勞氏公司 (LOW) 2008 Q1 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies' first quarter 2008 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 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 will be Mr.

Robert Niblock, Chairman and CEO; Mr.

Larry Stone, President and COO; and Mr.

Bob Hull, Executive Vice President and CFO.

I will now turn the program over to Mr.

Niblock for opening remarks.

Please go ahead, sir.

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

Following my remarks, Larry Stone will review our operational performance, including what we are doing to manage the business in today's challenging environment; then Bob Hull will review our first quarter financial results.

First a few comments about the quarter.

As expected, the decline in housing activity that has weighed on home improvement industry and pressured our performance over the past six quarters continued into the first quarter of 2008.

Top line sales decreased 1.3% and comp sales declined 8.4%, both were below our expectations.

While our guidance anticipated a very difficult sales environment, two primary factors accounted for our below planned sales.

First, wet, cool weather in February and March more than offset the more seasonable weather experienced in April.

Comps were down 12% in the February to March period and negative 1% in April.

Second, and probably the larger of the two, the continued erosion of macro economic variables and the resulting impact on consumers was greater than we anticipated.

Food and fuel inflation and an increasingly negative employment environment pressured consumer's wallets and eroded confidence.

In addition, today nearly 80% of our comp stores are located in markets experiencing housing price decline.

As a result, many consumers remain hesitant to begin big ticket projects.

The continued housing detraction in certain U.S.

markets, increasing pressure on discretionary income, and an uncertain jobs market are all top of mind with consumers.

While April's performance is encouraging, it is certainly too early to characterize it as a change in trend and the uncertainty in the broader economy suggest a conservative outlook is warranted.

In all sales environments our goal is to prudently manage expenses and identify opportunities to drive efficiencies while working to maintain the excellent service customers have come to expect from Lowe's.

Our disciplined expense management continued in the fist quarter and drove respectable earnings per share of $0.41 which was within our stated guidance.

In addition, despite the external pressures on sales we continued to capture market share.

During the quarter we gained 70 basis points of total unit market share according to third party sources.

Our market share gains are driven by the dedication of our 215,000 plus employees who remain focused on providing exceptional customer service everyday and our compelling offering of customer valued solutions.

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

On the past several conference calls we have described our use of third party home price information to define three broad market groups based on home price dynamics.

We described our performance in overpriced markets with a correction expected or occurring, overpriced markets with no pricing correction expected, and not overpriced markets.

We continued to see our most significant negative comps in overpriced markets going through housing price correction; but in the first quarter, the relative difference in comp performance between overpriced with a correction expected and not overpriced markets narrowed driven by slightly worse comps in the not overpriced markets compared to fourth quarter.

We believe comp sales declines in these more stable housing marks are a reflection of the broader overall downturn in the U.S.

economy during the first quarter.

It bears repeating, the external pressures facing our industry will likely persist throughout 2008 and the sales environment will remain challenging we remain cautious about our outlook and have a prudent plan in place for 2008.

We will continue to closely monitor consumer sediment and there's other structural drivers related to home improvement including housing turnover, employment, and personal disposable income.

Historically, fed rate cuts as well as fiscal stimulus packages have been beneficial to our business; however, consumers are facing rising costs elsewhere that may dampen their spending on home improvement.

The net effect is difficult to predict so we are taking a conservative view with respect to the recent fed action and the economic stimulus plan.

We are managing the business for the long term and will continue to build upon our already strong foundation.

Our goal is to provide outstanding value and gain market share through our superior shopping environment, compelling selection of products, and great service.

We are confident that we are well positioned to take advantage of the opportunity to gain market share in the current environment.

Now, Larry Stone will provide greater detail on our first quarter results.

Larry?

Thanks, Robert, and good morning.

As Robert mentioned the sales environment remains extremely challenging as the external pressures facing our industry have intensified.

Today I will share a few details for the quarter and describe the things we are doing to drive profitable sales in the current environment.

When I spoke on the earnings call three months ago, I described the fact that we were anticipating a tough sales environment in 2008 and that we were planning conservatively, but would be ready to react if sales came in differently than we planned.

Unfortunately, sales and comps for the quarter were weaker than anticipated.

We saw a 3.1 reduction in comp traffic and a 5.3% reduction in comp average ticket leading to our negative comps of 8.4%.

On the positive side, we experienced significant improvement in sales in April versus March an encouraging sign; but much of that improvement was driven by the sale of seasonal products and we have still not experienced a significant improvement in some of our core categories.

Until we see improvement in our core categories, we will remain cautious in our outlook and remain conservative in our planning.

None of our product categories generated positive comp in the quarter, a clear sign of significant pressures on our sales.

Categories have (inaudible) above the average comp included flooring, lawn and landscape products, nursery, paint and appliances.

In flooring we've seen a very favorable response from customers to our 199 entire house carpet installation program.

This offer simplifies the somewhat complex and intimidating process of determining the cost for having carpet installed.

As a result of this program we have seen a solid lift in our installed carpet sales.

We saw good sales in seasonal products, especially in April and that led to above average comp performance in our lawn and landscape and nursery categories in the quarter.

