勞氏公司 (LOW) 2006 Q1 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies first quarter 2006 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. Greg Bridgeford, Executive Vice President Business Development; 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 Lowes.

This morning I will highlight our first quarter results; following my comments Greg Bridgeford will discuss the impact of macroeconomic trends we're seeing, review our expansion opportunities, and describe our view of the home improvement consumer; then Bob Hull will describe our first quarter financial results in more detail.

But first a few highlights from the quarter.

Sales were $11.9 billion, a 20.3% increase over last year and diluted earnings grew 45.2% to $1.06 per share.

Comparable store sales increased 5.7% compared to last year's first quarter comp of 3.8%.

Our performance remains relatively strong across the country as 18 of 21 regions delivered positive comps.

We continue to experience strong sales in Florida and the Gulf Coast regions as we work to serve customers who continue to repair damage from last year's hurricanes.

On the West Coast an unusually wet weather pattern throughout much of the quarter negatively impacted two of our western regions.

Additionally one region in our north central division continues to feel the effects from corporate layoffs and plant closings and reported negative comparable store sales for the quarter.

Although it is early into the quarter we're seeing improving sales trends in our western regions as weather patterns begin to change.

Turning to our performance by category, 18 of 20 categories delivered positive comps.

Flooring had a great quarter driven by new ceramic products that provide customers with innovative flooring solutions at a great value.

We will continue to enhance our product offerings which differentiates us from the competition.

Also lawn and landscape products had a solid quarter driven by operationally efficient merchandising including customer friendly packaging, easy to shop stores, and product design innovation.

Gardening hard lines including products such as garden hoses and related accessories delivered a double digit comp for the quarter.

Home environment also had a strong quarter delivering comp sales above the Company average.

Sales were driven by robust demand for air conditioners in the southeast.

Additionally we continued to see strength in appliances with above average comps on top of the high single digit comp for the first quarter of 2005.

Our extensive appliance offering provides customers with the innovation and features they desire leading to continued market share gains.

In fact, independent measures show Lowe's gained 140 basis points of unit share in major appliances for the first calendar quarter of 2006 compared to last year, an increase greater than any other major retailer.

Also, outdoor power equipment or OPE continues to be an important category.

During the quarter OPE sales were negatively impacted by drier than normal weather on the East Coast and heavy rain on the West Coast resulting in below average comps for the quarter.

Even with adverse weather, Lowe's gained 190 basis points of OPE market share for the first calendar quarter of 2006 according to independent measures.

Again, more than any other major retailer.

This is evidence that our strong product offering enhanced by this year's addition of John Deere includes some of the most recognized brands in the world and continues to resonate with customers.

For the quarter the performance of these high ticket categories continues to drive average ticket growth.

In fact, for the quarter average ticket grew to more than $70, the highest average ticket in our modern history.

We are committed to being the customer's first choice for home improvement.

In 2006 we'll invest approximately 800 million in our existing store base ensuring our store's are bright, fresh and inviting so they'll remain best in class.

This commitment along with our proven big three sales initiatives of installed sales, special order sales and commercial business sales continues to align our offering with customer needs, drive traffic, and grow average ticket.

Our big three sales initiatives continued to perform well delivering comps above the Company average.

Continued investment of these important drivers of our business will help differentiate Lowe's and strengthen our relationship with customers.

While we did experience some weakness in sales in April and early May, we continue to be optimistic about the underlying fundamentals of the home improvement industry.

We're excited about the opportunities ahead as we continue to invest in our stores and infrastructure to better serve customers and continue to capture market share.

As closely watched housing metric such as housing turnover and statistics like home price appreciation begin to moderate, we're confident we have the programs, processes, and people in place to meet our customer's needs, capture market share, and drive solid earnings growth well into the future.

Now, here is Greg Bridgeford to highlight some of the customer trends we're seeing in our business as well as provide additional color on broader macro trends influencing our customers.

Greg?

Thank you, Robert.

Good morning.

It is a pleasure to talk to you this morning about three subjects.

First, the health of the home improvement industry and the economic and demographic factors that shape our opportunity.

Second, an update on our expansion plans, and third a look at the way we view the industry going forward and how we are developing capability to say deepen our relationship with customers.

