勞氏公司 (LOW) 2010 Q1 法說會逐字稿

Good morning, everyone, and welcome to Lowe's Companies' first-quarter 2010 earnings conference call.

This call is being recorded.

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

Management's expectations and opinions reflected in those statements are subject to risks and the Company can give no assurance that they will prove to be correct.

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

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 Bob Hull will review our financial results.

Sales for the quarter increased 4.7% and comparable store sales were positive 2.4%; our first positive comp in 15 quarters.

First-quarter sales were positively impacted by favorable weather in March and April, as well as government stimulus programs.

However, I also feel our solid sales results suggest consumers are more willing to engage in discretionary home improvement.

Even at the depths of the economic cycle, the home remained important to consumers, and they continued to spend on repair and maintenance products.

But encouragingly, during the quarter, we saw signs that consumers were expanding their spending beyond repair and maintenance into more discretionary products and projects like riding mowers and gas grills.

Consumers appear to be more positive about the economic outlook as many are beginning to see a path to recovery, supported by cautious signs that housing fundamentals are stabilizing.

While employment remains a concern, on a relative basis, the economic climate is much better than a year ago and consumers seem to feel better about the future.

That's what we heard in our first-quarter consumer survey.

Our survey, along with other national measures, suggests consumer confidence remains low.

But what we identified in this quarter's survey was that consumers feel more comfortable that nationally, the worst of the economic cycle is behind us.

Caution remains, but a growing sense of comfort has more consumers planning and executing discretionary projects and purchases.

In addition to signs consumers are re-engaging in discretionary projects, sales in the quarter were also aided by favorable weather.

Despite record snowfall in February, which led to a slow start for the quarter, warm weather and a compressed selling season in March and April gave consumers a reason to move outdoors and tackle traditional projects, as well as repair damage caused by the harsh winter.

We saw strong performance across all of our outdoor product groups.

Government stimulus also aided sales during the quarter.

Consumers took advantage of the government-funded Cash for Appliances Rebate Program to invest in energy efficient appliances which drove double-digit positive appliance comps in the quarter.

Detailed planning and great execution of our state-by-state marketing, merchandising and operations programs related to cash for appliances helped drive our stolid results.

Also, while difficult to measure, we feel the Home Buyer Tax Credit helped sales.

During the quarter, we continued our target outreach to new homebuyers, many of whom qualified for the tax credit, so Lowe's would be top of mind for their home improvement needs.

We experienced solid sales across our footprint with 45 of the 50 US states posting positive comps.

Strong performance in Canada continued with a positive 14% comp in constant currency, and over 38% comps in US dollars.

The solid performance by Canada added 20 basis points to the overall Company comp.

While our two stores in Monterrey, Mexico have only been open since February, we're excited about the opportunity presented by this market.

On the expansion front, we opened 11 stores in the quarter in vibrant markets in the US and our first stores in Mexico.

As we've slowed our expansion to minimize the pressure on our existing store base, our self-cannibalization has declined.

For the quarter, it was only 65 basis points and is expected to continue to decline as the year unfolds.

While our sales performance was better than expected, our gross margin rate was lower than expected driven by change in product mix.

For the quarter, strong sales of appliances and OPE caused a higher than expected sales penetration of those categories and impacted our gross margin rate.

Larry will provide additional detail on our margin trends in his comments.

Although investments in our new sales and facility maintenance positions pressured expenses in the quarter, we delivered earnings per share of $0.34, which is significantly above our guidance for the quarter.

We remain committed to balancing our efforts to manage expenses while also ensuring our stores remain staffed with knowledgeable and engaged employees ready to serve customers.

While our first-quarter results were aided by weather and government stimulus, consumers are also showing signs of renewed engagement in home improvement, evidenced by their willingness to spend on more discretionary products.

We're optimistic we'll continue to see solid sales through the balance of the year, with gradual improvement in core demand.

But we still view 2010 as a year of transition for our industry, and it will likely be 2011 before we see significant growth.

Within that context, we remain committed to providing great service and quality products to meet consumers' ever evolving needs, which we're confident will allow us to drive profitable market share.

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

Larry.

Thanks, Robert, and good morning.

Comps for the quarter were positive 2.4% exceeding our expectations as we headed into the quarter.

Comp traffic was positive 4.8% for the quarter, while comp average ticket was down 2.3%.

While there were definitely some of the one-time drivers that positively influenced our first-quarter sales, we also saw signs consumers are increasingly willing to spend on big ticket products.

That's evidenced by our positive comp of approximately 1% for tickets greater than $500.

Additionally, consumers continue to make smaller transactional purchases.

Comps for tickets less than $50 were positive 3% for the quarter.

Looking at results from a regional basis, 21 of our 23 US regions had positive comps for the quarter.

Two regions, one in the northeast and another in the north-central, posted double-digit positive comps.

Performance in these regions were driven by strong sales of seasonal products and major appliances.

Also, the western division, which includes some of the hardest hit housing markets, posted a positive comp in all four regions for the quarter.

This is our best performance in this division since the fourth quarter of 2005.

The two regions that had negative comps are in the Gulf Coast and southern Texas where we're still cycling last year's hurricane-related spending.

As Robert mentioned, our Canadian stores had strong performance with 14% comps measured in constant currency for the first quarter.

Follow-through from projects stimulated by the Home Renovation Tax Credit, as well as consumers attempting to complete projects ahead of an upcoming tax increase in Ontario for installed services, probably drove some sales in the quarter.