Consumers looking to repair lawn damage from last year's wide spread drought conditions, and the introduction of innovative easy to use products led to strong sales in grass seed.

On the nursery side, trees and shrubs had strong sales in the quarter as customers replaced many of the products that did not survivor last fall's drought.

Even in today's tough economic times, consumers appear willing to take on smaller projects around the home.

That's evident in the relative performance of our paint category, the number one DIY home improvement project.

Finally, our appliance category continues to perform well.

We launched Electrolux brand during the first quarter and all of our stores have been selling this new offering.

Early sales of this brand certainly contributed to the success of the appliance category in the quarter.

On a regional basis it remains a wide range of comp performance as four of our 22 regions delivered positive comps in the quarter while six regions had double digit negative comps.

Positive comp in regions include areas of the northeast that experienced a very rough early spring last year and generated relatively better sales this year; and our strong sales performance in the areas of Texas and Oklahoma that we experienced in fiscal 2007 continued into the first quarter of this year.

On the other side of the coin, all four regions of our western division delivered double digit negative comps as housing markets in California, Nevada, Arizona and the Pacific Northwest remain pressured.

Our Florida and Gulf Coast regions also had double digit negative comps in the quarter.

On the plus side, these two regions experienced a slight improvement from the first quarter of 2007 to continue the improving trend we saw throughout last year.

In the first quarter we had our best relative performance in our big three initiative in several quarters.

Driven by our flooring category, our installed sales delivered a comp above the Company average, but continued weakness in our cabinets and mill work categories forces us to remain cautious.

Our special order business, again driven by flooring and strong special order appliance sales, also out performed the Company average comp in the quarter.

Finally our targeted efforts to attract commercial customers continue to pay dividends.

We recently rolled out an enhanced customer account management tool that is ensuring our stores stay in touch with both active and inactive commercial accounts, driving sales, and producing an above average comp in the quarter.

While we still have room for improvement in all three of these businesses and each experienced a slightly negative comp in the quarter, we are encouraged by the relative performance.

In the end, a negative 8.4% comp is certainly nothing to get excited about, but in an environment where the market is shrinking, our goal remains to get a bigger piece of that market in every part of the business.

According to third party market share estimates, we continue to capture solid share in the first quarter, we gained unit market share in 15 of our 19 product categories, and as Robert mentioned we gained 70 basis points of total store unit market share.

I am also encouraged by our draw rate or the number of times Lowe's was in the consideration set of customers buying the products we sell.

Of our 19 categories, draw rates improved in 17, stayed flat in one, and declined slightly in one in the forst quarter.

These solid results suggest that we are moving ever closer to achieving our vision of becoming customer's first choice for home improvement.

We also know the competitive landscape is changing as anecdotal evidence shows less well capitalized competitors are struggling during this downturn in the industry.

We are working to ensure we are positioned to capitalize on the opportunities created by a changing competitive environment.

I am confident we are appropriately managing our business and I think our ability to respond quickly to our sales short fall in the first quarter is evidence of that.

We staffed our stores cautiously into the spring season ready to ramp quickly if needed, but also ready to pull back if sales didn't materialize.

In the first quarter, we deleveraged payroll by 61 basis points.

Considering the weak sales environment, I'm pleased with our store's efforts to manage payroll in the always challenging spring season; and I am also pleased that our customer service scores improved in the quarter which shows we are still delivering great service everyday.

Also, last quarter I mentioned our conservative inventory build heading into the spring.

I think our solid inventory position at the end of the quarter shows our ability to manage this asset in a tough selling environment.

Despite the slow start to spring we are in great inventory position on seasonal product.

Our distribution infrastructure has allowed us to cost effectively position inventory in the right place to sell the product.

We continue to utilize our coastal holding facilities to better position seasonal inventory to maximize sales and profits.

During the quarter, we opened 20 new stores and remain on track to open 120 stores in fiscal 2008.

As the sales environment remains pressured across most of the country, we continue to closely scrutinize every new store project to ensure we are putting capital to good use and maximizing returns of shareholders.

Our current non-comp store base includes a disproportionate number of stores in some of the hardest hit markets from the housing perspective including California and Florida, and some of these stores are generating sales below our original expectations.

Over time, we're confident these markets will recover and returns will improve; but as we mentioned last quarter, we are taking a close look at our expansion pipeline including the 100 additional stores we opened this year.

In some cases we have postponed planned new store openings in the most pressured markets until conditions improve.

In other cases we have walked away from perspective sites with plans to revisit the market in the future.

We think the steps we're taking will help ensure continued solid sales productivity and appropriate returns from our new stores.

On the marketing side, encouragingly, we continue to see a relatively stable promotional environment.

Consumers are clearly looking for value, and with the price of gasoline today, they want the confidence to shop without worrying about whether they're getting a great price and without the trouble of driving around to compare prices.

They want simple, easy to understand offers where the value is clear.

Our commitment to EDLT and our 10% price guarantee gives customers the comfort to shop our stores in confidence.

We're also continuing the use of our new lower price or NLP program.

These are price reductions on products that consumers want to purchase every day.

