勞氏公司 (LOW) 2009 Q2 法說會逐字稿

Good morning, everyone.

Welcome to the Lowe's Company second quarter 2009 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.

Managements expectations and opinion 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 an in its filings with the Securities and Exchange Commission.

Also, during this call, Management will be using certain non-GAAP financial measures.

You can find 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 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 and then Bob Hull will review our financial results.

As expected, home improvement spending remained weak in the quarter but even in this weak environment we were disappointed with the magnitude of erosion and our comp sales performance from the first quarter.

We expected challenging economic conditions but wavering levels of consumer confidence, unseasonable weather in many areas and tougher than anticipated comparisons to last years stimulus related spending led to lower sales than we expected.

We continue to see relative strength in outdoor products in the quarter but that was more than offset by pronounced weakness in larger ticket discretionary projects.

The decline in average ticket was the largest driver of our negative comp and was down 8.6% in the quarter.

Our comp for tickets greater than $500 was negative 16%.

For $500 plus tickets in Q2, we were lapping the toughest comparison to last years stimulus aided comp sales; however, in recent weeks, some categories have experienced an increase in detail fees.

The small fee we charge to take in-home measurements that is the first step in the installation process which should lead to improved trends in many of our installed sales categories.

Not surprisingly, consumer research suggests that in this uncertain economic environment, consumers are only taking on home improvement projects that they feel are absolutely necessary and are postponing discretionary projects until clarity about the future returns.

In fact, 40% of consumers say they have a major home improvement project they're postponing because they are waiting for their confidence about the future to improve.

On the flip side, we saw better performance from the transaction side of comp, with only a 0.9% decline in customer count.

Our comp for tickets less than $50 was slightly positive in the quarter.

I feel the relative stability of traffic indicates our stores were ready for the late Spring season, successfully transition into Summer categories and provided great service to customers.

Evidence of this is found in our continued market share gains.

In the second quarter we added 70 basis points of total stored unit market share according to third party estimates.

I'd like to thank our more than 228,000 employees whose customer focus and hard work made those gains possible.

As I mentioned, I think our store employees and merchants did a great job getting ready for Spring and preparing for the continued outperformance of our outdoor categories.

We had positive comps in our nursery category and above average comps in lawn and landscape and outdoor power equipment.

Being ready-to-serve customers with the right product and great service helped drive outdoor product related comps nearly 500 basis points higher than indoor products.

Also, I mentioned last quarter a growing trend of a return to DIY.

We continue to see evidence of that trend in the second quarter with strong performance in key DIY categories like paint, hardware, and rough plumbing, and also in products like mower repair parts, grill repair parts and gardening supplies.

As the return to DIY leads to more frequent trips to our stores, we have an opportunity to capture additional traffic item sales like HVAC filters and birdseed as well as items like trash bags and cleaning chemicals.

We saw positive mid single digit comps in cleaning chemicals and bird seed and above average comps in HVAC filters in the quarter which I believe is evidence of the foot traffic generated by the shift to DIY.

Despite the weak demand environment our entire organization worked to maintain gross margin by moving products more efficiently, minimizing the impact of markdowns and reducing shrink, combined with a favorable product mix and a rational competitive environment these efforts led to a 50 basis point increase in gross margin, better than our expectations when we began the quarter.

Expenses were also managed well, especially payroll, during what has now been 12 consecutive quarters of negative comps.

While payroll did deleverage, I believe we maintained an appropriate balance between cost control and service in our stores.

Our efforts to maintain gross margin and control expenses allowed us to deliver earnings per share of $0.51 in line with our guidance despite the weaker than expected sales results and also after taking into account the $48 million pre-tax charge primarily related to our new store pipeline evaluation.

In the end, I don't think our comp erosion from first quarter represented a significant shift in the consumer.

Home improvement consumers have been and remain reluctant to spend much beyond the necessities.

Our research suggests that the number of projects the average home improvement consumer plans to take on in the coming year has dropped only slightly from a few years ago, but the expected spend on those projects has declined substantially.

But in addition to an obviously cautious home improvement consumer with hindsight, I think the erosion in comp performance from first to second quarters had a lot to do with cycling last years stimulus checks and relatively little positive offset to date from this years stimulus package.

That is supported by the fact that we saw progressively improving comp sales through the month of July and continued better performance into the first two weeks of the third quarter as the comparisons to last years stimulus ease.

Significant headwinds remain including the pressures of the economic back drop and cycling last years hurricane spending along the Gulf Coast, but there are also encouraging signs that a bottoming process is under way.