But we've also been successful in differentiating ourselves in the Canadian marketplace.

One recent example is our exclusive offering of PARA Paints, a well-known Canadian brand renowned for its home color system featuring more than 2,100 colors.

Turning to our product category performance, 13 of our 20 categories had positive comps for the quarter, and three categories, appliances, outdoor power equipment and seasonal living, posted double-digit positive comps for the quarter.

As the government sponsored Cash for Appliances Program occurred across a majority of the states, we saw consumers take advantage of this program to replace their appliances with new, more energy efficient models.

During the quarter, we saw strong demand for refrigerators, ranges, dishwashers and laundry products.

Our team executed our state-by-state marketing, merchandising, distribution and store operations plans, enabling to us to capitalize on this opportunity.

In addition, to ensure we continue to meet consumer demand, we made opportunistic inventory purchases in the quarter to make certain we had adequate appliance inventory on hand during this high demand period.

We feel this purchase has paid off as many retailers struggled to replenish inventory as the state-by-state programs rolled out.

Our knowledgeable employees, combined with our well executed plans, great product selection and unmatched in-stock levels gave us a distinct advantage in satisfying the strong demand.

As the weather warmed up, homeowners headed outside and took on projects to enhance their outdoor space.

Throughout the economic cycle, we've seen consumers choose to repair outdoor power equipment, rather than replace, which drove strong comps in repair parts.

Our comps and parts remain strong.

We saw noticeable improvement in riders and walk-behind mowers as we posted double-digit positive comps for the quarter.

Additionally, we saw demand for pressure washers, gas grills and patio furniture.

Combined, these trends in big ticket OPE and seasonal living products are another encouraging sign consumers are more willing to spend on discretionary products.

Installed sales posted double-digit comps for the quarter.

A greater willingness to undertake some previously delayed discretionary projects, combined with consumer response to our easy to understand and value-based carpet installation offer, helped deliver strong comps in installed sales.

In addition, during the quarter, we announced our channel-exclusive partnership with Stainmaster Carpet, the brand most requested by consumers.

Stainmaster is known for its innovative stain-resistant carpet options, and we're excited about the opportunity to partner with them.

Special order sales, which is also project driven, had above-average comps for the quarter, driven in strong part by demand for special order millwork.

Finally, we had positive comps in our commercial business for the quarter.

Our district commercial and account specialists have improved focus on the opportunities we have for gross sales within this commercial segment.

We remain committed to driving profitable share gains, and we use third-party data to gauge our retail market penetration.

While this consumer survey data provides a good perspective of share movements, it is best used to reflect longer term trends across the industry.

According to these measures, during the first calendar quarter of 2010, we gained unit market share in 11 categories and remained flat in one.

Total store unit market share grew 10 basis points, which was greater than any other national retailer.

We continue to work closely with the provider of the market share data to determine how best to use it to gauge market share trends.

As a result of ongoing discussions with them, we feel transitioning to a rolling four-quarter view removes sampling anomalies and provides a better perspective of market share trends.

On a rolling four-quarter basis, we gained 70 basis points in total store unit market share.

Again, more than any other national home improvement retailer across that time period.

Gross margin rate for the quarter was below our expectations.

A change in sales mix driven by our outperformance in appliances and OPE resulted in 36 basis points in negative mix impact on margin.

While changes in mix accounted for essentially the entire decline, we also experienced some rate pressures as well.

In a commodity category like lumber, with many competitors competing for market share, retail prices have been slow to move despite the rising costs.

This timing lag between cost increases and movement in retail prices pressured margin in the quarter.

Additionally, we executed a reset in our home organizational category during the quarter, and we marked down and sold through existing inventories result, which pressured margin rate.

Turning to expenses, as we described on our fourth-quarter conference call, we expected some pressure from the new positions related to the rollout of our sales and service initiatives.

Store payroll, our biggest expense, de-leveraged 40 basis points driven primarily by the implementation of the project specialist exteriors and the facility service associate positions.

Also, as the quarter unfolded and sales accelerated, we added incremental seasonal payroll to maintain customer service standards.

At the district level, the new DCAS position pressured expenses as those employees come up to full speed and begin to generate sales.

In addition, advertising de-leveraged 8 basis points driven by three primary factors.

First, during the quarter we saw increased promotional activity in certain categories, and we chose to match competitor offers.

Also, the Cash for Appliance opportunity lasted longer than anticipated, and to ensure we captured our share of wallet, we extended our advertising spend accordingly.

And finally, some big-ticket categories like kitchen and bath, were planned with a low ad representation.

As the quarter progressed, we saw stronger than expected consumer demand in those categories leading us to increase our ad exposure.

We feel we have a solid advertising plan in place for the second quarter, but we will continue to review opportunities to drive sales.

Inventory's up 9.8% for the quarter.

While this increase was greater than we planned, the growth was driven by new stores, as well as some opportunistic purchases we made that we think will allow us to drive sales and capture profitable share.

As previously mentioned, we bought appliance inventories we saw greater than expected response to the Cash for Appliance Program, but we also made strategic inventory purchases in flooring, paint and lawn and landscape products to drive sales in these categories.

It's important to note that with our strong seasonal sell-through in the first quarter, our inventory increase is not in seasonal or perishable categories.

Overall, we feel like we have the right inventory in place to serve customer demand, and we expect our inventory position to be in line with our plan by the end of the year.

