勞氏公司 (LOW) 2007 Q1 法說會逐字稿

Good morning, everyone and welcome to the Lowe's Company's first quarter 2007 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 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 and CEO; Mr.

Mike Brown, Executive Vice President, Store Operations; 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.

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

Then Bob Hull will review our first quarter financial results.

First, a few highlights for the quarter.

As expected, the challenging sales environment we experienced in last year's second half continued in this years first quarter.

In addition, difficult weather in the quarter led to below planned comps of negative 6.3%.

Providing a little more detail on our sales progression during the quarter, facing difficult year-over-year comparisons, we expected and experienced a fairly soft February resulting in negative 9% comp.

Better weather in March which coincided with the early observance of daylight savings time led to a solid performance in the second month of the quarter.

After two months of the quarter, our comps were at the low end of our guidance.

As we headed into April, we faced our easiest comp compare of the quarter, but weather deteriorated significantly in the first two weeks of April and our sales suffered.

Record low temperatures across much of the country and late season snowstorms significantly impacted outdoor category sales.

Our comps for the first two weeks of April were negative 19%, but sales improved during the final two weeks of the month , outdoor categories were covered and our stores delivered some of the best weekly comps of the quarter.

While our guidance certainly didn't assume perfect weather, and every Spring season has its ups and downs, the unprecedented weather in the first two weeks of April had a significant enough impact to cause us to fall short of our sales forecast.

Mike will provide some additional color on sales by region and product category in a moment.

Driven in large part by a below planned sales, first quarter diluted earnings per share of $0.48 also fell slightly below our guidance.

The external factors we've described the past several quarters continue to weigh on our sales performance as the sales environment remains challenging.

Dynamics in the housing market while showing signs of stabilization in certain areas are down year-over-year.

Areas of greatest concern include markets in California, Florida, and parts of the Northeast.

As expected, our comps in these areas were some of the lowest in the Company.

We'll watch these dynamics including the impact of problems in the subprime mortgage market and monitor their impact on our business.

To date the impact of subprime mortgages appears to be market specific and contained.

Another market specific phenomenon we continue to face is the impact of cycling the sales lift created by the hurricanes in the third quarter of 2005.

Our region includes the Gulf Coast area most impacted by Katrina and Rita reported a negative 23% comp in the first quarter and was our lowest comping region.

In addition, while there are clear had additional factors affecting our Florida region, we're lacking hurricane rebuilding efforts from 2004 and 2005 and that region was our second worst performer for the quarter.

Finally, year-over-year deflation in lumber and plywood prices continued to impact sales results.

But current prices appear to be firming as producers close mills and regulate supply.

While we continue to expect this to impact sales through the second quarter, current prices and near term outlook suggest the impact will client as we move into the back half of the year.

For the past several quarters, home improvement consumers have been cautious regarding discretionary purchases, reflect above performance of our bigger ticket and installed categories but increasing real disposable income and a solid employment market provide near term support and are favorable signs that consumers can and will continue to spend on needed repairs and maintenance of their homes.

Our culture of ensuring great service and great stores with a differentiated product offering positions Lowe's for long term success and continues to drive our strategy.

We're attracting customers to our stores and closing sales leading to market share gains in most of our product categories.

Our outlook for the second quarter continues to include an element of caution, based on difficult year ago comparisons and evolving market dynamics.

Recent housing data might best be described as mixed, with February's housing turnover numbers stronger than expected and March numbers falling below expectations.

It's important to understand our guidance does not assume a dramatic turnaround in the housing market, especially in some of the high risk areas.

It does assume that nationally, the housing market is at or near a bottom and will not get dramatically worse from here.

Encouragingly, the positive overall trends experienced in the last two weeks of April have continued into the first two weeks of May driven primarily by strong seasonal product sales.

While we have yet to see a significant rebound in our bigger ticket and installed sales our hope is that our solid quarter to date sales trends will continue as the Spring season unfolds; however we will remain cautiously optimistic in our outlook until we have better clarity as to the consumer demand for larger ticket discretionary purchases.

I would like to personally thank our more than 210,000 employees for their efforts in a difficult sales environment.

Their committment to customer service gives me confidence we have the right people and programs in place to continue to take market share regardless of the pressures of the external environment.

In addition, we face easier comparison in the back half of the year on many fronts including hurricane markets and lumber and plywood prices which we believe will lead to gradually improving sales results.

Now, Mike Brown, who was promoted to Executive Vice President of Store Operations in December will highlight our operational performance in the quarter.

Thanks and good morning.

This morning I'll provide details about our sales performance by region, our sales performance by category, and give an update on several operational priorities.

These priorities will help drive sales, enhance customer service and are designed to capture market share and improve performance both for the short and the long term.

