勞氏公司 (LOW) 2007 Q4 法說會逐字稿

Good morning, everyone.

Welcome to Lowe's Company's fourth quarter and fiscal 2007 earnings conference call.

This call is being recorded.

Statements made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Management's expectations and opinions reflected in those statements are subject to risks.

And the Company can give no assurance that they will prove to be correct.

Those risks are described in the Company's earnings release and in its filings with the Securities and Exchange Commission.

Hosting today's conference is 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 call over to Mr.

Niblock for opening remarks.

Please go ahead, sir.

Good morning and thanks for your interest in Lowe's.

Following my remarks, Larry Stone will provide additional details on our performance and describe his objectives for 2008.

Including what we are doing to manage the business in today's challenging environment.

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

2007 presented a challenging sales environment.

Many external pressures affected our industry and weighed on consumers throughout the year.

Total sales decreased 0.3% for the quarter but increased 2.9% for the year with comp sales declining 7.6% for the quarter and 5.1% for the year.

While our top line results were disappointing we did have solid market share gains indicating that we are continuing to provide a compelling offering to customers despite the pressures on the overall industry.

Earnings per share of $0.28 for the quarter and $1.86 for the year were within our guidance but down 30% and 6.5% respectively from last year.

In a year when the housing market softened at an unprecedented rate, mortgage markets tightened considerably especially in the back half of the year, deflationary price pressures from lumber and plywood impacted sales and adverse weather including the exceptional drought in certain areas of the country pressured our industry.

Our relative performance reflects the strength of our team and suggests we are providing customer valued solutions in a challenging environment.

Sales trends continued to get worse in the second half of 2007.

We are obviously working to further understand the variables impacting our industry.

Over the last several quarters we have used third party home price information to define three broad market groupings.

Based on home price dynamics within those markets.

We described our performance in overpriced markets with a correction expected or occurring.

Overpriced markets with no pricing correction expected and not overpriced markets.

One thing that has remained consistent since we began this analysis is the logical tiers within our sales performance.

Basically, the worst markets from a home price perspective have generated the worst relative results.

And markets with less impact on the housing front have generated better relative comp sales.

But, as we have monitored these markets, we have seen an erosion in comp performance across all three market buckets, both troubled and relatively stable housing markets have seen an erosion in comp sales.

That was true from Q2 to Q3 and from Q3 to Q4.

Obviously this erosion is concerning, and while this analysis is not intended to be predictive, continued erosion in comp sales across all three market types has led to increased caution in our outlook for 2008.

The good news is that based on this analysis and supported by our customer sentiment surveys, we are seeing an indication that once a market reaches a trough, essentially a point where home prices are no longer declining consumers begin thinking about and acting on home improvement purchases very similar to consumers in markets where home prices weren't expected to decline.

We have only seen a few markets progress completely through this cycle and we've recently seen shifting consumer sentiment in those markets.

It is too early to put too much confidence in these numbers but there are encouraging signs that demand patterns should improve as markets move through the cycle.

In addition, as I mentioned earlier, we continue to capture market share despite the pressures on the home improvement industry.

In the fourth quarter, we gained 80 basis points of total store unit market share.

Later in the call, Larry will provide more details about specific category performance.

Our original plan for 2007 proved to be too optimistic.

In this challenging sales environment we will continue to pursue our disciplines of providing excellent customer service and gaining profitable market share.

My goal is to ensure we maintain an inspired and energetic workforce.

Given the external pressures we faced in 2007 I'm grateful and appreciative of the hard work and dedication displayed by the entire Lowe's team.

As we progress through 2008, we will closely monitor the structural drivers of demand including housing turnover, employment, and personal disposable income as well as consumer sentiment related to home improvement.

As 2008 unfolds we anticipate at least some of the head winds will lessen.

The effects of the recent economic stimulus package and the Fed rate cuts should aid in stabilizing many of the factors that pressured sales in 2007.

Additionally, normalized weather following last year's unusual pattern should lead to better relative results.

Even with these lessening head winds, fiscal 2008 will be another challenging year as many pressures on the home improvement consumer remain.

Considering these pressures, we have built what we feel is an appropriately conservative plan.

We are managing the business for the long term and will continue to focus on providing customer valued solutions and capitalizing on opportunities to gain market share and strengthen our business.

Our stores will remain best in class and the strength and experience of the Lowe's team positions us to drive profitable growth over the long term.

Now, here is Larry to describe in greater detail the results of the quarter and provide insights on how we are managing the business today.

Larry.

Thank, Robert.

Good morning.

As Robert mentioned, the sales environment remains challenging and external pressures facing our industry will continue into 2008.

I will start this morning by reviewing some details for our fourth quarter and fiscal '07 results and I will share how our outlook for 2008 will impact our line organizations.

Finally, I will update you on how we are thinking about the business longer term.

For both the fourth quarter and fiscal year, only two of our product categories had positive comps, rough plumbing and lawn and landscape products.

In rough plumbing we had success with our clean air and water filtration programs.

Our new operation efficient sets, in the rough fitting categories drove strong year-over-year increases.

Finally, we experienced some inflation in raw materials for the pipe category that contributed to the comp growth.

In lawn and landscape, the positive comps for the quarter were driven by snow related products such as ice melt, snow shovels, and winter gloves.

