勞氏公司 (LOW) 2012 Q1 法說會逐字稿

Good morning, everyone and welcome to Lowe's Companies' first-quarter 2012 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 reconciliation to the most directly comparable GAAP financial measures and other information about them posted on Lowe's investor relations website under Investor Documents.

Hosting today's conference will be Mr. Robert Niblock, Chairman, President and CEO; Mr. Bob Gfeller, Customer Experience Design Executive; and Mr. Bob Hull, Chief Financial Officer.

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, Bob Gfeller will review our operational performance and Bob Hull will review our financial results in detail.

But first, let me provide a summary of our first-quarter performance and share some strategic updates.

Sales for the first quarter increased 7.9%, including the impact of the week shift while comparable store sales were positive 2.6%.

As expected, comp transactions increased 2.6% in the first quarter and comp average ticket was flat to last year.

On our fourth-quarter call, we provided our annual comp guidance of 1% to 3% and expected all quarters in 2012 to fall within that range.

That guidance was predicated on transaction growth and for the first quarter assumed better weather conditions year-over-year.

We are pleased with the solid comp transaction growth in the quarter and continue to see stabilization in comp average ticket.

Geographically, all divisions in the US delivered positive comps in the quarter with our strongest performance in the North division.

While we capitalized on better-than-anticipated weather during most of the quarter, demand for seasonal products slowed toward the end.

Gross margin contracted, but the year-over-year impact was significantly less than the third and fourth quarters of 2011 and we believe we are now beyond the peak of gross margin declines.

We continue to effectively control operating expenses in the quarter and delivered earnings per share of $0.43, which included approximately $0.01 of severance and other costs associated with the voluntary separation program.

Delivering on our commitment to return excess cash to shareholders, in the first quarter, we repurchased $1.75 billion or 58 million shares and paid $174 million in dividends.

We are building on our core strengths with focus areas like value improvement and product differentiation and Bob Gfeller is going to share proof points with you momentarily.

But we are also strategically investing in ways that will better position Lowe's for success.

Those investments, [both] capital expense, continue in 2012.

At the core of our multiyear strategy is our commitment to deliver better customer experiences.

This is more than providing great customer service, having the right product and being in stock.

Those are fundamental to retail.

Delivering better experiences is about being relevant to the consumer at each step of the home improvement process from inspiration and planning, through finishing and enjoyment and it is executing simply and seamlessly across selling channels.

That is what will differentiate us from the competition.

Understanding that a seamless customer experience starts from behind the scenes, we began evaluating our organizational structure.

In fact, we have spent a significant amount of time over the past six months designing high level, future state processes.

To support our efforts, we announced a new organizational design in mid-April to align functions based on either the creation or the delivery of customer experiences and we will be measuring each function's success through that lens.

Greg Bridgeford will lead the customer experience organization as Chief Customer Officer and Rick Damron will lead the operations organization as Chief Operating Officer.

We are transforming the way we go to market and over the next year, we will be clarifying decision rights, redesigning processes to improve efficiency and effectiveness and ensuring that throughout the organization, we have the right people who are committed to the organization in the right roles.

It is a phased approach and while the focus is on process efficiency and effectiveness, we do expect to realize cost reductions.

We are making tough decisions in order to improve profitability and meet our 10% operating margin goal by 2015.

That goal assumed, among other things, 130 basis points of SG&A leverage.

The streamlined organization, together with the voluntary separation program, is expected to result in 15 to 20 basis points of SG&A leverage by 2015.

As I have said before, we are willing to accept short-term disruption for long-term gain so as differentiating on experience is a multiyear strategy.

Now let me conclude my remarks with some thoughts on the consumer.

We continue to maintain a cautious view of the housing and macro demand environment and our guidance reflects that view.

While there has been some acceleration in consumer spending recently, it was aided by unseasonably warm weather.

And while there has been improvement in housing turnover, the increase was off a small base.

We believe future uncertainties are still weighing heavily on the consumer.

For instance, there is no meaningful area of strength in personal income data, so while spending has been strong up to this point in the year, it will likely level off without real income growth.

Likewise, it remains to be seen whether housing has really begun to turn.

While prices for non-distressed properties appear to have stabilized, high-level distressed properties remain a concern.

Finally, Presidential election debates with the economy again as a primary topic could impact consumer sentiment and how consumers view the road to recovery.

We are focused on what we can control, making further progress with our focus areas, value improvement and product differentiation and delivering better customer experiences.

I would like to express my gratitude to our employees for their continued dedication and customer focus.

Thanks again for your interest.

Bob?

Thanks, Robert and good morning, everyone.

During my time today, I will describe the internal and external drivers of our first-quarter performance, highlighting the three internal sources of 2012 growth.

First, leveraging the foundation for a more simple and seamless customer experience; second, product differentiation; and third, our progress on value improvement.

Our first-quarter comp sales performance was consistent with our expectation at the beginning of the year.