As Robert stated, the impact of the current sales environment is reflected in our first quarter regional performance while many of the macro factors impacting our business appear contained in select markets the poor weather in April occurred across the country and only four of our 22 regions posted positive comps for the quarter.

Four primary factors led to our week Q1 sales.

First our results suggest that the home improvement consumer continues to take a cautious approach to spending in markets that are exposed to a slowdown in housing, including California, and areas of the Northeast.

For example, customers in California continued to shop our stores as comp customer traffic was down only slightly; however, comp average ticket was pressured reflecting consumers hesitancy to take on big ticket projects including installed sales.

Although the housing market in certain areas is showing signs of stabilization, research suggests that parts of California and the Northeast and certain other markets have not yet seen the bottom.

The expectation that these markets will continue to experience weakness for several quarters is incorporated into our outlook and we'll continue to look for ways to grow our market share.

Second, we face tough prior year comparison in hurricane affected regions including the Gulf Coast region and certain markets in Florida and as Robert mentioned these areas reported the lowest comps in the quarter.

We expect comparisons will ease in the second half of 2007 when we cycle a two year anniversary of hurricanes Katrina, Rita, and Wilma.

Third, our plywood and lumber categories experienced cost deflation of more than 20% which pressured comps in the quarter.

In examining historical price trends we anticipate these inflationary pressures should ease in the back half of 2007.

And finally, weather.

At the end of March our sales performance was at the low end of our first quarter guidance and April was our easiest comp comparison of the quarter from last year.

As we entered April the first two weeks brought unprecedented cold and wet weather to the majority of the U.S.

specifically our sales reports in outdoor categories including nursery, seasonal living, outdoor power, and lawn and landscape products were disproportionately impacted by poor weather.

For example, at the end of March, live nursery, bagged goods, and outdoor power each had positive comps ranging from high single digits to more than 16%; however this trend reversed to single digit negative comps for much of April as a result of the drastic weather changes.

Reflective of these external pressures only 2 of 20 product categories posted positive comp increases for the quarter.

Despite the relative raw based weakness across our categories there was some bright spots and I'll highlight just a few.

In paint it's about color.

We enhanced our offering to include Martha Stewart colors pallette and premium quality exterior paints and stains from Valspar and Cabot which contributed to above average comp sales.

Also lighting reported comps better than corporate average driven by our continued sales in comp pipe fluorescent light bulbs and in home environment, robust dehumidifier sales driven by the wet weather in the Northeast contribute to better than average comps for the quarter.

In spite of external pressures affecting the total market, we continue to gain unit market share in 17 of 20 product categories during the first calendar quarter according to independent third party measures.

This indicates the consumers are still shopping Lowe's and purchasing products to enhance and maintain their homes.

The third party market share data also identified areas of opportunity in the quarter.

According to the data we lost unit share in appliances.

The category we gained share over the past several years.

And all sales environments were committed to offering consumer value solutions at the best prices.

Our already strong line-up of appliances feature brands customers know and trust like the Frigidaire Elements kitchen line, Samsung, Whirlpool, and high efficiency laundry from Bosch.

However, as part of our culture we continue to evaluate our product offering to ensure we provide the most innovative products at the right price points, also we continuously evaluate our in store service and staffing levels to ensure departments are appropriately staffed and trained, their signage is clear and provides customers the information they needed to make their purchases.

We remain focused on capturing market share in not only appliances but each of our 20 product categories.

Now I'll review our Q1 specialty sales performance.

As I mentioned home improvement consumers continue to be cautious about taking on big ticket projects.

This caution is reflected in the mixed sales results for specialty sales.

Our commercial sales business continue to grow significantly during the quarter as we ensure our stores carry provisional great products and job lot quantities to meet the needs of our professional customer.

Commercial customers shop our entire store.

And we've seen relative strength across all of these categories.

Our CBC comp was above the average for the Company for the quarter and we achieved this growth in spite of 95 basis points deflation in lumber and plywood as well as negative 40% comp sales in these categories in the hurricane affected stores.

Our special order and installed sales collectively performed better than total company sales.

Probably not surprising but due to the lack of consumer willingness to take on big ticket projects we saw our largest comp decline in these two categories in California and parts of the Northeast in purchases greater than $1,000.

Notwithstanding near term external pressures we remain confident that the long term drivers of this business remain in place and we're positioned to grow these businesses.

As Robert stated despite the current sales environment we continue to focus on managing the business for the long term.

During the first quarter we assembled our store operations management teams for our annual sales meeting to communicate operational priorities and provide training and consistently execute on our initiatives in all stores.

Many of you heard us describe our five operational priorities and they remain the same.