For the year we experienced strong sales in pest control products, mulch and watering products which was one of the few product areas aided by the extreme drought conditions we faced in various parts of the country.

We also had relative success in other categories that outperformed the Company average.

For example, our hardware category performed above the Company average comp for the fourth quarter driven by weather-related products such as weather stripping.

In addition, outdoor power equipment posted numbers above the company average driven by the sales of snow blowers.

Our appliance sales also had relatively better results in the quarter driven by cooking and refrigeration products.

While market share data on appliances has been mixed through 2007, in the calendar fourth quarter we gained unit and dollar share and improved both our draw rate and close rate.

Not rest on these gains we are in the process of rolling out the Electrolux brand to all stores by mid March.

We are excited about adding this premium brand to our appliance department.

Electrolux has been a leading brand in Europe for over 70 years and they have many new features including the new curve front design and LED controls.

We are confident that these styles and features will appeal to customers and be another way to make Lowe's a destination store for major appliance purchases.

Electrolux is just one example how we continue to enhance our offering across all categories to provide a better selection of the products customers want to purchase.

From a regional perspective we are continuing to see dramatic differences in performance.

We have six regions with double digit negative comps in the quarter and four with double digit negative comps for the year.

For the quarter and the year, our four worst performing regions were in California, Florida and the Gulf Coast.

Also, on a slightly positive note, we did see improvement in the fourth quarter comp performance of our Florida and our Gulf Coast regions.

While comps are still double digit negative in both, the run rate in the fourth quarter was better than the year-to-date numbers.

Those four worst performing regions reduced total Company comps by over 2% for the fourth quarter and 2.5% for the year.

Contrasting those markets, we saw relatively better comp performance in our north-central and south-central divisions.

For the quarter we have positive comps in two of our 22 regions which included areas of Texas and Oklahoma and those same two regions had positive comps for the year.

In addition, one region in the north-central division had flat comps for fiscal 2007.

Finally, in the fourth quarter, we had 314 positive comping stores and 25 stores that posted double digit positive comps.

But in the end, as Robert mentioned while some regions are performing much worse than others, we did see erosion in comps across many areas of the country in the fourth quarter.

The results of our installed sales and special order sales initiatives continue to be pressured by the weakness in bigger ticket and more complex projects as we have described in the past.

That weakness is more pronounced in the most pressured housing markets.

In fiscal 2007, both programs had growth in total sales but comp sales fell slightly below the Company average.

For the year, installed sales remained approximately 6% of our total sales and special orders fell to approximately 8% from near 9% last year.

Contrasting that weakness has been the relative strength in our commercial sales business.

For the quarter and the year, both comps and total sales growth outpaced the Company average.

Our efforts to build relationships and serve the needs of repair and remodelers, property maintenance professionals, and professional trades people continue to drive results.

In the past year, we posted CBC comp increases in 11 out of 20 merchandising categories, our comp transactions for CBC were positive for the year but average ticket was down driven by the decline in sales of lumber and building materials.

We feel that our continued focus on the segments that have the greatest opportunity will produce growth in 2008.

Measuring relative performance is always important but in a difficult sales environment it becomes even more so.

Encouragingly we gained market share in the quarter and in fiscal 2007 evidenced by third party share market statistics.

Continued strong market share gains shows we are providing great service and value to customers and we also feel this is evidence of in street consolidation as the pressure of the cycle causes competitors to exit.

While our fourth quarter comps fell short of our expectations we did achieve some milestones in the quarter.

We opened our first stores outside the U.S.

in December and we now have seven stores operating in the greater Toronto market.

Customers in Canada have given us a warm welcome even in the cold months of winter and while it is obviously very early we are extremely pleased with the sales trends in our stores.

I would like to thank the team that has worked for over two years to ensure a successful launch in Canada and I would also like to thank the employees in our Canadian office and stores who have shown incredible enthusiasm and excitement in providing a great store to this new customer base.

In addition, we also opened our first store in the state of Vermont in January.

We now have stores in all 50 states and we still see many opportunities to continue to grow market share in the markets we serve.

Later this week, we will be kicking off our annual sales meeting with all of our store managers and merchandising teams.

At that meeting we will highlight some of our successes of the past year and highlight the opportunities in the coming year.

Yes there are plenty of opportunities.

As we look out to 2008 and consider how to best address the difficult sales environment we expect to face, we are doing several things to maximize sales, capture share and grow profitable.

First, we built what we believe to be a relatively conservative plan.

Frankly, the way 2007 unfolded, perhaps the best way to describe it is we chased sales down and probably remained a little heavy on expenses through the first half of the year.

We know it is harder to cut from an expense plan than it is to add.

We are planning a more conservative build into the spring season this year versus how we staffed in the past years.

Now, some might think the staffing plan could affect service levels should sales outpace our plan but I am confident we have the ability to add the hours we need to provide great service as sales ramp quicker than we expect.

In addition, Lowe's has always been a centrally managed company.

We value the discipline and consistency that comes with that structure and we build a regional and district support structure to ensure that happens.

As we further penetrate U.S.

markets, shortening the average distance between our stores we have decided to increase the number of stores in our district from eight to an average of nine.

We are also increasing the number of stores on average in a region from 69 to 75.