Our merchants have done a great job working with our vendors to deliver enhanced value to customers.

Finally, I mentioned last quarter a new initiative we are called innovation at a value.

Our goal is to work with vendors to bring exciting product innovation that has historically been limited to the best in premium ends of the pricing continuum more to the middle of the line.

We gained traction with this initiative in the first quarter with products like our exclusive shop vac upright vacuum.

It is the lightest full power upright on the market today, and at $129 compares to vacs priced at more than $300.

A true example of innovation at a value.

This is just one example of our merchants have many more in the pipeline to help continue to differentiate Lowe's and reinforce our value message.

Unfortunately, pressures will remain on the industry at least through 2008.

Our goal remains to drive profitable market share gains, manage expenses and make the right decisions to ensure we are well positioned when the sales environment does improve.

With this approach I feel we will continue to maximize long-term returns to shareholders.

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

Bob?

Thanks, Larry and good morning.

Sales for the first quarter were $12 billion representing a 1.3% decrease from last year's first quarter.

Total transactions increased 1.6% for the quarter while total average ticket was down 2.9% to $66.23.

Comp sales were negative 8.4% for quarter, which is below our expectations of negative 5% to negative 7%.

Looking at monthly trends, comps were negative 9% in February, negative 14% in March, and negative 1% in April.

As a result of the shift in timing of the Easter holiday, March comps were negatively impacted by slightly less than 200 basis points, and April comps were positively impacted by just over 200 basis points.

There was no impact on the quarter; and as Larry mentioned, for the quarter comp transactions decreased 5.3% and comp average ticket decreased 3.1%.

Lumber, plywood, and gypsum prices in the quarter were down to the same period last year.

This deflation negatively impacted first quarter comps by approximately 30 basis points.

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

In addition, building materials and rough electrical performed at approximately the overall corporate average.

Gross margin for the first quarter was 34.7% of sales and decreased 30 basis points from last year's first quarter.

The decrease in gross margin was driven by a number of factors.

First, there are a few product categories where it has been difficult to pass on price increases.

Specifically, some commodities such as lumber, gypsum, pipe, and copper cable have proved to be particularly challenging.

This had an approximate negative 20 basis point impact on gross margin in the quarter.

In addition, higher fuel costs increased cost of goods sold and negatively impacted gross margin by approximately 10 basis points.

Lastly, the whole house carpet promotion that Larry mentioned negatively impacted gross margin by approximately 10 basis points in Q1.

This was an opportunity to simplify the shopping experience and offer the customer a great value.

The customer did respond favorably to the offering and the promotion generated positive gross margin dollars; however, as with anything new, we will continue to identify ways to improve the net profitability associated with this offer.

Slightly offsetting these items were positive impacts of 13 basis points from lower inventory shrink as a percentage of sales and 12 basis points from the margin mix of products sold.

SG&A for Q1 was 22.7% of sales which deleveraged 63 basis points driven by store payroll and fixed costs.

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

For the quarter, store payroll expense deleveraged 61 basis points.

In Q1, rent and property tax expense deleveraged approximately 10 basis points each.

Utilities expense was flat to last year as a percent of sales.

Cooler weather in the quarter led to lower consumption which offset higher energy costs.

Bonus expense was essentially flat to last year as a percent of sales in the quarter as we adjusted accruals due to lower than planned sales.

Our expectation for Q1 was to deleverage 20 basis points.

Over the past several quarters we have discussed our initiatives related to in-sourcing certain tasks previously performed by third party vendors in our stores.

In 2006 we implemented phase one of our product service associate or PSA program.

In 2007 we implemented phase two and in Q1, 2008 phase three.

In-sourcing these tasks gives us more control over the work being done which improves productivity at a lower cost.

As I mentioned earlier, we deleveraged payroll by 61 basis points; approximately 25 basis points of which was caused by the additional PSA position.

As a result of the PSA transition, we were able to leverage in-source service expense by 30 basis points in the first quarter.

The net positive impact of the PSA transition to SG&A in the quarter was approximately 5 basis points.

Depreciation at 3.1% of sales totaled $375 million and deleveraged 47 basis points compared with last year's first quarter, primarily due to negative comp sales and a 15% increase in fixed assets driven by the addition of 154 stores over the past 12 months.

Store opening costs of $18 million deleveraged 5 basis points to last year as a percent of sales.

In the first quarter, we opened 20 new stores, this compares to 15 new stores opened in Q1 last year.

Earnings before interest and taxes or EBIT margin was 8.7% of sales and decreased 145 basis points, which is better than our expectation of a 170 basis point decline.

Interest expense at $76 million deleveraged 24 basis points as a percent of sales.

This deleverage was caused by the additional expense associated with the $1.3 billion of senior unsecured bonds issued in the third quarter of 2007 and short term borrowings outstanding during this quarter.

For the quarter, total expenses were 26.6% of sales and deleveraged 139 basis points.

Pre-tax earnings for the quarter were 8.1% of sales.

The effective tax rate for the quarter was 37.6% compared with 38% for Q1 last year.

Diluted earnings per share of $0.41 were within our guidance of $0.38 to $0.42 for the quarter but decreased 14.6% versus last year's $0.48.