We're maintaining what we feel is an appropriately cautious sales outlook and are building our plans accordingly, but as the second quarter results show, we feel we have the flexibility to appropriately adjust either a weaker or stronger than expected sales environment while continuing to deliver great service to customers and reasonable profit for shareholders.

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

Larry?

Thanks, Robert, and good morning.

Today I'll share details of the quarter and what we're doing to manage the business in a challenging sales environment.

The current economic conditions continue to weigh on consumers and pressure our sales.

Reflective of these pressures is our negative 9.5% comp for the quarter driven by consumers hesitancy to take on big ticket discretionary projects which led to an 8.6% decrease in comp average ticket.

Comp traffic continues to show signs of stabilization as our comp customer count was down only slightly for the quarter.

The sequential improvement in the first quarter this year did not continue into the second quarter.

Last quarter, 19 of our 23 U.S.

regions achieved better comps sequentially.

This quarter only six regions have sequentially better comps with some of the biggest quarter to quarter declines in our core markets where we have the highest concentration stores including the Southeast and the Ohio valley.

Although second quarter comps are weak three of our four western regions and three regions in the Northeast improved sequentially.

Macro pressures remain broad based leading to 12 or 23 regions experienced double digit negative comps for the quarter.

In our western division, comps improved quarter to quarter but they are still double digit negative.

While positive housing turnover is an encouraging sign, home prices are still declining and consumer confidence remains weak.

We're watching foreclosure data in key housing markets and we're working to build relationships with commercial business customers to capitalize on opportunities as these markets move towards home price stabilization.

Additionally, parts of the Southeast division had double digit negative comps driven to some degree by the stimulus spending on home improvement last year when these markets had more stable housing pricing.

Also, our sales and parts of Northeast were impacted by the unseasonably cool wet weather.

On the product side, as we examined our sales, it was clear the small projects, maintenance and repair products and outdoor products experienced the best performance.

Only two of our 20 product categories, nursery and paint achieved positive comps for the quarter.

Sales in these categories, the two most popular DIY projects were driven by consumers willingness to complete small projects that enhance the appearance of their home and outdoor space.

Lawn and landscape products including mulches, seed, and patio block continue to perform better than the Company average as consumers continued to do outdoor projects to improve the appearance of their homes.

As more consumers tackle basic repair and maintenance projects, we experienced relatively solid demand in faucet repair and repair parts for outdoor power equipment.

In fact for the quarter, we had double digit positive comps in OPE repair parts.

Also we continue to see positive comps in tillers as consumers continue to plant gardens in many of our markets.

Selling to the DIY customer has always been a priority of Lowe's and with the resurgence of DIY, many customers may be tackling their first home improvement project in a while and many are looking to Lowe's not only for home improvement products but for how to information to successfully complete their projects.

Consumer research tells us that interior painting is one of the top home improvement projects that will be planned and completed within the next 12 months.

Painting is one of the easier DIY projects but like most projects having the right tools plus the confidence you're doing it right can go a long way in customer satisfaction.

That is why we're focused on spending more time with these customers providing them with project information and tips that make their project easier to do.

With this resurgence in mind, we've tweeked our staffing model to ensure departments that feature more project basics like paint, rough plumbing, rough electrical and hardware remain appropriately staffed.

This is just another example of how we continue to maximize every sales opportunity.

Consumers continue to postpone discretionary projects, which are a primary driver of our special order sales.

Soft project sales led to a negative 23% comp for the quarter with the most pronounced weakness in special order cabinets and countertops, fashion plumbing and flooring.

Special order flooring was negatively impacted from [cycling] an aggressive promotion last year for installed carpet as well as consumer shift to our improved expanded offering of stock carpet that delivered double digit positive comps in the quarter.

The resurgence in DIY coupled with fewer discretionary projects led to a negative 22% comp in installed sales.

During the quarter we saw soft demand for installed millwork, flooring and cabinets and countertops.

Sales to commercial business customers fell slightly below the Company average for the quarter.

As I mentioned earlier, we continue to work on building relationships with CBC customers to provide them with products and services needed to maintain and restore foreclosed homes.

Despite the external pressures weighing on our sales, we continue to grow our market share.

According to third party estimates we gained unit market share in 13 of 20 product categories in the second calendar quarter versus the same time period a year ago.

And we gained 70 basis points of total store share in the quarter, a good indication that our value message is still connecting with customers.

Gross margin for the quarter expanded 50 basis points, aided by lower fuel costs combined with their efficient distribution infrastructure.

Improved inventory shrink and favorable mix shifts also contributed to the margin improvement in the second quarter.