They are, first, to consistently deliver on our customer service expectations, second, to reinvigorate our specialty sales trends, third, to continue to work to refine our processes allowing us to increase our store productivity, fourth, to build a core group of tenured and talented people to support our continued growth and our final priority is to maintain a thriving sales culture.

Now a little color on each.

Our first priority is to consistently deliver great customer service.

In today's environment is more important than ever that we remain committed to focusing on the customer.

Our customer focus program which we implemented in 1999 is refined every year.

This program tracks each stores performance on five key components, selling skills, delivery, install sales, check out, and phone answering.

These components are rated by our customers and mystery shoppers on an ongoing basis throughout the year.

As a result, our store managers have access to more timely customer feedback than ever before.

Our overall first quarter customer satisfaction score improved 100 basis points from the prior year and we showed improvement in all components as we worked to fulfill customer expectations.

Our customer focused program has always been designed to enhance our customer service culture.

Service is important at every level and area in the store and employees in the top performing stores that excel at providing customer service are recognized quarterly with special incentives.

We continue to improve this program to gain greater insight into the underlying issues impacting service.

Also, we're working other areas to enhance the customer experience in every department of our store while working closely with our merchants ensuring our stores remain easy to shop.

Our second priority is to reinvigorate our specialty sales trends to capitalize on the growing DIFM segment we'll continue to leverage our install sales model.

Our in home selling model positions us to benefit from this growing segment.

Initial test results have been favorable and we recently expanded our test with second market and we'll continue to evaluate opportunities to increase sales.

We continue to grow our special order offering to meet our customers demand for unique products and additionally, we'll continue to increase our level, that's with the commercial business customer with our targeted Marketing programs.

Moreover, we're investing in the sales side of our website lowes.com to stimulate E-commerce group.

Our third operational priority is to increase store productivity.

We know that by focusing on the customer and assuring employees engage customers or aisles that will close more sales.

In all sales environments we remain committed to our service standards.

Unfortunately, not all stores perform at the same level, a risk all retailers face in a softening sales environment is to tighten payroll expenses at each store location regardless of its sales performance.

Our flexible staffing model enables us to adjust store staffing levels based on traffic patterns and departmental sales so we have the right people at the right time doing the right job.

Although our comp sales performance fell short of our guidance within 500 of our stores reported positive comps and nearly 100 of these stores posted double digit positive comps for the quarter.

By using our sales forecasting tools we attempt to maximize store productivity by scheduling employees based on customer shopping patterns.

Because our sales were soft we adjusted our hours somewhat during the quarter; however we were very careful to maintain service levels in our stores.

As a reminder we begin with a minimum staff complement and build off that.

According to third party measures, our first quarter close rate improved in 13 of 20 categories, a strong indication of our committment to have knowledgeable salespeople taking care of our customers.

Our fourth priority is to find the right people to fuel our growth.

As we open 150 to 160 stores this year, a strong bench is critical for our continued success.

We must staff our stores with people who will provide level service, customers have come to expect from Lowe's.

We are focused on our bench strength at all levels starting with developing our internal candidates as well as recruiting talented external candidates.

External hires are rotated through the various positions to build their knowledge of Lowe's.

Currently we have active and ongoing training programs to prepare all levels of store management for their next assignment.

Consequently we have more than 7,000 employees trained and prepared for new responsibilities.

These range from over 3,000 employees ready to become Department Managers to 250 employees trained and ready to become a Lowe's Store Manager.

The final operational priority is to enhance our sales culture.

Customers shop Lowe's looking for solutions and expect our employees to be knowledgeable in all of our 20 product categories.

To help ensure we meet our customer service expectations, while creating a growing sales culture, we're continuing to refine existing tools as we develop new training and selling tools to ensure employees are positioned to sell services, products, and projects with confidence.

We use a variety of ways to execute this from hands-on, one on one training to self-directed E-learning.

As I mentioned earlier, our close rate improved in 13 of 20 categories in Q1 and as a result of ongoing training efforts our total store close rate according to independent measures increased 100 basis points compared to a year ago.

Our training programs position us to continue to improve upon our close rate.

Our operations team expects to continue to face a challenging environment through 2007 and we'll adjust continuously to changing market dynamics but will continue to manage the business for the long term.

We remain focused on delivering excellent customer service and developing knowledgeable employees by consistently executing and delivering our operational priorities to achieve our goals by capturing additional market share and growing profitably positioning Lowe's for continued success.

Now, here is Bob Hull to discuss our first quarter financial results.

Bob?

Thanks, Mike, and good morning, everyone.

As Robert indicated, sales for the first quarter were $12.2 billion representing a 2.1% increase over last years first quarter.

Total transactions increased 5.9% for the quarter while total average ticket was down 3.6% to $68.22.