For the quarter, 11 of 15 product categories comped positively, showing continued strength from the fourth quarter of 2011 -- tools and outdoor power equipment, seasonal living, paint and lumber led our performance with comps at least twice the Company average for the quarter.

In particular, a number of products produced double-digit comps demonstrating that we were well-prepared for the spring season.

These products were riding and walk-behind mowers, lawn chemicals, mulch and stone, trimmers, edgers and augers, handheld power tools, patio accessories, cleaners and exterior paints, stains and sealers.

Within indoor products, solid, single-digit comp performance in interior paints and applicators, ceiling fans, light bulbs, window treatments, stock laminate flooring and fasteners was offset by anticipated softer sales in appliances, cabinets and countertops and millwork.

The comp sales drag in these categories was the result of our decision to run fewer percent off promotions and those we did run were at lower discounts than last year.

Additionally, while stable, we believe recovery in these and other large ticket categories continues to be constrained.

Looking at how the quarter unfolded, in the first nine weeks, we drove a US comp sales increase of roughly 5% through strong sales of products associated with maintaining and beautifying the outdoor living space.

We were well-prepared for the warmer spring weather with sharp values and a coordinated presentation of outdoor products across channels.

Consistent with strong outdoor product performance, sales were strongest in our North division, which was the area of the country that experienced the most significant year-over-year improvement in weather.

For the first nine weeks, comps were roughly 450 basis points above the Company average in that division and all regions of the North division comped positively.

US comps for the last four weeks of the quarter declined by 3%.

This decline was driven by a pull-forward of seasonal sales into the first part of the quarter, most evident in the North division and a more pronounced reduction towards the end of the quarter in promotions relative to last year as we further emphasized everyday low pricing.

A particular strength in the first quarter was our commercial business, which experienced comp growth that was well above the Company average, especially in tickets above $500.

Commercial customers continued to respond well to our 5% off everyday Lowe's proprietary credit value proposition, vendor demonstration and promotional events, and expanded contractor pack offerings.

Enhancing first-quarter comp sales growth were our efforts to deliver a more simple and seamless omni-channel experience.

For instance, flexible fulfillment is the capability we implemented last fall, which allows us to deliver 96% of Lowes.com parcel orders from the most efficient location directly to customers within one day using standard shipping.

In the first quarter, flexible fulfillment contributed to Lowes.com sales growth of nearly 50%.

Another element of this enhanced omni-channel experience is our in-home mobile office suite of tools for our exterior project specialists, which has allowed them to increase the number of in-home appointments by 20% a week.

This increase in productivity has contributed to our exterior project sales growth in the quarter.

And lastly, in the first quarter, we also generated incremental sales through our contact centers.

Prior to last year, once contact center associates successfully addressed customer questions, they had to redirect customers to the store or to our website to make their purchases.

Now they can tender the sale over the phone when it is most convenient for the customer.

Taken together, we estimate that these first steps on our journey to a more simple and seamless omni-channel experience contributed to our first-quarter comp sales growth.

We believe that they will contribute even more as consumers associate Lowe's with great experiences and as our employees gain more experience with these tools.

Last year, we also introduced two focus areas that build on our core strengths.

One was product differentiation in which nearly one-third of our stores were reset with a concept that highlights innovation, brands, value and Lowe's creative ideas, creates flexible merchandising space that we can use to showcase seasonally relevant products and provides more open sight lines to navigate and shop a Lowe's store.

Based on our preliminary results, we are rolling this concept to another approximately 900 stores in 2012, over 100 of which were reset in the first quarter.

Within the approximately 500 initial locations that were completed in 2011, the areas we reset are driving sales with more items per ticket, evidence that this new format is effective at grabbing customers' attention with clear statements of value and innovation and with project merchandising to build the basket.

As we roll product differentiation to more stores, we are excited about two opportunities to improve our approach.

First, beginning in 2012, the six innovation end caps in each store feature more products that are new to Lowe's.

Last year, the products on these end caps were mostly pulled out of line to showcase them for the customer.

This year, innovative products sold first or exclusively at Lowe's are given priority to appear on this oceanfront property.

Second, we continue to learn from our initial rollout adjusting which types of stores receive the most extensive sets based on our experience so far.

For the approximately 900 resets in 2012, we will roll out at least three versions based on each market's dynamics.

This is test and learn in action.

Beyond value and innovation, the product differentiation concept is also helping to develop brands by highlighting some of our leading national brands like Husqvarna, Stainmaster, General Electric, Trane, Zep, Valspar, DeWalt.

This concept is also drawing customers' attention to the value provided by or private brands like Kobalt, Utilitech, Blue Hawk and allen + roth.

Our private brands offer great style, function and quality at a very affordable price.

In fact, during the first quarter, our allen + roth home decor brand expanded its footprint into furniture-style bath vanities, solid surface and quartz countertops, laminate flooring and a new wood closet organization program further driving profitable sales through private brand development.

