勞氏公司 (LOW) 2008 Q4 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies fourth quarter and fiscal year end 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's expectations and opinions reflected in those statements are subject to risk, 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.

Also, during this call, management will use certain non-GAAP financial measures.

You can mind a presentation of the most directly comparable GAAP financial measures, and other information about them posted on Lowe's investor relations website, under corporate information and investor documents.

Hosting today's 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 marks.

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're doing to manage the business in today's challenging environment.

Then Bob Hull will review our financial results.

We entered 2008 knowing a challenging environment would pressure our results.

As the year unfolded it became increasingly clear that the economic pressures on consumers, including falling home prices, rising unemployment and tightening credit markets were even greater than anticipated.

Those pressures came to a head in the fourth quarter and are reflected in our results, as unemployment swelled, confidence plummeted and consumer spending continued to contract at the faster rate in over 25 years.

Sales were down 3.8% versus last year, and comp sales were negative 9.9%.

Comp sales were weakest in November, relatively better in December, but weakened again in January.

While our comp results were disappointing, we continued to gain market share as industry sales contract.

According to third-party estimates, we gained 110 basis point of total store unit market share in the fourth calendar quarter.

Evidence of our compelling product offering and commitment to customer service during this prolonged industry downturn.

During the quarter, as consumers pulled back substantially across all of retail heading into the holiday season, we knew in certain categories such as holiday decorations, as well as what we call giftable categories like tools, the competition for sales would be intense.

Since we compete with a broader group of retailers in these categories, we were also competing for share of wallet during one of the most promotional holiday seasons in memory, we chose to be proactive and move quicker and deeper than originally planned with our seasonal markdowns.

These more aggressive markdowns pressured gross margin in the quarter, but improved our inventory position heading in to 2009.

Larry will provide additional detail on gross margin, but it's important to note that many of the pressures on gross margin were unique to the fourth quarter or one time in nature.

While we do expect gross margin to be down slightly in the first quarter, this will be a significant improvement from the fourth quarter due to less promotional activity.

For the year, total sales declined fractionally, and comp sales declined 7.2%.

Sales for the year were nearly $1.5 billion less than our original plan, but our earnings per share of $1.49 fell only $0.01 below the low end of our year-ago guidance.

Reflecting our diligent effort to control expenses during the third consecutive year of soft sales in our industry.

Given the unprecedented turmoil in the financial markets as well as a significant slowdown in the economy and the housing market during 2008, I'm proud we delivered earnings per share within $0.01 of our original guidance for the year.

This speaks to the dedication and hard work of our 220,000 plus employees, as well as our focus on making necessary and appropriate adjustments in an environment of uncertain and ever-changing business and economic conditions.

To that point, our centralized structure has allowed us to remain relatively lean during the good times and gives us visibility to areas where we can scale back as sales slow.

Over the past three years we have managed our corporate staffing to match the slowing environment primarily through attrition.

By filling only the most needed positions, we have effectively had a corporate level hiring freeze for nearly two years.

As a result we've frozen or left unfilled almost 400 positions at the corporate office in 2008.

In additional, in certain cases we have made even further cuts including a recent reduction in our real estate department reflecting our significantly lower store opening plans.

As a measure of our effort to ensure appropriate management of our corporate infrastructure, over the past two years, our store count and selling square footage have both grown by over 19%, but our corporate staff has grown by less than 5%.

Looking ahead, we know that during the past two years we have experienced stronger sales trends in our outdoor categories.

And as we move in to the spring selling season and weather warms around the country we're optimistic consumers will continue their outdoor projects providing some support to sales.

But the potential for recovering demand in 2009 is dependent on factors that are out of our control.

With improving employment statistics being one of the most important in restoring consumer spending.

We recognize sales will remain pressured, and we continue to take decisive action to manage expenses.

Larry will provide more details, but as an example of the actions we're taking we decided to freeze the salaries of all Vice Presidents and above for 2009.

In addition, we reduced the level of our planned merit increases for the rest of the organization in light of the current economic environment.

These actions will save in excess of $40 million for the year, and are evidence of our commitment to manage expenses.

On the capital spending side, we have further reduced our store opening plans to 60 to 70 for the year, including five stores in Canada, and two stores expected to open late in the year in Monterrey, Mexico.

Our revised 2009 store-opening plan is down approximately 15 stores from our plan in September, and down some 40% from the 115 stores opened in 2008.

We're also rationalizing other capital spending including our store remerchandising efforts to ensure an appropriate return on investment.

These changes have reduced our capital plan to $2.5 billion, a reduction of nearly $600 million from just a few months ago and down $1.1 billion from 2008.

We'll continue to work diligently to drive sales and capture profitable market share in this very difficult environment.

The stimulus efforts recently passed will provide some support to the consumer, but today the macro environment shows few positive signs and therefore we continue to plan conservatively for 2009.

Thanks for your interest in Lowe's and now I'll turn it over to Larry Stone to provide more details on the quarter.

Larry?

Thanks, Robert, and good morning.

As Robert mentioned we experienced further deterioration in the sales environment in the fourth quarter and had negative comps of 9.9%.

Only one region and two product categories delivered positive comps for the quarter.

On the regional front, our Western division continues to experience very weak demand with all four regions delivering double-digit negative comps, although comps in the quarter were only slightly worse than the division's year to date trend.

We also saw double-digit negative comps across much of the Southeast in the quarter as housing pressures continue in Florida and other parts of the Southeast.

We are still experiencing lower sales for big-ticket projects in this part of the country.

In addition, our sales in the Northeast continued to slow in part driven by the extreme winter weather.

On the more encouraging side, we had positive comps in the areas of our South Central division most impacted by last year's hurricanes as rebuilding continues.

