勞氏公司 (LOW) 2006 Q4 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies fourth quarter and fiscal 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 risk, 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 and CEO, Mr. Larry Stone, President and COO, and Mr. Bob Hull, Executive Vice President and CFO.

I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

Good morning. Thank you for your interest in Lowe's and for joining us on a Friday morning.

This quarter's earnings announcement coincides with our national sales meeting where we discuss strategies and initiatives as well as review our financial results. In order to have in-depth discussions with our management team about our performance in 2006, we chose to report our results in advance of this meeting, which is why we are reporting today instead of our typical Monday release.

Following my remarks, Larry Stone will review our operational performance and update you on a number of initiatives. Then Bob Hull will review our fourth quarter year-end financial results.

First, a few highlights for the quarter. Thanks to our 210,000 employees, we delivered solid results in a challenging operating environment. Our continued focus on executing the fundamentals and providing customer valued solutions drove sales of $10.4 billion for the quarter and $46.9 billion for the year.

Excluding last year's 53rd week, as well as the corresponding calendar shift, total sales increased approximately 5% for the fourth quarter and approximately 10% for the fiscal year.

Fourth quarter earnings per share of $0.40 exceeded our guidance of 36 to $0.38. In addition, our fiscal 2006 earnings per share of $1.99 increased 15% compared to 2005 and was only 2.5% below the midpoint of our original 2006 EPS guidance we provided last February.

Considering everything we faced in 2006, I'm extremely pleased with the EPS results we've delivered and I'm grateful and appreciative of the hard work and dedication displayed by the entire Lowe's team in fiscal 2006.

Comparable store sales decreased 5.3% in the quarter, within the range of our guidance of negative 4 to 6%. As we work to become more efficient in our operations, annual operating margin of 11.3% led to net earnings of $3.1 billion for the year, both record highs for Lowe's.

The external factors that contributed to lower than expected sales in 2006 included tough comparisons to last year's hurricane recovery and rebuilding efforts and significant deflation in lumber and plywood. In addition, we also continue to closely monitor the economic factors that are drivers of our business, including housing turnover, employment, and personal disposable income.

At the beginning of fiscal 2006 in many markets, including areas of the northeast, southern Florida, and the west coast, there were clear structural drivers suggesting a pullback in housing-related demand. That evidence led us to estimate housing turnover would decline in 2006 as these once hot markets cooled.

What was more difficult to anticipate was the pullback in home improvement demand we experienced in many unaffected markets where housing dynamics remain solid, but negative media reports appear to dampen home improvement sentiment. As the year progressed, housing turnovers slowed more quickly and deeply than we originally anticipated. That rapid decline also pressured home prices as speculative demand waned, housing supply grew, and homebuyers, as well as home improvement consumers became more cautious about spending. We will continue to closely monitor both the structural drivers of demand and the mindset of the home improvement consumer as we enter 2007.

Despite the housing-related pressures on the consumer, the job market remained solid and personal disposable income continues to rise. In addition, the tough comparisons to last year's hurricanes and commodity deflation will almost certainly ease in 2007.

While we are not banking on a rapid recovery, the most recent housing data show encouraging signs of a stabilization of housing supply and a bottoming in total housing turnover, all of which will lead to improving year-over-year trends. Based on these external factors, combined with our own internal initiatives to drive sales, we believe our comp performance has bottomed and we expect to see gradual improvement in comps throughout 2007.

Despite the pressures from external factors, we continue to manage the business for the long-term. In fact, we believe we have great opportunity to increase our market share and the current sales environment has not changed our expansion plans. We have considerable growth opportunities and see the potential for over 2,000 Lowe's stores in North America with our current prototypes. In fiscal 2006 we opened 155 new stores in great markets around the country and plan to open another 150 to 160 stores in 2007. We're also on track to open our first stores in Toronto, Canada, in the second half of 2007. And last month, we announced our intention to enter Mexico with plans for three to five stores in Monterey in 2009.

We have consistently invested in the business and will continue to do so to ensure our stores remain clean, easy to shop, and appropriately staffed in order to maintain our customer franchise and grow market share. In fact, despite the external pressures we're facing, according to independent measures in the fourth quarter of 2006, Lowe's gained 110 basis points [inaudible] market share for the total store, a clear indication that more and more customers are choosing Lowe's for their home improvement needs. Later in the call, Larry will provide more detail about specific category performance.

Well-trained employees are key to the success of our business and maintaining customer service standards. Therefore, we invest in our employees because we know that having knowledgeable employees is a competitive advantage. Our store management training program, or SMTP, is a structured program that exposes store manager candidates to all aspects of managing a Lowe's store, including customer service, leadership, staffing, and managing a store's financial performance. This is just one example of our many programs that help develop strong leaders to support our continued growth.

To ensure we continue to capture market share and drive profitable sales over the long term, in December we announced an organizational change, promoting Larry Stone to President and Chief Operating Officer. In his new role, Larry has responsibility for store operations, merchandising, marketing, logistics and distribution, store support, and Lowe's Canadian operations. This reporting structure supports a more integrated approach in developing, implementing, and evaluating operational initiatives and strategies. Additionally, Nick Canter, a 32-year Lowe's veteran, assumed responsibility for merchandising, global sourcing and store environment. Mike Brown steps into his new role as EVP of store operations with 23 years of Lowe's experience. Mike is now responsible for all Lowe's stores in the U.S. and specialty sales.