We stated last year at this time that the primary factors driving our top line are income, growth, and employment gains.

We also acknowledge that while there would be market bublets we forecasted a continuing healthy housing market overall.

To bring us up to date, in the year since last spring disposable personal income growth is 2.1% year-over-year.

Average weekly wages have increased by more than $27 when April of this year is compared with April of 2005.

On the employment front 2 million more people joined the labor force over the last twelve months.

Unemployment stands at 40 basis points less than this time last year at 4.7%.

On the housing front, 2005 finished as the highest year on record in total housing turnover.

That is the sum of new home sales and existing home sales.

Both new home sales and existing home sales had the best year's ever recorded in 2005.

In 2006 year-to-date through March housing turnover is down 3% from the first three months of 2005.

As we suggested last year, these positive economic factors helped drive a very strong period for our industry.

Now as we look forward we see a moderating housing market balanced with a strong income and employment forecast.

While the moderating housing market could cause head winds for the industry, we see the strength of incomes keeping home improvement healthy.

Let's go through these factors.

There is near unanimous endorsement of a forecast for strong wage growth and employment gains.

Business investment is strong and trending up and the unemployment picture seems strong across sectors.

We're even seeing slight wage growth nationally in manufacturing which didn't experience wage growth last year.

Housing is healthy but trending to a more normal level over the next twelve months after three years of record breaking growth.

The legacy of this growth bodes well for Lowe's in a number of ways.

Not only is homeownership at near all time highs, but the number of primary residences, secondary residences, and vacation homes that will be maintained and enhanced has increased by 4.6 million units in the last three years.

As we indicated last May, 30-year fixed mortgage rates according to the national association of realtors should rise to around 7% this summer and level off there for the balance of the year.

This is still below the 8% inflection point range that the NAR says could materially dampen demand.

One year ago at this time there was much speculation about a nationwide bubble of unsustainable housing value appreciation set to pop.

Today most analysts have narrowed this rapid price appreciation effect to a series of specific markets called bublets.

These bublet markets with spiraling appreciation are already in the process of self correction.

In these markets housing affordability has suffered as prices in markets like Santa Barbara, San Diego, and Miami have appreciated at unsustainable levels.

Nine of the top 20 housing bublet markets are represented in the worst 20 markets for housing affordability.

The majority of forecasts predict a soft landing for these markets.

Rational moderation in pricing will bring more families within reach of homeownership and home improvement.

Overall, total housing turnover by most estimates will normalize to 7 million units in 2006 which will still represent one of the best year's on record.

As we step back and weigh the risk and strengths among the drivers of our business we are realistic yet confident in the outcome of these forces.

Income and employment remain strong driving the economy.

Housing turnover nationally will moderate to a more normal level.

Even in these bublet markets we see support for home improvement spending, not coincidentally the top 20 bublet markets are solid employment markets and higher income markets.

Finally, it is important to understand that the bedrock for housing investment and improvement spending over the long-term is and has been household formation and attitude towards spending on their homes.

We monitor these trends carefully and they continue to be very encouraging.

Harvard's joint center for housing study projects new household growth of 14.6 million over the next decade 68% of which they attribute to minority household formation.

The JCHS in a recent study also described that despite delaying marriage and parenthood young adults are increasingly entering homeownership at a faster rate.

In 2005 43% of those under 35 owned a home.

That's up 5 points from 38% in 1995 representing a significant shift in a statistical category that's been static for decades.

On attitude towards investing in your home, recent American housing survey data analyzed by the joint center indicates that each generation is outspending its preceding generation on home improvements in constant dollars.

General Xer's in 2003 spent 22% more on their homes for upkeep and remodeling than baby boomers did at the same age adjusted for inflation, and in real dollars baby boomers spent more than the GI generation did at the same age.

In summary, when you incorporate both the balanced viewpoint of strength and risk in the current environment, and the solid midterm and longer term underpinnings of this market in your analysis, I think it is clear why we remain confident in our outlook.

Now, as we move from describing the opportunity to how we are taking advantage of the opportunity, let's look at the first of two core strategies we're employing to penetrate this healthy growth market.

Our expansion plans this year call for 155 stores and another 150 to 160 stores in fiscal year 2007.

You will continue to see a heavy focus on the highly productive markets for Northeast, California, and Florida.