We also had relatively better comps along the Gulf Coast and in parts of the Ohio Valley.

On the product side, project categories including cabinets and countertops, mill work, and flooring had double-digit negative comps in the quarter.

While carpet sales remained strong, our sales for hard surface flooring remain soft and customers are not taking on the larger kitchen and mill work products that were driving positive comps a couple of years ago.

In fact in fiscal 2008 these three categories were approximately 17% of our total sales, a similar percentage mix as 2002, after having peaked at nearly 18.5% in 2006.

We also saw a continued weakness in what we call style categories.

Products that are typically more discretionary in nature.

Our home organization, fashion plumbing, lighting, and windows and walls categories all posted double-digit negative comps in the quarter and in total are at decade lows as a percent of the total mix.

Double-digit negative comps in tools resulted from a more aggressive than planned promotions, and inflation in copper contributed to double-digit negative comps in rough electrical.

On the positive side, our building materials had positive comps in the quarter driven by hurricane rebuilding.

And many of our outdoor related categories had a relatively strong quarter with our lawn and landscape category delivering positive comps.

Our negative 9.9% comp for the quarter was driven by 5.3% decline in transaction, and a 4.9% decline in average ticket.

The sales weakness we're experiencing is most pronounced in discretionary bigger-ticket purchases.

Based on customer research, we estimate the discretionary component of our sales has climbed from approximately one-third of our total, down from approximately 45% in 2006 as the number and size of discretionary projects continue to decline.

One consistent trend during this sales slowdown has been strength in our smaller ticket comps.

Highlighting this fact, while total comps were negative 7.2% in fiscal 2008, comps for tickets below $50 were only negative 2%, and comps for tickets above $500 were negative 9%.

Perhaps a good barometer for discretionary project-based spending is installed sales, which has historically had an average ticket of approximately $1,000.

We had a negative 14% comp in installed sales in the quarter, and a negative 6% comp for the year.

While we saw customers respond during the year to easy to understand, value-based offers like our whole house carpet and window treatment install programs, the combination of many negative macro factors intensified as the year progressed and left many consumers hesitant, especially in the most pressured markets, hesitant to invest in larger projects related to their homes.

Also, our special orders sales had a negative 20% comp in the quarter and a negative 10% comp for the year, as many of these special order sales are also project driven.

But sales to the commercial business customer was one of the relative bright spots for both the quarter and the year, delivering above average comps throughout this down cycle.

As industry sales decline and our comp results were pressured it's hard to find many positives, but we continue to view our market share gains as a clear signal we're providing compelling products at a solid value and great customer service.

In the fourth calendar quarter we gained unit market share 15 of our 20 categories according to third-party measures, and during the three-year downturn for the industry, we've gained approximately 300 basis points of total store unit market share.

Our goal remains to drive profitable market share gains during these challenges times, taking advantage of opportunities created by competitor store closings.

Our gross margin rate was lower than expected during the quarter as we took aggressive steps to ensure seasonal inventory remained clean and accelerated our sell-through plans as we exit the majority of our wallpaper category.

In the fourth quarter, we had additional categories of seasonal products that are sold primarily around the holidays, and we compete with more retail channels for the sales of the products.

When we entered the fourth quarter, there was clear signs that the holiday season was going to be a tough one and probably more promotional than we had expected when we planned sales, inventory, and margin many months before.

Our sales slowed dramatically in the last few weeks of our fiscal third quarter, and the slowdown continued into November.

As the quarter unfolded, we chose to take earlier and deeper markdowns of our seasonal merchandise then planned.

In our trim-a-tree category, we enter ever season with a markdown plan that anticipates discounts of 50% and 75% to rid ourselves of the leftover inventory.

We also write-off any remaining inventory at the end of the fiscal year in this category, rather than carrying anything over to next year.

Considering the promotional retail landscape and the constrained consumer, we chose to execute our markdown plan early to ensure we sold through the inventory.

Acceleration of these markdowns impacted gross margin approximately 30 basis points in the quarter.

Our tool category experiences a relatively steady demand for most of the year.

But consistently sees a spike in demand in November and December as a popular gift-giving category.

While we had a conservative inventory plan, we bought product to prepare for the seasonal spike.

Similar to our cost on trim-a-tree we knew the [process stance] to the retail landscape, measured the pulse of the consumer and made a conscious decision to markdown our tool category faster and deeper than planned, to ensure we remained clean on inventory heading in to the new year.

Markdowns in our tool category impacted gross margin approximately 20 basis points in the quarter.

In addition, to the pressure on gross margin caused by seasonal products, we entered the quarter executing an exit strategy for wallpaper.

Wallpaper sales have slowed in recent years as consumers shift to other wall treatments and we felt the space could be better utilized.

Our regional plan includes selling through the remaining inventory over six month period, but in November we decided to accelerate the clearance activity to ensure all stores would be out of the category and set with our expanded cleaning supply offering by spring.

The decision to accelerate our wallpaper exit affected gross margin by approximately 15 basis points in the quarter.

In total these changes caused 65 basis points of our fourth quarter gross margin shortfall.

But in the sales environment like we experienced in the fourth quarter, I think we made prudent decisions to clean seasonal inventory and remain clean as we started the new fiscal year.

Since many of these pressures to gross margin were substantially rated to the fourth quarter or one time in nature, we expect our first quarter gross margin rates to recover and only be down slightly compared to last year.

Our efforts to manage expenses in this difficult environment continue, and I would like to describe several things we have done over the past year to manage expenses as well as additional steps we're taking heading into 2009.

First our large expense is payroll.

We work hard to closely tie payroll hours to the sales volume in our stores and more specifically to the sales volume in individual store departments.

