勞氏公司 (LOW) 2012 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Lowe's Companies second-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 they will prove to be correct.

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

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

You can 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. Greg Bridgeford, Chief Customer Officer; 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, Greg Bridgeford will review our operational performance and Bob Hull will review our financial results in detail.

But first let me provide a summary of our second-quarter performance.

Comparable store sales for the second quarter were negative 0.4% with an 0.8% decline in comp transactions and a 0.4% increase in comp average ticket.

The comp for our US business was negative 0.2%.

Ahead of the quarter we expected comps to be within the 1% to 3% range.

And while we fell short, our performance improved sequentially each month of the quarter and nine of 14 product categories ended the quarter with a positive comp.

In fact, seven of those product categories generated comps above 1%.

The most significant comp pressure came from building materials, lawn and garden, and millwork, and Greg will discuss those categories in a few minutes.

We also continue to see strengthen in our commercial business which outperformed the Company average in the second quarter.

As a reminder, our commercial business is roughly 25% of our sales.

While second-quarter gross margin contracted 56 basis points, we continued to improve sequentially while working to strike the right balance relative to promotions.

We effectively controlled operating expenses in the quarter, delivering earnings per share of $0.64, which included approximately $0.01 of severance and other costs associated with our voluntary separation program.

Delivering on our commitment to return excess cash to shareholders, in the second quarter we repurchased $1 billion, or 36.8 million shares, of stock and paid $166 million in dividends.

Before I turn the call over to Greg I would like to address two additional topics.

First, my level of satisfaction with the progress on our strategic initiatives and, second, our nonbinding proposal to acquire RONA.

In the US we were focused on two large bodies of work this year -- value improvement and product differentiation.

Together they will enable us to compete more effectively in the current macroeconomic environment.

These focus areas build on Lowe's core strengths and are expected to deliver comp transaction growth and better gross margins by localizing market assortments, driving excitement in our stores through better display techniques, and managing an appropriate balance of product cost and retail pricing.

We are also in the also in the process of transforming our business to deliver seamless and simple multichannel customer experiences.

We are seeing traction with mobile technology, our flexible fulfillment capabilities, and mile loads.

Individually and collectively these efforts are significant, but necessary to respond to the changing needs and expectations of consumers.

Given the magnitude of change we understood there would be some level of disruption.

We are willing to accept short-term disruption for long-term gain because we believe in our strategy.

However, I expect the organization to rise to the occasion and execute consistently every day.

We knew it would take time to see the full benefits of our actions.

The team is making progress on these initiatives but, frankly, the benefits are accruing at a slower rate than I had expected.

It will likely be mid-2013 before we fully complete this phase of our transformation.

We must be realistic about our timeline and we must ensure that we fully realize the benefits of our actions before moving on to the next phase of our transformation.

Greg will share his thoughts on improving execution and the interim milestones with you in a few minutes.

Finally, let me address our nonbinding proposal to acquire RONA.

First and foremost, an acquisition is not imminent.

We are evaluating our options and part of that evaluation, among other things, is whether or not we can complete confirmatory due diligence and ensure a fair price and an adequate return on our investment.

Second, at our analyst and investor conference last December we discussed our capital allocation priorities.

Those priorities were, first, strategically invest in the business; second, grow the dividend based on our targeted 30% to 35% dividend payout ratio; and, third, return excess cash to shareholders through our share repurchase program.

Regarding these priorities, let me emphasize two points.

One, our priorities have not changed.

We said in December that while we continue to focus on the US home improvement market we also look for opportunities in new and existing international markets to improve the overall portfolio of our business.

And based on publicly available information we believe about an acquisition of RONA will provide us with an opportunity to immediately and significantly expand our Canadian presence.

Two, the proposed acquisition cost of RONA is not entirely incremental because our average annual capital expenditure target through 2015 assumes some growth in Canada.

If we move forward with the transaction, there will be some short-term impact on our share repurchase program, likely two to three quarters, but longer term we expect to generate incrementally more cash flow as a result of the proposed transaction, providing a net benefit to our share repurchase program.