I would like to provide an update to new sales and service positions I described on last quarter's conference call.

While we are in the early stages of implementing these positions, we're excited about the opportunity they create.

Our PSE positions helped drive sales in millwork, and other building materials categories during the first quarter and positioned us to more effectively compete in categories that lend themselves to an in-home selling approach.

Our DCAS position, that's in 125 markets, has been instrumental in helping us build and strengthen relationships with new and existing customers.

During the quarter, we saw evidence of the sales benefit this new position can provide, and we're evaluating adding additional markets.

And finally, the FSA position will help us ensure we maintain an inviting shopping environment and have better execution of minor store repairs previously performed by third party vendors.

With the rollout of this position, we have eliminated approximately 75% of our service contracts related to janitorial work and general maintenance.

And as additional services contracts expire, we expect to realize additional savings.

These new positions will pressure payroll leverage in the near term, but we continue to be encouraged by the opportunities they create to drive sales and improve efficiencies.

We are encouraged by the widespread improvements in consumer demand across geographic regions and the positive comp performance in the majority of our product categories for the quarter.

While sales [raided] by weather and government stimulus, we're optimistic consumers are gaining confidence and a greater willingness to spend on discretionary projects around their homes.

Our continued investments in our new sales driving positions, great merchandising and focus on service ensure we're well positioned to drive profitable sales and efficiencies.

Thank you for your interest in Lowe's, and I will now turn the call over to Bob Hull to review our first-quarter financial results.

Bob?

Thanks, Larry.

And good morning, everyone.

Sales for the first quarter were $12.4 billion, which represents a 4.7% increase from last year's first quarter.

In Q1, total customer transactions increased 7.1%, while average ticket decreased 2.3% to $62.27.

Comp sales were positive 2.4% for the quarter, which exceeded our guidance of negative 2% to flat.

Looking at monthly trends, comps were negative 7.2% in February, positive 2.4% in March, and positive 8.8% in April.

For the quarter, comp transactions increased 4.8%, and comp average ticket decreased 2.3%.

Looking at some specific impacts to comp sales in the quarter, cannibalization negatively impacted comp store sales by approximately 65 basis points.

We experienced lumber inflation, which had approximately 30 basis points positive impact on first-quarter comps driven by plywood.

We estimate that Cash for Appliances Program aided total Company comps by 65 basis points in Q1.

With regard to product categories, the categories that performed above average in the first quarter include rough electrical, nursery, seasonal living, outdoor power equipment, lawn and landscape products and appliances.

Millwork and paint performed at approximately the overall corporate average.

Gross margin for the first quarter was 35.2% to sales and decreased 28 basis points from last year's first quarter.

The primary driver of the gross margin decline in the quarter was the mix of items sold.

Sales mix negatively impacted gross margin by 36 basis points.

Approximately half of the negative mix impact was driven by appliances.

We continue to see positive results related to inventory shrink which was 11 basis points lower than last year -- lower than Q1 last year.

SG&A for Q1 was 25% to sales which leveraged 1 basis point.

Here is some color on specific expense lines.

Proprietary credit leveraged 35 basis points in the quarter, primarily related to lower losses and decreased money costs relative to Q1 2009.

Utilities leveraged 7 basis points in the quarter as a result of reduced electricity usage and the increase in comp sales.

Store opening costs leveraged 6 basis points to last year as a percentage of sales.

In the first quarter, we opened 11 new stores.

This compares to 21 new stores in Q1 last year.

Almost entirely offsetting these items, was de-leverage in the following areas.

For the quarter, store payroll de-leveraged 40 basis points, driven primarily by additional hours associated with the PSE and FSA positions.

During our fourth-quarter earnings call, I noted due to the unusually high winter storm activity we were expecting incremental snow removal cost and expense de-leverage as a result.

While we did incur higher than planned snow removal expense, cleaning and maintenance expense reductions associated with the FSA position almost entirely offset the higher snow removal costs in the quarter.

Payroll taxes, de-leveraged by 11 basis points in the quarter, as a result of higher payroll and state unemployment tax rate increases.

Fleet expense de-leveraged 7 basis points due to an increase in the number of deliveries as a result of strong appliance sales and a 33% increase in the average fuel cost for the quarter.

Depreciation for the quarter was $397 million, which was 3.2% of sales and leveraged 19 basis points compared with last year's first quarter, due to slower square footage growth, assets becoming fully depreciated and positive comp sales.

Earnings before interest and taxes decreased 8 basis points to 7% of sales.

Interest expense at $82 million for the quarter was flat to last year's percent of sales.

For the quarter total expenses were 28.8% of sales and leveraged 20 basis points.

Pretax earnings for the quarter were 6.3% of sales.

The effective tax rate for the quarter was 37.8% versus 37.4% for Q1 last year.

Earnings per share of $0.34 for the quarter exceeded our guidance of $0.27 to $0.29 and increased 6.3% versus last year's $0.32.

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

Cash and cash equivalents balance at the end of the quarter was $2.7 billion.

Our first-quarter inventory balance of $9.9 billion increased $886 million or 9.8% versus Q1 last year.

The increase is due to a 4.9% increase in comp store inventory, square footage growth of 2.9% as well as a slight increase in distribution inventory.

Inventory turnover, calculated by taking the trailing four quarters cost of sales divided by average inventory for the last five quarters, was 3.56, a decrease of 20 basis points from Q1 2009.