Value improvement is our other focus area.

Its purpose is to ensure everyday low pricing built on a foundation of everyday low cost and tailored market assorting.

As I mentioned on the fourth-quarter call, this foundation requires us to simplify our agreements with vendors, obtain their best cost the first time they quote us and better determine the SKUs to carry in each and every market we serve.

Value improvement starts with a line review process, which we have enhanced to provide more analysis upfront to assist our merchants in selecting the products we will carry and driving to the lowest first cost from vendors.

Additionally, within these line reviews, we continue to refine the mix of national and private brands for each category.

It is important to distinguish between what occurs in the productline review and the post-review store reset.

At the completion of the productline review, we have the blueprint indicating what items we will carry and from which vendors we will buy them.

Before the disciplined decisions from the line reviews become reality in our stores, we must begin the process of clearing the old products and resetting our stores with the new products, signage and displays.

While we had initially expected a 90-day lag between when a line review is finalized and when the associated changes are completed in our stores, we are finding that the average lag is closer to 120 days.

So here is a quick snapshot of where we stand at the end of the first quarter.

Since we began the accelerated line review process last November, we have addressed about one-third of our lines and total revenue, but have completed only a small percentage of the associated resets.

By the end of the second quarter, we expect to have completed about half of our line reviews representing approximately half of our revenue and have completed about 15% of the associated resets.

As a result, in the second quarter, we will increasingly realize the lower cost of goods and sales benefits of assortments that are better tailored to each store's market and that are sourced at lower unit costs.

Some of these lower unit costs will fund targeted price reductions to ensure we are within a reasonable range of the most relevant competitor for each category and part of the inventory reductions will be reinvested in deeper inventory of project completers and priority items.

The customer and financial benefits of value improvement will start to accrue in earnest in the second half of 2012 and carry into 2013.

By the end of this fiscal year, we anticipate having completed line reviews that represent over 90% of sales, just below our expectations at the beginning of the year.

We are confident that gross margin comparisons will continue to improve as cost reductions catch up with price reductions.

Finally, I would like to share some of what we have learned so far from the value improvement initiative.

First, we are emphasizing quality of line reviews over quantity.

So while our merchants are delivering SKU and cost reductions, we have slowed down the process a bit to ensure the proper handoffs from line review completion to store reset.

Second, through our Vendor Advisory Council, we continue to listen to candid feedback related to topics inside the line reviews, like the value of channel exclusivity and the balance between national and private brands.

The feedback is ongoing and we are working relentlessly to be our vendors' best partner.

We will continue to monitor our progress and fine-tune the value improvement process as we learn more just as we are with the product differentiation and our efforts to develop simple and seamless customer experiences.

While we have a clear course, we will be ready to adjust our direction in response to ever-changing customer needs and expectations and with the evolution of tools available to improve customer experiences.

On a more personal note, I would like to express my excitement about my new role as Customer Experience Design Executive.

In this position, I will lead a team that will envision the consistent experience that customers expect as they interact with Lowe's across selling channels.

The ultimate goal of experience design is to differentiate Lowe's from the competition by consistently delivering simple and seamless home improvement experiences for both customers and employees.

I am confident the customer experience design team will accomplish this goal through intense cross-functional collaboration.

Thanks for your interest in Lowe's.

Bob?

Thanks, Bob and good morning, everyone.

Sales for the first quarter were $13.2 billion, which represents a 7.9% increase over last year's first quarter.

There is a week shift in fiscal 2012 as a result of 2011's 53rd week.

Essentially this year's first quarter included one less week of winter and one more week of spring than last year.

We estimate that the week shift aided Q1 sales by $514 million, which contributed 4.2% of the sales increase.

Comp sales were positive 2.6% for the quarter, driven by comp transactions.

Comp average ticket was flat to last year.

Looking at monthly trends, comps were positive 2.4% in February, positive 8% in March and negative 3.1% in April.

As you heard from Robert, we were able to capitalize on better weather for most of the quarter, but demand for seasonal products slowed toward the end.

In addition, April comps were negatively impacted by our decision to reduce the promotional intensity for big-ticket categories.

We estimate that our proprietary credit value proposition, which offers customers the choice of 5% off everyday or promotional financing, aided Q1 comps by approximately 130 basis points.

With regard to product categories, the categories that performed above average in the first quarter include tools and outdoor power equipment, seasonal living, paint, lumber, building materials, hardware, fashion electrical and lawn and garden.

Rough plumbing, flooring and home fashions, storage and cleaning performed at approximately the overall corporate average.

Appliances, cabinets and countertops and millwork underperformed the Company average and negatively impacted comp sales by approximately 120 basis points.

The remaining 1.1% sales increase was primarily attributable to new stores.

Gross margin for the quarter was 34.7% of sales and decreased 74 basis points from last year's first quarter.

The gross margin decline was a result of several factors.