In fact, almost 50% of 2006 openings are planned for these markets, and over 50% of all of our approved projects are in the Northeast, Florida, and California.

We now have our first stores open in Maine and New Hampshire and are in the final approval process for our first store in Vermont.

While the municipal approval processes are slow, we're finding more and more success in metropolitan markets.

We'll break ground on our second store in Brooklyn in 60 days and we're reviewing plans for multi-level stores and other innovative site plan approaches in a number of large metropolitan markets.

Our planning for Canada is proceeding as expected.

Our Canada customer support center is up and operating and under the direction of Doug Robinson, President of Lowe's Canada, the Canada team is engaged in merchandising line reviews and property acquisition and development.

We plan to open 6 to 10 stores in Canada during fiscal 2007.

We're continuing to assess other markets for potential international expansion.

On the domestic front, our comp growth strategy continues to be straight forward and well focused.

It is to understand the home improvement marketplace better than anyone else.

To execute against that knowledge, creating and executing valued solutions for customers and in the process always leveraging the investment we have in what we believe is the highest quality operating platform in our industry.

Our operating platform consists of our stores and our distribution network.

Our platform was built to serve the DIY customer.

It represents the largest and newest stores of any national home improvement retailer in the industry and the largest and most sophisticated central distribution system in our industry.

With the customer in focus we built large stores with the flexibility to accommodate new categories and services.

We built our distribution network with the flexibility to aggregate and economically control the flow of product to meet customer demand.

In addition, as we aggressively pursue the ever increasing do-it-for-me market, the flexibility we designed into our operating platform is a critical and positive leveraging factor for Lowe's.

The DIFM customer is demanding access to a wider and more upscale range of product, and our store network has the capacity to display this product in a way that is complemented by our Internet presence.

The DIFM customer wants the ability to order and have product delivered to their contractor, to their home, to their job site or for pick up at the store.

Our distribution system can accommodate their needs on a quick turn around basis.

The DIFM customer wants active management of their projects for both the projects they outsource and those that they manage themselves they still want a partner.

The work we did over the last four years to reconstruct and relaunch our installed sales management model is the basis for what we believe will be best in class project management of the future.

It is not there today, but the investment we have made in our store base production teams has given us a spring board towards our goal of being the preferred project partner for the DIFM customer.

We are focusing business development efforts on the DIFM consumer, and the commercial business customer serving that consumer.

Our goal is to add revenue generating programs to our business model that will profitably leverage the investment we have made in our operating platform.

I hope I provided a high level view of how we think about the home improvement market and our efforts to profitably penetrate it.

We are realistic but confident about the home improvement market through 2006 and for the foreseeable future.

We see strong organic growth as we penetrate some of the most attractive markets in the U.S. and Canada and assess other markets globally.

Finally, we remain focused on executing a business model that is customer facing, flexible, and highly leveraged utilizing the best infrastructure in the industry.

With that I will turn it over to Bob Hull for a review of the quarter's financials.

Bob.

Thanks, Greg.

Good morning, everyone.

As Robert indicated, sales for the first quarter were $11.9 billion representing a 20.3% increase over last year's first quarter.

As a reminder our first quarter was impacted, positively impacted by a weak shift as a result of our 53-week fiscal 2005.

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

This year's first quarter includes one less week of winter and one more week of spring than last year.

The week shift aided first quarter sales by approximately 3.4%.

This week shift had no impact on comparable store sales as weeks 1 through 13 this year are compared to weeks 2 through 14 of 2005 which allows for better seasonal comparisons.

Comp sales were 5.7% for the quarter, which was within our 5 to 7% guidance.

Comps were higher in February and March and trended lower in April.

The lower comps in April were caused by two factors.

First, the Easter holiday fell in April this year compared with March last year.

Unlike many retailers this shift aided our March and negatively impacted April sales.

Second, we faced much tougher prior year comparisons in April versus March, as you will recall we had a negative 2% comp in March 2005, so with pent up demand our April 2005 comps were 7.5%.

For the quarter comp transactions increased fractionally and total customer transactions increased approximately 13%.

Total average ticket increased 6.7% to $70.74.

Inflation in lumber and building materials resulted in a favorable impact on first quarter comps of approximately 60 basis points driven by gypsum, roofing, and cement products all set slightly by deflation lumber and plywood.

