states, including our first stores in New Hampshire.

Our expansion efforts continue and there is still significant opportunity to add profitable stores in great markets across the country.

You will hear more about our expansion plans from Nick.

We continue to build and enhance the infrastructure to support our stores.

One example from 2005 is our Rapid Response Replenishment initiative or R3.

The goal of R3 is to better leverage our industry-leading distribution and logistics infrastructure to make it an even greater competitive advantage.

With the majority of the R3 implementation in place, it has improved our replenishment process, helped drive sales and improve customer service by having the right products in the right store at the right time.

During 2005, we increased the volume of product channel through our RDC network.

Specifically, we now have appliances in eight RDCs, along with riding mowers, lawn and garden chemicals and fashion plumbing items moving through all RDCs.

We will continue to add other items throughout 2006.

As a reminder, when we began this initiative, about two years ago, approximately 50% of product was moving through our network.

Today, about 70% flows through our network and we're well-positioned to achieve our goal of 75% by the end of 2006.

Although we continue to take a measured approach with inventory management, particularly in a strong sales environment, for the quarter we leveraged inventory 1250 basis points to sales.

Bob Hull will provide additional details in his comments.

We continue to monitor economic data in the home improvement marketplace and many indicators for our industry point to continued strength in consumer demand for the products and services we offer.

Personal income continues to grow.

Blue chip economic indicators forecast real personal income growth of 3.4% for 2006 compared with 1.4% in 2005.

Employment growth, which is a strong indicator of home improvement sales, is encouraging and provides stability for American consumers.

The recently reported 4.7% unemployment rate suggests Americans will be more confident in 2006 about employment prospects than in the past four years.

Housing turnover is expected to continue at a historically high pace, according to the National Association of Realtors, which forecast 2006 housing turnover to be the third strongest year on record.

And importantly, record U.S. homeownership levels provide an established customer base for home maintenance and repair projects.

The vast majority of our customers are homeowners and they are not willing to let what is often their most valuable assets deteriorate.

Add that to the fact that demographic and societal trends remain supportive to home improvement and it is clear why we are optimistic about 2006 and beyond.

Now, here's Nick Cantor to highlight some of our successes for the quarter and the year, as well as outline his operational objectives for 2006.

Nick?

Thanks, Robert and good morning.

I'd like to spend a few minutes updating you on several operational programs that have helped drive performance in 2005, as well as discuss our new and continuing initiatives for store operations that are designed to enhance customer service and improve profitability.

Finally, I will review our 2005 store growth and our expansion plans for 2006.

First an update on the big three sales initiatives, install sales, special order sales and commercial sales.

As Robert mentioned, they continue to perform well and remain key drivers to our sales and comp performance.

Our soft sales business continues at rapid growth as we efficiently serve our customers with our enhanced product offering and well-trained sales specialists.

In late 2003, we announced the rollout of our new install sales model that basically separated the sales and production functions of installed sales in our stores.

The rollout was completed in late 2004 and in 2005 was the first full year that all of our stores had the new install model.

With this new model in place, we're able to market our program nationwide to highlight our installed offering.

This nationwide program created the customer awareness we needed, couple this with the growth of our base of installers and we're confident that installed sales will continue to grow.

Focused execution has led to install sales of 2.6 billion for the year, 22% growth over 2004.

Our installed sales consist of both stock and special-order product that we arrange to have installed for our customers.

Our growth in 2005 was driven by sales in cabinets and countertops, flooring and millwork.

These categories fit the new demographic as baby boomers shift to Do It For Me, or DIFM, from DIY, or Do-It-Yourself.

To capitalize on the growing DIFM segment, we will continue to leverage our installed sales model and expand into additional categories such as roofing, window replacements, fencing and siding to meet more customer demand.

We have tremendous opportunity in these categories as the DIFM segment continues to evolve.

In fact, to meet the needs of the DIFM customer, we're testing and evaluating an in-home sales model that is staffed with an in-market sales team who have expertise in evaluating and pricing installed projects at the customer's home.

Our initial results are favorable and we will continue to evaluate this program during 2006.

Special order sales continue to excel. 2005 sales increased 22% over 2004 to 3.9 billion.

As I mentioned, our definition of installed sales includes special order products, so there is some overlap between install sales and special order sales.

SOS is a tremendous growth opportunity.

As customers want to express their individuality, we continue to enhance our offering.

Employees utilized our electronic catalog program to process over 70% of our special order sales last year.