Our proprietary credit value proposition negatively impacted gross margin by 39 basis points.

This was more than offset by leverage in tender and other costs associated with our proprietary credit program.

I will provide the [SU] date and EBIT impacts in a moment.

As we've discussed, we are working to lessen our promotional activity and reemphasize everyday low prices.

Actions taken to date negatively impacted gross margin in Q1 by approximately 15 basis points.

Also, inflation hurt gross margin by 12 basis points driven by paint, treated lumber and building materials.

Lastly, higher fuel prices relative to last year negatively impacted gross margin in the quarter.

SG&A for Q1 was 24.65% of sales, which leveraged 95 basis points.

We experienced 63 basis points of leverage associated with our proprietary credit program.

This leverage was driven by a combination of fewer losses, lower promotional financing and higher portfolio income.

In addition, tender costs were lower as the penetration of proprietary credit increased roughly 540 basis points over last year's first quarter to 22.8% of sales.

In the quarter, store payroll leveraged 23 basis points largely driven by the higher sales associated with the week shift.

Also, advertising expense leveraged 21 basis points due to the timing of spend this year versus last year and higher sales.

As we discussed on our fourth-quarter call, the Company announced a voluntary separation program or VSP.

In Q1, we recorded $17 million in expense associated with the program causing 13 basis points of SG&A deleverage.

Depreciation for the quarter was $370 million, which was 2.81% of sales and leveraged 24 basis points compared with last year's first quarter due to the sales increase.

Earnings before interest and taxes increased 45 basis points to 7.24% of sales.

We estimate that the week shift helped Q1 EBIT by 53 basis points.

Interest expense at $103 million for the quarter deleveraged 6 basis points to last year as a percentage of sales as a result of higher debt levels.

For the quarter, total expenses were 28.24% of sales and leveraged 113 basis points.

Pretax earnings for the quarter were 6.46% of sales.

The effective tax rate for the quarter was 38% versus 37.7% in Q1 last year.

Earnings per share of $0.43 for the quarter represents a 26.5% increase over last year's $0.34.

We estimate that the week shift aided Q1 by $0.05 per share while the VSP reduced earnings per share by $0.01.

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

Cash and cash equivalents balance at the end of the quarter was $3.1 billion.

The higher cash balance relates to the $2 billion bond deal executed in mid-April.

Our first-quarter inventory balance of $9.8 billion increased $125 million or 1.3% over Q1 last year.

Inventory turnover calculated by taking the trailing four-quarter cost of sales divided by average inventory for the last five quarters was 3.68%, an increase of 18 basis points over Q1 of 2011.

Return on assets determined using a trailing four quarters' earnings divided by average assets for the last five quarters decreased 18 basis points to 5.45%.

We estimate that the impact of charges for last year's store closings, discontinued projects and long-lived asset impairments negatively impacted return on assets by 88 basis points.

Moving on to the liability section of the balance sheet, accounts payable of $7 billion represents a 4.2% increase over Q1 last year.

The increase in accounts payable is greater than our 1.3% increase in inventory, which relates to the timing of purchases in the quarter versus last year.

In the first quarter, we issued $2 billion of unsecured bonds.

We took advantage of treasury rates near all-time lows resulting in the lowest 5, 10 and 30-year debt in our portfolio.

The coupons were 1 5/8%, 3.12% and 4.65% respectively.

This issuance lowered our average cost of debt by 41 basis points from 5.22% to 4.81% and extended the average maturity from 14 to 14.5 years.

At the end of the first quarter, lease-adjusted debt to EBITDAR was 2.35 times.

Adjusting for the impact of charges for last year's store closings, discontinued projects and long-lived asset impairments, lease-adjusted debt to EBITDAR was 2.15 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 increase 6 basis points for the quarter to 8.97%.

We estimate that the impact of charges for last year's store closings, discontinued projects and long-lived asset impairments negatively impacted ROIC by 125 basis points.

Now looking at the statement of cash flows.

Cash flow from operations was almost $2.5 billion, which was up slightly over Q1 2011.

Cash use and property acquired was $337 million, up $24 million over last year due to an increase in information technology spending versus Q1 last year.

As a result, first-quarter free cash flow of $2.1 billion was up modestly versus last year.

During the quarter, we repurchased 58 million shares at an average price of $30.20 for a total repurchase of $1.75 billion.

We have $2.75 billion remaining under a share repurchase authorization.

The remaining $39 million of the $1.789 billion shown on the statement of cash flows as repurchase of common stock relates to shares repurchased from employees to satisfy statutory tax withholding liabilities upon vesting of restricted stock awards.

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

As I noted earlier, our fiscal 2011 included an extra week, so fiscal 2012 growth rates will be negatively impacted by comparing 52 weeks with last year's 53 weeks.

In 2012, we expect a total sales increase of 1% to 2%.

On a 52 versus 52-week basis, the total sales increase would be approximately 3%.