Our merchants and Operators continue to work together to find the right products to take care of the customers during this tough economic time.

We plan conservatively for our seasonal categories and overall we are in good shape as we head into the third quarter.

The exception to this would be air conditioners as the cool weather in the Northeast did impact our sales; however the hotter weather we've experience in August has led to stronger sales this month and currently our inventory is up only $16 million compared to last year.

We do have markdowns in place and we should move through the majority of this overage in the next month.

As a result of our sales performance for the quarter, payroll deleveraged 59 basis points.

Despite the external pressures weighing on our business, we remain committed to appropriately staffing our stores with knowledgeable employees ensuring we provide the service customers have come to expect from Lowe's.

Our Customer Service scores improved in the second quarter of this year compared to last year.

I'm very proud of our teams as they continued to deliver on our service committment and this committment has helped us increase our market share.

Throughout my career with Lowe's, improving Customer Service and managing inventory have always been priorities.

Flexible fulfillment is one initiative we're working on to enable us to better meet customers needs by leveraging our existing networks inventory.

Once these systems are in place it will allow the sale of product in any Lowe's location including Internet to be fulfilled and delivered to the customers homes from the most efficient mode in their network.

I know that those of you who have followed us for a while know that flexible fulfillment has been something that we've discussed before but with enhanced focus and resources, we're making progress and expect to implement deliverables in 2010.

Flexible fulfillment is another example of how we plan to continue to balance investment in our business to drive efficiencies in the future.

Needless to say we're disappointed with this quarter sales results, but we will continue to capitalize on opportunities to properly capture market share.

As we look to the balance of the year, our outlook remains cautious as we anticipate continuing macro headwinds.

Evidenced by this quarters results, we're committed to diligently manage expenses while continuing to deliver on our Customer Service committment.

Thank you for your attention and now I'll turn the call over to Bob Hull to review our second quarter financial results.

Bob?

Thanks, Larry, and good morning, everyone.

Sales for the second quarter were $13.8 billion which represents a 4.6% decrease from last years second quarter.

In Q2, total customer count increased 4% but average ticket decreased 8.2% to $61.43.

For the first half of 2009, total sales decreased 3.2% to $25.7 billion.

Comp sales were negative 9.5% for the quarter.

Looking at the monthly trends, comps were negative 7.9% in May, negative 9.9% in June, and negative 10.6% in July.

For the quarter, comp transactions decreased to 0.9% and comp average ticket decreased 8.6%.

We are encouraged by the improvement in comp traffic relative to Q1's 2.6% decline.

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

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

For the first half of 2009, comp sales were negative 8.2%.

Gross margin for the second quarter was 34.8% of sales, an increase of 50 basis points from last years second quarter.

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

First, the margin mix of products sold had a 19 basis point positive impact on gross margin.

Distribution favorably impacted gross margin by 13 basis points largely driven by lower fuel costs.

Lastly, lower inventory shrink as a percentage of sales had a positive impact of 10 basis points.

Year-to-date, gross margin of 35.1% represents an increase of 62 basis points over fiscal 2008.

SG&A for Q2 was 22.5% of sales which deleveraged 167 basis points driven by store payroll, credit, fixed expenses, and bonus.

For the quarter, store payroll deleveraged 59 basis points.

Proprietary credit deleveraged 27 basis points due to higher losses than last year.

In addition, rent, property taxes, utilities and other fixed expenses deleveraged approximately 20 basis points due to the comp sales decline.

Bonus expense deleveraged 19 basis points in the quarter.

This is primarily related to out stores as they attain higher performance levels this year versus missing many of our performance targets in the first half of 2008 largely driven by our better than planned first quarter results.

Given this challenging economic environment, we have reevaluated our future store expansion plans.

For 2010, new store openings will be likely in the range of 35 to 45 stores.

We will provide a more detailed update on our future store expansion plans at our analyst conference next month.

As a result of the lower store opening plans, we have decided to walk away from a number of future store projects.

We recorded expense of $48 billion primarily to write-off previously capitalized cost and reduce the value of these discontinued projects which is included in SG&A for the quarter.

Year-to-date, SG&A is 23.6% of sales and deleveraged 191 basis points for the first half of 2008.

Store opening costs of $14 million leveraged 4 basis points to last year as a percentage of sales.

In the second quarter we opened 18 stores with no relocations.

This compares to 23 new stores in Q2 last year.

Depreciation at 2.9% of sales totaled $408 million and deleveraged 32 basis points compared to last years second quarter primarily due to the negative comp sales and the addition of 111 stores over the past 12 months.