The goal is to manage payroll expense without sacrificing service, and we do that with the staffing matrix we have built over many years.

Payroll deleveraged 175 basis points in the fourth quarter, and 70 basis points for the year, driven by an increasing number of stores reaching our base hours threshold as sales remained weak.

In the fourth quarter which is our lowest sales volume quarter, 50% of our stores reached that base.

We review our staffing matrix at least ever 12 months in conjunction with improvements and efficiencies we have implemented that allowed us to move non-selling hours to selling hours.

Examples of such improvements in 2008 include our freight flow initiative that took best practices in the receiving process and implementing them across the chain.

We also reduced store hours in some slower sales markets when daylight savings time ended, allowing us to reallocate about 36 hours a week on average in affected stores to the busier times of the day.

These efforts, among others have freed up more hours for customer service.

Based on our review, we have updated our staffing matrix for 2009, reducing required hours across the matrix, and reducing the base hours threshold without reducing customer facing hours.

Looking at our sales level in the fourth quarter under new matrix, only 40% of our stores would have been at the base staffing level.

We don't make a change like this without significant forethought and analysis to ensure we maintain service levels in our store.

Today, our customer service scores measured by quarterly customer-focused process have never been higher.

And we're up across the board in the fourth quarter.

But we will continue to monitor our service levels very closely throughout 2009, to ensure this staffing matrix change does not impact service.

We're finding other savings too in tightening our belts to control costs during this environment.

One way is our ongoing effort to find efficiencies in our marketing plan.

Over the last two years, we have reduced our marketing spend by using more targeted advertising, and frankly by reducing programs that simply were not providing adequate return.

We have also looked at our physical inventory process.

Historically, the majority of our stores had two physical inventories per year, but we have had solid shrink results for the past several years, as many of our other initiatives on that front have paid off.

As a result, back in 2005, we began a test conducting only one annual physical inventory in our better-performing stores.

Over the past four years we have slowly increased the number of stores saving several million dollars in the process, and we have seen no noticeable increase in those store shrink results.

Based on our positive experience we're moving additional stores to one inventory per year in 2009.

This move will save us approximately $10 million.

Robert mentioned the benefits of our centralized structure and as we gain more store density across most of the US, we have been able to leverage our district and region staff.

During the past two years, we have added 268 stores, but only added one region and 15 districts, sending the average store count per district from eight to nine and average count per region from 66 to 75.

We have also been able to expand the coverage of our area operations manager, and our area loss prevention manager positions.

Over the past two years, we haven't added any additional head count in these positions, which increased to average number of stored covered by each manager by more than three stores.

In the end, while we made numerous cuts in search for efficiencies to respond to a difficult sales environment, we know the foundation of our success is our people.

None of us relishes an environment like we are in today, but one benefit is an opportunity to both hire and retain great people.

Over the past two years we have seen the average tenure of a Lowe's store manager increase by almost eight months from average from little over seven years to almost eight years.

We have also seen average tenure of the other members of store management team increase by nearly nine months over that time period.

I'm confident we're building a solid and experienced foundation to provide excellent service and drive sales when the macro environment does begin to improve.

We enter 2009 with conservative plan.

With the uncertainty with the current environment we have also made efforts to build additional flexibility and where we can.

We know entry sales remain pressured this year, and we are keenly focused on managing inventory, improving gross margin, controlling expenses, effectively deploying capital and capturing profitable market share.

Thanks for your attention.

Now I'll turn the call over to Bob Hull to review our financial results.

Bob?

Thanks, Larry.

And good morning, everyone.

Sales for the fourth quarter were $10 billion, which represents as 3.8% decrease of last year's fourth quarter.

In Q4 average ticket decreased 4.6% to $61.05 and was offset slightly by a 0.9% increase in total customer count.

For 2008, total sales of $48.2 billion were essentially flat to last year.

Comp sales were negative 9.9% for the quarter, which was at the low end of our guidance of negative 5% to negative 10%.

Looking at monthly trends, comps were negative 12% in November, negative 7.9% in December, and negative 9.9% in January.

For the quarter, comp transactions decreased 5.3% and comp average ticket decreased 4.9%.

We estimate that hurricane-related sales positively impacted our fourth quarter comp sales by approximately 100 basis points.

We experienced building material inflation in the quarter driven by roofing, which had approximately 50 basis point positive impact on fourth quarter comps.

With regard to product categories, the categories that performed above average in the fourth quarter include; building materials, rough plumbing, hardware, paint, nursery, outdoor power equipment, lawn and landscape products, appliances, and home environment.

Lumber performed at approximately the overall corporate average.

For the year, comp sales were negative 7.2%.

For 2008, comp transactions decreased 4.1% and comp average ticket decreased 3.1%.

For the year the categories that performed above average include; building materials, rough plumbing, hardware, paint, nursery, outdoor power equipment, lawn and landscape, appliances, and home environment.

In addition, flooring and seasonal living performed at approximately the overall corporate average.

Gross margin for the fourth quarter was 33.7% of sales, and decreased 115 basis points from last year's fourth quarter.

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

Given the state of the consumer, and the retail environment Larry described, we saw elevated promotional activity in many categories as a number of retailers initiated inventory clearing promotions in the quarter.

These included everything from 20% off major appliances and kitchen cabinets to a significant reduction in the installation of carpet.

To perfect our customer franchise and our price image we matched various competitor offers in the quarter.

We estimate this negatively impacted gross margin by approximately 50 basis points.

In addition, our efforts to clear seasonal inventory in trim-a-tree and tools negatively impacted gross margin by 30 and 20 basis points, respectively.

Also, markdowns associated with our decision to exit wallpaper reduced gross margin by 15 basis points in the quarter.