Now, to a few items on the balance sheet.

Our cash and cash equivalents balance at the end of the quarter was $913 million.

Given to our turnover calculated by taking a trailing four quarter's cost of sales divided by average inventory for the last five quarters was 3.92, a decrease of 16 basis points from Q1, 2007.

Our first quarter inventory balance decreased $63 million or 0.7% versus Q1 last year.

Comp store and distribution inventory were both down from last year as we built more conservative sales plans for seasonal products and successfully implemented inventory productivity initiatives in several categories.

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

Our debt to equity ratio was 34.6% compared with 27.7% for Q1 last year.

This increase was due to last year's bond deal and short-term borrowings to fund our Canadian expansion.

Return on invested capital, measured using a trailing four quarter's earnings, plus tax adjusted interest divided by average debt and equity for the last five quarters, decreased 309 basis points for the quarter to 13.1%.

Return on assets determined using a trailing four quarter's earning, divided by average assets for the last five quarters, decreased 215 basis points to 8.7%.

Our leveraged guardrail remains 1.2 times lease adjusted debt to EBITDAR for the first three quarters and due to the seasonality of our cash flows 1.4 times at year end.

These targets were established based on our goal of maintaining a strong single A credit rating and an A1 P1 commercial paper rating which is not only prudent in this environment, but provides us the financial flexibility to manage our business.

At the end of the first quarter, lease adjusted debt to EBITDAR was 1.35 times which exceeded our 1.2 times target for Q1.

There were no shares repurchased in the first quarter and our current plans do not contemplate any share repurchases for fiscal 2008.

We continue to evaluate market conditions and diligently evaluate our options to balance financial flexibility against the opportunities presented in the market.

Should conditions change, we will react appropriately.

For the quarter, cash flow from operations exceeded $2.5 billion which represents a $399 million or 18.7% increase over Q1, 2007.

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

In Q2, we expect a comp sales decrease of 6% to 8% and to open 23 new stores; one in May, 12 in June, and ten stores in July.

Total sales are forecasted to increase approximately 1% in the second quarter.

EBIT margin for the second quarter is expected to decrease approximately 190 basis points over last year.

The decline in EBIT margin will be largely attributable to store payroll as well as depreciation, fixed cost, and gross margin.

We expect the gross margin pressures related to commodity pricing and fuel impacted transportation costs to continue for the remainder of year.

We are forecasting an effective tax rate of 37.8% for Q2.

For the second quarter, we are expected diluted earnings per share of $0.54 to $0.59, which represents a decrease of 12% to 19%.

For 2008, we expect to open approximately 120 stores resulting in an increase of square footage of 7% to 8%.

We are estimating a comp sales decrease of 6% to 7% and a total sales increase of approximately 1%.

We expect EBIT margin to decline be approximately 190 basis points in the second half of 2008.

EBIT decline will be more pronounced in the third quarter as a result of comparison to the favorable self-insurance adjustment in Q3 of 2007.

For the fiscal year, we are anticipating an EBIT margin decrease of approximately 180 basis points driven by store payroll as well as depreciation, fixed cost, and gross margin.

We are forecasting an effective tax rate of 37.75% for 2008.

As a result, we expect diluted earnings per share of $1.45 to $1.55 for the year.

Regina, we are now ready for questions.

(OPERATOR INSTRUCTIONS)

Your first question will be from Deborah Weinswig with Citigroup.

Good morning and congratulations on managing well in a tough environment.

Thanks.

In terms of the expense side of the picture, we were very impressed with your expense management in the quarter can you talk about anything specifically that you did in terms of new initiatives, etc., to really kind of hone in on what maybe you could postpone etc., from a kind of cost perspective?

Deborah, this is Robert Niblock.

I think what I would like to do is get Larry to talk a little bit about--from the store side, what we did to manage payroll hours in the store; and how we built the--the plan differently this year than what we have done in the past which helped us obtain some of that less deleveraging we had anticipated.

Yes, Deborah, certainly this year, as we said in the fourth quarter call, we had planned conservatively going into the spring; and typically in the spring, we ramp up the hours and ramp up the stores; but this year we went in with a very conservative plan and gave instructions on how to ramp the sales team quicker than we expected.

As I said in my prepared comments, the comps did not come like we expected so certainly we didn't build the staffing plan like we had anticipated we might.

A lot of initiatives, Mike Brown, who heads up store operations has been working on in terms of the sales tiers that we spoke of many times how we staff the stores to make sure we're maximizing the labor that we have in the store and at the same time doing a great job on service.

So when things have fell as rapidly, as they did in the past several quarters, we've had to adjust stores down to the various sales tiers; and what we wanted to do is let attrition take care of a lot of it.

So that's why sometimes we didn't get the payroll down as much as we would liked.

This year going in more conservatively and coming through the winter months, we were able to hold that payroll number down a lot better in any opinion; and Mike has a lot of initiatives they're working on for the back half of the year.

So hopefully we will be able to continue to do a good job to manage that payroll expense.

Okay.

So, Robert, most of this was just very tight expense control at the store level.