Return on assets, determined using a trailing four quarters earnings divided by average assets for the last five quarters, decreased 106 basis points to 5.2%.

Moving on to the liabilities section of the balance sheet, accounts payable of $7.1 billion represents a 21% increase over Q1 last year.

The growth in accounts payable is higher than our 9.8% increase in inventory, which is attributable to the timing of purchases in the quarter, as well as ongoing efforts to improve vendor payment terms.

In the first quarter, we issued $1 billion of senior unsecured bonds in two tranches, a $500 million worth of 10-year notes with 4.625% interest rate, a $500 million 30-year tranche with a 5.8% interest rate.

The proceeds of the notes will be used to repay the $500 million June 2010 debt maturity, general corporate purposes and to finance repurchases of our common stock.

As a result, our long-term debt balance at the end of the quarter was $5.5 billion.

Our debt-to-equity ratio was 31.9% compared to 27.5% for Q1 last year.

At the end of the first quarter, lease adjusted debt to EBITDAR was 1.75 times, which is higher than our target of 1.5 times, as a result of prefunding the upcoming debt maturity.

Return on invested capital, measured using a trailing four quarters earnings plus tax adjusted interest divided by the average debt and equity for the last five quarters, decreased 150 basis points for the quarter to 8.2%.

Now, looking at the statement of cash flows, cash flow from operations was $2.7 billion, which was $391 million, or 17% higher than Q1 2009.

Cash used in property acquired was $283 million, a 51% decrease due to the reduction in our store expansion program.

As a result, first-quarter free cash flow of almost $2.5 billion was up 38% versus last year.

During the quarter, we repurchased 18.6 million shares at an average price of $24.18 for a total repurchase amount of $450 million.

We have 4.55 billion remaining share repurchase authorization.

The remaining $15 million of the $465 million of repurchase of common stock shown on the statement of cash flows relates to the shares purchased to facilitate stock-based compensation transactions.

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

We expect second quarter total sales increase of 5% to 7% which incorporates a comp sales increase of 2% to 4% and the opening of approximately four new stores in the quarter.

Depreciation for Q2 is expected to be approximately $400 million, and leverage about 20 basis points to last year's second quarter.

As a result, earnings before interest and taxes for the second quarter are expected to increase by approximately 40 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 forecast to be 37.8% for the quarter.

We expect earnings per share of $0.57 to $0.59 which represents an increase of 12% to 16% over last year's $0.51.

For 2010, we expect to open 40 to 45 stores resulting in an increase of square footage of approximately 2%.

We're estimating 2010 comp sales to be 2% to 4%, and as a result total sales increase from 5% to 7%.

For the fiscal year, we're anticipating EBIT to increase by approximately 60 basis points.

Our EBIT outlook includes an estimated $50 million or $0.02 per share impact for the pending credit card legislation regarding fair and proportional fees.

We expect the government's final ruling shortly, with the law becoming effective in August of this year.

For 2010, interest expense is expected to be approximately $325 million which is about $45 million higher than our prior outlook as a result of the April bond issuance.

For the year, we expect the effective tax rate to be 37.8%.

Some of these inputs should yield earnings per share of $1.37 to $1.47 which represents an increase of 13% to 21% from 2009.

For the year, we are forecasting cash flows from operations to be approximately $4 billion.

Our capital expenditures for 2010 are forecast to be approximately $2.2 billion with roughly $375 million funded by operating leases resulting in cash, capital expenditures of approximately $1.8 billion.

As a result, we are forecasting free cash flow of $2.2 billion for the year.

Our guidance for 2010 includes first-quarter share repurchase activity, but does not assume any additional share repurchases.

Regina, we are now ready for questions.

(Operator Instructions) In order to allow questions from as many individuals as possible, please limit yourself to one question and one follow-up.

Our first question comes from the line of Eric Bosshard with Cleveland Research.

Good morning.

Good morning, Eric.

You did a good job of highlighting the benefits from weather and appliances, both of which don't really continue in 2Q.

Can you just talk about what else you're seeing in the business that gives you the confidence in this guidance for basically 2Q sales to improve from the rate of 1Q?

Eric, this is Larry Stone.

Certainly a lot of our categories, lumber, building materials and so forth got off to a slow start in the quarter.

As the quarter progressed, you could see momentum starting to gather in some of those products.

Also, I mentioned our PSE, our project specialist exterior, really made an impact on our millwork sales.

So, there again, those sales should continue to grow as we head into the second quarter.

And a lot of the interior projects, carpet, cabinets and so forth, as the economy continues to get better and consumers gain more confidence we think those will continue as well.

Our seasonal categories should continue strong in second quarter.

Demand for outdoor power equipments and seasonal product, nursery products and all of our grills and patio and so forth should continue.

So really, we feel very confident as we head into the second quarter.

And one other thing, we haven't had that extreme heat yet that we normally start to experience.

So, categories like air conditioners and fans should also start to pick up as the weather gets hotter.

And then a follow-up.

The initial guidance coming into the year, I thought, was a little bit of a softer first half and a better second half.

Obviously the first half is turning out to be a bit better, but it appears with the full-year guidance that you're no longer assuming the second half improves from the first half.

Can you just talk about the thinking within that in regards to the full-year guidance?

Sure, Eric.

I think from a sales perspective, as we highlighted in Q1, we had some specific drivers that helped first quarter that, as you noted in your initial question, won't continue.