This allows merchants to add more choice for our customers and creates less paperwork for our stores by having cost and selling prices updated electronically instead of using paper catalogues with price sheets.

Also, this is another way we continue to leverage inventory by adding more premium products in certain product lines without the inventory investment.

Finally, our CBC business, representing approximately 25% of our total sales, posted another great year of double-digit comp growth.

Strengthening a relationship supported by targeted marketing and market specific merchandising assortments continue to drive this segment of our business.

CBC sales is all about execution.

That's why in 2005 we completed the rollout of the regional commercial sales manager program, or RCSM, who teaches, trains and shares best practices throughout our stores, as well as ensures the consistent execution of our lead management process and all of our delivery programs Also, our commercial sales desk is staffed with trained, certified, commercial sales specialists who provide the service and credibility that our commercial customers require and continue to build strong relationships with those customers.

Our focused targeting of repair remodelers, professional trades people and property management professionals ensures our commercial customers are shopping the entire store and not just lumber and building materials.

As our relationships strengthen and we consistently execute our commercial sales programs, I'm confident we will continue to see success in this segment of our business.

Our big three sales initiatives were key drivers in helping us deliver our third straight year of comps exceeding 6%.

To keep this trend going, we will continue to drive these programs in 2006.

In fact, we recently created a new position, Senior Vice President of Specialty Sales.

This position is led by a 25-year Lowe's veteran and is responsible for growing our install sales, special order and commercial sales as well as our e-commerce program.

By delivering great customer service, sales increased 26% for the fourth quarter and at the same time we controlled expenses by leveraging payroll.

All in all, we delivered another strong quarter and a great year for our company.

We're conducting our national sales meeting and while 2005 was a great year, our meeting this week isn't just about accolades.

It's about the future.

How can we take what we've accomplished, build upon it, enhance it in order to make 2006 an even better year.

Our operations team has four core initiatives for 2006.

First, continue to drive customer service in our stores, what I like to call a wow customer service experience.

Second, increased store productivity.

Third, build a core group of tenured and talented people.

And the last initiative, maintain and enhance our sales culture.

I feel all of these are critical to our continued success and will drive profitable sales.

Now I'd like to add a little color to each one of those.

First, many of you who attended our analyst meeting this past September heard me discuss creating a wow customer experience.

The 12th annual American Customer Satisfaction index indicates that Lowe's level of customer service is improving.

But you know that a customer's perception of the quality of service determines a retailer's success or failure and we're always looking for ways to improve our level of service.

I'm sure many of you have phoned a retailer, perhaps for store directions or store hours or just to get general information and received less than ideal service.

This may have even been a Lowe's experience, but we're working to improve that experience for our customers.

The wow experience really begins with that initial phone call.

We have an opportunity to increase customer satisfaction with consistent execution of the fundamentals, beginning with that call.

In 2006, we will look at the opportunities to upgrade the functionality of our phone system and implement a comprehensive training program.

A small piece of the overall effort, but this is just one example of an opportunity to improve customer satisfaction.

And to make sure we're making progress, this customer initiative of improving customer service on the phone is going to be included in our 2006 customer focus program that tracks performance to reward our employees on how well they take care of our customers.

Continuing with the store experience, another opportunity to wow our customers is with our checkout service.

Our customers tell us that they like the option of self-checkout.

We currently have it in 123 of our stores and our plan for 2006 is to add this to an additional 300 stores, which will bring our total stores with self-checkout to 425 by year-end.

We want to wow customers at all touch points.

So, we will continue to use our mystery shoppers to measure how well we're serving our customers.

As well as expand the scope of our customer focus program to include not only greeting customers and check out service, but our delivery services and our selling skills.

Our second operational initiative is increasing store productivity.

We spend hours reviewing store processes, challenging them and looking for ways to realize our vision to be our customer's first choice for home improvement in every market we serve.

Our goal is to have more salespeople in our aisles taking care of our customers.

With our new staffing model, we've identified opportunities to optimize store labor and drive in-store process improvement without reducing total store hours.

Our staffing model ensures we have the right people at the right time doing the right job.

In an average Lowe's store, a store with an annual sales of approximately 37 million, we've identified the opportunity to increase selling hours this year by approximately 150 hours per store, by better aligning management tasks.

Again, this model does not alter total store hours.

The best measurement for productivity in our stores is sales per hour worked.

This measure takes into account wage variation by market and levels the playing field across the stores.