I'm pleased that all these promotions were filled with internal candidates who have a long tenure with Lowe's and a great appreciation and understanding of our business and our culture.

Now Larry will highlight his initiatives and discuss his views on making an already successful team even better. Larry?

Thanks, Robert. Good morning.

I'd like to spend my time this morning and provide some details on the results we delivered for the quarter and fiscal year and then conclude by sharing our priorities for operations, merchandising, logistics distribution, and marketing in the coming year.

Reflective of the tough sales environment, only four of 20 product categories posted comp increases for the fourth quarter. For the year, we posted positive comps in 11 of 20 product categories.

Highlighting a few notable categories, appliances outperformed the Company average for the quarter and was in line for the year. Based on third party data, we saw solid increases in dollar share and draw rates for appliances in the fourth quarter, which is encouraging. But according to the survey, our unit share in close rates slipped in the fourth quarter. We're working to implement solutions to address this as we strive to capture share in appliances as well as other product categories.

While outdoor power equipment was in line with the Company average in the fourth quarter, this category did experience a tough year. Cycling against hurricane-related sales from 2005, comp store generator sales were down 34% for the year. In addition, a warmer than normal winter led to negative comps for snow throwers in the fourth quarter.

But despite the weak sales environment, our compelling selection of products led to a 2% unit share gain in OPE in the fourth quarter. Our inventory is positioned well as we head into spring and we're confident we'll continue to take share in 2007.

Our lumber and plywood categories experienced more than 15% cost deflation and similar deflation at retail for the year. This pricing pressure led to double-digit decline in lumber and plywood comps for the quarter and a high single-digit climb for the year. Our unit sales in these pricing trends, these inflationary pressures should ease in the second half of 2007.

While some categories had a tough year on an absolute basis, we were able to gain unit share in 19 of the 20 merchandising categories in the fourth quarter compared to the fourth quarter last year, according to third party estimates. I think these statistics show that we're listening to customers as we continue to provide a compelling product offering.

We enter 2007 in a good overall inventory position. We've marked down and sold through the majority of our seasonal heating products in the fourth quarter and we started off 2007 with our seasonal inventories in great shape.

The impact to some of the sales challenges we faced in 2006 is clear in our regional performance. Markets in the northeast, areas in Florida, and parts of our western division, including California, are broadly considered areas most exposed to a slowdown in housing, and sales trends in those areas clearly indicate a cautious home improvement consumer.

Also, as we described last quarter, areas of the Gulf Coast and Florida that experienced increased demand related to rebuilding from the 2005 hurricanes saw weaker sales and double-digit negative comps in the fourth quarter. Similar to the inflationary pressures in our lumber category, we expect the tough hurricane comparisons to ease in the second half of 2007 as we pass the two-year anniversary of hurricanes Katrina, Rita, and Wilma.

Our big three sales initiatives had mixed results in the quarter and for the year. An apparent hesitation to take on large projects, but some consumers had an impact on our installed sales and special order sales. Both of these businesses did experience a slower growth rate in 2006 versus prior years.

We continue to refine our offering, including an ongoing test of an in-home selling model for certain installed categories, new special order electronic selling tools, and many enhancements to Lowe's.com to reinvigorate growth in these areas for 2007.

Contrasting to slower sales and installed and special order, our efforts to increase our relevance with the consumer -- with the commercial business customer paid dividends in 2006. Comps in our commercial businesses were significantly higher than the Company average and they are a sign that our programs for commercial customers are working.

We've talked for a couple years about how enhancements to our logistics and distribution infrastructure, enhancements that we felt would allow us to more effectively and efficiently move products to our stores and change in demand environments. Basically, use our logistics and distribution assets to keep our stores in stock with the right product while working to minimize our investment in inventory. Because this investment we had one of our best years ever in some of our seasonal categories. The distribution network allowed us to allocate the product based on demand in the market and move the product to the stores to meet customer demand. We have more enhancements planned for 2007, all aimed to better serve customers.

In addition, we will open two additional regional distribution centers this year. Rockford, Illinois will begin shipping products in April, and an additional center in Oregon will come online in the third quarter. This will give us 13 regional distribution centers to better service our stores and meet customer demand.

A clear success in 2006 was development of our event sales group with the planning and execution of special events. Special events could be as big in scale as Black Friday or as targeted as a sales tax holiday in a particular state. I'm pleased to say the formation of this group has been a big win and allowed our merchandising, marketing, advertising, operations, and logistics and distribution teams to work more closely than ever before to maximize sales during these events. We'll continue to refine the role of this group in 2007 and get even better alignment.