As Larry described, there's probably other factors that help drive sales in Q2 and beyond, but we're still somewhat cautious regarding the state of the consumer and the economy as a whole.

So, we're somewhat cautious as we think about our outlook for the balance of the year.

Very good, thank you.

Thank you.

Our next question comes from the line of Michael Lasser with Barclays Capital.

Good morning.

Thanks a lot for taking my question.

Larry, I think in your prepared remarks, you discussed that one of the reasons for the advertising expense de-leverage was due to increased promotional activity.

Do you expect that this will intensify as the home improvement market continues to rebound and will that lead to incremental pressure moving forward?

Michael, we don't think so.

I think the thing that really happened in the first quarter is kind of an anomaly.

As Robert mentioned in his comments, the first quarter got off to a very slow start as Bob referenced in his comments also about the comps.

So, February started off extremely slow for us.

As the weather started to improve in March, we had our plans laid out, but there again a lot of promotional activity was starting to be going on in a lot of our markets so, naturally we had to respond.

I hope, and we don't think that will continue in the second quarter.

It seems like things have gotten more stable as we got through that initial two or three weeks of just tremendously good weather and a lot of sales and then things kind of equaled back out as we got into the April time zone.

So, I don't think so.

We think things will be more rational as we head into the second quarter and hopefully for the balance of the year.

But, there again I think it all depends on how the economy -- if the economy continues to improve and consumers still continue to gain confidence.

That's the way we see the market playing out.

But, there again, things could change dramatically, and if so that's why I put in my comments that we stand ready to make changes if needed.

And then, real quickly as a follow-up on the appliance category, in those states that began the rebate program early, how have trends been following the expiration of the program?

Are you seeing it just pull demand forward?

Certainly in some states it did pull some demand forward.

And in some of the states where we have relatively few stores, we saw some fantastic comps, numbers that are unheard of.

But quite frankly, it's off a very low base.

But if you look at some of our states where we have a lot of stores in there a lot of years, we're still seeing good demand for appliances.

It's not like we've brought everything into that quarter.

I think the thing that -- a big part of the appliance market that we've always done extremely well in is in the replacement market.

So, if somebody's refrigerator breaks unexpectedly or a washer breaks or so forth, that business is still out there.

So, I think it brought forward some sales, we're not that naive.

But quite frankly, we think that business is still going to be strong for us.

It's been a category that we remain strong in throughout the downturn.

And certainly with the new products, new innovations and so forth, we expect to be one of the industry leaders.

And we still have seven states that will launch this month, four in June and one in July, so there's 12 more states that will launch their programs during this quarter.

Okay.

Thanks a lot.

Good luck.

Thank you, Michael.

Our next question comes from the line of Colin McGranahan with Bernstein.

Good morning.

First question, just on average ticket with the strength in appliances, OPE, and then it sounded like you had double-digit sales growth in installed sales too, I was a little surprised that average ticket was down, I think 2.3%.

Can you give us a little bit more color on what was driving the decrease in average ticket given the strength in some of the bigger ticket categories?

Sure, Colin.

Appliances certainly was strong for us in Q1.

However, other bigger ticket categories were off a little bit, specifically cabinets.

We talked about improving trends in fourth quarter.

However, cabinets was down slightly -- a slight negative comp in the first quarter.

So, that had a big contribution to the ticket decline, as well as the lumber category.

Lumber category was a little bit lower mix of total sales to Q1, so that has an influence on ticket as well.

Okay.

And then just on gross margin, thinking about the mix, obviously that should get a little bit better here going through as appliances lessen out.

But on the rate side, the promo side and then the fact that inventory is up, should we expect gross margin to be up for the year, or are you now thinking that it's going to be a down gross margin year?

We still expect gross margin to be up for the year.

Certainly the mix impact related to appliance was huge in Q1.

We do expect that that's going to lessen as the year progresses.

So, we do expect margin to be up slightly for the year.

And the driver of that will just be better rate?

It will be a combination of better rate.

It will be a combination of the things we've talked about in the past, which is global sourcing, markdown optimization.

We've also talked about, in the past, some expansion of patch areas that should help with us being competitive from a retail price perspective.

Colin, this is Robert.

Also as Larry mentioned in his comments, we're in real good shape on our seasonal sell-through, the way the season has started out, the way those inventory levels are.

So, that really takes a lot of pressure off markdowns on those seasonal categories as we move through the season and towards closing those out as we get through the second quarter and even the third.

So, we feel good about where we're at.

We feel good about where those inventory dollars are invested.

As I think Larry said in his comments, having gone through what the nation has gone through in the past three years, a lot of capacity was taken out from a production standpoint.

So, where we saw opportunities, particularly the in the appliance and some other areas, we did some advanced buys because we thought we wanted to make sure we had the inventory to be able to garner our share of sales opportunity and stuff like these stimulus programs that are out there from the government.

It's worked well so far.

And as Larry said, we don't have as many of those in the second quarter, but certainly some more states kicking off.

And then there's the extra 60 days to close on those homes that went under contract by the end of April.

And a lot of times when someone buys a home, that's obviously one of the things they have to have is appliances with that.

So, we think we're in good shape.

We think we've got the inventory in the right place and we think we've minimized the markdowns.

So, all of that helps, obviously with the gross margin trend heading into second quarter and also the balance of the year.

Okay.

Fair enough.

Thank you.

Thanks, Colin.

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

Hi, good morning.

You talked about opportunistic buys affecting the inventory a little bit in categories where you felt good.