Additionally, the new organizational design that we announced in mid-April provides for a separation of management to either the US or our international operations.

We made this decision in recognition that our US and international businesses are in different stages of maturity with market and cultural differences that require different approaches.

Now let me conclude with some thoughts on the second half of 2012.

While we are encouraged by improving housing metrics, we believe underlying demand will remain soft in the near term and our guidance reflects that view.

It has also been adjusted for our performance to date and revised timeline to benefit assumptions for our initiatives.

I have confidence in our strategy and our employees.

While I recognize the significant magnitude of change we have asked the organization to absorb as we transform our business, we fully understand that we must improve our level of execution.

Thanks again for your interest.

Greg?

Thanks, Robert, and good morning, everyone.

During my time today I want to dive a little deeper into our quarterly results, describe our challenges and progress, and provide clarity on our priorities.

Our second-quarter performance resulted from a number of factors -- its challenging start, learnings applied, and a better finish.

For the first few minutes I would like to focus on product category performance.

As Robert noted, building materials, lawn and garden, and millwork put significant pressure on our total comp growth.

In fact, excluding these categories the remaining 11 categories combined comped above 1% with particular strength in lumber, cabinets and countertops, paint, and tools and outdoor power equipment.

We faced a headwind in building materials which finished the quarter with double-digit negative comments.

Substantial tornado and hurricane repairs drove double-digit positive comps in this category in the second, third, and fourth quarter of 2011.

In lawn and garden the combined effect of a strong pull forward in the early spring season followed by extreme heat and drought conditions lead to slow sales in distressed live goods inventory which negatively affected margin in this category.

Millwork sales were negatively impacted as we struggled to strike the right balance on promotions.

Focusing on our monthly comp progression, our May comps were negatively impacted by our reduced promotional schedule that resulted in light Memorial Day weekend traffic, particularly in appliances, flooring, cabinets and countertops.

As a result of early adjustments, we improved sales as the quarter progressed but in hindsight we overcorrected and added to heavily to big-ticket promotions, negatively impacting margins.

Based on our experience in the second quarter we have completely taken apart our promotional strategy, not to go back and add in more events for the third and fourth quarters, but to rebuild from the inside out.

Revising tab item selection to appropriately balance traffic driving and attachment items; building more effective traffic driving messaging within our TV campaigns, our radio spots; looking at all of our media vehicles.

We are on a journey to return to the operational leverage of EDLP, and we recognize it is not a day trip.

Turning to our strategic focus areas, our most immediate priority is to improve our product sales business model through our value improvement program.

Let me take a minute to explain the purpose of this program.

Using research support, each merchandise category team identifies the product attributes that are most important to customers.

This information creates the assortment strategy that guides the work of the accelerated line review process.

The process has firm targets of lowering first cost through comprehensive line reviews and to realign and leverage inventory dollars to support sales.

Another critical goal is to locally assort items by using new planning systems to identify the store's market needs.

So the approach is define the category strategy based on research, create a differentiated product offering, and lower the cost structure.

Here is a quick snapshot of where we stand at the end of the second quarter.

We have now completed line reviews representing nearly half of our business and expect to reach approximately 90% by the end of the fiscal year.

We continue to exceed our inventory reduction goals and are making progress to meet our cost reduction goals.

A portion of these cost reductions involve redirecting vendor promotional and marketing support dollars to lower unit costs.

Based on our inventory turns, the benefit to our cost of goods sold will lag the completion of the resets by approximately one quarter.

We will apply the savings achieved through the line reviews as appropriate to product categories to create better everyday pricing and support higher turn categories with deeper inventory.

At the end of the second quarter we have completed resets representing nearly 15% of the business and we expect to reach approximately 50% by the end of the fiscal year.

While we are on pace with the timing of line reviews and reset completion that we shared with you last quarter, we have set more realistic expectations in the back half of the year for the time it will take for customers to respond to the improvements we have made and for gross margins to more fully reflect unit cost reductions.

With only a handful of resets fully in place for more than a few weeks, we are just starting to accumulate performance data from these completed sets.

One category whose early results are favorable is paint.