Earnings before interest and taxes or operating margin decreased 145 basis points to 9.3% of sales.

Year-to-date operating margin of 8.3% represents a decrease of 156 basis points from the first half of 2008.

Interest expense at $76 million deleveraged 8 basis points as a percentage of sales.

For the quarter, total expenses were 26.1% of sales and deleveraged 203 basis points.

Pre-tax earnings for the quarter were 8.8% of sales.

The effective tax rate for the quarter was 37.6% versus 37.4% for Q2 last year.

Earnings per share of $0.51 for the quarter were at the low end of our guidance of $0.51 to $0.55 but decreased 19% versus last year's $0.63.

As a reminder during the first quarter we adopted the FASB staff position or FSP related to EITF 0361.

The FSP which deals with share based payment requires both a change in our method of calculating EPS and retroactive adoption.

The amount of securities involved is insignificant but as a result of rounding our second quarter 2008 earnings per share is now $0.63 versus the $0.64 reported last year.

Earnings per share for fiscal 2008 are unchanged at $1.49.

For the first six months of fiscal 2009 earnings per share of $0.84 were down 19% to 2008.

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

Cash and cash equivalents balance at the end of the quarter was $1.1 billion.

Our second quarter inventory balance increased $250 million or 3.1% versus Q2 last year.

The increase was due to a 6.8% square footage growth and higher distribution inventory as a result of opening our 14th regional distribution center.

These were offset somewhat by a 5.2% reduction in comp store inventory.

Inventory turnover calculated by taking a trailing four quarters cost of sales divided by average inventory for the last five quarters was 3.72, a decrease of 29 basis points from Q2 2008.

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

Return on assets determined using a trailing four quarters earnings divided by average assets for the last five quarters decreased 267 basis points to 5.7%.

Next I'd like to highlight a few items from the liability section of the balance sheet.

Our debt to equity ratio was 26.5% compared to 30.1% for Q2 last year.

At the end of the second quarter, lease adjusted debt to EBITDAR was 1.52 times.

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 367 basis points for the quarter to 8.8%.

Now looking at the statement of cash flows.

Year-to-date, cash flow from operations was $3.7 billion, a decrease of $152 million or 4% over the first half of 2008.

The decrease is attributable to lower net earnings offset somewhat by working capital improvements.

Cash used and property acquired was $1.1 billion for the first six months of 2009 compared to $1.6 billion for the same time frame last year.

As a result, year-to-date free cash flow of $2.6 billion represents a 17% increase over the first half of 2008.

There were no shares repurchased in the second quarter.

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

We expect the third quarter sales decrease of 2 to 5% which incorporates the opening of approximately 11 new stores, two in August, three in September, and six stores in October.

Comp store sales are estimated to decline 6 to 10% to last year.

EBIT or operating margin for the third quarter is expected to decline by approximately 170 basis points to last year as a percentage of sales.

The anticipated sales and operating margin declines are expected to generate diluted earnings per share of $0.21 to $0.25 which represents a decrease of 24 to 36% compared to last years $0.33.

For 2009, we expect to open 62 to 66 stores resulting in an increase in square footage of approximately 4%, we're estimating a comp sales decrease of 7 to 9% and total sales decrease of approximately 3%.

For the fiscal year, we're anticipating an operating margin decrease of approximately 130 basis points.

We're forecasting an effective tax rate of 37.5% for 2009.

As a result, we expect diluted earnings per share of $1.13 to $1.21 for the year.

For the year we expect cash flow from operations to be approximately $3.6 billion.

We forecast total capital expenditures of approximately $2.4 billion with roughly $300 million funded via operating leases leaving cash, CapEx of approximately $2.1 billion for 2009.

As a result we are forecasting free cash flow of approximately $1.5 billion for the year.

Our outlook does not contemplate any share repurchases for the third quarter or fiscal 2009.

We're now ready for questions.

(Operator Instructions) Your first question comes from Budd Bugatch with Raymond James.

Good morning, Robert.

Good morning, Larry.

Good morning.

Can you give us maybe a little bit more color on the impact of special order sales and installed sales on the overall comp number and when do you think that might turn around?

What are you looking for on that going forward into 2010?

Budd I'll start off.

It's Larry Stone and let Robert and Bob join in.

As Robert mentioned in a few categories we've noticed our detail fees have increased and installed sales for starting off in the third quarter have improved in a couple of categories but that's still the big bogey that we think consumers are just not willing to go out and spend on categories like kitchen cabinets and countertops and even on our installed carpet program.