With regard to product categories, the categories that performed above average in the first quarter include rough plumbing, building materials, rough electrical, hardware, appliances, home environment, paint, flooring, and lawn and landscape products.

In addition, millwork and trash and plumbing performed at approximately the overall corporate average.

Gross margin for the first quarter was 35% which was a 69-basis point improvement over last year's first quarter.

The increase in gross margin was driven by higher margin rates associated with the impact from additional import of goods and line reviews, changes in sales mix, and R3 benefits.

These items were offset slight by by higher fuel prices.

During the quarter we reviewed our method of accounting for discounts related to early payment of merchandise purchases.

Based on this review, and after consulting with our independent public accounting firm, we had decided to change our method to net these discounts against inventory and then recognize them as a reduction of cost to sales when the related products are sold.

Previously we treated early payment discounts as a financing item and reduced cost of goods sold in the period in which we purchased the product.

The impact of the change to Q1 is a reduction to gross margin of $9 million.

Prior periods have been restated for comparability.

The impact to any one year does not exceed $0.01 per share.

Future periods are expected to be impacted by no more than $0.01 per share.

This change will have no impact on historical or future cash flows or the amount the Company pays for merchandise.

The quarterly financial statements attached to today's release reflect this change.

SG&A for Q1 was 20.7% to sales and leveraged 86 basis points driven primarily by advertising and in-store service expenses.

Also rent, property taxes and other fixed expenses were leveraged due to the additional sales associated with the weak shift.

While we spent more advertising expense dollars in the first quarter of this year versus last year, we continue to refine our marketing mix, including adjusting the timing of TADs and ROPs by climatic zones which makes our programs more productive.

This has allowed us to rebalance our spend across quarters.

Given this we're able to leverage advertising expense as a percent to sales.

We've previously shared our plans to evaluate the tasks that our service vendors were providing in our stores.

This has allowed us to eliminate some non value added tasks as well as insource some tasks where appropriate.

These efforts led to in-store service expense leverage for the quarter.

In addition, stock option expense was $11 million for the quarter compared to $16 million in Q1 last year.

We realized a $10 million or 7-basis point favorable impact from the adoption of FAS 123-R for the quarter.

These items were offset slightly by deleverage and store remerchandising expenses associated with our ongoing investment in our existing store base.

Operating margin defined as gross margin less SG&A and depreciation increased 164 basis points to 12% of sales.

Store opening costs of $25 million leveraged 4 basis points to last year as a percentage of sales.

In the first quarter we opened 24 new stores.

This compares to 27 new stores opened in Q1 last year.

Depreciation at 2.3% of sales totaled $274 million and leveraged 9 basis points compared to last year's first quarter primarily due to the higher sales associated with the weak shift.

Interest expense at $35 million was down to last year's first quarter and leveraged 17 basis points as a percent of sales.

For the quarter total expenses were 23.5% of sales and leveraged 116 basis points.

Pre-tax earnings for the quarter were 11.5% of sales.

The effective tax rate for the quarter was 38.5%, the same as Q1 last year.

Diluted earnings per share of $1.06 increased 45.2% versus last year's $0.73.

Diluted shares averaged 778 million for the quarter.

The computation of diluted shares takes into account the effect of convertible debentures which increased first quarter weighted average shares by 12 million.

In the first quarter we repurchased 8.9 million shares at an average price of $67.02 for a total repurchase amount of $600 million.

Now to a few items on the balance sheet.

Our cash position remains strong with over $1.1 billion in cash and cash equivalents at the end of the quarter.

Inventory turnover was 4.41 an increase of 13 basis points over Q1 2005.

For the quarter inventory grew 18.1% compared to our 20.3% increase or 220 basis points of inventory leverage to sales.

At the end of the first quarter we owned 84% of our stores versus 82% at the end of last year.

Our debt to capital ratio was 19% at the end of our first quarter down from 24% for the same period last year.

Return on invested capital measured using beginning debt and equity in a trailing four quarters earnings was 19.9%, an increase of 275 basis points to Q1 last year.

Return on assets determined using beginning total assets and a trailing four quarters earnings was 13.3%, an increase of 208 basis points.