I am confident we will continue to have the oversight we need from district managers and regional vice presidents to ensure consistent application of our policies and procedures under this evolving model.

But, by expanding the size of the average district region in 2008, we estimate that we will save approximately $10 million through a combination of cost avoidance and true expense reductions.

On the merchandising side we continue to enhance our offering to customers but with the awareness that in many markets customers are more focused on maintenance versus enhancement and they're looking for great value regardless of the price point.

We are calling this innovation at a value and we are working closely with our vendors to deliver this strategy.

We are also going to continue to diligently manage our seasonal inventory to ensure we maximize sales that minimize mark downs.

Our goal is to be out when the season is over.

A similar awareness of market differences will drive our advertising plan this year.

We are focused on highlighting key maintenance projects and inexpensive enhancements in markets suffering through the biggest slowdown in housing while continuing to highlight larger projects in less impacted markets.

Expense management is very important in times like this.

Bob will provide a few specifics in a minute but we have and will cut expenses where we can without sacrificing customer service.

Opportunities present themselves all over the store, from renegotiated purchases of register tape and plastic shopping bags to a reduction in unneeded or redundant signage.

We continue to identify ways to cut costs that will not be noticed by customers.

Finally, we look critically at our capital plan for 2008.

We reexamined every store in our pipeline and made the decision to reduce our 2008 new store openings by approximately 20 stores.

Most these 20 stores were planned for high growth markets like California and Florida.

Where current conditions suggest sales may fall short of our original forecast.

We know these markets will recover and we will be ready to add stores when the time is right, but we are going to delay some of them until conditions improve.

Also our commitment to reinvesting in our existing store base remains strong, bust we have decided to pull back on what we call major remerchandising projects in 2008.

Routine maintenance will continue at the same pace and we will continue to make sure that we deliver a bright, clean, easy to shop store with great merchandise.

This is part of what differentiates Lowe's and that will not change but we are working to ensure we are putting capital to use in ways that drive the best return, both short term and long term.

I want to make sure it is clear that nothing we have seen in the current environment has materially changed our long-term view of the industry and in fact over the next three to five years we are likely to build just as many stores as we planned a year or so ago.

These openings will just be delayed in certain markets until conditions improve.

I said it earlier but I think it is worth repeating; our plan for 2008 acknowledges the challenges we face this year and we are making decisions facing that reality and as a Company I feel we have been proactive versus reactive.

I want to conclude by making sure it is clear that we are also working to ensure we position the Company for the opportunities to come.

Those that will be available to us when the cycle passes.

The past 18 months has been extremely tough for the home improvement industry.

In fact in my 38 years in this industry, I can only recall one other time in the mid '70s that we have experienced so many head winds.

While I am not suggesting my experience and experience of the rest of the Lowe's management team, which averages 17 years at the Senior Vice President level and above ensures we won't make mistakes, it certainly gives us some perspective.

Clearly Lowe's has made more correct decisions through the past cycle than bad ones, evidenced by our success.

But I can remember a few instances where we reacted to a near term cycle and were not in the best position when the cycle ended.

Let me giver you a couple of examples.

In past slowdowns we added many different products that did not fit in the home improvement channel.

It sounds crazy today but we added everything from bicycles and sporting goods to toys.

While we generated some sales, at the end of the day we never made any money and just created confusion for customers.

We have avoided that pitfall in this cycle.

In the past, I have watched us make real estate decisions and store-size decisions that were not best for long-term growth and decisions that we later regretted.

While we are reducing our expansion plans for 2008 we have matured as a company, and we are making sure that we are positioned for longer-term growth.

The same can be said for our remerchandising efforts.

While we are committed to having the best stores in the industry, we feel the prudent business decision is to decrease the number of major remerchandising projects from 116 in '07 to approximately 80 projects in 2008.

As I stated earlier, our minor reset program will continue with basically the same number of products we had in 2007.

We are fighting on two fronts, maximizing results in the environment we face over the next several quarters, and positioning the Company for longer-term opportunity ahead.

Eventually the housing market will turn around and I am confident that decisions we are making are the right decisions for our customers and our shareholders.

While no one enjoys a slow down I can say it has been an educational process for many, a chance to critically analyze everything we do and it will make Lowe's a stronger company in the future.

Our centralized structure paired with knowledgeable and hardworking people at all levels of the organization capped off with the best stores in the industry ensure we will maximize every opportunity.

Thanks for your attention and I will now turn call over to Bob Hull to review the financials.

Bob.

Thanks, Larry.

Good morning everyone.

Sales for the fourth quarter were $10.4 billion representing a slight decrease over last year's fourth quarter.

For the year, sales increased 2.9% to $48.3 billion.

Comp sales were negative 7.6% for the quarter which is below our guidance of negative 3% to 5%.

Building materials deflation in the quarter was offset slightly by lumber inflation.

That impact to comps on the fourth quarter was negative 25 basis points.

Looking at the monthly trends, comps were negative 4% in November, negative 9% in December, and down 11% for January.

For the year, comp store sales were negative 5.1%.

In Q4, total customer count increased 3.8% but average ticket decreased 3.9% to $64.06.

For the quarter, comp transactions declined 3.3% and comp average ticket decreased 4.2%.