A lot of it was tight expense control, we also talked about in Bob Hull's comments the switch where we went from having third parties doing some of the tasks inside the store to using our own people, our PSAs as we call them; and obviously that put deleverage on payroll but it picked up leverage on our store services line.

The net of that was favorable about 5 to 7 basis points in that range; and we continue with some of the initiatives we have with some of our costs for providing insurance, we are self-insured over a lot of categories for insurance.

We continue to see favorable trends; and a lot of that is just initiatives that we've put in place to try and manage that be it either on the employee side for health insurance, and the initiatives we've taken there to try and manage down the escalation in cost or if it's on the general liability side, safety programs and other things that we've put in place to continue to try and manage those trends at favorable trend lines.

So some of those are coming in a little better than we had originally anticipated the trend lines would be.

We will continue to try and pursue those efforts as well.

Okay, and then I just wanted to clarify one of your comment about Florida and the Gulf Coast region, would you go as far as to say that you've seen stabilization in those two regions based on your comments in this call?

Yes, I think so.

If you look at the comments we made, I think we saw slight improvement in the negative comps in those regions over 2007; and that improvement continued into the first quarter of 2008.

Great.

Thanks again, and congratulations.

Thanks.

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

Thank you.

Looking at gross margin, you went through a couple of things that helped and hurt.

As you think about it through the rest of the year, how stable do you think those numbers are--the gross margins are and how should we think about it into the back half of the year?

Dave, this is Bob Hull.

As we've talked about in the past, we came into the year thinking we might have some slight gross margin expansion.

As a result of the pressures we're seeing related to fuel and commodities, we think it is probably a slight decline for the year.

In addition, as we've said in the past, not all quarters are made alike.

So the impact quarter by quarter will be a little bit lumpy.

I think your guess is as good as mine what's going to happen with fuel prices and we're planning conservatively at this point in time.

Typically there is some time lag between price increases and retail increases for commodities.

We think that will be true here as well, but it might just take a little bit longer to get in--get in an impact of retail prices.

So you think actually some of these areas where you weren't able to pass on that pricing you might, as the year progresses, you might be able to do some of that?

I think that's a possibility, yes.

And just one last question on interest, you guys paid off some interest this quarter; yet relatively strong cash flow, can we start to see those increases start to subside?

I think so.

As you know, we have gone to market the past couple years with financings, there's none contemplated in 2008.

We have a--a pretty wide swing in our seasonal cash flows.

So right now we are entering our Christmas selling season which is our peak cash balances.

We were able to pay off all of our outstanding commercial paper at the end of the first quarter with the exception of the Canadian borrowings that I mentioned.

We do expect to exceed our lease adjusted debt to EBITDAR metric at year-end.

So at year-end as our business slows, we expect our cash balance to only be slightly above where it finished year end 2007.

Thank you.

Appreciate it.

Your next question will be from Chris Horvers of Bear Stearns.

Thanks, and good morning.

Question is, can you take us through the rationale on the change in guidance?

The first quarter EPS comes in a little bit above the comps below probably shaving about 60 basis points off the comp guidance for the year.

The question is, are you--is the year playing out as you expected; meaning if you look at the second quarter, what we had expected for 2Q, you are pretty much in line there, so could you take us down the rationale for bringing down the back half?

Chris, this is Robert Niblock, I'll start with just some overview comments; and then I will have Bob get into the details of the drivers of the guidance on the first versus the second half.

Obviously when you think about coming into the year, with the guidance we gave and where we took the earnings to for the year versus last year, when we talk about our first quarter comp guidance of being a--a negative 5% to negative 7%; and then you come in outside of that, those are--that's a--that has a stand-up take, [Paul].

Certainly, I have talked about it in my comments, the wet, cool weather; and we think without the wet, cool weather, yes, we would have probably been within or close to possibly the negative 7% part of that guidance but maybe not quite in it.

So net-net, what that tells us is that in the first quarter of the year the environment was weaker than we anticipated.

I mean, certainly when you look at some of the unprecedented things that took place in the credit markets, we continue to hear negative information coming out on overall macro variables.

If you look at what's happening and all of the pressure you are seeing about food and fuel prices I mentioned in my comments; net-net when we look at everything, the environment was still slightly weaker than we anticipated.

It is really tough, we've got--as we said, don't know what the full impact of the economic stimulus package will be.

We think there will be a benefit, how much of that there will be is hard to determine.

So when we reduced our guidance like that and you still fall outside of it, it causes us to take a slightly more conservative standpoint as we go over the balance of the year.

Hopefully things are better than we anticipate, hopefully we have gotten conservative enough over the balance of the year; but that's really what drove that decision is even when you X out the weather, first quarter was still slightly weaker than what we anticipated.

So with that, I will let Bob talk about some of the detailed drivers.

Chris, as Robert mentioned our sales came in below expectations for Q1.

So if you think about coming into the year we guided for comps down 5% to 6% for the year.

We are now down 6% to 7%.

Second piece of that is, from my comments regarding gross margin, we expected some slight gross margin increase for the year.