For the quarter cash flow from operations exceeded $2.1 billion, and increased $900 million or 76% over Q1 2005.

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

The positive sales impact of the weak shift realized in Q1 will be 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 reminder comp sales are not impacted by the week shifts.

Including the negative impact associated with the week shift, total sales are expected to increase approximately 12% for the second quarter.

In Q2 we expect a comp sales increase of 3 to 5% and to open 24 new stores.

Six stores in May, nine stores in June, and nine stores in July.

Operating margin for the second quarter is expected to increase 10 to 20 basis points over last year which includes a negative impact associated with the week shift.

The sales growth and operating margin I described are expected to generate diluted earnings per share of $1.21 to $1.24 which represents an increase of 15 to 18%.

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

We're estimating a comp sales increase of 4 to 5% and a total sales increase of approximately 13%.

I want to remind everyone that fiscal 2006 a 52-week year will be impacted by the comparison to 2005 which contained 53 weeks.

For the year we're anticipating an operating margin increase of approximately 40 basis points which coupled with our sales increase should drive diluted earnings per share of $4.14 to $4.22.

Regarding current sales trends, I mentioned earlier that our business outlook for the second quarter anticipates 3 to 5% comps.

For the first 16 days of the quarter our comps are at the low end of this range.

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

Operator, we're now ready for questions.

[OPERATOR INSTRUCTIONS] Our first question is from the line of David Schick of Stifel Nicolaus.

Good morning.

It is Stifel.

A couple questions.

You talked about the big three initiatives were above the general comp.

Could you delve more detail into the installed sales, what's the total growth you're seeing there and what are the trends within that, and then secondly, you talked about in-store vendor services are allowing some expense leverage.

Is that -- talk about how that might continue or how that plays out through the rest of the year elapsed.

Thank you.

Dave, this is Bob.

I will take the second part of that.

In-store vendor services is something we've been talking about for quite some time.

In fact, Nick Cantor highlighted our efforts there on the Q4 call.

We have seen some leverage in that area as we continue to take a look at tasks that vendors perform in the stores.

As I mentioned in my prepared comments, we are eliminating some non-value-added tasks, we're insourcing some tasks as appropriate.

We did see some leverage in the first quarter.

We do expect some continued leverage in Q2 and the rest of the year.

However, we're going to start cycling against some of the benefits we saw last year.

The leverage we'll see in Q2 and for the rest of 2006 will be slightly less than the leverage we saw in the first quarter.

Dave, it's Robert Niblock.

On total installed sales were up about 23% for the quarter.

Okay.

Is there any change in the make-up of what people want within installed or is it more of the same?

Dave, this is Larry Stone.

We found a trend as Greg mentioned the DIFM model, do-it-for-me, we're certainly testing some things there.

We found there is a lot more things tha customers do want us to install.

We do have a very robust test that's going on currently in a couple districts in the Company and hopefully once our test results are validated it will be something that we'll be ready to roll out in '07.

Thanks very much.

Your next question is from the line of Deborah Weinswig of Citigroup.

Good morning and congratulations on a great quarter.

In terms of the gross margin side of things, can you first elaborate on the positive mix impact in the quarter and what categories had the greatest impact?

And then secondly, what can we expect from the R3 initiative as we look throughout 2006?

Deborah, the positive mix impacts for the quarter was about 10 basis points really driven primarily by lumber and outdoor power equipment.

We're experiencing some pretty significant deflation in lumber and plywood.

Both were down approximately 15% for the quarter.

Lower prices contribute to lower sales in a lower margin category which had a positive impact on margin.

In addition, as Robert mentioned, OPE. performed lower than the Company average in the first quarter.

That's another lower margin category.

Both those items as well as the strong sales performance we saw in rough plumbing and rough electrical contributed to the positive mix impact.

As relates to the R3 benefits, we are going to start cycling some of the benefits we started picking up in the back half of last year.

As you recall R3 was a drag in Q1, almost flat in Q2, and we started experiencing benefits as relates to R3 in the back half of 2005.

We expect some benefit again in Q2 and some slight benefit in the back half of the year, slight I mean, 5 or so basis points.

We should think of the first half of 2006 as having a greater benefit than the back half?

I think you will see more benefit in Q1 than Q2, and then a little bit less in Q3 and Q4, that's correct.