[Inaudible] our company communicates across functional boundaries as well as or better than most retailers, the success we've had with or event sales group is an example of the opportunities for improvement that remain. In my new role, I will continue to bring synergies to the line functions and work on communications between the groups to ensure that we're always focused on what matters most, customers. We're fortunate to have experienced retail executives leading functional areas of our company, but my goal is to ensure we capitalize on opportunities that can come from better teamwork and better alignment of goals and strategies across all functions.

As Robert mentioned, we have many initiatives for 2007 that will ensure we're positioned to capitalize on whatever sales environment we face. I'd like to briefly review a few areas of focus for 2007. In operations, our approach has not changed dramatically from 2006. We have five key strategies.

They are; number one, deliver great customer service, which we like to describe that create the wow through consistent in store execution. Number two, we are focused on improving store productivity and operational efficiencies. Number three, we will continue to ensure our bench is full with tenured and talented people at all levels of the organization to fuel our growth and maintain our commitment to service. Number four, we will work to enhance our sales culture by providing training and selling skills for our team and continue to drive the selling focus in our stores. Finally, we'll work to reinvigorate the sales trends of our specialty sales categories.

On the merchandising side, we have several strategies that will allow us to provide exciting and compelling products for customers while at the same time improve gross margin. Our goals for 2007 include, number one, continue to simplify the shopping experience based on a clear understanding that the customer's experience is one that matters most. We will work to ensue we have clutter-free displays and improved signage to allow customers to more easily make their product selections.

Number two, we remain committed to provide an operationally efficient merchandise in our stores. The goal is for customers to be able to easily identify features and benefits, compare product choices, and shop for related project purchases nearby.

Number three, since we know differentiation is key, we're focused on product, service, price, and presentation differentiation. As part of this effort, we recently created a new position at Lowe's, a senior vice president of product development and global sourcing to help us enhance our connection to customers and provide the products, styles, and price points important to the shopping experience. Mike Menser, a 16-year Lowe's merchandising veteran, will lead this team. Mike brings great experience to the job having served as general merchandising manager of home decor for the past eight years.

Number four, we are committed to improving inventory productivity. There's obviously a fine balance between productivity and in-stocks, but we know there's room to improve.

Number five, flexible store format solutions. We know that in some markets that we enter, we must create different footprints to fit the available space. We are committed to this and our store planning team has the talent in place to meet this demand.

And finally, our merchandising teams are supporting our expansion into Toronto with our Canadian team that is in place in our Toronto office.

On the logistics and distribution front, strategies for 2007 include driving quicker service to the stores by using flexible fulfillment for certain products. Flexible fulfillment is a method that we use to distribute slower turning items that we can stock in the DCs and not in all stores. And we will continue to drive efficiencies, which we expect will generate about five basis points of gross margin improvement in 2007. We will continue our goal to drive inventory growth at 75% of our sales growth. Progress was made in 2006 and will help us improve our inventory position in 2007.

Finally, our improving draw rates are a clear indication that our marketing programs are inspiring customers to visit our stores. Our marketing team will continue to drive the traffic to our stores with their new media and print campaign that we will kick off for 2007.

Our team is unified in the line and deep in experience to meet demands of the market. The average Lowe's tenure for the EVPs for operations, merchandising and logistics is 20 years. Our five Senior Vice Presidents of Operations have an average Lowe's tenure of 17 years, and our five general merchandising managers have an average Lowe's tenure of 16 years.

While year-over-year comparisons will be tougher during the first half of 2007 versus the back half of the year, we will ensure that we utilize the experience we have to position Lowe's to take market share by providing customers the best products, services, and stores in the industry.

Thanks for your time this morning, and I will now turn the call over to Bob Hull to provide the details of our financial results. Bob?

Thanks, Larry, and good morning, everyone.

As Robert indicated, sales for the fourth quarter were $10.4 billion, representing a 3.7% decrease over last year's fourth quarter. For the year, sales increased 8.5% to $46.9 billion. The sales decrease for the fourth quarter and the year was negatively impacted by the comparison to the 53-week fiscal 2005. The extra week added approximately $750 million in sales to Q4 last year. This negatively impacted 2006 sales growth by 7.2% for the fourth quarter and 1.9% for the year. In addition, the 53rd week contributed approximately $0.035 to last year's diluted earnings per share.

Also, last year's 53rd week caused a calendar week shift for 2006. The calendar week shift positively impacted first half sales by approximately $150 million, but negatively impacted fourth quarter sales by a similar amount, reducing sales growth in Q4 by just over 1%. There was no net impact for the year.

Comp sales were negative 5.3% for the quarter on top of a positive 7.8% comp in Q4 2005. As a reminder, last year's positive comp results included an estimated 100 basis point positive impact from sales associated with hurricane affected markets and a 75 basis point favorable impact from lumber and building material inflation. Given the mild hurricane season in 2006, this resulted in a negative impact of approximately 100 basis points on this year's fourth quarter comp sales. Lumber deflation negatively impacted fourth quarter comps by approximately 90 basis points. This was somewhat offset by inflation in building materials.

Looking at the monthly trend, comps were negative 5% in November, negative 4% in December, and down 7% for January. This compares to 2005 comps of -- 2005 positive comps of 10% in November, 4% in December, and 10% in January. Last January's strong comp performance was driven in part by favorable weather.