Comp sales were a negative 6.3% for the quarter compared with 5.7% positive comps in Q1 2006.

Looking at monthly trends comps were negative 9% in February, negative 1% in March and negative 10% in April.

March and April comp sales were impacted slightly by a holiday shift.

In addition, our performance in the first half of April was dramatically different from the second half of the month.

Impacted by severe weather across most of the country, we experienced negative 19% comps for the first two weeks of April.

As weather improved, so did our performance and we had flat comp sales for the last two weeks of April.

For the quarter, comp transactions decreased 2.2% and comp average ticket decreased 4%.

Our first quarter 2006, comp sales included a 100 basis point positive impact from 2005 hurricane activity, given the mild hurricane season in 2006, cycling against last years elevated sales caused a negative impact of approximately 100 basis points on this years first quarter comp sales.

Lumber and plywood prices in the quarter were down almost 25% to the same period last year.

This deflation negatively impacted first quarter comps by approximately 95 basis points.

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

In addition, tools performed at approximately the overall corporate average.

Gross margin for the quarter was 35% and increased 2 basis points over last year's first quarter.

The increase in gross margin was driven by a 27 basis point positive impact associated with a mix of products sold.

This was offset by distribution costs and higher inventory shrink.

With lower sales volume, we experienced deleverage on our distribution fixed cost.

In addition, we incurred start up costs for new facilities including our regional distribution center in Rockford, Illinois which opened this quarter.

Lastly, higher fuel costs negatively impacted distribution.

The sum of these items was approximately 10 basis points.

In Q1, inventory shrink was 8 basis points higher than last year as a percent of sales.

Although shrink dollars were below our plans, the sales shortfall calls to higher shrink percent to sales in this years first quarter.

In addition, a position of the shrink increase is attributable to the write-off of live goods that were damaged due to the unseasonal weather during the first two weeks of April.

SG&A for Q1 was 22.1% of sales which de leveraged 137 basis points driven primarily by store payroll.

In addition, rent, property taxes, utilities, and other fixed expenses deleveraged due to the comp sales decline.

For the quarter, store payroll deleveraged 93 basis points due to maintaining base stacking levels in our stores, while this creates short-term pressure on earnings, this is the right decision to maintain the high service levels that customers have come to expect from Lowe's.

In Q1, stock option expense deleveraged 9 basis points.

In adopting Financial Accounting Standard 123R, In last years first quarter we recognized a $10 million favorable impact causing the 9 basis points of deleverage in this years first quarter.

The deleverage related to the items just noted was slightly offset by approximately 20 basis points of incentive comp leverage in the quarter.

Also, in the quarter we entered into an agreement to extend our long term partnership with GE Money related to our proprietary credit offerings.

This agreement includes the transfer of management of our co-branded Visa to GE.

As a result of this transfer, we recognized a small gain that will be amortized over the ten year agreement.

I look forward to continuing to grow our business with GE.

Depreciation at 2.7% of sales totaled $323 million and deleveraged 35 basis points compared with last years first quarter primarily due to negative comp sales and the opening of 142 stores over the past 12 months.

Operating margin defined as gross margin less SG&A and depreciation decreased 170 basis points to 10.3% of sales.

(Inaudible) cost of $11 million leveraged 11 basis points to last year as a percent of sales.

In the first quarter we opened 15 new stores.

This compares to 24 new stores opened in Q1 last year.

Interest expense at $47 million deleveraged 9 basis points as a percent of sales.

This deleverage is caused by the additional expense associated with last years bond deal.

For the quarter, total expenses were 25.2% of sales and deleveraged 170 basis points.

Pre-tax earnings for the quarter were 9.8% of sales.

The effective tax rate for the quarter was 38% compared with 38.5% in Q1 last year.

As a result of our sales shortfall, diluted earnings per share of $0.48 was slightly below our guidance and decreased 9.4% versus last years $0.53.

In the first quarter, we repurchased 22 million shares at an average price of $31.85 for a total repurchase amount of $700 million.

We have $789 million remaining authorization on our share repurchase program.

Now, to a few items on the balance sheet.

Our cash position remains strong with $629 million in cash and cash equivalents at the end of the quarter.

Inventory turnover was 4.08, a decrease of 33 basis points over Q1 2006.

For the quarter, inventory grew 8.8% compared to our 2.1% sales increase or 670 basis points of inventory deleverage to sales.

Our first quarter inventory balance increased $684 million versus Q1 last year, almost all of this increase is from new or non-comp stores.

Increase in non-comp store inventory is driven by our store expansion over the past four quarters.

Distribution inventory is up slightly due to the opening of a new RDC.

For the quarter, comp store inventory was down slightly less than 1%.