Thanks again and congratulations.

Thank you.

Your next question comes from the line of Budd Bugatch of Raymond James.

Good morning and my congratulations as well.

I am just a little confused about what surprised you in the quarter positively with the 160 some basis points of operating margin and I guess the 80-some basis points in SG&A.

Your guidance I think was 20 to 30 basis points of improvement, and the sales came in relatively in line with your guidance of up to 20% up.

Where was the surprise and what do we read about that going forward?

Budd, this is Bob.

Really two big areas were in gross margin and SG&A.

In gross margin we saw positive impacts really from two timing issues.

Timing of changes in cost and retails.

As we received price increases, those aren't always passed onto retails in the same period.

We may have had some price increases in Q4 where retails weren't adjusted until Q1.

We didn't expect necessarily that retails would be adjusted.

That was a positive surprise.

In addition, the other timing issue impacting margin deals was resets.

We had better sell-through on some of the reset product in Q1 than we expected, and some of the resets, a couple of small resets were actually pushed back into Q2.

A couple of timing issues hat positively impacted margin in Q1.

The resets will in fact impact the cost through SG&A and in the pricing can you kind of quantify the pricing impact?

Am I right on that SG&A issue on the resets?

We'll tell you about the physical cost to reset the aisles in the store, Budd, not the product costs.

I understand the physical costs.

That goes through SG&A, right, Robert, that explains what hits store labor costs, right?

There are really two pieces to that.

Number one is the markdown associated with the reset product.

We had better sales experience in that than we anticipated in Q1.

That was a favorable impact to gross margin.

By delaying a couple of small projects, that did positively impact SG&A slightly in the quarter.

The bigger impact as it relates to SG&A was some of the transition regarding the in-sourcing of the vendor service, some of the in-sourcing of product assembly that Nick spoke of on the Q4 call.

We had a very conservative plan going into Q1.

Q1 with spring breaking there's a lot of opportunity to drop a ball per se.

We plan very conservatively in vendor service, in payroll, and we executed the transition much better than we anticipated which drove much of the additional leverage and expenses for the quarter.

I understand.

We assume that same conservatism plays forward?

No.

The primary impacts of the change were in Q1.

A lot of the changes were made in Q1.

I would not expect that positive impact going forward.

Budd, this is Robert also any time we're going into the week shift which we only have coming after a 53-week year, we're anticipating that that week shift is going to be a benefit.

Obviously it depends on what the weather is like during the quarter and how much additional sales you get in week 13 versus you would have had in week 1 and the prior year.

It was a benefit as Bob spoke of, but it wasn't really quite as large a benefit as we had originally anticipated.

We're always a little bit conservative behind that guidance and that will turn around on us here in the second quarter.

It was one of those quarters where a lot of things that lined up came in favorable as Bob mentioned.

The advertising in-store service, a lot of things there.

We did have a favorable impact from the week shift.

You mentioned stuff like the one-time impact from the 123R on stock options with 7 basis points.

A lot of small things like that are added up.

So it was a great quarter, no we don't anticipate having 160 basis points of leverage in Q2.

Thank you, Robert.

Thank you, Bob.

Your next question is from the line of Chris Horvers of Bear Stearns.

Question for you.

On the 20 bublet or bubble markets, have you seen any change in your business in those markets and could you describe in terms of maybe what they comped in 2005 or contributed to your comp in 2005 and what you saw in the first quarter?

As Robert mentioned in his comments, we had positive comps in 18 of 21 regions.

Our business was strong across most of the U.S.

As relates to those specific markets, each market has a variety of factors impacting it, be it our own stores we're opening up in the markets, weather patterns specifically in the west.

On balance we saw no difference or no change in the performance of those 20 markets relative to the other markets we do business in.

Your I guess slightly tweaked comp guidance for the year, is it more cautious outlook giving interest rates and fuel versus what you're seeing in the business now?

Chris, this is Robert.

As Bob was saying on those 20 markets, yes, those markets generally are performing above average and they continue to be, but obviously our average dropped a little bit so far in the quarter.

We were expecting -- we had 5 to 7 comps that came in at 5.7.

We said that we saw a little bit of weakness in the last part of the quarter, the first part of -- last of April, first part of May and any time we see that happen, Bob told you we're at the low end of our range even though we're only 16 days in the quarter.