Can you talk about the cycle times on what you bought?

Would you expect that to smooth out over the next quarter or two?

Dave, this is Larry Stone.

Yes, we should.

Appliances, one of the things that's really helped is in appliance sales over the -- all the time we carried appliances and having appliances in stock, as the Cash for Appliances started to unfold, quite frankly, demand was outstripped in stock positions so we worked with our vendors and did make these opportunistic buys of products that obviously are not going to go bad.

These are products that we'll be selling as the year progresses, but we felt like to have the product in stock for the customers was worth an inventory investment.

Also, in categories like lawn and landscape and paint, once again we felt like, based on the trends we were seeing in the business, that these were good solid investments for us.

So, the products that we purchased during the first quarter are products that the business is pretty stable throughout the whole year.

So, it's not a lot of seasonal products like we went out buying a ton of grills and patio.

I could understand concern.

But quite frankly, the products we bought were products we know we can sell through without a lot of markdown, or hopefully no markdown.

So the number should look more normal relative to comp maybe next quarter?

Is that right?

They should.

That's correct.

Okay.

And then the follow-up really would be the payables expansion.

Bob, if could you talk talk about that?

Sure.

As I mentioned in my comments, a lot of it was really just due to timing of purchases in the quarter.

The increase in purchases, a lot of that came in April.

So, as we progress throughout the year, the AP to leverage, AP as a -- divided into inventory will be up slightly for the year, but not to the extent it was up in Q1.

And Dave, this is Robert.

Just to follow up, our merchants are always obviously working on terms with vendors, but there's no significant change in terms across the board or anything like that that we've executed with our vendors.

So, as Bob said, it's more driven just by the timing of purchases and where they occurred late in the quarter as demand wraps for things like appliances.

And just one follow-up, David, I think you're going to see inventory normalize as the year progresses.

It still might be a little higher than one might expect relative to sales in Q2, but we expect to be roughly on plan by year-end or up approximately 3%.

Thanks a lot.

Thank you.

Our next question comes from the line of Dan Binder with Jefferies.

Hi, good morning.

Dan Binder.

I was just curious if you could comment on new store productivity versus your expectations in the quarter?

And then, also, you mentioned hurricane activity.

I am just curious if you could outline what the impact was this quarter and what you expect it to the look like next quarter?

And then finally, aside from the lumber you're seeing -- or it appears there is inflation in other categories, including carpet, flooring and other building products.

I am just curious what your outlook is on inflation and how that may impact your comps for this year?

I'll take the hurricane question, Dan.

As you know, we did see elevated sales in Q1 last year as it relates to the 2008 storm activity.

That negatively impacted first-quarter comps by about 90 basis points.

We think that's roughly cut in half in Q2, down about a 45 basis point negative impact.

And Dan, your first question you referenced productivity, could you expand on your question a little bit if you don't mind?

Just how new stores opened up over the last 12 months, how they've performed versus your expectations?

New store productivity in the first quarter was about 72%, so I would say that's fair.

Ideally, we'd like to have it closer to 80%, but anything above 70% is decent performance.

Dan, on your issue with inflation, obviously lumber and some other commodities we've seen some inflation in, some in rough electrical when you think about copper wiring.

Those categories, I think compared to other cycles, as Larry mentioned in his comments, our retails have moved up a little slower than what they have in the past, but are starting to move up compared to what we've seen on the cost side.

So, that had a little bit of an impact, as Larry mentioned, on margin rate during the quarter.

We are seeing those retails starting to move up.

It's only the fact that it's just been slightly slower than what we saw in prior cycles, as we've seen our commodity prices move up.

But we expect to see those continue to move up.

As you get the economy starting to pick back up, there's probably going to be pressure where supply has been taken out of the market.

So, you're probably going to see some inflation in those categories.

Certainly in the second quarter we expect it based on where lumber prices and where stuff like copper wire prices are at that are impacting the rough electrical category.

And also plywood, Dan, we have had quite a run-up in plywood products.

So, there again, if you look at, as we start in the second quarter and in the third quarter, there's a lot of comments out there about weather and storms so forth, so again, we're keeping our eye on that as well.

So, we just feel like that things hopefully will start to level off, especially on the lumber and plywood prices as we head into the end of the second quarter and get back into the fall of the year.

Okay.

And this is a follow-up to that -- the comments on inflation, do you expect that there is a temporary gross margin pressure that continues into Q2, Q3, or is it starting to flow through a little bit more quickly now?

I think Robert's comments, and we're starting to see people finally starting to move up on some of these products.

Like I say, a lot of pressure in lumber, plywood, and really in copper cable are three of the ones that gave us some margin pressures in the first quarter.

So, we're starting to see retailers move more proactively now versus -- for the middle part of the quarter people were kind of stuck on the price they bought it at versus replacement cost, and the replacement cost jumped quite a bit as the quarter progressed.

So, we feel like there's opportunity to move prices up to recapture some of those costs that are embedded into the product now with the replacement cost being much higher than they were at the start of the quarter.

Okay, thanks.

Thank you, Dan.

Our next question comes from the line of Laura Champine with Cowen and Company.

Larry -- Robert, you mentioned that 2011 might be the year where we really start to see improved growth, and I understand the caution this year, but why move it out a full year?

And what should be the drivers you think to take 2011 growth even faster than 2010?

I think if you look at some of the economic estimates that are out there, Laura, a lot of them, as we've gone through the recovery process, have started to push out when the time line is for recovery.