For the year, total customer count increased 5.9% but average ticket decreased 2.8% to $67.05.

For 2007, comp transactions declined 1.8% while average, excuse me, while comp average ticket decreased 3.3%.

With regard to product categories the categories that performed above average in the fourth quarter include rough plumbing, hardware, paint, lighting, seasonal living, outdoor power equipment, lawn and landscape products, and appliances.

In addition, rough electrical and home environment performed at approximately the overall corporate average.

For the year, the categories that performed above average include rough plumbing, hardware, paint, lighting, nursery, lawn and landscape, fashion plumbing, and appliances.

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

Gross margin for the fourth quarter was 34.9% which was a 56 basis point decrease compared with Q4, 2006.

The decrease in gross margin was attributable to a number of factors including seasonal clearance, mark downs related to recent activity and to a lesser degree commodity pricing pressures.

The commodity pricing issue is a function of the timing of cost increasing for products, relative to the timing of changes in retail prices.

These items were slightly offset by sales mix and lower inventory shrink.

For the year, gross margin of 34.6% represents an increase of 12 basis points over 2006.

SG&A for Q4 was 24% of sales and deleveraged 153 basis points driven by store payroll and fixed costs.

As sales per store decline, additional stores are hitting the minimum hours threshold which increases the proportion of fixed to total payroll.

For the quarter, store payroll expense delevered 71 basis points.

Also, lower sales volumes in the quarter caused deleverage in expense lines containing fixed costs; specifically utilities deleveraged 21 basis points, rent 15 basis points, property taxes 11 basis points in the quarter.

Lastly, bonus expense deleveraged slightly in Q4.

In an environment where rising delinquencies and losses are much discussed, I'd like to give you an update on our proprietary credit program.

Our partner, GE Money manages the account and owns the receivables.

Our agreement has us paying some of the expenses directly like promotional financing and interest, gives us some limited exposure to losses and allows us to participate in the portfolio profits.

In 2007, we planned for higher money costs and losses and these items came in close to plan for both Q4 and the year.

Offsetting these increased costs, cardholder income was higher than planned allowing us to realize higher portfolio profits.

For the year, SG&A is 21.8% of sales and deleveraged 103 basis points to 2006 driven primarily by store payroll and fixed expenses.

Depreciation at 3.6% of sales totaled $370 million and deleveraged 60 basis points for the quarter.

This deleverage was driven by a 15% growth in fixed assets and negative comp sales.

Operating margin, defined as gross margin less SG&A and depreciation decreased 269 basis points in the fourth quarter to 7.3% of sales.

For fiscal 2007, operating margin decreased 126 basis points from last year to 10%.

For the quarter, store opening costs of $61 million deleveraged 12 basis points to last year as a percentage of sales.

In the fourth quarter, we opened 72 new stores including the first six stores in Canada.

This compares to 58 new stores in Q4 last year.

Interest expense at $47 million deleveraged 3 basis points as a percent of sales, interest expense was lower than forecasted due to capitalized interest.

We reviewed our accounting policy related to capitalized interest.

As a result we capitalized more interest than expected, reducing interest expense for the quarter by approximately $23 million or $0.01 a share.

For the quarter total expenses were 28.6% of sales and deleveraged 228 basis points.

Pre tax earnings were 6.3% of sales for the quarter and 9.3% for 2007.

The effective tax rate was 37.5% for the quarter and 37.7% for the year.

Earnings per share for the quarter of $0.28 was within our guided range of $0.25 to $0.29 but decreased 30% versus last year's $0.40.

For 2007, earnings per share of $1.86 decreased 6.5% from 2006's $1.99.

Weighted average diluted shares outstanding were 1.48 billion for the quarter, the computation diluted shares takes into account the effect of convertible debentures which increased fourth quarter weighted average shares by 21 million.

In the fourth quarter, we repurchased 14.1 million shares at an average price of $23.02 for a total repurchase amount of $325 million.

For the year, we repurchased 76.4 million shares at an average price of $29.79 for a total repurchase amount of almost $2.3 billion.

We have $2.2 billion remaining 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 $281 million.

Inventory turnover calculated by taking a trailing four quarter cost of sales divided by average inventory for the last five quarters was 4.06, a decrease of 21 basis points from Q4, 2006.

Our fourth quarter inventory balance increased $467 million or 6.5% versus Q4 last year.

The majority of this increase was from new stores.

Distribution inventory was also up slightly.

Comp store inventory was down 3.2% from last year.

At the end of the fourth quarter we owned 87% of our stores versus 86% at the end of fourth quarter last year.

Our debt to total capital was 29.3% compared with 22% for Q4 last year.

This increase was due to the $1.3 billion of senior unsecured bonds issued in the third quarter and almost $1.1 billion of commercial paper outstanding at year end.

Return on invested capital measured using a trailing four quarters earnings plus tax adjusted interest divided by average debt and equity for the past five quarters decreased 319 basis points for the quarter to 13.9%.

Return on assets, determined used a trailing four quarters earnings divided by the average assets for the last five quarters decreased 226 basis points to 9.4%.

At the end of the quarter, lease adjusted debt to EBITDAR was 1.46 times.

Looking at the statement of cash flows, for the year, cash flow from operations was $4.3 billion, a 3% decrease from 2006 driven by the 10% decline in net earnings.