That's flipped to slight gross margin decline for the year; and then as Robert said, we continue to think about the business in this uncertain environment with the many pressures facing the consumer and just try to be as prudent as possible in our planning.

So was--have you thought about what you might have thought for 2Q one quarter ago.

Is this pretty close to where you might it might be?

90 days ago we were a little bit more optimistic about Q2.

Okay, and then just one follow-up question: on April, you had really easy comps in the first half of the month.

Was there a big dichotomy between the first half and the second half of April?

A couple of things about April.

One, we did have dramatically easier comparisons in the first half of the month, I think last year we were negative 19% in the first two weeks and negative 10% for the month.

The other thing to take into account is the shift in Easter holiday.

So absent the shift in the Easter holiday, April comps would have been minus 3% versus minus 1%.

Okay, but the back half there was any difference in--how do you shake out the first half versus the back half of April?

The comps in the first half of April were better than the second half of April, but probably not as much as you would have anticipated given we also had--the weather was a little more favorable the second half of April than the first half.

Thank you very much.

Okay.

Your next question will be from Budd Bugatch of Raymond James.

Good morning.

As you're demonstrating how to navigate through this difficult climate, I guess my thoughts go to as we come out of this climate some time either hopefully this year or maybe next; how do you look at it--how do you look now towards unit growth going forward?

You have got this year growing square footage at 7% to 8%.

What do you look like going forward, Robert, as you think about 2009-2010 and beyond?

Well, today, I don't think we are prepared to give you a full updated number with regard to the out years.

We would plan on doing that at our annual analysts meeting this fall to give us a little bit more time to look at the environment out there.

It is something we are continuing to look at on a day by day basis--a week by week basis, I guess you'd say, as Larry talked about in his comments as we meet in real estate committee while continuing to evaluate markets and projects and make decisions.

Certainly we did pull back the number for this year.

Over the long term, we are still very confident about the long term opportunity that is out there, the opportunities are still as significant number of stores here in the U.S.

But really we are just going to get to the back half of the year and say okay what does it look like as far as when the recovery is going to be taking place and then that will be the driver of how we look at the 2009-2010 period as to whether we have a number similar to what we are talking about for 2008 or is it a number that's slightly less or slightly more.

We haven't made that final decision yet.

I think we have got plenty of stores in the pipeline that we can go either way, but it will be just looking at those, looking at the individual markets they are in and trying to make a decision on the timing as to when it is most appropriate to get those stores open.

Just as a follow-up, looking at the performance, of the new stores that I hear you say, are the from the low expectations, and is that primarily macro driven, or do you have any other thoughts about maybe those locations themselves?

They performed below our original expectations when we approved them; and obviously, if you think about it, Budd, several of these or a lot of these stores we were approving a couple of years ago and finally getting them open now.

So--and as Larry said in his comments a lot of those are in some of the more challenging markets that we've had from a housing standpoint.

So we really think what we're seeing in most of these markets where we've seen performing a little bit less than our original expectations is really macro driven based on the current environment--the credit environment, the housing environment, those type of things.

Most of those markets we think are going be fine longer term; and so we don't have any long term concerns about those stores we have opened in the past year.

Larry?

Thank you very much.

All right.

Thanks, Budd.

Thanks.

Your next question will be from Colin McGranahan of Bernstein,

Good morning.

Just wanted to follow-up a little bit on Budd's questions there.

Obviously the new store productivity is pretty weak, and it sounds like that is [asynchrical] pressure from Florida and California openings, but we would expect that new store productivity to be weakening.

So I guess philosophically I want to understand capital allocation a little bit and how you are allocating capital to these stores versus not to buying back the stock and understanding you have this 1.2 times adjusted debt to EBITDAR guardrail; but why is that the right guardrail today when the return on capital of the new stores doesn't look like it's as good as the return on capital would be of buying back the existing stores; i.e., buying back stock, so maybe philosophically, you can just talk about that capital allocation decision a little bit here.

Colin, I will start and let Bob talk about the guardrail.

Yes, in a pure laboratory setting, I can understand your argument and the question that you are proposing; however, when you think about the pipeline of real estate projects and the--the amount of time it takes to get these stores in the pipeline, to get the approvals, to get them developed, and out of the pipeline you can't really just turn the spicate on and turn the spicate off; unless you are talking about turning the spicate off and then having a substantial lag between when you really have a meaningful pipeline full of stores to go into the future.

Also if you look at the market share gain numbers that we are talking about, we really believe that this is an opportunity for us to gain substantial market share over the next several years because we look all across the landscape, there are less well capitalized competitors that just, due to the circumstances that they're facing in the macro environment may not make it through the downturn so there's going to be opportunity to gain share.

So we are trying to balance the competing options there of one, we know that there's going to be opportunity to gain share, we are looking hard at the stores, those that had--were more on the borderline from a return standpoint, we've either delayed or walked away from, as Larry said; but those that we think that have got great long term opportunity, we are continuing to pursue those opportunities because we think they're going to give our shareholders great return over the long term; yet you may have slightly lower return over the next few quarters but longer term I think it will pay big dividends for us.

Okay.