We continue to get traction on sales per hour and into 2005, with SPH up over 2.5%, as we continue to focus on shifting hours to selling versus management and nonselling positions, we expect to see this continue to grow.

Our labor management software will provide our stores with detailed analysis and reports and we're excited about these robust reporting capabilities.

In addition to increasing the number of selling hours, other opportunities were identified to increase store productivity.

One such project was bringing our assembly program and our assembly service in-house.

By managing this process of assembling products, like outdoor power equipment and gas grills, in-house we will recognize cost savings.

I'm convinced we will provide better service to our customers by being able to respond quicker to seasonal demand spots.

Many of you heard us discuss vendor service management in our efforts to find efficiencies.

A change we're currently testing is in-house service of our lumber building materials and millwork departments.

The challenges of maintaining these areas that require heavy use of equipment that must be driven by our employees leads us to believe we can improve the level of service provided with our new approach.

We will continue to use third party vendor service in many of our categories and for all major resets and re-merchandising projects.

Again, we're confident that we can leverage expenses by exploring opportunities like this in the future.

Our third initiative is one of our biggest challenges for the future, finding the right people to fuel our growth.

Bench strength is critical for our continued success.

While we currently have a strong bench with more than 250 store managers, district managers and regional Vice Presidents ready and waiting for assignments, we need to ensure that we continue developing employee talent to support our expansion plans.

To ensure our success, we're committed to developing bench strength at all levels, by developing and implementing a manager coaching program, a people leadership training program and revising certain roles in the store to optimize workloads, accountabilities and succession planning.

We need strong teams to drive growth and be successful.

These programs will help us develop a talent pool with the appropriate experience to grow our management bench.

The last of our four operational initiatives is maintaining and enhancing our sales culture.

We're a sales company.

It's our culture.

Therefore, selling is a critical skill for all of our employees.

We're developing and implementing training tools such as e-learning and selling skills refreshers to reinforce our sales culture.

Additionally we're reinforcing the role of the sales manager whose primary responsibility is driving sales by hiring sales specialists, training and coaching those sales specialists on selling skills, and driving specialty sales.

Given that we operate 20 different departments in our store, there is a lot of information to learn.

And our customers expect our sales associates to be experts, no matter where they are in the store.

To help our associates provide great service, we're developing additional selling tools, such as selling guides that list product information and serve as project estimators and calculators.

While our big three sales initiatives continue to perform well, knowledgeable associates delivering exceptional customer service is critical to the continued success of those programs.

Our store expansion continues as we remain committed to having stores where our customers want to shop, evidenced by our opening 150 stores in 2005 as well as our entry into our 49th state, New Hampshire.

We finished the year with 28% of the stores in the nation's top 25 markets and approximately 55% in the top 100.

We will continue to add stores in these markets which represent a significant market share opportunity.

In fact, we currently have nearly 400 projects approved through our real estate committee and of those, more than 35% are in the nation's top 25 markets and 65% are in the top 100 markets, clearly evidence of the metro market opportunity for Lowe's in 2006 and beyond.

In fact, we plan to open 155 stores in 2006, approximately 50% of them will be in our under penetrated northeast and western divisions of the U.S.

And we will balance our metro expansion with the opportunities presented in smaller markets, many of which are ideal locations for our 94K prototype.

So, I'm confident that execution of our operational initiatives of driving customer service, increasing store productivity, building a core group of tenured and talented people and maintaining and enhancing our sales culture will keep Lowe's in a great competitive position.

The outlook for 2006 is bright.

We're focused on execution and providing services that meet our customer's needs.

I'm convinced that we have the operational team and the initiatives in place to consistently wow our customers in 2006.

Now, here's Bob Hull to discuss our fourth quarter and year-end financial results.

Bob?

Thanks, Nick, and good morning, everyone.

Sales for the fourth quarter were $10.8 billion, an increase of 26.4% over last year, ahead of our 22% guidance.

For the year, sales increased 18.6% to $43.2 billion.

The sales for the 53rd week were approximately $750 million and impacted sales growth by about 8.8% and 2.1% for the fourth quarter and year respectively.

Comp sales were 7.8% for the quarter, which exceeded our guidance of 4 to 6%.

Coup sales were solid across the quarter, but strongest in January, as we benefited from favorable weather, producing the highest monthly comps of the year.

In addition, comp sales for the quarter were driven by increases in both ticket size and the number of transactions.

Comp transactions increased approximately 1.5% for the quarter.