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

In constructing our 2008 plan we have attempted to take into account the external factors influencing the consumer and our business, the competitive landscape, and the internal initiatives that Larry described.

We have built what we feel is a prudent plan given this environment.

We expect a first quarter sales increase of approximately 2% which will incorporate the comp sales decline of 5% to 7%, the comp outlook of down 5% to 7% is an improvement from Q4's trend but we feel this is achievable based on what we have seen to start the quarter and easy April 2007 comparisons where the first two weeks at negative 19% comps due to severe weather.

We plan to open 21 new stores in the quarter, four stores in February, four stores in March, and 13 stores in April.

Earnings before interest and taxes or EBIT for the first quarter are expected to decrease by approximately 170 basis points to last year as a percentage of sales.

The biggest driver to the decline in EBIT is deleverage in store payroll as we maintain customer service levels in a negative comp sales environment.

In addition we expect deleverage in depreciation, bonus, utilities, property taxes, and rent expenses in Q1.

For the quarter, interest expense is expected to be approximately $81 million.

The income tax rate is forecasted to be 38% for the year.

We expect earnings per share of $0.38 to $0.42 which represents a decline of 12% to 21% over last year's $0.48.

For 2008, we expect to open approximately 120 stores resulting in an increase in square footage of approximately 8%.

Our 2008 store expansion plan is more evenly balanced across the year relative to the 2007 opening schedule.

As a result, the average new store will open, will be open one month sooner in 2008 compared to 2007 new store openings.

We are estimating 2008 comp sales to be negative 5% to 6% and a total sales increase to be approximately 3%.

For the fiscal year, we are anticipating an EBIT decline of approximately 180 basis points.

The decrease is higher for the year relative to the first quarter due to cycling last years self insurance adjustment in Q3, 2007.

For 2008, interest expense is expected to be approximately $273 million.

Some of these inputs should yield earnings per share of $1.50 to $1.58 which represents a decrease of 15% to 19% from 2007.

For the year we are forecasting cash flow from operations to be approximately $4.5 billion or about 4% higher than 2007.

Our capital plan for 2008 is approximately $4.2 billion, with roughly $350 million funded by operating leases resulting in cash capital expenditures of approximately $3.8 billion.

Our guidance for 2008 does not assume any share repurchases.

We are now ready for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Budd Bugatch with Raymond James.

My question goes to the guidance, and I know you have talked about being appropriately conservative but I am trying to reconcile the guidance with the comments too that you expect to see some head winds abate as the year unfolds.

Obviously the tougher, the easier comparisons happen as you get against the end of 2007 and even against the end of 2006.

So Robert or Bob could you give us some feeling on that as to the comps?

Budd, I will start, then I will let Bob get in the details.

Certainly, the fourth quarter the actual comp was weaker than we anticipated.

If you look at the comp guidance for the first quarter and for the fiscal year '08 we are expecting better comps than we had coming out of the -- out of the fourth quarter.

If you look at the unknowns that are out there, certainly there's the stimulus package, how impactful is that going to be.

When we look at the credit markets and what's taking place out there in the credit markets, how much more deterioration potentially do we have from there and we do have, obviously, easier comparisons in the back half of the year but certainly we have got some things we are cycling up against like Bob mentioned in his comments with the self insurance reserve adjustment that we had out there.

We try to take all that into account and build the guidance but yet, be somewhat conservative we believe because we have been a little surprised both in Q3 and Q4 in the weakness that we've had out there, and by, as Larry said in his comments by building a more conservative plan hopefully we continue to make sure that we have our payroll and our other costs right in the store so that if the environment is better than we anticipate because of the fed rate cuts, stimulus package, cycling easier comparisons, moving further through the housing cycle getting closer to the trough, any of those things then we can try to feed into that tight demand versus trying to be in more of a reactive mode, where we're reaching and trying to pull back and chase those volumes down.

Bob, I'll let you add anything on top of that.

Budd, when you look at the comp guidance of negative 5% to 6%, the midpoint is negative 5.5%.

We are implying that the comps for 2008 were actually worse than 2007's reported negative 5.1%.

We do feel like we've got an opportunity in the spring based on the tough April of last year, where we had negative 10% comps really driven by the poor performance in the first two weeks.

Some of that is, came to us in the second quarter of last year, so we have tough comparisons; in the second quarter of last year, it was only negative 2.6% comps.

Our plan does contemplate slightly improving performance in the back half of the year really because of easy comparisons.

Some of the markets improving as well as some potential benefit from the stimulus package and the lower interest rates.

Just as a follow-up, can you maybe parse your comp so far based on, I know you haven't done this, but maybe you can give us a feel, project business versus kind of everyday kind of purchases, I know projects are where you are really feeling most of the impact, or I think you would suggest you're feeling most of the impact.

And maybe if you could quantify that differential for us, that would be helpful.

It won't be able to quantify the differential at this point.

I can tell you that we have seen relative strength in the smaller ticket purchases, some of the traffic driving items that we've done in the fourth quarter, the innovation at a value that Larry described we are seeing pretty good performance from a relative standpoint, as you might expect our worst performing categories are the biggest ticket categories, cabinets, millwork and flooring to a lesser degree.

Okay.

Thank you very much.