So philosophically I agree with that; but then would it make sense in this market to maybe adjust up that guardrail a little bit; that that is something that can be moved up and down more flexibly than a store development schedule?

I will let Bob speak to the details of the guardrail.

Unfortunately, Colin, you are probably aware anytime you have a slower environment like this, if you start pushing the guardrails up too high, generally, the rating agencies are more concerned in a slowing environment than they are in other environments.

So it can have kind of a compounding effect on you and if you are not careful can potentially lead to a downgrade that we don't think would be prudent given that today in what we have seen in the credit market and all of the disruption that has taken place we want to maintain our A1 P1 rating on our short term facilities.

So Bob anything to add to that?

Two comments to add.

Colin, as it relates to the stores that we are opening, it has been discussed a moment ago about the process in real estate taking a look at all of the openings.

We are also taking a look at the appropriate prototypes for the particular market.

In some cases we are actually either moving down to a 94 or building a 103K for market.

So that's an opportunity relative to the 117 to potentially take as much as $1 million of invested capital out to serve that market.

So we're trying to right size the investment for the opportunity market by market.

As it relates to the leverage metric, we can spend a long time talking about the balance between leverage and liquidity.

In today's market, high grade issuers are having no trouble accessing the credit markets and we were in the commercial paper market to a large degree at year-end 2007 in the beginning of the first quarter.

We are now out of the market and have had no trouble accessing commercial paper markets.

Others who aren't as well capitalized either had trouble accessing the market or were paying significantly higher interest rates for the opportunity to get funds.

There has been a couple of examples in the retail landscape where credit has dried up for retailers.

So we are being cautious in the environment.

We believe things will turn in 2009 but that's not certain today.

So we are being very prudent in managing our capital structure at this point in time.

Okay.

Thank you.

Thank you.

Your next question will be from Mitch Kaiser of Piper Jaffray.

Thanks, guys.

You have done a very good job on the expense control on the SG&A side in a tough environment.

As we'd think about an improving sales environment, what type of leverage do you think you could get on positive comps?

What's a good rule of thumb that we should be using?

Mitch, this is Bob.

I will start and see if anybody else wants to chime in.

The interesting dynamic here, Mitch, is when you have been deleveraging for a period of time because of negative comps, as you deleverage less there's an opportunity to improve your expense performance.

Certainly, as we think about as the turn comes, I think the first year we get to flat comps, there's an opportunity to have flat expense performance as a percent of sales or even slight leverage just taking pressure off of the deleverage of fixed cost; and then certainly from there, we would expect decent leverage and a low single digit comp.

Okay, and then, one follow--up if I may.

If you look at the second quarter comp and look at it on a two year basis you are going up against your easiest comp in the second quarter a negative 2.5.

So is there an acceleration in the business in the second quarter or is there something that I am missing there because it looks like if you take first quarter stacked it is about a 14, second quarter is about a negative 9, negative 10 or there about.

Is there something in May that suggests a slight acceleration or not really?

If you look at our comparisons, it is actually a little bit tougher comparison.

We had our best comp performance in Q2 last year.

There are some factors that we think contribute to the--the less negative comps in Q2 relative to Q1.

We have seen decent performance in the exterior categories as markets hit the spring selling season.

The northern part of the country is just hitting that spring selling season, so that is an opportunity for us in the second quarter.

There are some markets that were, principally in the southeast, that were impacted by last fall's drought that we think there's some recovery efforts and some additional business to be garnered there; and then we think there's slightly less pressure from commodities in the second quarter than the 30 basis points we saw in the first quarter.

So those are a couple of items that we're thinking about as it relates to improving trends and again, the big unknown is what happens with the stimulus package.

There are expectations that some $3 billion will get spent in the home improvement market; however, there are significant pressures facing the consumer today, so it is unknown how much of that actually gets spent.

Okay.

Thank, guys, good luck.

Thank, Mitch.

Your next question will be from Matthew Fassler of Goldman Sachs.

Thanks a lot, and good morning to you.

I wanted to follow-up on expenses a bit.

On a per store basis or per square foot basis, you had much, much sharper cuts than you'd had any time in the past number of quarters.

I just want to understand how sustainable that is?

You spoke about reaching more stores essentially reaching their minimum hours threshold.

I'm curious, was it a lot more stores than you had say in the fourth quarter was this kind of when you finally went to Defcon 5 or call it what you will, where you took expenses down to that level and once again is it a sustainable level of expense cuts for you as you look through the year?

Matt, this Larry Stone, I will take part and let Bob fill in.

We did have a few more in the first quarter than we did have last year; and any time you go through these economic downturns and we have talked about it for the past several quarters; I think you go in and really do a much better job of looking at everything under the hood of these stores and figuring out how can you get more efficient; and we like to say around the Company do more with less.

So I think it is really forced us to take a look at a lot our sales tiers, take look at a lot positions in terms of can we do things differently and more efficiently.

I really applaud Mike Brown and his team and the folks out in the field, they've really taken the lead on this thing and done a great job in holding down expenses on our payroll.

Is it sustainable?

I think so.

I think we are make improvements in our infrastructure, we're making improvements in terms of systems, we're making improvements in terms of the way we go to market with different parts of the business.