Our stock program that I mentioned in my comments has been extremely strong with double digit positive comps in the second quarter so once again we think once the housing kind of bottoms out and people get more confidence that the economy is starting to turn, I think there's a big backlog on these projects but right now we're just seeing people spend on the smaller projects but certainly we've got the processes in place, we continue to have our sales focused on the projects that do come on Board and I just think it's going to take a while before that business comes back probably some time in 2010 would be a good estimate in my opinion.

Budd, this is Robert.

The impact of installed in special order negatively impacted comps about 200 basis points in the quarter.

Okay, and what's the indicator you're looking forward now that you think will indicate that this has turned?

Is it housing values?

We are seeing a better velocity at least relatively in some of the housing indicators, so is it value or is it just all of the above?

Budd, obviously there's a lot of inputs into the consumers decision-making process but I think a key item is seeing a bottoming in housing prices.

If you think about for the number of homeowners that out there for them to move on those discretionary side larger projects, I think they want to know how bad are things going to get, how low is the value of my home going to go before they get off the fence and start spending on those major projects, so the velocity of housing, the turnover number has bottomed, there's still a lot of pressures out there in the economy and obviously they know where unemployment is at.

And finally is there any impact of the stimulus into your forward thinking right now?

I know last year you had 100 to 150 basis points of stimulus affecting last years second quarter and the stimulus now is going to affect the second half of this year and maybe into 2010.

Any of that projected into your outlook?

We haven't specifically built anything into that only to the extent that it is the overall economist consensus outlook that's out there and how we're thinking about the overall economic recovery would be the only thing but no we've not specifically built anything from that into our outlook.

Thank you very much, good luck.

Your next question comes from the line of Brian Nagel with Oppenheimer.

Hi, good morning.

A couple questions if I could.

First off a point of clarification.

Robert, you talked about sales in July improving a bit and that improvement continuing to August but I think the monthly numbers that Bob gave us suggest that sales continue to decelerate through the quarter so maybe I want to make sure I have those numbers correct, also a function of comparison with last year but if you could further expand upon that?

It is true that as you look through the quarter, sales decelerated but within the month of July as you look at the trends and particularly the traffic side of the comp we saw improvements in that during the month of July and those improvements have continued into our first two weeks of August, so in a tough environment like this we think traffic is key.

We're continuing to have traffic come into the store and kind of a follow-up to the response to Budd's question, once we see the consumers mind set change towards where is the value of their home going and they start those discretionary projects hopefully having that traffic in the store today will be a good leading indicator of the opportunity in the future but we've got to get to that point and obviously we still got some challenges and headwinds from the economic standpoint and from a housing pricing standpoint before we get there.

The second question I have with respect to the lower number of new store openings for 2010, as you look at Pawnee, the stores that you will no longer be opening that you'd planned to was it a really broad based decision or are you targeting certain areas of the country where you decided to pull back in store openings?

Well, what we did, Brian, was it's part of the ongoing evaluation process we've been going through really for the past couple years in a challenging environment and as we look out and say okay, when is the recovery going to take place?

Obviously things have been deeper and longer than most people anticipate when we first got into the process.

We went in and we're constantly reevaluating what we think these store opening volumes are going to be so it may be based on a store is falling below our hurdle rate and in other cases it may be the new store had an acceptable hurdle rate but it would be cannibalized having too much of a cannibalization impact on existing stores now that we've gone through three years of negative comps so it was part of the overall evaluation process to look at those that were in the pipeline and it's kind of looking all across the country and in some cases it's on the facts and circumstance basis for each individual site that we made the decision on.

Okay, thank you very much.

Your next question comes from Deborah Weinswig with Citi.

Good morning.

Larry, you'd stated that I think sales to commercial business customers fell slightly more than the Company and you're working to build relationships with those customers.

Can you elaborate in terms of what you're doing specifically and is there anything you've done in the past especially as it relates to the foreclosure market?

Yes, Deborah.

Certainly we're trying to work with various organizations and each market realtors and banks and so forth because a lot of those homes have been foreclosed on and we said if the bank owns the home then there's certainly a good opportunity to work with the folks they work within terms of growing that commercial business, so it varies by market and some markets, the real estate agents that we're working with and trying to get the jobs and so forth, some cases we've actually used our installed sales team to do the projects that in say a small market where a realtor might be working with a bank to get a house ready to sell and so forth so it varies all across the US and certainly, the amount of spend on foreclosed homes varies quite a bit.

If it's just a home that a customer basically left a home pretty much intact, the expense is much less versus a home where a lot of fixtures were taken out and it's pretty hard to quantify that across the U.S.

because it varies by market but it's just a continual effort to drive more sales at that relationship with those CBC customers and also with the lending institutions and the realtors throughout the U.S..