The two-year comp for fourth quarter was 2.5%, which was a slight increase from the third quarter's two-year comp of 2.2%. For the year, comp store sales were flat to last year. Comp sales for 2005 increased 6.1%.

In Q4 average ticket decreased 2.1% to $66.65 while total transactions decreased 1.7%. On a 13 versus 13-week basis, total transactions were up 6.3%. Comp transactions were down 2.7% in the quarter.

With regard to product categories, the categories that performed above average in the fourth quarter include rough plumbing, rough electrical, hardware, appliances, home environment, paint, fashion plumbing, lighting, flooring, and seasonal living. In addition, outdoor power equipment, nursery, home organization, and lawn and landscape performed at approximately the overall corporate average.

For the year, the categories that performed above average include rough plumbing, building materials, rough electrical, home environment, paint, fashion plumbing, flooring, nursery, seasonal living, and lawn and landscape. In addition, hardware performed at approximately the overall corporate average.

Gross margin for the fourth quarter was 35.4%, which was a 42 basis point increase compared to Q4 2005. The increase in gross margin was attributable to a number of factors including sales mix, distribution efficiencies, and a greater proportion of imported goods. The largest impact was from the mix of products sold which helped gross margin by 25 basis points in the quarter. These items were slightly offset by higher inventory shrink as a percent of sales.

Our shrink dollars came in 2.5% below plan, but deleveraged in a slow sales environment. For the year, gross margin of 34.5% represents an increase of 32 basis points over 2005.

For 2006 we imported approximately 11% of our goods, which compares to about 9.5% last year. SG&A for Q4 was 22.4% of sales and deleveraged 113 basis points driven by store payroll and fixed costs.

Our stores continue to utilize our store staffing model to adjust hours by store, by department, based on forecasted sales. As sales slowed, our stores adjusted their hours accordingly. However, because of our base staffing requirement and our customer service standards, we did not reduce payroll at the same rate as sales. As a result, store payroll expense deleveraged 78 basis points in the fourth quarter.

Also, lower sales volumes in the quarter caused deleverage in expense lines containing fixed costs. Specifically, utilities, property taxes, and rent expenses each deleveraged approximately 10 basis points in the quarter. These items were slightly offset by leverage in retirement and bonus expenses. For the quarter, retirement expenses leveraged 30 basis points while bonus expense leveraged approximately 10 basis points. The bonus expense leverage was lower than we anticipated. This was a function of the sales and earnings performance for the stores that earned a bonus.

In 2006 approximately two-thirds of our stores earned at least a partial bonus. Interestingly, the remaining one-third of the stores that did not earn a bonus accounted for 95% of our sales variance and over 100% of our earnings shortfall to plan. For the year SG&A is 20.8% of sales and leveraged nine basis points to 2005 driven primarily by bonus and retirement expenses.

Depreciation at 3% of sales totaled $308 million and deleveraged 56 basis points for the quarter. This deleverage was driven by 17% growth in assets, negative comp sales in the quarter, and the comparison to last year's 14-week quarter.

Operating margin, defined as gross margin less SG&A and depreciation, decreased 127 basis points in the fourth quarter to 10% of sales. However, for fiscal 2006 operating margin increased 20 basis points over last year to 11.3%. This represents the highest annual operating margin in our modern history.

For the quarter store opening costs of $49 million leveraged six basis points to last year as a percentage of sales. In the fourth quarter we opened 58 new stores, including three relocations. This compares to 63 new stores in Q4 last year. There were no relocations in last year's fourth quarter.

Interest expense at $43 million deleveraged nine basis points as a percent of sales. For the quarter total expenses were 26.3% of sales and deleveraged 172 basis points.

Pretax earnings for the quarter were 9.1% of sales. The effective tax rate for the quarter was 35.6% versus an effective tax rate of 38.6% for Q4 last year.

The decrease in the tax rate was attributable to federal and state tax credits, which positively impacted our fourth quarter effective tax rate. The Tax Relief and Healthcare Act of 2006 became law in December of 2006 and retroactively reinstated the welfare to work and work opportunity tax credits.

Additionally, we received credits from states related to our investments in employees and property. We provide competitive wages and state of the art facilities in areas where economic growth is important to local economies.

For 2006 the effective tax rate was 37.9% versus an effective tax rate of 38.5% last year.

Diluted earnings per share for the quarter of $0.40 decreased 7% versus last year's $0.43 which includes approximately $0.035 associated with the extra week. Diluted earnings per share would have been approximately flat to last year on a 13 versus 13-week basis. For 2006 diluted earnings per share were up 15% over last year. On a 52 versus 52-week basis, diluted earnings per share were up over 17%.

Weighted average diluted shares outstanding were 1.55 billion for the quarter. The computation of diluted shares takes into account the effective convertible debentures which increased fourth quarter weighted average shares by 21 million.

In the fourth quarter, there were no share repurchases. For the year we repurchased 56.8 million shares at an average price of $30.56 for a total repurchase amount of just over $1.7 billion. We have $1.5 billion remaining of share repurchase authorization.