Good luck on the quarter and the year.

Thanks.

Your next question comes from Dan Binder with Jefferies.

Hi, good morning.

It is Dan Binder.

A couple of questions for you.

One, can you give us an idea of how many of the stores you are building this year are in California and Florida?

And then two, given the increased defaults in the credit card portfolio, what are you seeing in terms of availability of credit to your customers?

Where is that penetration today?

What are you building in for your expectations in the coming year?

Dan, this is Bob.

I will start with the second part of the question.

One of the things when we think of our credit portfolio, is we were not aggressively chasing the business for the past couple of years, we had a very prudent growth strategy that allowed us to gradually increase the mix of proprietary credit to total sales.

As it relates to extending credit to consumers we've not had any change in our approach and our approval levels are relatively constant '07 from prior years.

We do have good transparency into GE's delinquency trends, collection effectiveness and losses.

Hopefully this allows us to have very good visibility and be out in front of any potential impacts.

We have planned for some additional losses in 2008.

That's contemplated in our 2008 plan, but we don't see any dramatic changes in our credit portfolio going forward.

Dan, it's Robert Niblock.

For California and Florida, you're looking at about approximately 20 stores is in the plan currently for 2008.

Great.

Thanks.

Your next question comes from Colin McGranahan with Bernstein.

I had a longer term question.

It sounds like you are prudently taking a pretty hard look at capital and expenses, districts, regions, remerchandising plans, and whatnot for '08.

How are you thinking about the duration of the cycle at this point?

And some of the work you've done looking at home prices in past cycles, what are you thinking about beyond 2008 and do you care to revisit your 2010 outlook that you went over I guess it was last September?

I think it was 8% to 11% top line growth and 12% to 15% EPS growth?

I will start with the last question, Colin.

At this point in time we are not going to revisit our 2009, 2010 assumptions.

I think longer term, as Larry described there probably is an opportunity to build just as many stores in the next three to five years as we thought about last year but we are trying to think about and get through 2008 at this point in time.

Colin, it is Robert Niblock, when you look at all of the data that's out there as far as when the trough will occur, and those type of things I think there has -- it looks like it has moved out some, obviously there's a chance it can still move further.

Right now when you look at some of the projections that are out there it puts your trough somewhere maybe around the third quarter of '08 is when the biggest part of the markets have entered the -- or have troughed out and you start to see some recovery, but then you still have other markets that are still troughing.

Overall, we wouldn't be looking to even probably begin a recovery until at least the first part of '09 based on what we are seeing today.

So we would certainly expect '09 to be better than what we are seeing or projecting in '08.

But as Bob said until we get a little further out we really are not prepared to update that long term guidance we have given for '09 or for 2010.

Okay.

Just as a quick follow-up on that you did mention that you had seen some kind of bottoming in some places, it sounded like maybe Florida, California, what did you see in those particular small markets, those individual markets when you did see the bottoming?

Did you see comps go flat or did you actually see just a slower decline?

Colin, this is Larry Stone.

I'll answer that one.

The comps are still double digit negative for the year.

The comment in the fourth quarter we did see an improvement over the previous three quarters for the year.

If you look at it, you try to dissect the business, there was really no one particular product category or categories that drove it.

It was just a general improvement across basically all categories but nothing really significant, but there again you are always looking for rays of hope and certainly looking at that.

We did think that was significant to mention about the fourth quarter but Florida stores and the California stores and certainly the Gulf Coast stores are still stores we have been having struggles with but hopefully those will start to turn around as we get later in the year and hopefully by '09 those markets will start to trend back to where they were in the past years.

Okay.

Great.

Thank you.

Colin, and I think Larry's comment was specifically with regard to what we are seeing in the Florida and California markets.

It had some of the worst or some of the toughest housing price declines and some of the toughest comps that we've seen over the past several quarters.

Got it.

Thank you.

Your next question come cans from Brian Nagel with UBS.

Hi, good morning.

Morning.

I have a longer-term, relatively longer-term question as well.

The home improvement sector from a price perspective has been more rational than retail.

As you've seen sales weaken relatively significantly since the earlier part of this year has price competition become any more of an issue within your space?

Also, related to that you weighed out some of the expense leverage opportunities you have?

Could you, are there levers you could pull on your own advertising, whether it be pricing or even non pricing advertising as you look into 2008?

Thanks.

Brian, this is Larry Stone.

I will start on the answer.

Certainly we monitor the competitive landscape on basically a daily-weekly basis.

We haven't noticed anything that gave us any concern in the fourth quarter.

Certainly we looked at our advertising versus the competition we compete with in this sector and we didn't see anything that gave us any real concerns about a pricing battle shaping up.

We think there's still business out there, we think everybody is taking a more rational approach to capturing that business.

Our advertising plans are solid for 2008.

We know what we want to do and when we want to do it.

And certainly we think there's a lot of opportunity to still gain market share the way we go to market with our plans.

Thank you very much.

Your next question comes from Mike Baker with Deutsche Bank.

Hi.

Thanks, guys, two questions.

One just on the commodity pricings, you said you are seeing a little bit of a lag on when that gets passed through right now.

So is that normal, is that what you have seen in the past or are you seeing that lag because consumers are being a little bit more hesitant to be out there passing the prices?