We want to become more conservative.

We think the primary driver was weather out there and we also think that if fuel prices ramp up the way that they have, sometimes the customer will sit back and take a little bit of a breather.

We saw that happen last fall after Katrina and fuel prices ramped up.

The customer takes a breather, they start adjusting, doing things differently whether it's trading in that SUV and getting a more fuel efficient vehicle and then they start adjusting their lifestyle and going back and we believe that will be the same case here.

After Katrina there was a one-time event that customers could look at and see how the fuel prices -- or the reason fuel prices increased.

I think they were a little bit more surprised this spring because they didn't have that one triggering event to cause the increases in fuel prices.

We believe the American consumers, in particular the homeowner which is our customer is very resilient.

We think they will adjust.

Greg talked about how the way housing turnover is run.

Yes, down 3% the first quarter of this year.

All of those things have an impact.

We still believe the primary drivers of our business are employment and wage growth.

Both of those continue to have very favorable outlooks.

Yes, there can be some moderation out there and a run rate the way that our business is, but overall we think the underlying fundamentals are very healthy.

We're expecting a good second quarter and a good balance to the year.

It may be at a slightly lower run rate than what we saw last year, what we anticipate going into the first quarter but overall very healthy year is what our outlook is telling us right now.

Do your comps ease as we get into the quarter?

Is May harder than the next two months?

On a one year comparison they're slightly tougher, on two year comparison they're slightly easier.

Finally, given that the run rate in the business is a little lower are you looking at cost out or expense control opportunities so that you will be able to lever in a tougher comp environment?

We always manage our business for the term term.

We're investing in customer relationships, not individual transactions.

But, yes, there are certain things that we can do on a short-term basis but relative, make sure we're investing long term to gain share and to be sure we take care of the customer.

We're not going to do anything radical on a short-term basis.

We will manage the business prudently from our standpoint.

Thanks very much and great quarter.

Thanks, Chris.

Your next question is from the line of Danielle Fox with Merrill Lynch.

Good morning.

You gave us a lot of useful detail on the SG&A.

I was just wondering, are labor hours up, down, or flat on a per store basis?

I remember last quarter you talked about introducing the new staffing model.

I am not sure if some of the things you described as leverage for the SG&A are Incorporated into that new model.

Danielle, this is Bob.

The payroll hours at a comp store are actually up Q1 this year versus Q1 last year.

We had as I mentioned a 5.7% sales increase.

The average sales per hour were up about 2% this year versus last year.

The hours were up year-over-year.

Okay.

If I could, Danielle, I want to make a clarification to a statistic in my comments.

The number of shares outstanding.

The basic shares were 778.

The diluted shares were 795 for the quarter.

Then just one other question quick.

You had a pretty sizable positive swing in accounts payable.

Was that in some way related to the calendar shift?

I am wondering was that R3?

What drove that?

And what should we look for as the year progresses from working capital?

Two items.

First, as we indicated in our analyst conference last September, our goal is to try to increase days payable outstanding by about two days per year.

If you look at the end of the first quarter we're actually up 3 days, about 47 days Q1 '06 versus 44 days Q1 '05.

We're a little bit ahead of where we expected.

The second is the calendar shift.

As you mentioned in Q$ call with the year end spilling over into February we had some timing differences there, but longer term I think you would look for three, maybe four days increase in days payable outstanding for 2006.

Thanks a lot.

Your next question comes from the line of Eric Bosshard of Midwest Research.

Good morning.

Two questions.

First of all, can you give us a sense that you talked about May and the sales guidance in 2Q relative to 1Q.

Can you talk at all about on a category by category basis or region basis if you're seeing anything that's leading you to the comp sales guidance that you're giving and then secondly on inventories, if you can just talk about how we should see the year-over-year inventory numbers trend as we go through the year relative to sales?

Eric, this is Robert.

I will start a little bit with May.

As we said we think weather was the biggest impact in the quarter.

Certainly I talked a little bit about fuel prices.

We said that a couple of our western divisions which have been hit by rain had tough first quarter and a little bit to the first part of the second quarter but both of them have come back now and are comping positive quarter to date.

Certainly as the weather is improving we're seeing better performance out there.