Higher fuel prices increased cost of goods sold and negatively impacted gross margin by approximately ten basis points.

Slightly offsetting these items was a positive impact of 14 basis points from lower inventory shrink.

For the year, gross margin of 34.2% represents a decrease of 43 basis points from fiscal 2007.

SG&A for Q4 was 26.2% of sales, which deleveraged 218 basis points, driven by store payroll, write-offs associated with discontinued projects, a store impairment charge and fixed expenses.

For the quarter store payroll deleveraged 125 basis points driven by negative comps in our cyclical lowest volume quarter of the year.

During the fourth quarter, we incurred $19 million in expense associated with the write-off of new store projects that we are no longer pursuing, compared with $2 million in Q4 2007 which caused 17 basis points of deleverage in the quarter.

In addition, we had a 16 basis points of deleverage in the quarter related to a long-lived asset impairment charge for open stores.

The $16 million charge represents the writedown of the carrying value of the assets of three under-performing stores to their estimated fair value.

There is no impairment charge for open stores in the prior year.

Lastly, rent, property taxes, utilities, and other fixed expenses, deleveraged approximately 50 basis points due to the comp sales decline.

This deleverage was offset slightly by leverage in store service and bonus expense in the quarter.

For the year, SG&A was 23% of sales and deleveraged 118 basis points to 2007.

Store opening cost of $32 million leveraged 27 basis points to last year as a percentage of sales.

In the fourth quarter we opened 33 new stores, this compared to 72 new stores opened in Q4 last year.

Depreciation at 4% of sales totaled $397 million, and deleveraged 40 basis points compared with last year's fourth quarter.

Primarily due to negative comp sales and the addition of 115 stores over the past 12 months.

Earnings before interest and taxes decreased 346 basis points to 3.3% of sales.

For the year EBIT of 7.9% represents a decrease of 189 basis points from 2007.

Interest expense at $70 million for the quarter deleveraged 25 basis points as a percentage of sales.

This deleverage was caused by lower capitalized interest associated with fewer stores under construction.

For the quarter, total expenses were 31.1% of sales and deleveraged 256 basis points.

Pre-tax earnings for the quarter were 2.6% of sales.

The effective tax rate for the quarter was 37.5%, versus 37.5% to Q4 last year.

For the year, the effective tax rate was 37.4%, compared with 37.7% for 2007.

Earnings per share of $0.11 for the fourth quarter were within our guidance, but decreased 61% versus last year's $0.28.

For fiscal 2008 earnings per share of $1.49 were down 20% to 2007.

Now, to a few items on the balance sheet starting with assets.

Cash and cash equivalent balance at the end of the quarter was $245 million.

Our fourth quarter inventory balance of $8.2 billion increased $598 million or 7.9% versus Q4 last year.

Increase was due to square footage growth of 7.2% from this time last year, and an increase in distribution inventory associated with the opening of our 14th RDC in Pittston, Pennsylvania.

Comp store inventory was down 2.9% in Q4 versus last year.

Inventory turnover tax lead by taking a trailing four-quarters cost of sales divided by average inventory for the last five quarters was 3.91, a decrease of 15 basis points from Q4 2007.

At the end of the fourth quarter we owned 88% of our stores versus 87% at the end of the fourth quarter last year.

Return on assets determined using a trailing four quarters earnings divided by average assets for the last five quarters, decreased 268 basis points to 6.8%.

Moving on to the liability section of the balance sheet, we ended the quarter with $987 million of short-term borrowings, this was comprised of $789 million of domestic commercial paper and $198 million of Canadian debt.

We ended the quarter with accounts payable of $4.1 billion, which represents a 10.7% increase over Q4 last year.

The growth in accounts payable is higher than the 7.9% increase in inventory, which is attributable to ongoing efforts to improve vendor payment terms.

Our debt to equity ratio was 33.6% compared with 41.5% for Q4 last year.

At the end of the fourth quarter, our lease adjusted debt to EBITDAR was 1.57 times, which exceeded our 1.4 times target for Q4, but was in line with our expectations.

There were no shares repurchased in the fourth quarter or for fiscal 2008.

Return on invested capital measured using a trailing four quarters earnings plus tax-adjusted interest, divided by average debt and equity for the last five quarters, decreased 359 basis points for the quarter to 10.3%.

Now, looking at the statement of cash flows, for the year, cash flow from operations was $4.1 billion, and cash used in property acquired was $3.3 billion, resulting in free cash flow of $856 million, which was a $519 million -- which was $519 million higher than 2007.

While 2008 didn't turn out as we expected, in this challenging environment, we still managed to earn $2.2 billion, and generate almost $900 million in free cash flow, which speaks to the strength of our operating model.

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

In constructing our 2009 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 first quarter total sales to range from an increase of 1% to a decline of 3%, which incorporates a comp sales decline of 6% to 10% and the opening of approximately 21 new stores in the quarter, 13 in February, five in March, and three in April.

We expect gross margin to decrease slightly in Q1 as a percent of sales due to the mix of products sold and the remaining impact from our exit of wallpaper.

For SG&A we anticipate store payroll to deleverage of approximately 80 basis points and fixed cost deleverage of approximately 50 basis points.

In addition, we expect about 50 basis points of deleverage associated with our proprietary credit program in Q1 due to an increase in losses which is higher than the expected ten basis point impact for fiscal 2009.

Depreciation for Q1 is expected to be approximately $404 million and deleverage about 30 basis points to last year's first quarter.

As a result, earnings before interest and taxes for the first quarter are expected to decrease by approximately 310 basis points to last year, as a percentage of sales.

For the quarter, interest expense is expected to be approximately $85 million.

The income tax rate is forecasted to be 37.3% for the quarter and for the year.