At the end of the first Quarter we owned 86% of our stores versus 84% at the end of last year.

Our debt-to-capital ratio was 22% at the end of our first quarter up from 19% for the same period last year.

Return on invested capital measured using beginning debt and equity in a trailing four quarters earnings was 17.2%, a decrease of 265 basis points at Q1 last year.

Return on assets determined using beginning total assets and a trailing four quarters earnings was 11.1%, a decrease of 216 basis points.

For the quarter, cash flow from operations exceeded $2.1 billion and increased slightly over Q1 2006.

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

In Q2, we expect a comp sales decrease of 1 to 3% and to open 26 new stores, 1 in May, 15 in June, and 10 stores in July.

Total sales are forecasted to increase 6 to 7% in the second quarter.

Operating margin for the second quarter is expected to decrease approximately 40 basis points over last year.

The decline in operating margin will largely be attributable to store payroll and appreciation deleverage offset slightly by modest gross margin expansion.

For the second quarter we're expected diluted earnings per share of $0.62 to $0.64 which represents an increase of 3 to 7%.

For 2007 we expect to open 150 to 160 stores including 3 relocations resulting in an increase in square footage of approximately 11%.

We are estimating a comp sales decrease of 1 to 2% and a total sales increase of approximately 7%.

For the fiscal year, we are anticipating an operating margin decrease of 70 to 80 basis points driven by store payroll and depreciation deleverage of 40 and 30 basis points respectively.

As a result we expect diluted earnings per share of $1.99 to $2.03.

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

We're now ready for

(OPERATOR INSTRUCTIONS) Your first question comes from Deborah Weinswig with Citigroup.

Good morning.

Can you talk a little bit more in terms of what you saw with regards to appliance market share and what you think is happening in that category?

And then secondly I was very impressed with the market share gains at the commercial business customer, can you also, Larry, elaborate if there's anything that you're doing there that's unique or different than you have in the past?

Deborah, this is Larry Stone.

The appliance market was somewhat promotional in the first quarter and certainly if we look at the track line results, we gained in some categories as Mike alluded to, we lost a little bit in unit share but dollar share we were basically up and the whole trend in appliances seems to be going more to the higher energy efficient products so certainly we're seeing a mix within the mix so to speak.

In laundry, for example, the high efficiency laundry is still driving that category versus the opening price points and mid price points a few years ago.

So we feel real confident about the appliance business, certainly, we elected to look at some promotions we didn't match, some we did match in the first quarter and we have a real solid plan in place for the second quarter and the balance of the year in terms of trying to take market share back in major appliances.

And your second question?

CBC?

I think CBC, you got to go back several years and several years ago we made a real committment to try to sell the whole store, not just lumber, building materials and millwork and certainly, if you look at the comp performance which we're not going to divulge the comps by-product category but if you look at it across the store, we do have comps across the store and I think that's the whole strategy that we put in place years ago.

Lumber, plywood, some of those core commodities did have huge deflation in the first quarter but the other categories carried the load for us on the commercial business customers in the first quarter and there again, it leads to a higher average ticket.

It leads to more margin increases because you're not selling as much commodities to those folks, but certainly, when the business comes back we'll be waiting for it.

Last question for Robert.

Robert, you had stated last quarter that you believe the comp performance had bottomed and expected to see gradual improvement in comps throughout '07.

Excluding the weather in the first quarter would you say that statement is still true?

Yes, if you look at our first quarter performance at a negative 6.3% on comps, if we had not had the unfavorable weather that we experienced in the first two weeks of April we would have been probably about 200 basis points or so impact so we would have been right at the low end of that guidance and would have certainly been an improvement over what we saw as far as comps in the fourth quarter of '06.

If you look at our guidance what we're looking at for the second quarter, we think that because we get easier comparisons from hurricane results we're going up against as well as lumber and plywood slowly getting into easier comparisons, we still believe that comps get gradually better over the balance of the year and it's primarily driven by the easier comparisons and obviously we hope that we don't have weather as unfavorable as we had in the first quarter during those tough, really tough two weeks of April that we experienced.

So, we think it gradually gets better.

As I have said in my comments, it is primarily being driven by seasonal categories right now, so we are kind of remaining cautiously optimistic on some of those bigger tickets.

We think it's going to be slower for the consumer to come around on those bigger ticket items because we are still seeing pressure in a lot of those key markets in California, the Northeast, as Mike mentioned as well as in addition to the hurricane activity down in Florida, you're also seeing pressure down there where you had some overheated Real Estate markets.

Okay, thanks so much on the details were extremely helpful.

I appreciate it.

Thank you.

Your next question comes from Greg Melich with Morgan Stanley.

Thanks.

Just two questions if I could.