We are estimating 2012 comp sales to be positive 1% to 3% and we expect to open approximately 10 stores resulting in a slight increase in square footage.

As we've said before, our sales expectations are predicated on growth in customer transactions.

For the fiscal year, we are anticipating an EBIT increase of approximately 90 basis points.

We expect depreciation expense of about $1.5 billion.

The effective tax rate is expected to be 37.9%.

The sum of these inputs should yield earnings per share of $1.73 to $1.83, which represents an increase of 21% to 28% over 2011.

Our EBIT and EPS estimates are slightly lower than the outlook we've shared on our fourth-quarter call primarily as a result of the voluntary separation program.

In addition to the $17 million of expense incurred in Q1 associated with the VSP, we expect to record an additional $16 million in the second quarter for a total expected severance cost associated with the VSP of $33 million for the year.

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

As Bob Gfeller discussed, we are focusing on quality versus quantity during the line review process.

As such, we are reducing our expectations for inventory reduction in 2012 from $400 million to $200 million, which is driving the expected reduction in cash flow from operations versus our prior estimate.

Our capital forecast for 2012 is approximately $1.4 billion with roughly $100 million funded by operating leases resulting in cash capital expenditures of approximately $1.3 billion.

This results in estimated free cash flow of $2.7 billion for 2012.

Our guidance assumes approximately $2.75 billion in additional share repurchases for a total of $4.5 billion for the year.

We have a $550 million debt maturity in September 2012.

For the year, we expect that lease-adjusted debt to EBITDAR will be at or below 2.25 times.

Christy, we are now ready for questions.

(Operator Instructions).

Chris Horvers, JPMorgan.

Thanks and good morning.

Can you quantify how much the reduced promotions impacted same-store sales overall and was this isolated to April or did you see anything in February and March?

And related to that, as you think about the journey to EDLP, how are promotional levels -- what were the cadence of them last year?

Do you think 1Q last year was more promotional than the second quarter?

And then any commentary in relation to the fourth quarter as well.

Thanks, Chris.

This is Bob Hull.

I will start and let Bob Gfeller chime in as necessary.

As relates to the promotional impact on comps in Q1, as I said in my comments, we estimate that the impact for appliances, cabinets and countertops and millwork was approximately 120 basis points for the quarter.

It was more pronounced in April, which is closer to about 200 basis points in April for those categories.

As it relates to the promotional intensity, in Q1 last year, we were going up against cash for appliances in Q1 2010.

Therefore, there were some incremental promotions that we ran in Q1 last year that we elected not to repeat in Q1 this year driving the impact in appliances specifically.

And Chris, this is Bob Gfeller.

Just to add a little bit more color on Bob's comments, as we look at promotions going forward, inside of the value improvement program, a couple of points.

The 5% value proposition on our private label credit cards is critical in all of our thinking because it is value everyday to our customer, so that is helping us to deep promote and rationalize promotions.

Also, as we look at major holidays in key categories, we have always said that we are a retailer, so we've got to make sure that we are sharp.

Certain categories at certain times of year and certain holidays and specifically for the first quarter of the year, we did have 30% fewer promotions in the first quarter versus 2011.

A significant number of those were advertised last year and as Bob said, many of them were in the big-ticket categories, specifically in appliances where we were deeper discounting in 2011 than we were in this first quarter.

Chris, I would like to add in -- this is Greg Bridgeford -- as we look ahead to the second quarter, we are taking a very analytical look at the balance and the mix of our promotional activity and specifically where we are putting the focus on elements of the marketing mix like search, like print, like radio to make sure that we are balancing out the opportunity for driving tickets and transactions and specifically as it relates to flooring, appliances, cabinets and countertops and millwork.

So to follow up on that, on 4Q, 4Q seemed like a promotional quarter as well, so does that add -- given the comparison, the weather lift in 4Q last year, does it add any risk to the thought that you will have consistent comps of 1% to 3% across the year?

Chris, we feel like that, as we said last quarter, that all four quarters this year will fall in the 1% to 3% range.

We do have some pressure in the fourth quarter relative to the roughly 150 basis point weather favorable impact we experienced in Q4 '11.

However, we still expect that to be in the 1% to 3% range, although it may be the lowest comping quarter of the year.

Thanks very much.

Budd Bugatch, Raymond James.

Good morning and thank you for taking my questions.

Just a couple of them.

One, on a 13-week comparable, I know that, because of the calendar shift, you gave us ended March 4, but if we looked at the 13 weeks ended April 27 versus last year's April 29, do you have what that number would have been on a comp basis to get an idea versus competition?

So two thoughts.

One, as we think about the 53rd week last year, [to be sure], we had 14 weeks of comparable sales performance in Q4 last year.

The 14th week in Q4 comped against week one of 2011, which means weeks 1 through 13 this year comped against weeks 2 through 14 last year.

So there is truly a comp versus comp.