So, for example, the thought was originally that home prices would bottom in the second half of 2010.

That's now been pushed out to the first half of 2011, as we've got to get through this glut of foreclosures that potentially need to move through the marketplace.

We continue to see pressure there.

There's obviously still concern out there from an employment standpoint.

Even though I think the latest numbers were 290,000 jobs were added, unemployment rate ticked up recently, and is estimated to be at I think about 9.6% consensus for the year in 2010.

So, as we think through that process, just looking at it from an overall estimates out there, what the overall market growth is going to be, what the consensus is for our industry this year versus next year, things have pushed out just a little bit.

We've always said that 2011 would be the first year of recovery.

We haven't really changed our outlook so much for 2010.

We just had a better first quarter than we anticipated because of some of the incremental factors that impacted that quarter being the Cash for Appliances, response for that being greater than we anticipated.

We didn't know at the beginning of the quarter, since the federal government rolled that out to the states and let them put in place the programs on an individual state-by-state basis, we didn't know exactly how those programs were going to be structured, and a lot of times it depends on how those programs are structured.

Is it an instant rebate, is it a mail-in, how does that work that drives the consumers' response to the category.

So, things like that had an incremental impact above what we'd anticipated in the first quarter because we didn't have the information as to exactly how those programs were going to be rolled out.

And so the impact that would have on consumers' ability to take those -- to take the states up on those offers.

So, Greg, do you have anything else on the economic outlook?

I think, Robert, you're looking at the consumer mind-set is slowly starting to change favorable.

But I think that, as Robert described, Laura, that we're still going to have to watch and see how home values do bottom out, which has been pushed out.

So it's -- so most of the economists that you talk to today would say that it's going to be a longer recovery with fewer curves in it, and then we'll begin to see meaningful change in consumer mindset towards the end of this year and into the first half of 2011.

Got it, thank you.

Our next question comes from the line of Peter Benedict with Robert Baird.

Hey, guys, first question, could you give us some more color on the improved trends you're seeing in the western regions?

Specifically, how's California performing, and how does that compare to the prior quarters?

Peter, it's Larry Stone.

As I stated in my comments, we had positive comps in the western division for the first time since 2005.

Certainly, all the parts of the west are doing much better than we were doing previously.

I have been out there a couple times in the past quarter, and you can just see traffic in the stores.

And just anecdotally talking to customers and talking to our store teams and so forth, things seem to be getting better.

We know we're not out of the woods yet in those states, but certainly the improving trends are much better.

The bounce in the step, so to speak, of the customers and the employees are very encouraging.

And there again, we've got all of our programs in place out there in terms of our project specialist exteriors, our DCAS positions on our district commercial account specialists.

So, we feel real good about the West Coast and how it's performing.

But, that's one great quarter.

So, we hope this trend will continue, and certainly as we drove throughout the year and things continue to improve that will just continue to get better on the West Coast.

Okay, thanks.

And then, Bob, the $50 million credit expense that you alluded in to your prepared remarks, when do you expect that to hit the income statement?

Is that going to be in 2Q or 3Q?

Pete, that starts in third quarter.

I think the final regulations would become effective August 22.

We see that impact largely spread throughout third and fourth quarter.

So, $50 million over the second half of the year is to way to think about it?

That's right.

Okay, great.

Thanks.

Thank you.

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

Thanks a lot.

Good morning.

I've got one question And one follow-up.

First of all, after the --

Matt, we're having a little trouble hearing you.

Sorry.

Can you hear me now?

Yes, we can hear you now.

Great.

Sorry about that.

My first question would be a follow-up to Dan's question on new space productivity.

I totally hear you on the productivity rate being very solid in absolute terms.

I believe that for the quarter and for the year you guided to the neighborhood of 100% for new space productivity based on the kinds of openings that you saw for this year.

So, some color on how you're tracking to that expectation would be helpful.

And then my second question just relates to the appliance stimulus program.

If you think about all of the various states and add up the potential, how much -- what proportion of the dollars do you think has been extended or claimed at this point and how much do you think would be left for subsequent quarters?

Thanks.

Matt, it's Bob.

I'll take the first part.

So, new store productivity is assumed to be roughly 100% for the year.

There's some nuances of the calculation.

As we've talked about in the past, we've got a very healthy 2010 new opening schedule.

Average sales per store roughly $33 million versus the $28 million average we saw per store in 2009.

The other impact is when the stores open within each quarter, which has some nuance to the calculation itself, so we do expect good new store productivity in 2010.

I think it's just some of the nuances of the calculation that gets us to a new store productivity, mathematically calculated to be about 100%.

Got it.

Matt, it's Robert.

On the estimate as to how much is already behind us, that one's a little bit harder to estimate.

Most of the larger states have come through with their programs.

As Larry said, there's about 11 or 12 more that are kicking off.

One of them out there that had a fairly big program was California, but the way they executed it initially was it only applied to very high-end appliances, very high average ticket, so they didn't get a very big response.

So, one of the big unknowns is do they come back with their remaining funds and execute it at a level that is more mainstream and drives more of a take rate for the residents of the state there.

So, roughly I'd say we're probably maybe 75% of the way through the programs out there.

Depending on what California does, that could tick up a little bit more opportunity later in the year if they choose to do something there.

So, are you intimating that the first quarter probably saw the bulk of the benefit that you're going see, or do you think it can be material for 2Q as well?