Total average ticket increased 7.1% to $68.06, and total customer transactions increased 18%.

Fiscal 2005 comps were 6.1% compared with 6.6%, 6.7% and 5.8% for 2004, 2003 and 2002 respectively.

This is a four-year average comp sales increase of 6.3%.

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

The favorable impact for the year is 50 basis points.

Also, continuing rebuilding efforts in the gulf region aided comp sales in the quarter by approximately 100 basis points.

With regard to product categories, the categories that performed above average in the fourth quarter include millwork, rough plumbing, building materials, rough electrical, paint, flooring, nursery, cabinet/countertops and a lot of landscape products.

In addition, hardware, appliances and fashion plumbing performed at approximately the overall corporate average.

Comp sales were positive for 19 out of 20 product categories and 20 out of 21 regions.

For the year the categories that performed above average include millwork, rough plumbing, building materials, rough electrical, outdoor power equipment, appliances, home environment, paint, flooring and cabinets/countertops.

In addition, hardware and fashion plumbing performed at approximately the overall corporate average.

Comp sales were positive for every product category in 18 of the 21 regions for 2005.

Strong comp sales growth and great new store locations increased our average sales per store to $37.2 million this year. 2005 represents the 16th consecutive year that average sales per store increased.

Gross margin for the quarter was 35.1%, an improvement of 18 basis points over last year's fourth quarter.

The improvement was attributed to better margin rates associated with lower inventory acquisition costs, including the impact from additional foreign-sourced goods and R3, also, a positive mix impact of 10 basis points and a 7 basis point reduction in inventory shrink.

These items were slightly offset by the negative impact of markdowns associated with seasonal heating and home accents products.

For 2005, gross margin of 34.3% represents a 60 basis point increase over fiscal 2004, driven by the growth in imported goods, improvements in inventory shrink and a positive mix impact.

The comparison to an EITF 0216 impacted 2004, aided gross margin by approximately 40 basis points for the year.

SG&A leveraged 15 basis points in the quarter, driven primarily by store services, bonus and payroll expenses.

These items were slightly offset by the additional 401(k) expense that Robert noted.

Previously, we have described the process that gained greater visibility to our in-store vendor service expense.

This greater visibility has allowed us to right size the service level in our stores and led to leverage in the store services line for the quarter.

With balanced earnings growth across the four quarters of 2005, we accrued bonus expense consistently across the year.

In 2004, we increased our bonus accrual as our forecasted sales and earnings increased throughout the year.

Consequently, we accrued less bonus dollars in the fourth quarter of 2005 relative to the fourth quarter of 2004, contributing to leverage in the quarter.

For the year, in 2005 we will pay 16% more bonus dollars versus 2004 and slightly leverage this expense line.

In addition, our strong sales performance in the quarter allowed us to leverage payroll expense.

Lastly, we did experience some deleverage from a private label credit program in the quarter.

For 2005, SG&A is 20.8% of sales, which deleveraged 10 basis points compared with 2004.

Depreciation at 2.5% of sales totaled $273 million and leveraged 23 basis points.

For the year, depreciation at 2.4% of sales leveraged 10 basis points.

The 53rd week contributed 19 and 4 basis points of depreciation leverage for the quarter and year respectively.

Operating margins, defined as gross margin, less SG&A and depreciation, was 11.3% of sales for the quarter, an increase of 56 basis points over Q4, 2004.

The 53rd week aided operating margin by 15 basis points for the quarter.

For the year, operating margin was 11.1%, an increase of 60 basis points.

For 2005, the 53rd week helped operating margins by 3 basis points.

As Robert noted, this is the first time in our modern history that annual operating margins had exceeded 11%.

Store opening costs at $57 million leveraged 7 basis points to last year and reflect an opening of 63 stores in the quarter.

This compares to 56 stores opened in Q4 of 2004.

Interest expense totaled $36 million for the quarter and leveraged 17 basis points as a percent of sales.

For the year, interest expense of $158 million leveraged 12 basis points versus fiscal 2004.

For the quarter, total expenses were 24.7% of sales and leveraged 62 basis points.

For the year, total expenses were 23.9% of sales and leveraged 12 basis points.

Pretax earnings were 10.5% of sales for the quarter, up 80 basis points over Q4 2004.

For the year, pretax earnings of $4.5 billion were up almost $1 billion or 27.4% to 2004.

With regard to income taxes, our tax rate was 38.5% for both the fourth quarter and fiscal 2005.