As we think about the calendar impact, if we modeled our comp performance assuming the 13th versus 13th the other way, comps would have been about 60 basis points higher than what we reported, so it would have been roughly 3.2 versus the 2.6.

Thank you.

That's helpful.

And on Bob Gfeller's comments, he gave a language I am not sure I heard before.

He said I think it was within a reasonable range of the nearest competitor for pricing.

Can you maybe flesh that out and tell us what that means exactly or is there a way to think about that?

Sure, Budd.

This is Bob.

The reason why I am using that phraseology is because our lens is wider as we think about our competitive set, as we think about being an omni-channel company.

So traditionally, we would look at price competitiveness just against our principal retail competitor, but as we look at the value improvement program holistically, we have a wider lens.

So really depending on the category, depending on the product, we will be priced competitively based on what is a solid offer for the customer for that category against the relative competitor.

So I think I had gotten the question before.

We are certainly looking at Amazon and certainly looking at other retailers that play in categories that we also compete in, although they may not be core to those competitors.

So it is just a broader lens as we look at being price-competitive.

One last note for you though is we have -- as it relates to our principal competitor looking at our price competitiveness, as we have said before, we have expanded the number of items we are looking at across our store and we are very confident that we are priced competitively against that specific competitor.

Okay, thank you.

And just one last quick one, can you give us the big-ticket versus small ticket comps that I think you have done in the past?

I didn't hear that, Bob.

The over $500 and under $50 I think it was.

Budd, I don't have that available.

We can certainly call you back on that.

Okay, thank you very much and good look on the quarter and the year.

Just responding to your question regarding what comps would have been, the spread across the months would have been much flatter than the reported comps.

On the restated 13 weeks, they would have been roughly 5% for February, 3% for March and flat for April.

So less lumpy than plus 2%, plus 8%, minus 3% than we reported.

That's very helpful.

Again, thank you and good luck on the quarter and the rest of the year.

Alan Rifkin, Barclays.

Thank you very much.

First question for Bob Hull.

Can you maybe, if possible, shed some color on the performance of the Southern markets where one would probably expect that the weather did not have as profound an effect from month to month relative to the corporate average?

As Bob Gfeller spoke, the Northern markets had the best performance early in the quarter and trailed off most at the end of the quarter.

The Southern markets were the most consistent performing in the quarter, typically right at the Company average for most of the quarter.

Okay, second question for Robert Niblock.

On the VSP program, it sounds like the charge is being a little bit greater and your anticipation implies that more people took the program than what you had originally thought.

First, if you can confirm or deny that.

And then maybe just a little bit more color as to where specifically you saw most of the people take this program.

What divisions and categories were they in?

Yes, Alan, as far as -- we haven't built anything into our guidance for the year for VSP.

So we said we would wait and see what the impact of that was and treat it accordingly.

As far as the magnitude of it, I think we had I think it was 526 people that took the VSP.

As you know, it was really a program for the corporate office structure.

And I think as we look through the number of people who took it, the years for which they took it, I'd say I'm pleased with the impact and what we've accomplished with the VSP.

It was pretty broad-based across the organization where we saw people taking the VSP for a number of different reasons.

People may have been in different life stages and it provided them the opportunity to do something different.

The other thing was, in the last 18 months, we have changed dramatically our expectations of leaders in the organization.

So it really is a different company that they are working for today than it was 18 months ago let's say.

So that did provide people an opportunity if they wanted to move on because they weren't fully committed let's say in the direction we were headed in.

So as we looked across the organization of people that took it, really pleased with the outcome, really pleased with the way that it shaped up and as far as getting into -- it was pretty broad-based across the organization.

I don't really want to get into particular areas as to where people took the VSP or not, but overall pleased with the results.

Okay.

And one last question if I may.

With respect to ATG, I remember you folks said that you were going to kind of lay off of them for the first 90 days.

Now that we have kind of passed that mark, what changes, if any, are you making to the integration of ATG with your brick-and-mortar presence?

Alan, this is Greg Bridgeford.

ATG is -- our primary focus with ATG is really to enable the processes that they have fine-tuned through the years to quickly add items and make it into meaningful assortments for consumers to be able to leverage those processes over to Lowe's core model for the purpose of expanding the reach and the impact of Lowes.com.

So if you look at that, that is working well and we are adding items at a faster rate.

We are learning their processes.

We are keeping it very focused.

Our interaction with ATG, as you said, there are some firewalls around it.

And we are also -- in the interim, we have been able to add ATG product to our SOS offerings, special order sales offering, within the Lowe's stores today.

So two focus areas, keeping a pretty tight rein on any distractions for ATG, which operates its business model very effectively and getting the leverage we expected.

Okay.

Thank you all very much.

Michael Lasser, UBS.

Thanks for taking my question.

Can you provide a little more clarity on what is driving the delay of the implementation of the line reviews by 30 days?