One is a follow-up, so that's why it's two.

On those bigger ticket items, is there a way you could segment what the comps were of over $1,000 sales or what the special order sales ones were?

Because it seems like given the traffic and ticket numbers you gave, a lot of this pressure, 80% of it is just not doing these big projects anymore.

Is that fair?

Greg, this is Robert.

I think that would be fair that you are seeing quite a bit of pressure on those larger ticket items.

For the quarter, special order sales on a comps and special orders were worse than our overall company average, so clearly we did see pressure in SOS being tough and I think you're going to continue to see that and it's being primarily driven in a lot of categories.

One, you've got deflation out there that's impacting us and two, California always overindexed on installed and special order sales and when the market was very strong, when housing market was very strong so now you're going against tough performance on the West Coast out there, you're cycling against some of those trends that you had out there in the past so it's putting a lot of pressure on those bigger ticket, particularly special order items on the West Coast and also some down in Florida too.

And then on the balance sheet, Bob, you ramped up the buyback to 700 million in the quarter.

Would it be too optimistic of me to assume that that could be multiplied by 4?

Is this an attempt to get the debt-to-cap up to something a little more leveraged?

Greg, we're not going to talk specifically about prospective share repurchases as we talked about in the fourth quarter we didn't have any share repurchases yet we re purchased $1.7 billion for the year in the first quarter the share price was below our target and we were opportunistic in going into the market.

As I described at our analyst conference back in September, we're targeting a strong single A rating, an upper guard rail of 1.2 times adjusted debt to EBITDAR so that's the guard rail that we're going to manage up to over the next couple years.

Greg, this is Robert.

As Bob mentioned in his comments, I think we only have 789 million of authority left on this current repurchase program so we would need to go back to the Board to get additional authority to meet numbers anywhere close to what you're throwing out.

Thanks.

Thank you.

Your next question comes from David Strasser with Banc of America Securities.

Thank you.

You talked a little bit about the promotional environment related to appliances.

Can you sort of -- when you look at Home Depot's gross margin they talk about the promotional environment.

From your perspective generally across-the-board, where do you see that getting better, worse?

It seems there's a little extra inventory out there.

Is that having an impact?

David, this is Larry Stone.

In the first quarter most of the promotions were really geared around appliances and flooring.

We didn't see a lot of promotions on seasonal categories and I think all retailers were in the let's wait and see what happens mode and certainly those first two weeks in April regardless of what we did in terms of promotions, you wouldn't have drove any business because customers were not out buying.

Tools were also promotional in the first quarter and certainly, we've responded to a promotion that competition ran.

We try to do it in a different way trying to make it a little bit more simpler for customers to purchase the product.

So we've got a promotional plan built for the year.

We review the promotional plan on an ongoing basis with Operators and the merchants and the marketing group, and certainly, we look at promotions, some that we react to, some that we do not react to, but we have our own plan built and we have different things that we'll do during the year to drive sales and drive traffic when needed, but it was a little bit more promotional in those three categories in the first quarter than normal but there again with the weather I think a lot of people are trying to drive sales regardless of the margin pressures on the bottom line.

So I guess was there anything that really surprised you and I guess the fact that you maintained the flattish gross margin even up a few basis points, you probably, was that around your plan or in line with your plan being flattish?

The gross margin improvement was about what we expected.

As Larry said we try to be rational in our approach to promotions and evaluate what the competition is doing and respond accordingly.

I will tell you our advertising dollars were slightly below plan for the first quarter so we kind of took a look what the competition was doing but largely executed our game plan in Q1.

Thanks.

Your next question comes from Danielle Fox with Merrill Lynch.

Thanks, good morning.

Your comp was 2 points below the low end of your guidance but you had only a $0.01 miss relative to the low end of your EPS guidance.

I guess where were things better than expected, Bob?

I think you mentioned that you spent a little bit less on advertising.

Were there other places that you saw some ability to maintain or improve the margin and do you see more or less flexibility in those areas going forward?

For the quarter advertising which is slightly below plan so that was not a large driver.

Going into the year, we talked about expecting some pressure on incentive compensation.

Obviously with our below plan sales and earnings performance , we adjusted our bonus accruals accordingly and that did help 20 basis points in the quarter.

In addition, we have a number of other cost reduction initiatives under way that progressed a little bit faster than anticipated.

Things regarding I Team maintenance, store maintenance, a variety of RFP's that took place in the fourth quarter, first quarter where we're seeing some of our cost reduction efforts progress a little bit faster than we

So it sounds like it was mainly on the SG&A line?

That is correct.

And then you had mentioned the compensation accruals so the 20 basis point offset to the deleverage this quarter was better than you had originally planned because you accrued less than you originally expected?