For fiscal 2006, we are planning for an effective tax rate of 38.5%.

For the quarter, diluted earnings per share of $0.87 increased 35.9% versus last year's $0.64.

For fiscal 2005, diluted earnings per share of $3.46 increased 27.7% over 2004.

As a result of unseasonably mild weather, the 53rd week added approximately $0.07 per share and impacted diluted earnings per share growth by 10.9% and 2.6% for the fourth quarter and year respectively.

Diluted shares averaged 800 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 14 million.

In the fourth quarter we repurchased 4.2 million shares at an average price of $66.12, for a total repurchase amount of $279 million.

For the year, we repurchased 12.5 million shares at an average price of $61.94, for a total repurchase amount of $774 million.

Also, last month our board of directors approved a $1 billion increase to our current share repurchase program.

As of February 3, 2006, 226 million remained under the previous share repurchase authorization, providing a total capacity of 1.23 billion through fiscal 2007.

Now to a few items on the balance sheet.

Our cash position remains strong with over $400 million in cash and cash equivalents at the end of the quarter.

Inventory turnover was 4.36, a decrease of 5 basis points over Q4 2004.

For the quarter, inventory grew 13.9% compared to our 26.4% sales increase, or 1250 basis points of inventory leverage to sales.

On a 13 versus 13 week comparison, this equates to 370 points of leverage.

At the end of the fourth quarter, we owned 84% of our stores versus 81% at the end of the last year.

Our debt to capital ratio is 20% at the end of our fourth quarter, down from 24% for the same period last year.

Return on invested capital, measured using beginning debt and equity and a trailing four quarters' earnings, was 18.9%, an increase of 249 basis points to Q4 last year.

Without the impact of the 53rd week, ROIC was 18.4%, which increased 209 basis points over 2004.

This represents the highest return on invested capital in the Company's modern history.

Return on assets, determined using beginning total assets and a trailing four quarters' earnings was 13.1%, an increase of 147 basis points.

Without the impact of the 53rd week, ROA was 12.8%, which is an increase of 118 basis points over 2004.

This also represents a record high in the Company's modern history.

For the year, cash flow from operations exceeded $3.8 billion for 2005 and increased $769 million, or 25%, over 2004.

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

Prior to getting into the numbers, I want to remind everyone that fiscal 2006, a 52-week year, will be impacted as a comparison to 2005, which contained 53 weeks.

In addition, the quarters in fiscal 2006 will also be impacted from a comparability standpoint due to a shift in weeks.

Specifically, the 13-week period, representing first quarter 2006, will end May 5th, versus the 13-week period representing last year's first quarter, which ended April 29 of 2005.

As this year's first quarter includes one less week of winter and one more week of spring than last year, we are estimating an approximate 400 million or 4% positive impact to sales.

Therefore, in the first quarter of 2006, we are expecting sales to improve by 19 to 20%.

The first quarter sales increase incorporates a comp assumption of 5 to 7% and the opening of 24 stores.

We plan to open four stores in February, eight stores in March and 12 stores in April.

The positive impact of the week shifting Q1 is offset by negative sales impacts in the second and fourth quarters.

The second quarter negative impact is projected to be approximately $200 million or 1.7%.

As a result, total sales are expected to increase 13 to 14% for the second quarter, which ends August 3, 2006.

Also, the fourth quarter of 2006 will reflect a 13-week period ending February 2, 2007, compared against a 14-week period ending February 3, 2006.

Operating margin for the first quarter is expected to grow by 20 to 30 basis points from last year.

The sales growth and operating margin expansion I described is expected to generate diluted earnings per share of $0.92 to $0.94, which represents an increase of 24 to 27%.

For 2006, we expect to open approximately 155 stores, including five relocations, resulting in an increase in square footage of approximately 12%.

Our 2006 store opening schedule is weighted toward the second half of the year, with almost 70% of our stores opening in the last two quarters.

We're estimating a comp sales increase of 5 to 6% and a total sales increase of 13 to 14%.

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

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

For 2006, we expect diluted earnings per share of $4.03 to $4.13.

Our capital plan for 2006 is approximately $4.2 billion, with $400 million being funded by operating leases, resulting in cash, capital expenditures of approximately $3.8 billion.

Cash flows from operations will satisfy our capital plan for 2006.

Regarding current sales trends, I mentioned earlier that our business outlook for the quarter anticipates 5 to 7% comps.