And are you seeing any greater disruption from the process that is impacting your sales than you previously anticipated?

Michael, this is Bob Gfeller.

I will give you a little bit more color around that.

So we have got the accelerated line review process, which is the upfront piece that the merchants are working them through and then, of course, we have got to execute the resets.

We always knew this was going to be test and learn as we kind of moved through because we are taking on such a challenge and the two key learnings are really from a capacity of just workload from the number of line reviews we are going through.

We have talked about almost 400 line reviews completed by really the end of this year.

From a quality standpoint, number one is we wanted to slow it down to make sure we are utilizing the analytics as best as we possibly can from the merchandising standpoint, number one.

So that is the integrated planning execution tool, the efficient item assorting tool, number one.

Number two is there is a lot of work to be done when you move to reset and because we are making significant changes in SKU assortment and price progression and in some cases presentation, our learnings to date have been let's make sure that those handoffs are as smooth as possible so that we make sure that the presentation to the customer is as good as we expect it to be when we model the results on paper.

So the reason why we are hedging a little bit more into the leadtime is because, as we move through these first few resets, as we are just kind of learning as we are going and we want to make sure that we give it enough time so that the results are what we anticipate.

Okay.

And as you think about the quarter, how long do you think the impact from demand being pulled forward is going to influence your comp trend and was the impact from being less promotional about what you expected for the quarter?

So Michael, this is Bob Hull.

The comp impact from the big tickets was about as we expected.

Deep promoting, we expected that less of an impact in Q2.

As I mentioned earlier, there was a lot of promotional activity in appliances, specifically to Q1.

So less impact of deep promoting in Q2.

As it relates to the pull-forward, we estimate that the impact on Q2 is roughly 40 basis points, so not terribly significant.

So the 40 basis points is all as a result of the favorable weather?

Correct.

Okay, thank you very much.

Best of luck with the year.

And then earlier, Budd had a question on ticket bucket performance.

I was able to run to my office and grab that information.

So if you think about tickets below $50, they were plus 2%.

Tickets below $100 and $500 were plus 3%.

Tickets above $500 were negative 1%, again driven principally by the three categories I noted -- appliances, cabinets and countertops and millwork.

Peter Benedict, Robert W. Baird.

Hey, guys, thanks for taking the question.

A couple things first.

Just on the week shift, Bob, maybe help us what you think the sales impact is going to be on the second quarter as you start to give back some of the benefit you got in the first.

How is May to date?

It sounds like obviously you guys are expecting 1% to 3% for the quarter, but just trying to get a flavor as to how things maybe come off of that depressed level in April.

And then with the 30% fewer promotions in the first quarter year-over-year, can you give us a sense maybe what that was in April and then what has been the competitive response to that and how should we be thinking about the promotions year-over-year as we move throughout 2Q and beyond?

Thank you.

So Pete, I will start with the first few and let others chime in.

As it relates to the week shift impact, there really is no impact for the year.

So the entire pickup in Q1 is given back largely in Q2 and Q4, but we still expect comps of 1% to 3% in each of those remaining quarters for the year.

May has started off as expected, so we are in good shape out of the gate to hit the 1% to 3% target.

As it relates to Q1 promos, as I mentioned, the biggest impact on the big-ticket promos was in April roughly 200 basis points relative to the 120 basis points for Q1.

And then your last question dealt with competitive response.

And Peter, this is Bob Gfeller.

Just one other point on the big-ticket promotions in April.

As I think we mentioned in the scripts, these were conscious decisions because we are moving back to EDLP.

Some categories will be EDLP plus, but some categories don't need to be promoted at the depth that we did last year.

So it was really a depth issue on appliances, millwork where we frankly bypassed some big offers that we had last year.

From a competitive response -- one other point on that as well is the merchants upfront, as they are looking at their lines, they are critically looking at the profitability of promotions they have run in the past.

And as Greg said, they are making hard decisions not to repeat where it wasn't a profitable decision that was right for the customer.

That is happening all throughout the quarter inclusive in April.

And as it relates to the competitive response, the competition quite frankly is doing -- they are executing their plan and we are executing our plan.

We are certainly keeping an eye on it, but we did make some decision to make sure that we stayed on plan because we think what we put in the marketplace was still competitive to address customer needs.

And as Greg said, in the second quarter, looking at both promotional and media mix we think is going to help us move into the second quarter on plan.

Okay, thanks so much, guys.

Dan Binder, Jefferies.

Hi, good morning.

My first question was with regard to the strategy behind fewer promotions on big ticket.

I am just curious, as you consider the EDLP approach, if that is necessarily the right strategy across the store and whether or not you're seeing others in the industry pull back on promotion in big ticket.

You mentioned that the customer is constrained and I am just curious if it is accretive if you do promote that particular area of the store, would you reconsider?

Dan, I will start and then I will get Bob Gfeller to jump in.

As Bob explained, there are still certain categories, certain times of year when we will be promotional.