Mike, it's Larry Stone, I'll start.

On the commodity pricing, a lot of times, when you are in, especially you get into lumber and some other categories like pipe and copper cable and so forth a lot of, the way we are so up to date on our costs and so forth, sometimes the market will not allow you to go up.

People have now got their current cost into their systems, in some cases you have to wait for a week or ten days or even a couple days in some cases to take those projects up to the current replacement cost.

That's always been the norm in our business.

Years ago, we were selling a lot of lumber and building materials, it was always the norm competing with the smaller folks in that business.

That has been something that has been ongoing forever in this business.

It is not any different in this kind of environment?

No.

Then one more question if I could.

Bob, you said that the guidance assumes no share buybacks.

Does that mean you are not planning on doing anymore buybacks or you just haven't put that in the plan?

There are no share repurchases in the plan.

We have talked in the past about maintaining a strong capital structure.

In today's environment, maintaining an A-1 P-1, commercial rating is extremely important, making sure there's good access to capital.

We are continuing to evaluate our capital structure.

We have talked to you about maintaining a guardrail of 1.4 times lease adjusted debt to EBITDAR.

We were slightly above that in the fourth quarter at 1.46 times.

We will continue to monitor the environment.

We will continue to evaluate our strategy regarding capital structure.

But at this point in time we are focusing on investing in the business, 120 new stores and then whatever excess capital we have will be returned to shareholders.

Okay.

Thanks a lot, guys.

Your next question comes from Gregory Melich with Morgan Stanley.

Hi, I guess to follow-up on that, Bob, the CapEx number that I think you gave is $3.8 billion; it looks relatively unchanged from the October or September meeting.

But there's 20 less stores, can you just describe why that is or the timing of it?

Yes, a few items causing that.

First, we had some items slip from 2007 into 2008 about $80 million or so.

Second, as you would expect, building costs are going up related to cement, steel as well as increased fuel prices, means increased cost of getting the goods to our site.

In addition, we expect to have even a more balanced opening schedule in 2009.

Ideally, a 50% in the first half, 50% in the second half.

To be able to accomplish that we need to procure that land in 2008 to make that come together.

Really those three factors are driving relatively same CapEx outlook now versus September on a lower store base.

Greg.

This is Robert.

When you think about it, we reduced the number of stores that we're opening this year, a number of those were originally slated for the fourth quarter, they may have moved out to the first quarter of '09 so you will still expend part of that capital, as Bob said, this year, but we do save some of the grand opening and the other costs associated with opening that store by pushing that out to the first quarter so we shift those costs from '08 to '09.

But a good part of the capital still gets spent in '08.

Okay.

Great.

A second question, I noticed the commercial paper you did in the fourth quarter, Bob, what is the strategy of now having commercial paper as part of the capital structure?

It is really, Greg, about managing the capital structure.

We were managing to the 1.4 times lease adjusted EBITDA guardrail and that's just part of the strategy.

Okay.

You are comfortable to keep that billing there now, going forward?

Again we are going to manage to the guardrail.

Okay.

We are forecasting a decline in EBITDAR for the year so we are going to trim the commercial paper throughout the year.

If I could just as a follow-up on credit.

I just want to make sure I got this is right.

Credit hurt you year-over-year but it was not any worse than planned or was it actually better than planned because of some of the income that was made?

For 2007, we performed slightly better than plan and slightly better than last year from a percent to sales.

Okay.

And then in terms of your outlook, do you expect in your guidance for this year, do you expect credit to be a bigger percentage of sales or less?

We expect prior to credit to continue to increase roughly 100 basis points of a mix of tender type, in 2008, that's been fairly consistent to how it has grown over the past couple of years, however based on forecasts of higher losses that I mentioned earlier we expect credit to be a slight drag of 5 or so basis points to operating margin in 2008.

Okay.

Great.

Thanks.

Your next question comes from with Chris Horvers with Bear Stearns.

You took down your square footage growth by about 20 stores this year and you have emphasized that, that's something that you want to come back to later when the market gets better.

Could you take us through your thought process there?

Is it that the new store productivity is getting hit right now and you expect that to return back to a higher level and perhaps, what that level, what that expectation is?

Think about it Chris, this is Robert Niblock.

In a lot of these markets we are going into, they were very high growth markets and we were trying to store and stay ahead of that growth.

And with what's taking place in the housing environment, you have seen that growth in that market slow dramatically.

So and we were in and obviously having a significant hit on cannibalizing existing stores trying to stay ahead of that growth.

The market had now slowed so the comps in those existing stores have now slowed so you would be going in and cannibalizing those stores, running at a much lower volume than you had originally anticipated when you were bringing in that additional store.

We have gone in, taken a hard look at those market that have been hardest hit and we are saying let the market recover and let the volumes in the store recover before we are ready to come in and cannibalize and that's going to be pushed out probably a couple of years.

That's why we, in many many cases shifted these stores out either a few quarters or possibly even a couple of years depending on how hard the market was hit and how heavily we had the markets -- those particular markets stored previously.

So are you with the stores, is it that you presented it this way because you want to have the option later of coming back to those 20 stores in investors minds but is it truly definite that will come back to and bring those stores in?

There's a few of the stores where we have canceled at this point in time, with we will come back and look at the market later.