Now, to a few items on the balance sheet. Our cash and cash equivalents balance at the end of the quarter was $364 million. Given that our turnover calculated by taking the trailing four quarters cost of sales divided by average inventory for the last five quarters was 4.27, a decrease of 22 basis points from Q4 2005. The comparison to last year's 53-week year caused eight basis points of decline in inventory turnover.

Our fourth quarter inventory balance increased $509 million, or 7.7% versus Q4 last year. All of the increase was some new or noncomp stores. Both comp store and distribution inventory were down slightly to last year. At the end of the fourth quarter we owned 86% of our stores versus 84% at the end of the fourth quarter last year.

Our debt to total capital was 22% compared to 19.8% for Q4 last year. The increase was due to the $1 billion of senior unsecured bonds issued in the third quarter and $23 million of commercial paper outstanding at year end.

Return on invested capital, measured using beginning debt and equity and trailing four quarters earnings, decreased 90 basis points for the quarter to 18%. Return on assets, determined using beginning total assets and trailing four quarters earnings, decreased 50 basis points to 12.6%. Approximately one-half of the decline in ROIC and return on asset is attributable to the comparison to the 53-week 2005. For the year, cash flow from operations was $4.5 billion, an increase of $660 million, or 17% over 2005.

Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook. We expect a first quarter sales increase of 5 to 6%, which incorporates a comp sales decline of 2 to 4%. We plan to open 15 new stores in the quarter, five stores in February, three stores in March, and seven stores in April.

Operating margin for the first quarter is expected to decrease by approximately 150 basis points to last year as a percentage of sales. The biggest driver of the decline in operating margin is deleveraging store payroll as we maintain customer service levels in a negative comp sales environment. In addition, we expect deleverage in depreciation, rent, utilities, property taxes, and credit expenses in Q1.

The income tax rate is forecasted to be 38.1% for the first quarter and 38% for the year. We expect diluted earnings per share of $0.49 to $0.51, which represents a decline of 4 to 8% over last year's $0.53.

For 2007 we expect to open 150 to 160 stores including three relocations, resulting in an increase in square footage of approximately 11%. We're estimating comp sales to be flat to up 2% to last year and a total sales increase of approximately 10%.

For the entire fiscal year, we are anticipating an operating margin decline of 70 to 80 basis points, which coupled with our sales increase should yield diluted earnings per share of $2.02 to $2.09, which represents an increase of 2 to 5% over 2006. Our capital plan for 2007 is approximately $4.6 billion with $300 million being funded by operating leases resulting in cash capital expenditures of approximately $4.3 billion.

Before I turn the call over to the operator for questions, I'd like to mention that in addition to Robert, Larry, and I, other members of our management team are present for the question-and-answer session. Dennis, we're now ready for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Mark Rowen with Prudential.

Thanks. Good morning. Robert, I'm a little curious on your sort of outlook for the timing of improvement, and you said that it looks like your sales trends are bottoming. It took about six or eight months from the time the housing market turned negative until your comps turned negative, so why do you think we're not going to see the same kind of lag on the upside? Thanks.

Mark, I'm -- really, when you look at, obviously, from the housing market, there is a delay, like what you said in the slowdown. And there is a lot of inventory that's out there on the market that will have to be worked through, which will impact when new home construction takes -- picks back up.

Part of that optimism is coming from the fact that we're getting further away from cycling the hurricanes. We know that as we get to the second half of the year, we're not going to have the hurricanes to cycle against. We know we're not going to have deflation in lumber and building materials.

And then part of it also comes from, as [we're] looking at our sales trend and we see favorable weather in markets, we're starting to see some better trends in a number of markets. Now we still have some challenges down in those hurricane markets. We've still got some challenges in west coast, specifically California where the housing industry was the most hard hit.

So as we sit there and we look at our trends, we look at what we're going up against, we know that -- look at the comp trends last year in the first quarter is our toughest comps that we have to go up against, and they were the toughest in the earliest part of the quarter. So as we move into the quarter, cycle through that, some of the trends we saw last year, some of the weather impact, as we just look at the business on a detailed basis, we don't think it gets any worse.

So that's kind of where we're at as we look at all the touch points we have out there on a daily basis, and so that leads us to believe that our comps will, as we said, just start gradually trending up on a quarter-by-quarter basis through 2007.

Okay. And just a sort of a follow-up on that, you mentioned gaining share, and you've done a great job of that over the past few years. From a competitive standpoint, are you seeing any more promotional pressure from either Home Depot or some of the regional players in this downturn as they try to gain share or maintain share?

No, I mean, really, in totality, no, we're not seeing any more promotional activity. You see different types of promotions, you know, here and there someone will try something different. We try different things from time to time.

But no, I think the promotional environment has stayed -- has not gotten -- it's stepped up a little bit as things were slowing last year, which is natural. Anytime you start seeing sales slowing you're going to have a tick-up in it.

Then when everyone kind of realized that this is just more of an industry-wide phenomenon, then they, particular -- more than a particular Company phenomenon, things kind of have leveled off. It hasn't really gotten anymore promotional than what we were experiencing, let's say, in the fourth quarter.