It is all about rationalizing that promotional cadence.

So for example, as he described in the first quarter, it was about going less deep on certain promotions such as appliance.

I think last year, in many cases, we were doing 15% off Estar.

We didn't do any of those 15% off this year.

So it is really rationalizing that as we are moving back to EDLP, rationalizing the promotional cadence across the store, looking at the profitability of promotions previously, looking at which categories we think need to be promoted, which ones the customer is most likely to expect to be promoted or will respond most likely to those promotions.

And part of that, you pull it all together, is also being driven by what we did a year ago, which was rolling out our 5% off everyday value prop on the Lowe's credit card.

We anniversaried that in April of this year for the consumer and for the commercial customer, we will anniversary that in the second quarter.

So now that you have got that 5% off out there, we are taking that as an underpinning and reviewing our other promotional cadences to say when, where, how deep should we be promoting other categories and that is what Bob and the merchants have been working through in this process.

And Dan, just to build one other comment around Robert's points.

Robert's script talked about the stages of home improvement and when we think about these big-ticket categories, both merchandising and operations, we need to sell the project.

And so one of the other things that we are trying to look at critically is how do we use more than just price promotion where we bring in the value proposition, where we bring in the exterior selling solutions, where we bring in the technology to make the experience simpler for the customer, this is all about how we kind of encircle the project and sell the project in totality.

So that type of a mindset is what we are trying to look at as we go forward so that again we move from just a product promotion to more of a project selling mode.

And so that is something we are looking at based on selling across the stages and addressing customer needs.

Okay.

My follow-up question was on the credit.

Credit has been doing well for a while.

Portfolios in general have been experiencing lower losses, lower [writeoffs].

I am just curious, as you look forward, what kind of leverage you would expect out of credit based on your current comp plan as we go through Qs 2 through 4?

So Dan, as Robert said, we have cycled -- for the value proposition, we cycled the consumer piece in April.

We cycled the commercial piece in July.

So for the year, we do expect the credit program to generate leverage on 30 basis points for the year, which is lower than the 63 we leveraged in the first quarter principally due to losses.

So we will still see benefit for the year, but to a lower degree than we saw in the first quarter.

Great, thank you.

Christy, we have got time for one more question.

Eric Bosshard, Cleveland Research.

Good morning.

Interested on the line review process.

Bob Gfeller, I know you are in a new position now.

So I'm just curious how that process is being managed related to the management change.

And then also you talked about the timing of implementing the line review changes.

If there is anything else that is being done differently as you have worked your way into this process with the net price effort and the other pieces of it and if you could just expand on those thoughts.

Eric, sure, this is Bob.

Happy to do that.

First of all, I am in a transitionary role moving to the new customer experience team led by Greg and currently continuing to lead the merchandising organization until that position is filled.

I will tell you we have got very strong merchandising leadership in our two SVPs, GMMs and our MVP ranks, lots of tenure, lots of great capability as it relates to their leadership of the line review process.

So I don't think you have any hiccup there.

Two other elements as it relates to kind of moving past the 90 day and trying to look at this to make sure quality is the winner is, as we have said in the past, our clearance program as it relates to clearancing out inventory is being scrutinized so that we are as profitable as possible on clearance so that again we get the margin inflection in the back half.

And then the second reason I would cite as it relates to taking a little bit more time is that, as private brands grow their penetration in some of these lines, where they are relevant and where they don't displace a powerful national brand, there are some leadtimes related with import products that are also giving us a little bit of inflection on the 90 days.

Great.

And then secondly, just in terms of marketshare, I wonder if you all have any perspective on the marketshare performance relative to the channels or the competitors that you are now thinking about, how that looked in 1Q and how you think about that through the balance of the year.

Eric, this is Greg Bridgeford.

I think when we look at share, we have looked at the NAICS figures and the home improvement channel is the lowest performing of all the channels, but it seems to be quite a volatile figure as you have seen the revisions that the Census Bureau has just applied to 2010 and some 2011 figures.

But the home improvement subdivision of 444 is increasing at about 9%.

It is driven heavily by the major players in that industry, but some of the hardware channel, the garden supply channel are increasing at significant double-digit rates.

What we are watching is, and I will go back to what Bob said earlier, we are looking at, from the customer lens, where are they looking for an inclusion in the project processing, where are they finding information related to pricing of projects, help in this industry.

So we are trying to make sure that, as we look at what our channel has represented in the past, which was primarily getting supplies, that we are going to represent a different vehicle for them in the future.

We have got to be fundamentally sound in getting supplies, but we also realize that specialists appear to be making gains in some specific categories and we wanted to make sure that as we alter our business model that that business model reflects the changing points of entry for consumers today as they look at the projects both large and small.

Okay, thank you.

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

We look forward to speaking with you again when we report our second-quarter 2012 results on August 20.

Have a great day.

This concludes today's conference call and you may now disconnect.