Okay, and then Robert, you referred to one of the issues regarding comps this quarter being the stimulus from last year.

What is it you saw in this quarter that makes it feel differently this year versus last year in terms of the benefit and how much do you think the benefit was to last years second quarter?

We previously said we thought the benefit last year was 100, 150 basis points and in hindsight it was probably at least 200 basis points of benefit so maybe approaching 100 basis points more than what we previously thought and I think last year, obviously if you think about it, there was a discrete amount of money put in individuals hands from a rebate check and the money they received then was prior to the collapse that we saw in the financial markets and the significant -- unemployment was on the rise, a significant increase in unemployment that we saw in the second half of last year.

So in many parts of the country when that money was put into the consumers hands, it seems like a propensity to spend it, I think obviously part of it wound up in our channel whereas this year there hasn't been that discrete amount of money that's been put in someone's hands in a large dollar sum like that and obviously the consumer is in a much different mind set given the state of the overall economy.

So I think those things combined, it's just probably our trend line last year was decelerating more than what we anticipated and then stimulus filled that gap and it was a bigger impact, the actual impact was bigger than what we estimate when we look at the numbers last year.

Okay and then last question for Bob.

Can you provide additional details at the upcoming analyst meeting with regard to the square footage growth changes but will there be a greater focus going forward on the smaller stores or are you finding the returns there are maybe greater than what you expected?

Deb, we're still looking at kind of a bar bell strategy.

We still think there's a great opportunity in many of the metro markets.

A lot of the metro markets we still feel like year we're under stored and it's a great opportunity.

A lot of those markets, land was was very tough to come by previously and in these current economic times we're finding more opportunities than we have in the past to put a Lowe's store in some of those metro markets.

We'll continue with our in fill strategies and the other top 100 markets as prudent, as Robert said we do look at it on a market by market basis to evaluate the whole market and the related cannibalization impact so depending on household growth in those markets would dictate our comfort level to put a store there and then lastly, the 94 cases continue to perform well and as we've talked about we've got several stores opening lower than 94 square footage, less than 94K, that we're continuing to evaluate, so we think there's opportunity in all markets but we're proceeding a little bit more cautiously going forward.

Great.

Well, thanks so much and best of luck.

Your next question comes from Michael Lasser with Barclays.

Good morning.

Thanks a lot for taking my question.

Given the weakness that you're seeing in bigger ticket items and the research that you cited that showed consumers are probably going to spend less on home improvement projects how long do you think it's going to take for positive comps to return given the changing dynamics between ticket and traffic.

Another way to say it is can you see positive comps such that traffic will return without that big ticket spending?

This is Robert.

I assume you're talking about overall comps?

Yes.

Yes, certainly, I think in an environment like this, I think traffic is what's king, so that's what we're after is maintaining the traffic, as the environment improves, as the consumers outlook improves and housing prices bottom and that will help from a ticket standpoint and certainly we're doing everything we can to get those add-on sales from when we drive the traffic through the store.

Housing prices aren't looking to bottom until maybe the first half of next year, so hopefully by the first half of next year, unless we have another set back in the overall economy hopefully we can start moving to at least flat comps maybe in the first half of next year and certainly hopefully positive comps as we move through the year next year.

And as a quick follow-up, on the reduction in store openings, is this a change in the way that you see the longer term market opportunity or is it more so that some of these sites that currently do not have -- meet your hurdle rates will when the environment changes?

I think obviously, I think it's just an extension of the store opening process because in many of these cases, you're opening a store that when we planned that store two or three years ago, the surrounding stores were doing a greater volume, now those surrounding stores after three years in many cases have negative comps, the volume has dropped to the point where you don't want to cannibalize and it's going to take a few years for those store volumes to recover to the point you'll be ready to cannibalize that site.

So we're just going through looking at it on a market by market basis and deciding is it best to walk away now and come back to the market at some point in time in the future so we still think there's great long term opportunity out there but that overall number of stores that we're talking about opening the timeline on that gets extended.

One quick last one.

Your guidance for the rest of the year would suggest that the margin performance is going to deteriorate somewhat from what you saw in the first half of the year.

Is there anything that's happening particularly on a gross margin side even though comparison are becoming much easier that would suggest that performance will be somewhat restrained?

Actually gross margin for the second half as a percent of sales increased relative to last year was actually slightly higher, I think we had 62 basis points of improvement in the first half our outlook is 70 basis points for the year but suggests a little bit higher performance in the back half.