So yes, I think once things do turn, I think there's a lot of things we have learned during these past several quarters that will certainly help the Company be a stronger performer in the future.

And as we look at the year on year run rate here, we look at it on a per store basis, there's lots of ways to do so.

Do you think that having achieved these kinds declines the compares aren't terribly different certainly next quarter that they're maintainable through this year?

I think so.

Everything we've got built in place, we think we are and certainly we are just continuing to dig in and evaluate in everything we do; and quite frankly, question everything that we do and like I said earlier, how can we do it better, and how can we do it with less and at the same time, maintain customer service in our stores.

Understood, and I just want to follow-up on Bob Hull, your answer to the last question, talking about the expectations for Q2 versus Q1, you intimated that you expected less commodity pressure in the second quarter than you saw in the first quarter less than that 30 basis points.

It sounded like the commodity inflation issue is probably a bigger deal now than you would have thought it would be in February.

Are you saying that you see that very much a capped issue over the course of the year or did I kind of misread that?

That is accurate.

There's been a number of mill curtailments--a number of mill closures that are firming up.

The lumber prices, plywood is basically flat to last year at this point.

Gypsum was about 18% down Q1 year-over-year.

We expect that to be negative most of the year but less negative as the year progresses.

So you're talking in that instance about the comp sum?

I'm sorry.

That 30 basis points related to the comp store, the numbers, and on the commodity inflation issue in terms of out cost of goods that is something that you'd expect would probably persist through the year it sounds like?

Yes, but to the extent prices increase, there's less pressure on our suppliers.

They're getting more dollars for the forward-put that they're producing; therefore, there's less pressure on us.

Got you.

Thank you so much.

Matt, this is Robert Niblock.

Congratulations to the new addition to your family.

We hope everyone is doing well and getting some sleep.

That's very kind of you.

Thanks so much, guys.

Operator, we have time for one more question.

Your last question will be from Mike Baker with Deutsche Bank.

Thanks, guys.

So my question is on some of the regionalty discussion you had with the different markets--the markets that aren't going through a correct, etc.; and it sounded like those markets were the worst.

Is this the right interpretation that the weakness that you're seeing is now more broad based and you are seeing it--it's not just Florida and the west coast, it is actually getting worse in some of the other areas that maybe were holding up better in the past; is that a fair interpretation?

Mike, I will address that.

Certainly, if you talk about the west coast as we said we still had double digit negative comps out there.

Florida, as we said we saw some improvement through 2007.

It improved into 2008.

You did see as you narrowed the gap between those better performing, more stable markets and those worse performing markets that have had the biggest impact from a housing decline, you did see a narrowing of the gap.

There was a slight improvement on the worst performing markets coming up, but the better performing markets declined a little bit.

We are talking about a narrowing of less than 100 basis points or so in total, but there was a drop in the better performing markets.

If you think about that, some of the areas of the country that were less impacted by the run-up in housing, the Midwest, the middle parts of the country didn't have the sustainable run-up in housing over the past several years; and if you looked at average household incomes, they're generally slightly lower in there than they are in some of these more coastal markets where you have seen the large run-up in housing.

So as you see fuel prices going up, as you see food prices going up, they have a larger proportionate impact on some of those areas of the country that have lower median household income.

So you have seen a slight closing of the gap between the two, but we are talking about less than 100 basis points; but that is what we are--that is part of what drove a little bit of our revision of our guidance for the year is when you see that kind of a ramp-up in the other pressures on the consumer, tightening credit, ramp-up in food and fuel and those other issues, it does warrant us to be slightly more cautious over the balance of the year.

So really that was going to be my follow-up.

So you--it makes you less optimistic about a recovery seeing the markets that had hung in better getting worse rather than the really bad markets getting a little better if you follow me; is that right?

Yes, I think what you're saying--what we are looking at is had the on going pressures from housing.

We had tight credit markets but now all the sudden you've got a couple of other variables that coming in on top of those.

We know--if you look at housing, even if house stays where it is at, you are a year out before you get flat year-over-year housing turnover, so--and now you're adding a couple other variables in there whether it is employment, food, fuel, the other pressures on the consumer.

Yes, there will be some offset there from the stimulus package, and while consumers have said that there's a certain amount of that that's going to be spent on home related items, we will have to wait and see how that proves to be true.

So the unknowns, or what happens from the stimulus package, what happens from the competitive standpoint and able to gain market share if there are competitive closings out there.

So those are some of the unknowns.

We think think both of those will happen.

If they come to fruition, yes, our numbers may prove to be conservative and we may have better performance than we'd anticipated; but as I said, we thought we took a pretty nice reduction in our outlook for the first quarter.

Yes, we made our numbers from an earnings standpoint but we still fell short on the top line.

So that caused us to say even ex-weather it was still a little bit weaker than we anticipated.

And so we think it is appropriate to be slightly more cautious than we previously were until we can see how the economic stimulus package plays out and how some things play on the competitive front.

Well, good.

Thank you.

Fair enough, appreciate those comments.

All right.

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

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

Thanks and have a great day.