For the first 23 days of the quarter, our comps are within this range.

Before I turn the call over to the operator for questions, I'd like to mentioned that in addition to Robert, Nick and I, Larry Stone, Mike Mabry, and Greg Bridgeford are present for the question and answer session.

Operator, we are now ready for questions.

[ OPERATOR INSTRUCTIONS ] Your first question comes from Deborah Weinswig with Citigroup.

Good morning and congratulations on a great quarter.

In terms of -- you had talked about or originally given guidance of 20 basis points of deleverage and operating margins and actually delivered 56 basis points on the positive side.

Can you talk about the biggest drivers of the differential there?

I'm sorry, comparing the 56 basis points to what, Deb?

The original guidance of 20 basis points of deleverage?

A lot of that had to come from the 53rd week.

We conservatively estimated the 53rd week to be approximately $600 million in sales.

As we mentioned in the past, it's likely to be our lowest sales week of the year.

With the unseasonably mild weather we saw in the month of January, it actually delivered $750 million worth of sales, so a lot of the incremental sales fell straight to the bottom-line versus our initial assumption.

And you've also talked about what you've done in the advertising side.

Were you able to leverage advertising in the quarter?

And how do we think about advertising for 2006, as well?

Advertising for the fourth quarter was roughly flat to last year.

We are anticipating some advertising leverage in 2006.

Great, thank you very much and congratulations again.

Thank you.

Your next question comes from Budd Bugatch with Raymond James.

My congratulations, as well, Robert and Bob and Nick.

Can you talk a little bit more about the installed sales and special order sales differential in the quarter?

Maybe normalize that for the -- for the extra week, as well.

Year-over-year gain, you said it was positive.

I don't think we heard the quantification of that.

The impact of th53rd week on installed sales, is that your question, Budd?

No.

What did they gain year-over-year in the fourth quarter.

And then if you normalize that for that extra week in quarter, what was the year-over-year gain?

It's 22% on each those for the year -- .

Yes.

Actually, Budd, on installed the number is 29%.

That was misquoted on the script.

For the year installed was up 29%, SOS was up 22%.

Okay.

And for the quarter, Robert?

For the quarter, installed was up about 37% and SOS was up about 24.

And is there any way to normalize that for that extra week?

Or is that going to --

We don't have -- just follow with Paul Taffee on that.

He will try and get you that information.

We're out here for our sales meeting, we don't have that detail in front of us.

Congratulations again, thank you very much.

Thanks.

Your next question comes from Gregory Melich with Morgan Stanley.

Hi, you guys don't want to hear my congratulations again, but it was nice!

I know at the analyst meeting you guys talked about looking at more international stuff and doing a team that was working on that project.

Greg, could you give us an update on how that's going?

Yes, Greg.

We continue to look at opportunities across a variety of international markets.

And as you know, the only announcement we've made is the announcement in 2007.

We anticipate opening six to ten stores in Canada.

That's really all we can say at this point, but that's what we're doing.

We're looking at domestic business opportunities.

We're looking at international expansion opportunities and it's a continual process.

But the only announcement we made, obviously, is Canada.

And following on on the expansion theme, and this might be for Larry or Robert, I know there's been some rumblings of the Whirlpool/Maytag deal could get held up.

Could you just remind us of your opinion on that deal?

And whether it's good or bad?

Greg, this is Robert.

Just -- I think that that is still under review by the Department of Justice.

So, given that it is currently under review, we don't feel it's appropriate to make any comments, since it's in that stage.

Okay.

But what you said in the past, do you think would still -- ?

That was prior to being under review by the Department of Justice.

At this point, being under review, we don't want to comment one way or another.

Okay, thanks.

Great quarter, guys.

Great, thanks.

Your next question comes from David Schick with Stifel Nicolaus

Hi, good morning.

Good morning.

What can we expect from the R3 initiative as we look out into '06 as it compares to '05?

What incremental efforts will be made?

David, this is Mike Mabry.

As Robert said, we made significant progress, including service, by quoting more product through our distribution network, which is allowing us to bump our stores more often, take out lead time and variability.

So, on that service part, we will continue to execute on that and that will allow us to continue to fuel the -- when the opportunity is there, then you'll see the comps that we saw this quarter.

Under managed costs, obviously fuel costs were a pressure for everybody in the quarter and without the implementation of R3, we would have certainly been worse than we were.