We expect earnings per share of $0.23 to $0.27 which represents a decline of 34% to 44% over last year's $0.41.

For 2009, we expect to open 60 to 70 stores resulting in an increase in square footage of approximately 4%.

Our 2009 store expansion plan is more evenly balanced across the year relative to the 2008 opening schedule.

As a result, we plan to open more stores in the first half of the year than the second half.

We're estimating 2009 comp sales to be negative 4% to 8%, and as a result total sales should range from an increase of 2% to a decline of 2%.

For the fiscal year we are anticipating an EBIT decline of approximately 170 basis points.

The decrease is smaller for the year relative to the first quarter due to the expected improvement in gross margin as we cycle last year's elevated fuel prices, and as we have described today the one-time negative items impacting Q4 2008.

Also, the impact of losses associated with proprietary credit, and fixed cost deleverage will be the highest in the first quarter.

For 2009, interest expense is expected to be approximately $310 million.

The sum of these inputs should yield earnings per share of $1.04 to $1.20, which represents a decrease of 20% to 30% from 2008.

For the year, we are forecasting cash flow from operations to be approximately $3.7 billion.

Our capital plan for 2009 is approximately $2.5 billion, with roughly $300 million funded by operating leases resulting in cash capital expenditures of approximately $2.2 billion.

Our guidance for 2009 does not assume any share repurchases.

We know that 2009 will be another challenging year.

However, we still expect to earn $1.6 billion to $1.7 billion and generate free cash flow of almost $1.5 billion.

This represents a free cash flow increase of approximately 75% over 2008.

[Dennis] we are now ready for questions.

(Operator instructions).

And your first question comes from the line of Brian Nagel with UBS.

Hi, good morning.

Good morning, Brian.

A couple of quick questions if I could.

First off of inventories.

Sounds like -- you mentioned in your prepared comments and I calculated too that inventory in Q4 was up 7.9%, you highlighted the DC as a piece of that.

But maybe if you could help me better understand that.

How much of that 7.9% in Q4 -- how much of that is a specifically related to the DC?

Because if I look over the last four quarters, Q3 and Q4 were higher versus Q2 and Q1.

Sure, Brian.

I'll give you a little bit more color around that.

The new DC was about $50 million or about 0.6% of the year-over-year growth.

Also, due to the timing of in-transit purchases, at quarter end, some of which was trying to avoid the Chinese New Year, that was about $100 million of the increase year-over-year.

And then lastly as I talked about in my comments, with our goal to open up stores sooner in the year, we'll actually have more stores open in February '09, 13, relative to February '08, four, so nine additional stores at about $4 million each was the last factor that contributed to the increase in inventory year-over-year.

Thanks.

And then the second question much more from a strategic point of view.

We obviously have your new guidance.

Some thoughts on how you are looking at -- I mean there has been a lot of noise lately, a lot of government intervention so to say with the housing market How are you thinking about the impact that some of these programs may have on housing, then ultimately is demand for home improvement products in Lowe's?

Thanks.

Brian, this is Robert Niblock, I'll start and then I'll let Greg Bridgeford who is in the room with us, jump in.

I think certainly when you look at the forecast that a lot of the economists have prepared for 2009, which is kind of what we try to base things off of, that they took into account that there would be some government intervention to try to improve -- to improve -- the issues we're faced with regard to employment, with regard to housing and the overall economic situation, including the severe impact we're getting from the banking and financial sector.

So I think, certainly it's no different than what we talk about when fuel prices dropped.

Any time that you can put the consumer in better financial shape, by having either more disposable income in their pockets, loosen -- lessening their debt burden, giving them greater confidence in the ability to meet their ongoing obligations, all of those things, I think, help.

Now is what you seeing going to be enough to cause a dramatic turn around in the environment?

No, we don't think so.

We think it just makes the environment, less bad, if you want to call it that.

But so all of those things help.

It helps improve what the situation otherwise would have been, but we're just going -- at some point in time we got to get employment back in the country really to be able to drive the turn around that we would all like to see.

Greg, I'll let you jump in.

Thanks, Robert and Brian we are focused on the some of the more tangible aspects of what we are understanding and certainly trying to understand the recovery and reinvestment act.

And some of that that we're -- and again, analyzing and looking for opportunities is to be able to serve customers in the areas of -- of extending and expanding the tax credits with energy-efficient products, windows, doors, furnaces, insulation, for example.

The $5 million program to improve the energy efficiency of the modest income homes through weatherization.

The $6.3 billion program for energy efficiency improvements in Federally supported housing, the $2 billion for the neighborhood stabilization plan, and obviously the $800 -- $8000 credit for first time home buyers.

These are all part of the recovery and reinvestment act that we're analyzing and making sure that we're available to be there for customers as they take advantage of these -- of different parts of the stimulus plan.

Thank you.

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

Thanks.

Excuse me -- thanks a lot.

Two quick questions.

First of all if you could clarify why you expect your credit experience to improve throughout the year?

Is the accounting dynamic, does it reflect your expectations for actual losses or any other drivers?

And the second question relates to the competitive dynamic over holiday.

Clearly it sounds like you felt more competition in some of your categories than in the past.

If you could be more precise as to some of the channels that popped up as being more competitive, and sort of the exposure that you think you might have on more of a year-end basis, understanding that it wouldn't be quite as severe as in the fourth quarter?

Thank you.

Hi, Matt, it's Robert Niblock.

I'll start with competitive dynamic, your second question and we are forecasting around the holiday's.

I'll let Bob talk about the impact of the credit losses first quarter versus the rest of the year.

When you think about it, heading in to the fourth quarter, particularly when we saw the disruption that took places in the financial markets.

For me retailers out there, the fourth quarter is really their prime selling season.