Okay. Great. Thank you.

Your next question comes from the line of Gary Balter with Credit Suisse.

Good morning. It's actually Seth Basham for Gary. If you could give us a better sense of what the macro assumptions are underlying your forecast for 2007, that would be helpful.

As Robert indicated, we do expect a tough housing environment again in 2007. As you discussed, the overhang of existing inventory, as well as new homes on the market -- as he indicated, though, we do see easier comparisons as the year progresses.

Our toughest comparison is in the first quarter. Get much easier throughout the course of the year. The comparisons to both inflation -- lumber and plywood inflation as well as the hurricane comparison both ease in the back half of the year, which gives us optimism for the increasing comp performance throughout the year.

I would add, this is, Robert. I would add that I think personal disposable income is expected to grow about 3.4%. We're expecting long-term mortgage rates to stay a little more similar to the range where they're at today. We think that the signs out there from an overall economic standpoint is that the economy's in good shape. There's going to be continued growth in the economy.

Unemployment, I think's sitting at about 4.6%. We think it hangs in somewhere around that area. Obviously, if the Fed sees signs of inflation out there that they're not comfortable with, that could cause them to move. But I think, you know, obviously they've been on hold and I think that they'll be on hold for, hopefully, through most of 2007. So all of those things give us comfort in what we're seeing out there.

Obviously, one of the things that's been in the media recently is default and foreclosures in the subprime market. That's something that obviously if that stepped up could have an impact in certain markets. There's probably a heavier impact in those markets that were overheated last year than it is in some of the other markets because that's where people probably overextended to get into housing in a rapidly appreciating market.

There are clearly some issues like that that could be a risk in certain markets. But, you know, as Bob described in his comments, last year we still had a bunch of stores, [overall] majority of our stores had great performance out there.

You really had significant impact in some of those markets that were most heavily impacted by the slowdown in housing and we should start, and also the, [inaudible] come up against some of the hurricanes and we'll start to cycle through some of that, and we think as you get towards the back half of 2007, [inaudible] housing turnover at least gets flat and hopefully in 2008, maybe we start seeing an improvement in total housing turnover on a year-over-year basis.

That's very helpful, Thank you and good luck.

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

Thank you, and good morning. Question, as you think about your planning for 2007 you're being helped out on the retirement and bonus side. As we think about the progression throughout the year in arriving at that 202 to 209, how much does that hurt you as you proceed throughout the year?

As we think about 2007, we expect deleverage in both bonus and retirement. Specifically, that will be somewhere in the order of probably 30 basis points in total for both of those items in 2007.

Obviously, when we set our plan for 2007, it's a much lower sales target than we had for 2006. So we readjust our store sales and earnings targets based on those expectations, with the intent of paying target bonuses to those folks who achieve their sales and earnings targets for the year. So we expect -- we do expect deleverage on both of those lines in 2007.

And is that more weighted towards -- in terms of the pressure, more weighted towards the back half?

That would be more back weighted, yes.

And then as just one follow-up, Robert, you talked about better trends in a number of markets as weather got favorable. Is it something that you're seeing in mixed traffic ticket, you know, are people trading up? You're seeing more kitchens and bathroom models, things like that?

Well, you know, a lot of it is where maybe spring's, you know, get some favorable weather breaking in some of the markets and you see some, a little bit of a pent up demand out there. Obviously, you know, we've had, like I said, continued challenges in California, tough comparisons in the Gulf Coast, up in the northeast we've had some unbelievable snowstorms. And so obviously the days that you have those unbelievable snowstorms, you have some, obviously, tough sales on those days.

But, you know, we're, not so much on the big ticket. I think that what you'll find is that when housing does start -- when overall view on housing starts to turn more favorable, we'll get through some of the inventory of supply that's out there.

Generally what happens is there is some pent up demand because there are a number of homeowners, consumers that maybe had a larger project kitchen remodel, whatever that was planned to be done, and when they start hearing negative reports on housing and the value of housing, they probably put plans on hold. And then all of a sudden when they start seeing that the sentiments turning more favorable, and that there was no issues of overvalued housing in their markets, you do have some pent up demand out there that will start to unlock itself.

And so we think we'll see that later in the year as the overall view on housing starts to turn, we believe a little bit more positive as we get to -- get through the negative comparisons on a year-over-year basis. But really what you're seeing, I think a lot of activity is where the weather's starting to break in some of your outdoor categories, OPE and some of those others, outdoor power equipment. and some of those seasonal categories.

Larry, you want to add any color?

I think Robert's comments are right on target, Chris. We are seeing it when the weather breaks in certain markets a lot of the seasonal categories and even the lawn and garden categories, you start thinking about our bagged goods and even our nursery items.

So that's pent up demand, depending on the weather when it breaks early in markets. We think that people get an early start on spring planting and yard work and so forth. That just really continues through the year.

There again, the winter's been mixed. We've had some tough winters in parts of the country and some mild winters in other, but once again, that pent up demand when the weather breaks, it just really comes out in these markets.

Thank you.

Your next question comes from the line of Matthew Fassler with Goldman Sachs.