And under inventory management, we expect to see about 10 basis points of improvement for 2006 and without the impact of the 53rd week, it would have been closer to 20 basis points.

Dave, this is Bob.

The comparison to 53rd week negatively impacts turns in 2006.

So, we talked to you in the past about growing inventory, about 75% of the rate of sales and 20 basis points of annual turnover.

On a 52 versus 52 week basis, we feel like we would be there.

However, without that, it's about 10 basis points for 2006.

Sure, that's great.

Thank you.

Thank you.

Your next question comes from Danielle Fox with Merrill Lynch.

Thanks, good morning.

I was wondering, how does the new staffing model affect Lowe's ability to leverage a lower comp, especially given recent labor investments and sales initiatives like SOS and CBC?

Well, we build our staffing model based on forecasted sales.

So, Nick and his team have varying models for each sales tier.

And as the stores forecast their sales, they lever up or lever down the number of hours required to support those sales accordingly.

So, obviously, when sales go up you add staff and you have a better opportunity to leverage your fix payroll costs, in a sense.

As your forecast sales come down, you try to pull back the hours and meet the rate of sales.

And store managers reforecast their sales on a weekly basis, correct, Nick?

Right.

Danielle, this is Nick Canter.

We have a scalable model that I've shown some of you all in the past that actually have hours spread and scalable positions that we add as the volume grows.

We have a lot of guidelines, have a lot of initiatives.

We review that every year and we just reviewed that and we're being able to combine some positions and get more hours on the floor.

We've realigned the job descriptions for certain management roles within the store, which we think will give us some more leverage.

So, we review that every year, the beginning of the year, realigning those tasks.

And to Robert's point, we forecast hours out monthly and quarterly and we adjust that weekly as the sales are forecasted.

So, we've got our finger on the pulse of that pretty well, we think.

We shouldn't be worried that the rollout of this regional commercial sales manager and this new position for SOS in any way compromises your flexibility?

Not at all.

The rollout of the regional commercial sales manager occurred in 2005.

Basically all of those were in place by the beginning of 2005, Danielle, so, they're already out there.

Okay, terrific.

Very helpful, thank you.

Thank you.

Your next question comes from Gary Balter with Credit Suisse.

Thank you.

I have a more macro question.

Your stock -- you've put up great numbers, you continue to put up great numbers, your competitors are putting up great numbers, yet, between the days that you report, your stock seems to have trouble rising.

How should we think about the macro?

Obviously, the housing environment, there are a number of homes out there seems to be growing every year, housing turnover, as you mentioned, at pretty much record levels and even if it comes down a bit will be close to record levels.

Could you help us and lay out the macro environment that impacts you to get over the concerns that people seem to be stuck on?

Yeah, Gary.

I will address that and if Greg wants to jump in, he can, as well.

Obviously, when we look at it, just as you laid out, the number of houses grows every year.

Homeownership levels are still near the 69% record level out there.

Those houses that are out there continue to age every year, so, they require ongoing maintenance and repair.

We are primarily in the repair and maintenance business.

We look at the larger demographics with the baby boomers, the amount of net worth and disposable income that they have investing in their second homes and upgrading their current homes.

That certainly drives a lot of things out there as well as the immigration into the U.S. and great desire for homeownership.

But you layer on top of that, really growth in income and employment.

So, those are the two real things that we look at and say, okay, if you've got great employment out there and great prospects for employment, and, as we mentioned, unemployment rates at 4.7%, so, that's good, and growth in real wages.

The blue chip numbers are actually talking about 3.4% growth in 2006 compared to, I think it was, 1.4 in 2005.

So, with great income numbers out there and then the housing stock, the age of the housing stock, yes, turnover may go up or down a little bit, based on interest rates and what happens with interest rates, but interest rates are still at historically low levels.

That's why we're optimistic for 2006 and beyond, as I said in my comments, because we just think when we look at the broad fundamentals, the sheer number of houses out there, the markets we are in, the amount of repair and maintenance that is going to take place on those homes, that we think that that provides us a good base for business going forward.

And then obviously, as we talked about in several key categories, in a lot of these key categories we're continuing to gain share in the marketplace, just by great programs, great product selection and great execution and service in those stores every day.

So, mathematically, we should be looking at the base as the bigger piece as opposed to just existing home turnover?

Exactly.

You should look at all the homes that are out there today that require ongoing maintenance, not the incremental amount that added every year, because there are new homes that are being added.

We're not really in the new home construction business.

That's great.

Thank you very much.