Obviously that skews a little bit lower than that in Q3, higher than that in Q4 relative to the easier margin comparison we have relative to Q4 2008.

Okay, thank you very much.

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

Thanks.

Two questions.

One on the credit and then on DIY.

If you think about how credit drives the larger tickets, what did credit drop as a percentage of sales on the quarter and could you just give us an update on what percentage of your sales were on those larger tickets like you did in the first quarter?

I can tell you that credit, as a total percentage of the mix is roughly 20% in the second quarter and that's down from about 21.5 from Q2 last year, actually bank card mix dropped by a similar amount with the cash and debit card increasing in mix.

I don't have the specific big ticket amount in front of me.

Certainly the credit does play an impact in the big tickets and has an impact in overall big ticket performance.

We're certainly seeing a differing dynamic in the credit markets this year relative to last year which is having an impact on the extension of credit.

Greg, this is Robert.

When you talk about big tickets just keep in mind that's not always done on the credit card.

It can be big tickets and when we speak about it is in all forms so not specific to the credit card but when I talked about sales greater than $500 the comp being down about 16%, those tickets above $500 is somewhere in the neighborhood of 30% of our total sales.

Okay, great and then secondly, Larry, you got into the DIY and how it's always been an important focus.

Beyond adding staffing into the categories where that's important are there other initiatives you have or things you can do to get people to put more in the basket if they're doing a project or in store kiosks or other things that we should look for?

Certainly, Greg.

I think the thing that we've really tried to emphasize in the last three years, we spend a lot more time working on our new lower price strategy, special values which would come in maybe for a weekend with special values and so forth to really hit it pretty hard and drive that traffic into the store, clinics have certainly come back in some of our markets, the kids clinic has proven to be very very successful for us and not only gets the parents into the stores to shop but really drives hopefully a lot of DIY'ers in the future for our Company.

Lowes.com has many many how to videos and information now where customers go online and look at various ways to do projects so as I said in my comments DIY has always been very important to us as a Company and we continue to explore that business as we move forward.

Inside the store we've got a tremendous focus on selling related items, we've always had that but now even a more renewed focus our cart starter areas, our side stacks, everything we're trying to do inside the store is really going to enhance that ticket and drive as much ticket as we possibly can on the smaller purchases so it's all throughout the store, challenge the merchants with better packaging, better signage, better how to, the whole gamut of things that you would do, basic retail operation but just with tremendous amount of focus from all parts of the organization.

Great.

Thanks.

Your next question comes from the line of David Schick with Stifel Nicolaus.

Good morning.

You talked about some details on different line items but the share gains that you mentioned can you talk about those categories where you're gaining share and losing share and how you feel about those and relatedly, are there any new market entrants or exits into the categories?

Certainly, we can go through that.

As we talk about share gains we talk about unit volume share and we said we were up 70 basis points in total in the quarter and this is from a third party estimate and keep in mind this only relates to DIY spend.

This isn't anything to do with commercial spend but we saw in hardware, we saw an improvement, lawn and landscape, rough electrical, we saw a slight improvement in appliances in the quarter, seasonal area of the store, so a lot of those kind of DIY type projects we talked about where the customer can come, get everything they need for that project, get the how to advice if they are somewhat hesitant or hasn't done DIY in a while or moving back into that category, so we saw across-the-board some nice improvements in our share volume from a unit basis in a lot of those key categories.

And is there anything you guys are picking up in terms of either mass discount players trying to play in a category or the opposite closing a store from stuff that you guys can pick up on, just whatever, just give us your view on competitive entries and exits into different categories would be helpful.

David this is Greg Bridgeford.

One area we've seen a lot of closures and probably the most predominant sector that's been hurt by the nature of the current downturn is the number of building material dealers of all sorts and I think you've seen that reflected in the strength we've exhibited in building materials and rough plumbing and hardware and some of the core categories.

So it's a lot of anecdotal information but that seems to be the one category of our sector within our industry that seems most impacted by the nature of the current downturn.

Thanks.

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

Hi, guys, Scot Ciccarelli.

You in the past have provided some guidelines regarding how the outdoor mix changes quarter by quarter relative to the indoor mix.

I was wondering if there's a similar color you might be able to provide us in terms of big ticket purchases versus smaller ticket purchases and how that kind of flexes during the course of the year?

Generally speaking the big ticket categories seem to peak in the third quarter, if you think about it a lot of folks try to get their homes ready for the holiday season and a lot of big projects take place in the third quarter so we're about to bump up against the cyclical peak if you will in big tickets as it relates to a percentage across the year.