I know in the south eastern part of the U.S. the weather was pretty dry during a lot of March we finally saw that starting to break.

Some in April and improving again in May.

Like I said weather was probably the biggest part of it.

I think the consumer probably did pull back a little bit with rising fuel prices.

We continue to think that -- and then probably should -- and some of those bublet markets Greg talked about, those pulled back as overall company pulled back slightly.

Rational home price appreciation in some of those markets is going to be good longer term because it was appreciating at unsustainable levels and we think that, as Greg said in his comments that there will be a soft landing out there.

Anyway, we're only 16 days into the quarter.

It has been many times before when we've met the low end of the range and improved during the quarter.

I wouldn't read too much into that.

It is just something we want to give you directionally to know where we're at.

Like first quarter, we were at the high end of the range and we came down to 5.7 by the time it was over.

I will let Bob talk about the inventory question.

Eric, we longer term plan to grow inventory about $0.75 rate of sales.

We think for the year we'll have inventory leverage to sales of about 2 to 300 basis points.

We think turns will be slightly positive for the year, but remember we've got a 52 versus 53-week comparison which negatively impacts the turn calculation by about 10 or so basis points.

The 18% inventory increase versus the year sales guidance, you think which is maybe 13%, we should see those catch up as we move?

We should see the inventory levels grow slower as we move through the year?

That's correct.

We're in the heat of spring, so we have got a lot of seasonal inventory that will be sold over the coming weeks.

Really you're right that you would see the inventory year-over-year growth decline as the year progresses.

Did the calendar shift impact that up 18 inventory number?

A little bit.

Because we're a week further into the season.

It impacted that a little bit, Eric, but then you probably have stuff like grills and patio furniture and stuff because the weather categories we've been seeing.

You got kind of a delayed selling season.

We expected those categories to be picking up over the next few weeks.

Perfect.

Thank you.

I think we have time for one more question.

Your last question is from the line of Colin McGranahan of Bernstein.

It is Colin McGranahan of Bernstein.

Looks like on a category basis, am I right in assuming the two negative categories were lumber and OPE?

If you could first verify that.

You got one of two right.

I'm sorry?

You got one of two right.

Lumber was negative, right?

No.

OPE was negative?

Correct.

OPE and home organization.

Home organization, then.

Some of the other categories that looked like they were then below average, cabinets, lighting, walls and windows that we tend to think of as more kind of the remodel, the major remodel categories.

Can you just comment on any kind of trends you're seeing in those categories and what you think might have impacted them to be below average?

Well, Colin, this is Larry Stone.

We certainly, as Bob alluded to, had nine categories above and two at average and then nine below.

All of these different categories, there is different things going on in each category.

It will take a long time to answer each question about each category.

But certainly in some of the fashion categories, a lot of resets in walls and windows, lot of resets in fashion electrical also in home org.

All thee of those are driven more by fashion forward products that are currently being reset.

In cabinets we've seen a lot of strength in our in-stock programs and also in our special order programs, but the [Inaudible] just didn't hit the high average that it has in the past.

That's been a category that's had double digit comps for three straight years.

Nursery seasonal live-in's driven a lot by the weather.

Patio furniture had a real strong quarter and certainly nursery as the weather's got warmer and we got rain in certain parts of the country, our nursery business has also been very strong.

Overall we think OPE, the one that Robert was negative.

OPE's came back nicely in the last couple of weeks, coupled with the stop of the rain in some parts of the country and rain in other parts of the country we feel real confident our OPE lineup is very, very competitive and certainly with the addition of John Deere, we anticipate a great year at OPE category.

Thanks, Larry.

While I got you, can you just comment on the appliance promotional environment?

It looks like Sears maybe turned up the heat a little bit and I noticed Home Depot was doing a 10% off last weekend.

Certainly, there is some out there but really no more than it's been in the past.

Our competition still continues to run various promotions trying to gain market share.

According to independent measure we're still gaining share at a very fast pace and we're real confident with the addition of Samsung appliances, a lot of innovation from Whirlpool and other vendors we certainly have the strongest appliance line-up in the category of any major retailer.

Thanks.

Good luck, thanks.

Thanks and as always thanks for your continued interest in Lowe's.

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

Thanks and have a good day.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.