There's others where we have just delayed the closing on the site out a few quarters because we think it is going to take a couple more quarters for that market to respond.

So there's not one factor that we use.

We did it on a market by market basis and also, look at how tough is it to get sites in those markets, how well are we stored in those markets.

There's a whole number of factors that went into each and every decision.

Got you.

And then as a follow-up, on the gross margin, Bob, could you possibly talk about what the outlook is in gross margin for this upcoming year and if there's any particular factors that we should be thinking about in any particular quarter.

Sure.

If you look at 2007, gross margin was up for the year, but it is pretty lumpy quarter by quarter.

We had a 56 basis point decline in Q4, against tough Q4 '06 comparisons where margin was up 41 basis points.

We do expect gross margins to be up in 2008 but again it will be lumpy quarter by quarter and we expect gross margin to be down slightly in the first quarter of 20608.

Thank you very much.

Chris, this is Robert Niblock, just to reiterate a point from Larry's comments earlier that we still have the same long-term outlook for the market, we are still looking at longer term for the North American market 2400 to 2500 stores, that has not changed.

But and that's predicated on a return to more normal productivity levels?

Yes and I am also not stating over what period of time we will get there as well.

Got you.

Thank you.

Your next question comes from Eric Bosshard with Cleveland Research.

Good morning.

Morning, Eric.

On the gross margin comment that was just made in regards to growth in 2008, can you give a little bit of insight into what might drive that gross margin expansion?

And then I guess I would especially be interested within that hat you're seeing in terms of souring cost within your direct import side of the business.

Eric, this is Larry Stone.

Certainly we will continue to use Lowe's global sourcing to help us on our gross margin expansion.

We think that's still got a lot of potential to grow and to source products from overseas and bring better value to customers at a lower price.

That certainly figures in all of the decisions we make in terms of how we look at the markets.

We think longer term there's still potential for margin to go up albeit not as much as we had in the past.

There's a lot of different things we are doing from retail mark down optimization, the way that we really go in and optimize our mark downs as we cycle through products to doing a much better job of our productivity in the stores with the way that we take products to market.

There's a lot of different levers that we are looking at and ways that we can continue to work on our gross margin, and certainly at our sales meeting this week we will be discussing that with our store management teams.

Eric, specifically two items we think are going to help drive gross margin for the year, as Larry said, we think there's still import opportunities, one, and two as I described in our fourth quarter performance, we took a bit of a hit because of seasonal merchandise.

We think we'll do a better job in 2008 with seasonal merchandise which should aid our margins for the year.

And secondly related to that in terms of inventories, and I know you commented that the growth is all new-store related but is there a material opportunity with inventories, with structurally some of the things that you have done and also considering the environment in 2008 to make some changes there?

We think long-term there's opportunity to be more productive with inventory.

It is very hard to be productive when you are forecasting comps of negative 5 to 6%.

Long-term, we feel, yes, we can be more productive in inventory but coming off six quarters of negative comping forecasting a year of negative comps, it's tough to be too aggressive from an inventory standpoint.

Very good.

Thank you.

I think we have time for one more question.

Okay, sir, your final question comes from Steve Chick with JPMorgan.

Hi, thanks.

I guess first off, Bob, and it relates to the store productivity question, it looks like for this year you have been below your kind of 80% target.

And in your '08 guidance, it, if I have my math right to get to 3% sales growth it looks like you -- I know you are opening up less net new stores, but it looks like you are assuming productivity will be back up to 80% for this year.

Is that correct?

The thing that drives the improved store productivity is the acceleration in the store opening schedule.

If you think about the average of 120 stores opening a month sooner that's quite a bit of sales weeks and months gained which helps contribute to the improved new store productivity relative to the 72% or so we had for 2007.

Okay.

All right.

And I am sorry if I missed this but with your comp guidance for the first quarter, and being down 11% for the month of January, the last month of this past quarter, I had that that month was actually a very easy year-over-year comparison.

Did you say, have you seen an improvement so far at the beginning of the quarter we are in?

What are you seeing that gives you comfort that the sales will rebound like from where they are, where they ended the quarter at?

Sure, Steve, in my comments I noted two factors.

One was what we have seen to far to start the quarter so we haven't seen improved performance to start February relative to January's performance.

In addition, we had negative 10% comps in April 2007 with the first two weeks negative 19% due to severe weather.

So really those two factors contribute to our outlook of negative 5 to 7% comps in Q1 relative to negative 7.6% in the fourth quarter of 2007.

Okay.

So I am sorry.

So you have seen a pretty, an improvement from the January trend so far in February?

Yes.

Okay.

And then last, Bob, the interest expense guidance, for the year if I took these down right, you are expecting $81 million for the first quarter, and then is it $273 million for the whole year?

That's a pretty big increase in the first quarter.

I guess you're going to -- the idea is your excess free cash flow will pay down debt as the year goes on?

Can you just walk through that a little bit?

We do expect to pay down the level of commercial paper outstanding throughout the year.

In addition we have got some modest debt maturities, $60 million or so, it is a little bit higher interest rate.

Those are a couple factors that contribute to having a little bit heavier interest expense in Q1 relative to the rest of the year.

Okay.

Thank you.

Thank you.

Thanks and as always, thanks 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.

Thanks.