Particularly think about the soft good retail, so as we saw the market unfold, we knew that we were really competing for a limited amount of discretionary dollars available with the consumer.

So you out there competing on a broader scale with, 75% off clothing at a lot of the clothing retailers, let's say.

So we knew we had to move early in order to try to sell through some of the categories that Larry spoke of in order to make sure that we had a clean inventory position in those categories when we got to the end of the season.

And on the same vein, Bob talked about in his comments, we saw some -- little bit more aggressive promotions.

I think you mentioned 20% off in appliances, and cabinets.

Once again I think it was our competitors out there trying to draw foot traffic in to their store, because we were all competing for foot traffic during that key holiday selling season.

I think obviously as you move forward you are moving in to an area -- or to a time of year when retailers have relooked at the environment.

They've rebalanced their inventories and their inventory buys, and we don't have -- we're not also cycling up against those broader retailers, and their prime selling season where they having to clear that inventory that they bought for that season.

So as we went in to the fourth quarter and we saw things unfold, we made some decisions.

We said we would rather be aggressive, move quicker and deeper, and maybe give up some of the margin at the end of that selling season and look back and say, wow, we wish we would have reacted quicker.

So it was a good decision we made.

We believe it was the right decision because for those categories that we went through we did a great job of clean through -- clearing through the inventory at a lesser margin impact that we potentially we would have had we not reacted quick enough and that drew some footsteps in the door and allowed us to sell some other carry on categories as well.

So with that, Bob, if you will address credit loss issues?

Yes.

Thanks, Robert.

The dynamics involving the spread of the credit losses in 2009 is really a function of our agreement with GE.

As you know, GE owns the receivables; however Lowe's bears the first slice of losses.

As you know, losses have been increasing over the past couple of years.

As a result that agreed-upon loss cap will be hit in early -- we're forecasting early second quarter, therefore, we'll experience somewhere in the magnitude of about $50 million worth of losses in the first quarter, with the balance of that being incurred by GE going forward.

So $50 million worth of losses in Q1, relative to our expectation of about $60 million losses for the year, which is causing the spike in Q1 and really a leveling off for the balance of the year.

So there's no risk even if the actual credit experience on the program goes up, you do not bear any incremental risk?

We don't bear any incremental loss risk, that is correct.

Loss risk.

Is there any other kind of exposure, just to make sure we are getting this completely?

We have a couple of other pass-through costs one of which is money costs which is favorable.

Yes.

We don't think that's going to change in 2009, and that's really about it.

The real risk we have got is if there's any risk tightening as people take a look at the strains on the consumer, to the extent consumers have changes in their FICO scores, and further tightening of credit would potentially impact us from a sales perspective, not from a credit loss perspective.

And finally, Robert just to follow-up in terms of where you saw the competition from, was this from other home centers, Home Depot, Sears kinds of guys or is it guys from outside your traditional competitive set who got meaningfully more aggressive over holiday?

I think everybody was slightly more promotional and rested over the holidays.

The point I was trying to make is yes from the typical competitors that you would expect, when we're competing for foot traffic, yes, you would have had -- seen incremental promotional activity from those competitors.

Secondly, the issue was that when it comes time for gift-giving, you only -- the consumer only has X-amount of discretionary dollars to spend on gifts this year, and we wanted to try to get them in early and at least get our share of those dollars.

So for example, the soft goods retailers, they were discounting early, and we knew that we wanted to be able to get our -- our share of wallet from consumer in the amount that they had allocated or budgeted for their Christmas spend, so.

Got you.

Thank you very much.

Yes.

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

Thanks and good morning.

Just to follow-up on Matt's question, do you -- clearly Sears has been very aggressive on the appliance side and Craftsman is a big gift-giving time for -- during the Christmas season, as you enter to spring has that competition from the big box home centers abated at all?

And then I have some follow-ups?

Yes, we don't expect to see the same level as what we saw around Christmas.

If you think about Sears they sell more than just appliances and tools, so in all likelihood that was used as a drawing card to get the consumer into sell other categories.

And so -- but obviously those are the categories that we compete with, so we had -- we had in certain cases would match some of the promotions that they had going on.

So every -- I think every retailer that is out there in a time like this is going to use what they have for the drawing card in order to be able to -- to pull the consumer in.

And -- and also these -- everyone had seasonal inventory that they had in the fourth quarter.

That you had to sell through in the fourth quarter.

And it is -- I think all of us, as we're trying to compete on that giftables category as I call it, we bulk up our inventory, because you are trying to partake in the gift-giving process around the holiday season.

And so certainly we think that that is something that is somewhat unique to the fourth quarter.

Now, as I have said before, any time you've got a slower retail environment, it's going to be more promotional.

We're competing for footsteps.

I think that's accentuated and is a greater issue in the fourth quarter, particularly given that everyone already had their inventory buys in place and we saw the dramatic slowdown after the disruption in the financial markets and the dramatic slowdown in foot traffic.

So as we said, we still expect margin to be down in the first quarter, year-over-year, but not to the extent with what we saw in the fourth quarter.

Okay.

So -- and then as a follow-on to that, have you seen -- I mean there was always a lot of consternation about Home Depot's new lower price program, and it was viewed, I think by both companies as a bit more after a advertising play, in the key categories stake in the ground category play.

Is that -- do you see that -- that initiative taking on, I guess more teeth than what was initially expected?

Chris, this is Larry Stone.

We have stated in a couple of our calls we have had a new lower price program out in the market for about four years.

And certainly we treat new lower prices from competition just like we do any other market shop and look at what they are doing.

And in some cases you match prices, some cases you don't match prices.

But certainly I don't think that really drove a lot of the dynamics in the fourth quarter.