For the year, on February, we thought incentive comp would be about 25 basis point drag, based on our first quarter performance and our current outlook, we now believe that's going to be flat for the year, so that was the 20 basis points of positive impact we saw in the first quarter.

Thank you.

Your next question comes from Budd Bugatch with Raymond James.

Hi, good morning.

I'd also like to follow-up on that operating margin question, because in the first quarter, I think you said you had 170 basis point deleverage on op margin and yet in the guidance you're looking at 40 for the second quarter and 70 to 80 for the year.

I take it, it's mostly in SG&A, Bob, as you said you're going to have a modest improvement in gross margin.

Can you give us a little comfort of how you get there to that 40 basis points in the second quarter.

Sure.

The 40 basis points in the second quarter, we had 93 basis points of payroll deleveraged in Q1.

We think that improves by 50 or so basis points, only about 40 basis points of deleverage in Q2, 9 basis points of stock options regarding the FAS 123 adoption, Q1 '06.

That doesn't happen in Q2.

Depreciation gets a little bit better Q1 versus Q2.

Fixed costs deleverage on a minus one to minus three is better than on a minus 6.3, and then some of the other cost reduction initiatives I just spoke of responding to Danielle's question, those taking hold will help us in Q2 as well.

That's very very helpful, thank you very much.

You bet.

Your next question comes from Chris Horvers with Bear Stearns.

Thank you.

In thinking about the seasonal impact in Q1, we know that lawn seasonal, outdoor power equipment, nursery is about 17% for the year.

Assuming you overindex in 1Q and 2Q, can you talk about how much different that is in the first half on the mix basis?

The mix really ramps up in April, May, and June.

Those are the highest seasonal mix quarters, so obviously with the poor start to April, we saw that as a direct hit in the month of April, but we still have two more months in what we basically call the 100 days of Spring so the mix really transpires three months over two of our fiscal quarters.

And Chris this is Robert.

Obviously as you are moving into, if you think about between now and the July 4th time period, that's when you have a lot of sales of outdoor power equipment, gas grills, patio furniture, a lot of those seasonal type categories, after July 4th you start to trend down a little bit but you also as it starts getting warmer, your air conditioner sales start to trend up and probably peak going into the July time frame, so obviously, that's a category that air conditioners are also in what we refer to as seasonal categories as well.

So would you say then perhaps in those three months you're generating 25 to 30% of your total sales?

I don't think it would be quite that high.

It would index up but it wouldn't be quite that high in those months.

If you think about OPE, you've got lawn tractors in the Spring but you've got generators and other wheeled equipment that sells all year around.

Okay, and then as we think about just the overall EPS guidance for 2Q and the comp guidance, thinking about your internal plan versus what you're publishing now, how different are you on EPS and comps in 2Q versus what you were privately expecting three or four months ago.

What we were thinking three or four months ago isn't really relevant sitting here today with the current fact pattern.

As we think about our second quarter and the comparison to last year, we had a 5.7 in Q1 last year versus a 3.3 in Q2 last year, so the comparison get about 240 basis points easier.

As Robert indicated, the April impact first two weeks of weather is 200 or so basis points.

The hurricane compare, the hurricanes helped us about 100 basis points in Q1 last year, about 75 basis points in Q2 last year so it's 25 basis points less headwind.

In addition, we had some inflationary benefit in Q1 last year and deflation in Q2.

That helps us about 40 to 50 basis points in Q2 so as we think about kind of trending from Q1 to Q2, those are a number of factors that give us some confidence for improved comp trend relative to the negative 6.3% reported in Q1.

Okay.

Thank you.

Your next question comes from Matthew Fassler with Goldman Sachs.

Thanks a lot and good morning.

I'd like to follow-up on the guidance discussion and take it to the second half of the year, just to get some clarity from your comp guidance, it would look like you're expecting a continued improvement from Q2 into the second half.

It seems, however, like the operating margin that you expect to recognize on the year to year basis won't be quite as good in the second half as it will be in the second quarter.

Is that a function of the fact that you're cutting back on SG&A in the second half of last year and think it will be deleveraging if you make your comp numbers here?

If you think about back half of last year and specifically the third quarter we had very favorable impact regarding incentive compensation in addition in the third quarter, we recognized a favorable impact regarding insurance expenses as a result of a number of safety initiatives, so we are thinking about the back half of the year having operating margin decline of 40 to 50 basis points.

That's a function of a little bit better sales performance, only slightly positive comps in the back half of the year relative to the negative comps in the first half of the year as well as those specific comparison that I mentioned a moment ago.

Just as a follow-up to think about your guidance and what it says about your check on the environment, you took the high end down by a greater degree than the first quarter miss versus your guidance, so is that essentially incremental caution on the environment given some of what you experienced, general conservatism?