I think it'll still have an impact on 2Q, but we think the impact on the first quarter is bigger than what the impact will be on the second quarter.

Got it, guys.

Thank you so much.

Our next question comes from the line of David Strasser with Janney Montgomery.

Thank you.

So, you had talked about lumber prices inflation, not being able to keep up with inflation or inflation being -- cutting into margin a little bit because prices haven't been able to go up as much.

And then you -- in the past two or three years, part of the story here has been that you've seen a lot of competition, particularly some of the lumberyards go out of business.

You alluded to it a little bit.

I'm just trying to reconcile a little bit some of the comments.

Are you seeing more competition come back in, which is kind of keeping some of that lumber pricing in check at the retail level?

Dave, this is Larry Stone.

I'll start on that one.

Certainly it's not more competition.

It's just the competitors that we still have left that seem to be trading dollars on product versus trying to get in line with the replacement cost.

That's been an age old problem selling lumber.

A lot of folks buy it at one price and sell it at one price and don't think about replacement cost.

But the major retailers that we compete with on lumber products it seem like they've been holding their prices on some of the products.

Traditionally, this time of year there's certain products that go up in terms of retail, and this first quarter they were just held down, and quite frankly, we've got to match the competition in these areas.

But, as far as new competitors, we're not seeing a lot of new competitors in the lumber and building materials business.

It's more the same folks we compete with day in and day out.

Just as a follow-up to that question, as you think about back half of 2010 and 2011, I remember over the course of the last few years you talked about barriers to entry being relatively low for some lumberyards to come back.

How do you think about competition coming back if you're right on the economy continuing to improve?

I think, Dave, when you start talking about in the lumber and building materials area, and those competitors starting to come back, there was a lot of consolidation that took place in the industry as they were trying to rationalize, and based on the pull back on sales, rationalize their overhead and those type of things, you wouldn't expect to see them really coming back.

You really have new home construction heating up in a big way.

So, when you think about still the overhang we have in existing home sales, the pressure that's going to be coming from the foreclosures that need to move through the pipeline like we've talked about earlier, I think we're well into recovery in new home construction before you would really start seeing an expansion in the traditional lumber and building material yards.

All right.

Thanks a lot.

I appreciate it.

Thanks, Dave.

Regina, I think we've got time for one more question.

Our last question will come from the line of Chris Horvers with JPMorgan.

Thanks, and good morning.

Can you talk about big ticket category trends outside of cabinets and non-seasonal categories?

I was curious, I think that will be a really interesting read on how much we could maybe expect to continue into the back half of the year.

Chris, this is Larry Stone.

A lot of the big ticket items, and certainly if you looked at our seasonal products, outdoor power equipment had a real strong quarter, as I mentioned, double-digit comps.

And certainly that's a big ticket item.

Patio and grills, which are also considered big ticket items, had real strong first quarter as well.

So, you would expect those to carry over into the second quarter as these products are really sold during the first and second quarter, our two best quarters for those particular products.

So, we think that will continue.

Kitchen cabinets, as Bob mentioned, were down slightly for the quarter.

But, there again, as consumers gain more confidence, we expect kitchen cabinet sales to get better over time.

Flooring was strong in the first quarter.

There again, a large ticket purchase.

And millwork was extremely strong in the quarter with our average ticket in that being pretty high.

So, we think there's a lot of different big ticket categories that are doing quite well for us and should continue as we head into the second quarter and hopefully the balance of the year.

So, then as you reflect back, and you did almost a 9% comp in April, so it seems like there's some -- you have a lot of reasons to be optimistic as to what the second quarter holds, particularly with really easy weather compares in June and July.

So, what's the foundation of your comp outlook here for 2Q?

Chris, this is Robert.

Obviously as we said, one of the big drivers in the first quarter was the Cash for Appliances program.

We think that will continue into Q2, but not as heavily as in Q1.

Also, Q1 had the impact of a lot of repair being done, coming out of a harsh winter with the damage that was done to people's homes and landscaping and those type of things.

So, a lot of that activity would have took place, as Larry spoke of, as soon as the weather broke in the quarter.

Some of that obviously will carry over into the second quarter.

Probably a little bit more of an impact, a favorable impact on that in the first quarter.

Certainly, we're looking for just a -- even if you take -- if you think about taking the impact of some of that out, you're still looking for a nice improvement in comps going into the second quarter, and just part of a gradual improvement that we've talked about.

So, we're still very optimistic.

We're only into the beginning of the quarter.

We're pleased with the way the quarter has started.

But as we said, there's still -- this is kind of a year of transition.

We're transitioning from a year -- from the prior three years where we had negative comps into a year where we're looking for positive comps.

But there's still not significant growth out there in the industry that's going to take place until we get employment really moving back in the right direction, we get home prices to bottom, which is probably more of a 2011 phenomenon, even though it gradually gets better.

So, there's still challenges out there in the economy.

So we try and look at it as we're being cautiously optimistic.

We're very pleased with the signs we saw in the results we got in the first quarter.

We're sitting back and knowing that some of those were certainly aided by the stimulus program, and the response to the harsh winter.

We think that as the consumers gradually are feeling better, and we're seeing them start to take on more discretionary type projects, that carries over into the second quarter.

But, we're cautiously optimistic.

But, at this point in the quarter don't want to get ahead of ourselves.

Fair enough.

Thank you very much.

Okay.

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

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

Have a great day.

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

Thank you all for participating.

You may now disconnect.