You lower prices in a lot of categories bring in more footsteps and certainly makes out your ticket much better for you overall.

So we use that just like any other program we used to make sure that we're driving more footsteps in to stores and increasing our average tickets and at the same time, have that value equation for the consumer that is so important today, to make sure that you are getting your share of the spend that they are going to do in today's tough environment.

Okay.

And then one final one, as -- you did pull back your store growth again, here, about 15 stores in 2009, was that -- I guess minimized by the amount of sites that you could back out from, and how are we thinking about 2010 footage growth?

Chris, this is Greg Bridgeford.

It really wasn't.

We look at each site independently, and -- and Robert was just stating before, Robert, and Larry, and Bob and myself sit on the real estate committee and review every site.

And we have actually gone through a reapproval process of every site that comes before us, and make sure that even under the -- what we -- we recast the revenue forecast we take, we look for ability to reduce cost to the sites through rebidding and just strong negotiation.

We have gone back and combed through all of the previously approved sites before we put in place this year's expansion plan.

We have flexibility at -- towards the end of 2009, and certainly in 2010, and 2011 to adjust the number of stores that we put in the market appreciably as we judge the macroeconomic climate going forward.

Thank you.

Your next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

Hi, guys.

Just a quick housekeeping item first.

Did you stay the store traffic was up in the quarter?

Store traffic in total was up in the quarter.

Comp traffic was down.

I got it.

Okay.

That's helpful.

And then can you just -- you guys have provided guidance, and obviously that's helpful to give a way to think about it, but can you provide some of the key macro assumptions you guys were making to get to your sales and earnings guidance?

Scott, this is Greg Bridgeford.

We look at the macroeconomic climate, I look at the consensus forecast out there by the Blue Chip economic forecast.

We also work pretty closely with certain economic teams such as Moody's, economy.com.

Take a look at both the general growth in domestic product, we're looking hard at housing, we're -- our assumptions about housing are very conservative as you have seen in most economic forecasts.

We anticipate that housing turnover itself will trough sometime towards the end of the first half of this year.

We believe it starts will trough in that same time period, and that we'll see some movement towards trough in home values and home pricing in the second half fiscal 2009 with the ability for it to stabilize in 2010.

So our economic forecast assumptions are on the conservative side, and that's built in to the modeling that you have seen.

Just a last question on employment is there a specific unemployment number you guys are targeting or looking at as you kind of create your models?

I think those assumptions too we have gone very conservative on.

We have seen estimates that we think are fairly credible that estimate the peak of the unemployment in the 9% range, and they seem to be credible from our standpoint.

All right.

Thanks a lot, guys.

Your next question comes from the line of Mitch Kaiser with Piper Jaffray.

Thanks, guys, good morning.

I know that you lowered your CapEx assumption for 2009 by about $700 million.

I think in September you talked about doing $2.8 billion to $3 billion in 2010 through '13.

Could you just help us think about, how that adjusted based on your thinking for 2009?

Hi, Mitch, this is Bob.

Certainly a lot has changed since September.

We're not prepared to give you any update beyond 2009 at this standpoint, but I think it's safe to assume that with the stepdown in CapEx relative to the fewer stores in '09, there would be also be fewer stores planned for 2010 relative to what we said in September.

Okay, fair enough.

And then I'm sorry, Bob, could you just go through the components of the SG&A for the first quarter?

I know you said payroll is 80, fixed expense was 50, credit card losses were 50, and then I think depreciation was 30.

So that's about 210 basis points, but you said that EBIT was going to deleverage by about 310.

Is the delta then the gross margin?

Couple of items.

Margin is some of that.

Margin will be down ten to 20 basis points in the quarter.

We expect to deleverage bonus by about 20 basis points in the first quarter, really, just relative to how bonus was accrued Q1 last year.

We expect insurance expense to be down 30 basis points in the quarter, and then there's a whole litany of small items, bank card and other smaller things that just deleverage on a negative 6%, negative 10% comp.

Got you.

Okay.

Thank you.

Sure, Mitch.

Your next question comes from the line of Alan Rifkin with Banc of America.

Thank you very much.

Couple of questions for Robert or Greg.

There's probably a lot of economists out there who would argue that your assumptions as you call conservative may not be conservative enough, and that housing may not bottom until way past the early part of the second half of this year.

If that in turn turns out to be correct and that this downturn lasts a lot longer than that, what is your ability to potentially cut back on growth going forward and for the longer term and focus more so on preservation of cash flow?

Al, I'll start, this is Robert Niblock, and then I'll turn it over to Greg.

Yes.

That's clearly true.

I mean, look what -- in the past couple of years from the predictions that were out there, the reality has come in worse than the prediction.

So we certainly understand that's the case, that's why we have -- as Greg said we're reviewing projects on an ongoing basis and on an ongoing basis looking at our market-by-market, and making decisions whether we want to go forward or not before we get to the closing on the real estate side of the project.

I think we have done a good job over the past couple of years of showing how we can manage our expenses, throttle back as we need to in order to be able to preserve cash flow.

Just like going from September to now taking another 15 stores out of the new-store opening pipeline.

So I think we have shown the ability to do that.

And I think somehow of an offsetting factor to keep in mind, is that assuming that things are worse and the downturn is more prolonged than let's say what the consensus estimate assumes, we also believe that that will lead to -- from those competitors that are less well capitalized, more closings to take place.

So therefore, we believe that there will be some market share to be gained, which would help soften the impact that we would otherwise see all else being equal.

So Greg with that I'll see if you have anything else to add.

Yes, specifically to your question, Alan about if housing values for example, don't -- there's the delay trough and certainly delayed leveling off, and therefore, delayed return in any growth in housing values.