How would you position that?

There's a little bit more caution going into the back half of the year.

And that would be sales focused in your view?

Sales focused but obviously with the lower sales you have trouble covering the fixed cost so that trickles through to the operating margin as well.

Got you.

Thanks so much.

Thank you.

Your next question comes from Eric Bosshard with Cleveland Research Company.

Good morning.

Two things.

First of all you've had a lot of focus I know on inventory management and the R-3 initiative.

Can you just talk about how we should expect inventories to behave as we move through the year and if at this point with inventories growing faster than sales if there is any consideration of adjusting your promotional efforts around that?

Eric, this is Larry Stone.

Certainly R-3 has been implemented in all of our distribution centers and although we didn't hit our stated goal that inventory grow of 75% of sales we certainly still have that goal in mind and it's a target that we shoot for with our stores every time we talk to stores about inventory growth and so forth.

I think the problem in the first quarter was a lot of seasonal products as we've stated repeatedly just didn't sell like we thought they would in the first quarter, but we're still very optimistic about our seasonal products and certainly the last four weeks of sales have shown that seasonal products are moving well.

So we think we'll get there, just some of the things that happened in the first quarter we have control on that we wanted due to the weather but there again we had to have the product in the stores and we talked repeatedly about Spring is always a crap shoot.

You don't know when it's going to hit or how hard it's going to hit so you got to have the products out there and certainly we feel well positioned for seasonal products for the month of May and July and July because as Robert mentioned earlier those are peak opportunities to sell those products so we thought we are in real good shape on our seasonal inventory and see no reason to have any major discounts for anything on seasonal products right now.

Eric, this is Robert Niblock.

I think in the first quarter inventory turns were down about 33 basis points.

I think the year we're forecasting to be down about 5 or 10 basis points so we should gradually get it headed back in the right direction over the balance of the year.

Within that is there any consideration to manage the promotional effort differently or is it just buy a little bit less and sell a little bit more as the business naturally behaves?

Well, certainly we're always looking at our products that we are buying and certainly on some of the seasonal categories we did slowdown some of the buys on some of the products as we felt like sales were not going to be as strong as we had hoped for when the weather turned on us us but that's just ongoing business strategy that we used constantly taking a look at what's selling and what's not selling and what we need to cut back on or add to in some cases, but we manage the business like that on a consistent basis in the merchants and operators and logistics and distribution are all working together as a team to make sure that we've got the right product out there and not too much of the product that we would have to discount at a later date.

And then secondly, in terms of in store service levels you've talked about managing the labor and payroll in the stores and some of the in store maintenance.

Can you just talk about how you're thinking about those efforts now or differently in this environment and also considering what Home Depot is talking about doing in terms of the investment they're making if that's factoring into how you're thinking about your in store investment and your business.

This is Mike Brown.

We look at each stores individual sales performance and we track that stores performance and the store actually will schedule hours commensurate to that stores volume or anticipated forecast so from our standpoint, we remain with all of the values that we put in place regarding our customer service culture and we see no degradation of that whatsoever.

Eric, this is Bob.

Just to follow back up.

As Mike indicated in his prepared comments we manage the business for the long term so while we have a number of efforts focused on cost reduction, cost containment, we're not slashing and burning.

We're doing everything in our methodical manner to ensure it's executed to our standards and everything that's customer facing is up to our standards as well.

Okay, thank you.

Thank you.

This is Robert Niblock.

We have time for one more question.

Yes, sir.

Your next question comes from Colin McGranahan with Bernstein.

Good morning, thank you.

Just wanted to follow-up on Greg and Chris's question on large ticket and seasonality.

Just so I really understand this, so in terms of the seasonality in 1Q and 2Q in terms of the Spring selling goes, then as you move of into Q3, would it be almost entirely maintenance or repair and larger ticket remodeling projects and then as you move of into Q4, you obviously start to pick up holiday but the seasonality of holiday is small in relative comparison to the seasonality of Spring.

Is that an accurate way of thinking about it?

The third quarter there's another seasonality that comes into play.

You got seasonal heating products that come into play, obviously as you are heading high into the winter months, you have Fall lawn and garden clean up and seasonality for OPE that's out there in some of those categories and then depending on whether or not you have hurricanes you have potentially hurricanes and storms, potentially large generator sales and clean up associated with that so there's seasonality on both ends.

So it's just different products.

You got to be out of one generally coming out of Spring season to make room for what comes in for the Fall season.

Okay.

And then just one quick follow-up on housekeeping.

Of the 100 double digit positive comp stores and the 500 positive comping stores, how many of those are less than three years old?

I don't think we have that information with us on the call today.

Okay.

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 great day.