Yes.

Your next question comes from Colin McGranahan with Bernstein.

Two questions.

First one is for Nick.

Nick, I think you mentioned the midwest region was not particularly a strong performer, I'm assuming that's Michigan and the difficult environment there.

But if you could comment specifically on Minneapolis, which I think is now exactly one year since you opened that market.

What has your experience been there as a new market entry for Lowe's?

And then the second question is for Larry.

Larry, a couple of quarters ago you talked about the breakdown of average ticket by price point.

So, below 50, 50 to 100, 100 to 500, over 1,000.

Do you have any of that data handy and can you just comment on what the average ticket comps look like?

This is Nick Cantor.

On the Minneapolis market, we're really just getting started up there.

We don't have an awful lot of history.

We really can't speak to it.

So, the first store we opened up there, we're very, very satisfied with the results of that store.

It came out better than expectations.

We have other sites that we're working.

We have a real estate team up there.

We have other sites under construction.

But really don't have an awful lot of history yet.

We're very excited about being in that part of the country and we formed that regional office out in that part of the country to sustain that growth and staff those people so we're really real excited about being there.

We just don't have a whole lot of history yet to talk to you about it.

And Nick, am I correct in assuming it's really Michigan and Chicago is doing fine?

Maybe you can talk about Chicago then?

Our Chicago growth continue to be on track and we're very satisfied with the growth in those stores and the sales that are coming out of those stores.

That's part of that same region.

So, we're very satisfied with that part of the area -- that part of the world.

As Robert mentioned earlier in his comments, every headline you pick up has something to do with the auto industry and what's happening with the economy in parts of that part of the world and we think there may have been some effects from that, but other than Chicago and the northern part of Minneapolis, it seems to be very good for us.

You're not seeing any impact from Menards or anything like that?

Nothing more than what we've seen in the past.

Colin, this is Robert.

I think I'd say we go into those markets, particularly in those metro markets, we think the format, the value we bring to the customer going into the markets, we think we'll be able to compete very effectively with all the competitors we have in the marketplace and I think the results we've seen to date, the average volumes we're doing, will show that.

And, when Nick talks about the layoffs, it really just goes back to the question that Gary asked and I elaborated on, employment and income are, we think, key drivers of our business.

So certainly, if you do have wide scale unemployment in a particular area, it can have an impact on those stores.

That's only in pockets of certain areas in the country.

I think your other question, Colin, was with regards to the stratification of average ticket.

I think that was actually Dale Pone that provided that information sometime last year.

We're out here at our national sales meeting and we don't have that detail with us.

I think we were up 6 or 7% for the average ticket for the year, Bob.

And so we don't have that information with us.

And I'm trying to think back, I think there was something going on that Dale was trying to elaborate on a particular point, I don't know how much it was up, the way that we were moving up to continuum or what, at that point in time, but all we have out here with us is just the overall average ticket information.

Let me add my congratulations, but on Daytona, rather, in the quarter.

Great, thanks.

Operator, we have time for one more question.

Your next question comes from Dana Telsey with Telsey Advisory Group.

Good morning, everyone.

I want to add my congratulations.

It certainly looks like you've made improvements in your store opening costs.

What are you doing differently in order to minimize those costs?

Are you getting more productivity out of your new store openings?

Thank you very much.

Thanks, Dana.

This is Bob.

A couple of items.

One, as you know, several years ago we started our national advertising program, which has really allowed us to leverage that vehicle.

So our in-market advertising for new stores has come down consistently over the past several years.

In addition, we continue to refine the process to get new stores set prior to opening and there's a dedicated team that manages those projects on our behalf.

And I think over the past year or so, they've actually taken about six days out of the process.

So, we continue to be able to open up our new stores faster, [while] taking some of the costs out of the equation.

And another bit of color to that, too, Dana, Nick Cantor here.

We continue to look at when we add the staff to that store.

We've been able to reel in some days, instead of adding them months out, weeks out, we've been able to reel that in some and add that staff in there more efficiently and more effectively and cutting back on some of that opening cost payroll, as well.

And we're digging into every opening cost expense, category by category, to define any waste and get rid of that, because we think there's obviously some opportunity there.

Thank you very much.

Thanks, Nick and Bob, for those comments.

And as always, thank you for your continued interest in Lowe's.

We look forward to speaking with you again as we report our first quarter earnings results in May.

Goodbye and have a great day.

This concludes today's conference call.

You may now disconnect.