Thanks a lot. Just a couple questions. First of all, on the last numbers call -- of calls as far back as I can remember, you've given us some color month-to-date comps on the month in which you're reporting. I'm wondering if you can give us a somewhat clearer sense of what you're seeing in February versus the range that you gave us for the quarter?

Matt, this is Bob. As we said at our analyst meeting back in September, we're no longer going to provide our monthly -- or our current comp performance in the early part of the quarter. Remember, we're only 20 days into the quarter.

As you recall, on the Q3 call, we told you that we're below the range that we provided and we finished within the range. So we're only 20 days into a 90-day quarter. I will tell you that the first quarter does provide our toughest one-year, two-year, and three-year comp comparisons.

As I said, the two-year comp in the fourth quarter was a negative 2.5. The guidance for the first quarter implies a slight improvement to about 2.7% two-year comp. So, but I will tell you that we are, do have a negative comp to start the quarter.

Got you. And your guidance is for negative comp, as well. Negative two to negative four.

I guess the second question I'd like to ask you, can you give us some color on how you managed payroll through the fourth quarter as you saw sales fluctuate? Clearly, I think there's some broader questions still in the environment and on the macro front, and it would be interesting to hear as you just get some real life insight on how you manage variable costs in the course of a period like the one that you just saw. If you could give us more comfort on the '06, on the '07 outlook.

Sure Matt, this is Bob. I'll start then I'll let Mike Brown add some color. As I said in my comments, we do have a staffing model that the stores utilize to forecast their sales and schedule hours accordingly. It's a very effective tool for them to ensure that we've got the appropriate staffing levels in each department to serve customers.

Comp sales were down 5.3% in the quarter, comp hours were actually down a half a percent. As I indicated, sales -- store hours did decline, but not at the rate of sales as we attempted to maintain our standards. Mike?

Yes, Bob, this is Mike Brown. Just to reiterate Bob's comments, we do have a store specific. Every store has a staffing model and the staffing model really is driven on the departmental sales within that particular store. And the store management team has ongoing, very active, involved forecasting processes where they're looking at trends within the departments and are shifting based on businesses with individual store departments. And to Bob's point, we do have a floor on hours, and we do not let those stores degredate below those floor of hours in any particular store.

And just to follow-up on that. Does that happen in any given store every couple of weeks with that kind of frequency or is it more [inaudible] that that?

Matt, this is Mike again. We are continually looking at forecasting within every store on a weekly basis, really, we're looking at trends within stores. And again, the staffing model is such that we have a base floor by department and we build off that based on each individual store's performance within their particular department. So we compile the staffing based on foot traffic and sales in those departments.

Great. Thank you so much.

Your next question comes from the line of Gregory Melich with Morgan Stanley.

Hi. Great. I wanted to ask first on the balance sheet. Is there any reason that you guys -- I mean we see a lot of companies use the balance sheet a lot more, you didn't buy back stock in the fourth quarter. What is the debt to cap target or leverage ratio that you guys really think you need in the business, especially since we see a lot of other retailers basically adding leverage?

And I guess related to that was, Bob, did you mention that leased stores went to 80% from 84? Did I get that number right?

Owned stores were 86% versus 84%.

Great. Owned 86. Thank you.

86. As it relates to the balance sheet, we're targeting adjusted debt ratios of approximately 30, 40% range. We set a target for share repurchase for the year. We exceeded that target by a wide margin.

As I said, we repurchased $1.7 billion for the year at an average price of $30.56. Our targeted price was about 20% higher than that, 15 to 20% higher than that given the opportunity to repurchase our stock at a lower price. We got a little bit more opportunistic within the year. So we felt like we bought what we needed to for the year and didn't feel like we needed to go back into the market in the fourth quarter.

Okay. Great. And then since I've got Larry and the rest of the team there and Mick, on merchandising, I guess I have one question is this thing you did on paint with Valspar, and it looks like you're going a little bit away from private label and back to a manufactured brand. What was the logic behind that?

Greg, it's Larry Stone. We just felt like in paint that we needed brand that we could really count, you know, we've used different brands through the years made by Valspar for the last 30 plus years in our paint department, but we really didn't have a national brand we could hang our hat on. And we looked at all the different brands that were available and came back with the strategy we felt like this was the best brand available to the marketplace that we could really put some leverage behind and really gain share.

Plus it's a great quality paint, and our stores have done a great job with it over the years. And we think, or we actually know we can grow this brand into a leading brand throughout all of our stores.

Greg, this is Robert. Just to layer on top of that, as well. Obviously, with our expansion into Toronto, and we like to have as much consistency as we can among our brands, we didn't think that American Tradition was the best brand to take into Canada. So that was also played into our overall branding strategy. This way we can keep the Valspar brand and utilize that and as we go into Canada and have a little bit more consistency in our branding. It helps with the efficiency of the operation.

And I guess linked to that is, how are we on net-net pricing? Are most vendors there yet or is that --

We've got only a handful of vendors on truly net-net pricing. What we have done is the vast majority of our vendors are on simplified deal structures. As you know in the past, we used to treat co-op and vendor service reimbursements separately with EITF 0216, all that's part of margin. So we really collapsed all of those deals and dramatically reduced the number of programs.