Okay and is there any geographic difference that you've seen in terms of the big ticket versus smaller ticket mix?

Scot, no real big differences.

Certainly as we talk about the pressure into the western division and so forth into the northeast your big ticket sales as we've stated previously many years ago some of our best home decor stores were on the West Coast and certainly large kitchen cabinet sales and so forth so you did have a higher percent of their sales being done in larger tickets so people spent a lot more on housing projects say in the West versus Midwest, but recently it's been pretty well balanced across the U.S..

We still have strong pockets of stores that did not have big up swing in housing prices so those stores are still pretty much strong versus how they were three or four years ago.

Your next question comes from Matthew Fassler with Goldman Sachs.

Thanks a lot and good morning.

First a couple follow-ups on the weather.

Just want to try to sort of reconcile the comments on the outdoor categories leading the mix while the weather was in fact a problem for you.

Would it have been that much stronger if the weather had been more seasonal for you?

Matt, this is Larry Stone.

In certain categories and air conditioners is one that highlighted my comments certainly in the northeast is a very strong air conditioner market for the Company and a lot of window units are still used in apartments and so forth and we had a very weak season in the northeast in terms of air conditioner sales and some of the outdoor categories also suffered with a result of the cool wet weather but in this day and time, big tickets are slow but that's why I made the comment about outdoor power equipment repair parts.

People are really coming back and getting their mowers out of the basement so to speak and fixing them up and using them for one more season so there again, we think as we said earlier a lot of pent-up demand could happen in the next year or so as things continue to improve but the wet weather and the cool spring hits in a lot of different categories but really air conditioners was probably one of the biggest ones this year that we got hit with in terms of sales slowdown.

And following up on that what kind of margin exposure or what kind of margin pressure have you factored into your third quarter numbers based on air conditioner markdowns?

Is it material relative to the overall number?

It's really immaterial as I said in my comments.

We've got about 16 million more in inventory than we had last year and based on the first couple weeks of August we've been going through that inventory at pretty good clip so we really feel like in the next three or four weeks we should be back in line with what we had last year and quite frankly you get in this late in the season and there's no reason to give it away because people are just not going to buy it if it's not hot so we think we have a great opportunity based on the weather forecast we're looking at in the next couple weeks to blow through that inventory without discounting substantially.

Got it.

Then finally following up on Greg's question on credit, a question for Bob.

You spoke about the mix that you're experiencing in the different credit methods of payment.

What are you seeing from your partner in terms of how they're treating your customers new applications, turns out, et cetera, what do the metrics look like and how are they evolving from earlier in the year?

The approval levels have dropped slightly from this time last year.

As you would imagine, everybody is tightening their lending standards and our partner is no different.

The drop is not as dramatic as we once thought.

I think roughly 85% of our consumers are homeowners and they've got very good credit stores.

The commercial customers, this is their livelihood so they are paying their bills in order to be able to procure more products so we aren't seeing much degradation.

In fact towards the tail end of 2008 our partner took certain risk actions and now that we're reversing some of those risk actions, so we've got a good balanced approach to try to grow sales profitably with our credit partner.

If you think about -- just to follow-up on that if you think about what you're seeing sequentially, is this sort of as big a drop you've seen year on year or had you already turned the corner in that regard in terms of approvals?

The approvals have -- they dropped, probably the biggest drop was Q4 last year, Q1 this year so we're seeing some relative stabilization there as it relates to approval levels.

Got it.

Thank you so much.

We've got time for one more question.

Your final question comes from the line of Eric Bosshard with Cleveland Research.

Good morning.

A question on the second half, seasonal and outdoor are certainly a favorable contributor in the first half and the second quarter.

As that becomes a smaller piece of the business in the second half what are the thoughts in terms of driving traffic?

Is there any thought of increased promotion or anything different to try to drive traffic other than this focus on core DIY categories you've talked about?

Eric, this is Larry Stone.

Certainly as we get into the third quarter and we start to switch out to more of the seasonal fall products, you get into the seasonal heat and certainly as we get into the latter part of the third quarter and to our Trim a Tree and get ready for Christmas, we don't see anything right now that makes us think we need to do anything drastic to change people coming into our stores.

We think we've got great values every day and certainly the special values and the new lower price and all the things we're doing from a marketing standpoint we feel real comfortable that we can continue to drive traffic without having to do anything that would be beyond the norm of what we've done in the first half of the year.

Perfect.

That's all I needed.

Thank you.

Thanks for your continued interest in Lowe's.

We look forward to speaking with you again when we report our third quarter results on November 16.

Have a great day.