The way that we have been able to build that in to our real estate process is that we have been very, very sensitive; we look at the microeconomics of the markets.

And again, working with outside economic consultants, the microeconomics in the markets that we consider for expansion in real estate.

And we have leaned away in the -- in future expansion from those markets that are very, very sensitive to housing value improvement to be able to maintain our top-line revenue forecast.

So you'll see, as the year rolls out and we unveil where we're putting this expansion capital, you'll see much more of a focus and a skew towards those markets that have been less affected by housing bubble, so to speak, and less dependent upon housing economics to meet our top-line estimates.

That goes for 2009 and certainly those markets that we look at for 2010 and 2011.

Just a follow-up if I may.

Greg, obviously you are a privy to a lot of data on not only a market-by-market basis, but a store-by-store basis.

As you look at that data with respect to areas of the country that were either first to enter the housing woe, or -- woes -- or saw the deepest decline, is there any evidence that you are seeing today on a specific market basis that's -- that points to some stabilization or even an improvement in the environment?

There's -- Alan as you know there is certainly evidence out there that -- that there is existing home sales occurring in some markets that have been very distressed from a housing standpoint.

It is foreclosure sales.

It is certainly speculators, and certain -- in some cases, home owners -- perspective homeowners sitting on the sidelines who have been waiting for housing to hit certain values.

What you are seeing is markets that have experienced downturns before, and have that -- using that experience, recognizing there are bottom levels they are willing to jump in.

California is a good example, Florida is not a good example.

So we see slight signs of that in the marketplace today.

And we also see, which is much more emphatic is an attitude on homeowner's today to lean much more towards do it yourself involvement than do it for me, which really plays to some of our strength areas.

And I see -- and we're trying to take advantage of that knowledge and track how that -- how that plays out and opportunities with the customer today.

Okay.

And then just a quick one for Bob.

Understand the -- the effect on gross margins of the heavy couponing and promotions, was that a benefit to comps in any -- in any way, Bob?

Not necessarily, Alan, just for a rough -- rough math, if you discount something 10% you need 11% more units to get to the same sales.

Right.

So we didn't necessarily sell more units, which is evidenced by the decline in traffic in the quarter, so it actually hurt both sales and margin in the quarter.

Okay.

Thank you very much.

Dennis, we have time for one more question.

Yes, sir, this morning's final question will come from the line of Deborah Weinswig with Citi.

Thank you so much.

So a few questions with regards to guidance.

Can you help us understand, Bob, the difference between first quarter versus all of 2009 from a comp perspective?

Sure.

Certainly we think things are going to be toughest at this point in time.

We do believe there's an opportunity for improvement as the years progresses, mainly because of the factors Greg described; some stabilization in housing, not that housing improves, but it gets less bad year-over-year on a relative basis.

So we think Q1 improvements cyclically from fourth quarter due to couple of factors.

First the mix of outdoor categories.

Our outdoor categories improved -- outperformed the indoor categories by about 500 basis points over the course of 2008.

If we look at first quarter, outdoor category is about 35% of the mix relative to 20% for fourth quarter.

So sequentially there's about a 15% mix improvement, which we think helps the first quarter.

We are optimistic about outdoor in 2009.

We still see people tracking on smaller projects.

Larry talked to you about the decline in larger projects, which we certainly expect to continue in 2009, but we do see people willing to take on smaller projects, and that was contemplated in our outlook for 2009.

Okay.

And then with regards to your refined store opening plan, three different questions.

A, have you been able to renegotiate any of those openings?

Two, are any of those takeovers, or are they all Greenfield, and then three, you many of those are the 66,000 square foot prototype?

Deb, this is Greg Bridgeford.

On one we've actually have put every site that hasn't been closed as of almost a year ago back up for renegotiation from a land standpoint.

Certainly from a construction standpoint, we've rebid every project, and we have seen some interesting changes in a positive direction in that in most regions of the country, it has been material.

From the standpoint of -- of the small market prototype, we see, we have a number of 94's in the -- in the 2009 plan, and we have a -- a 66K.

We're working on that model right now.

It's in development.

We have another 66K that we're going to test rolling out this year, and then we have others that are lined up -- other sites that are lined up behind it, as we improve that model, and tweak that model.

Debra the other question on takeovers.

None of these stores are takeovers.

They will all be Lowe's stores that we built.

And we also have one 80K that we will be opening this year.

Are takeovers an opportunity though for -- since you are obviously in a square footage growth mode.

Is that an opportunity in 2009?

They are, and it's actually something we always do, actually a store that just opened two weeks ago is a takeover store, but that's second-use space, and there's always seconds-use space available.

We constantly comb for it, and we -- we don't -- it's so matter of course for us, we don't view it as a takeover.

We view a takeover something where -- there is an existing operation, we buy it, close it down and reconvert it to a Lowe's store.

But second-use space is more available today.

We think it is going to be more available in the future and we certainly incorporate it in our plans as we look at markets where we have opportunity -- we know we have opportunity to grow from a share standpoint and from a market gap standpoint.

Okay.

And then promise, last question, this is for Bob.

Bob, with all of these, I 'd say intense cost reduction efforts, how should we -- and obviously this is -- well very hopefully sooner than later, but when we return to positive comps how should we think about your new, kind of leverage point?

I think as we attempted to describe have done a lot of work to continue to take costs out of our operations to become more efficient and productive while maintaining our customer service standards.

I think our opportunity to have positive leverage once we turn is somewhere between 1% and 2% comps.

Okay.

Incredibly helpful thanks so much for providing all of the color.

Thanks, Bob, for those comments.

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 on May 18th.

Have a great day.

Ladies and gentlemen, this does conclude today's call.

You may now disconnect.