I think, Greg, the number -- year-over-year's about a 43% reduction in a number of programs for our ongoing vendors. So we're working towards it, but we've got dramatically simplified terms with our vendors that decreases the administrative burden for both parties to do business with each other, which allows us more time to focus on what's most important, which is serving customers.

Great. Thanks.

Your next question comes from the line of Colin McGranahan with Bernstein.

Good morning. First question for Larry. Can you just comment a little bit more on the appliance market share slippage there? Was there, and obviously Home Depot reported some gains. So other than them, who gained share? Was there any promotional activity that you chose not to match? And again, Home Depot reporting some gross margin pressure in appliances. And are there any other aspects you feel like you're missing a category, a brand, et cetera? Any comment on what's going on there?

Well, Colin, we felt, you know, if you look at overall our appliance share grew for the year, and certainly you're looking at different measures we look at it in terms of dollar share, unit share, close rate and draw rate. Overall, we had another great year in major appliances.

Certainly, a lot of competitive pressures in the fourth quarter. We actually had some promotions of our own. Some other promotions we elected to match, some we didn't match, depending on the promotion, depending on the competitor, depending on the deepness of the discounts and so forth.

Be very candid, we're not overly concerned. We know we have all the brands. We're not concerned with brands other folks have versus what we don't have. Certainly Samsung has been a home run for us in terms of high efficiency laundry products, and high efficiency laundry's still one of the major drivers in our appliance business. We feel well positioned with that category and certainly with Maytag and Whirlpool, some of the new product lines they're coming out with, as well as products from Bosch and several other leading suppliers that we have.

So we feel real confident that we'll reverse this trend [inaudible] these things happened. We're digging deep, we've looked at all our different reports and dug into it, whether it the inventory that we have to take a look at, staffing in Mike's group, and the marketing group and how we market our products. So overall we feel real good about where we're positioned and we certainly think we'll reverse this trend.

Okay. And then just a quick follow-up for Bob Hull. With the first quarter guidance for, I think, operating margins down about 150 basis points with a better comp, a forecast for a negative two to negative four versus 5.3, and you did, I think, 122 basis points of margin erosion in the fourth quarter. Is that difference just on a less optimistic gross margin outlook? Because I'm assuming you'll delever less with a better sales trend.

I think it has to do with a couple things. One, you're right, we're not forecasting 42 basis points worth of gross margin expansion in the first quarter, we're forecasting for a more modest increase in gross margin. Also recognizing the fact that our first quarter of last year was a very strong quarter for us with net earnings up almost 45% and strong operating margin growth, as well.

So just a tougher comparison going up against Q4 -- excuse me, Q1 '06 and just recognizing that, as well as the negative comp environment.

Okay. And then 2Q is actually your most difficult two-year compare for the year? Right?

As far as --

Just two-year average comp compare?

It is -- no, Q1's the toughest two-year comp compare. We're going up against 7.8% and 3.8% for a total of 11.6 versus Q2's 9.8.

Okay. Sorry, I was looking at the wrong numbers. You're correct. Thanks.

Dennis, we have time for one more question.

Thank you, sir. Your final question will come from the line of Deborah Weinswig with Citigroup.

Hi, good morning. Charmaine Tang for Deb Weinswig. Just wanted to close out with what you guys view as the big areas of opportunity with the commercial business customer in '07. I think you'd mentioned a good performance from them in '06.

Deb, it's Larry Stone. I'll start and let other people add in. Certainly, the commercial business customer has been a focus of ours for a number of years, and the programs we've put in place in a sense insulate us against the new home building business because years ago when Lowe's was a smaller company, that was kind of the trend we followed. But we've really focused on all the core categories. When you get into categories inside the store like plumbing, electrical, and rough in-fashion categories, our hardware tools, and even all the other categories like paint and paint accessories and so forth. So the plan that we've worked on for several years has been to take the focus off lumber, building materials.

We still want all that business, don't take it as we don't, but the real focus has been on inside the box. And through various promotions to these folks in terms of direct mailers and so forth, we've had a very solid marketing plan that we've used for the last five years to bring this customer into our stores.

And coupled with this, our credit programs, the in stock of the job lot quantities they need and so forth. It's just been a really solid that we've worked on for a number of years that's made this business continue to grow for us.

And just one last question. Outside of the appliances category, are there any specifics you can share on market share trends just in some of the other key categories?

Well, we gained in 19 out of 20 categories in terms of unit share, and we take a look at dollar share and close rates and so forth. But we feel real confident that we're gaining share in all of our major categories. And certainly, we continue to look at the lines that we carry for our customers. We take a continual approach on how we go to market with these various products, the service aspect of having the right staff in our stores to sell the products. And we're continuing to work with our vendors to get exclusivity and different brands that we can carry versus competition.

Thank you.

Okay. Thanks, Larry. And as always, thank you for your continued interest in Lowe's. We look forward to speaking with you again when we report our first quarter results in May. Good-bye and have a great day.