In the first quarter we reset our entire paint category, including both paint and accessories.

Paint is the number one DIY project among home improvement customers, yet we know that selecting the perfect color can be challenging.

So with our vendor partner, Valspar, who is exclusive to Lowe's, we developed a Lowe's Color Studio.

The goal is to sell more paint by simplifying this process.

We developed four new color collections, one for each season.

Swatches of these colors are available in-store and online and premixed samples are available in the store in a clear sample jar that inspires the customer at the shelf and makes obtaining a sample quick and easy.

We also simplified our offering of paint applicators, making use of analytics generated using our market clustering and assortment tools.

These analytics led us to eliminate items with identical function, leading to significant SKU and cost reductions while increasing our inventory of our highest volume items, resulting in net inventory reduction.

In paint applicators and accessories we are emphasizing our private brands at lower price points with the Project Source brand as the opening price point offering and the Blue Hawk brand as a step up to a better price point.

We have also identified a cluster of roughly half our stores where the Purdy national brand is the most important to the commercial business customer.

The result is a bay of paint applicators that is much easier for the customer to choose from and that provides national brands where they are most valued and a clear progression of features and brand relevance and increasing price points.

To summarize, these paint category line reviews demonstrate how we are using the accelerated line review process to work with vendor partners to generate innovative product and display ideas, use brands in a rational manner to cater to specific customer needs, and use new analytical capabilities to identify opportunities to tailor our offering to each market and to simplify our assortment to make it easier for customers to choose the right product for their needs, purchase it, and get on with the project.

An early read from this reset is that it is driving comp and margin growth above our initial expectations.

Another fundamental operating improvement we are making in our stores is the end cap and promotional space resets that we are executing as part of the product differentiation focus area.

We have revised many of our end cap locations to highlight innovative new products and significant values leading into our category.

We have also revamped the promotional spaces, or drop zones, to promote seasonally relevant, high-value items to drive sales.

To date we have reset over 1,000 of our 1,700 domestic stores, over 350 in this quarter alone.

While we have not yet obtained the full benefit expected from the first stores we reset, the results of these changes in end cap and promotional spaces have continued to improve as we adjust the mix of end cap themes and improved the rotation of products.

We believe there are further opportunities to improve the performance through better end cap item selection, increased depth of supporting inventory, and better adjacency of end cap items to the associated in-line inventory.

We anticipate resetting another 400 stores in the third quarter.

In growing our multichannel capabilities we continue to gain traction in enabling consumers to fulfill their needs seamlessly across channels.

We implemented what we call flexible fulfillment last fall.

This capability allows us to deliver Lowes.com parcel orders from the most efficient location directly to consumers.

We now ship from 53 fulfillment locations around the country and can satisfy over 90% of US markets within 24 hours at standard shipping rates.

In the second quarter flexible fulfillment allowed us to more than double our parcel shipments versus last year and deliver over 98% of them on time.

These flexible fulfillment capabilities contributed to second-quarter Lowes.com sales growth of approximately 70%.

The MyLowe's customer base also continues to grow.

Since we launched this customer-enabling personalized website in October 2011 over 10 million cards have been activated and 3.3 million cardholders have registered their cards on MyLowe's.

As a reminder, MyLowe's allows customers to access their purchase histories, home profiles, project lists, reminders, and folders.

We continue to enhance the capability we have already delivered while developing new capabilities, all with an eye to further increasing engagement with customers.

In the same way we are continuing to expand the use of iPhone technology in our stores.

Last year we deployed 42,000 devices across all stores, so approximately 25 per location.

Each phone was used on average over 30 times a day in the second quarter, an approximate 40% increase over the first quarter.

Associates used the iPhones to perform tasks like looking up inventory and requesting new inventory.

Additionally, new features have been recently added that provide associates with even greater ability to assist customers in the aisle.

For instance, an associate has immediate visibility to rebates available on scanned items.

We have now added voice capabilities that use our store WiFi and that will allow us to eliminate a separate mobile voice system in the store.

Additionally, we are piloting tender in the aisle and will continue to add capabilities that improve the customer's experience and make our associates more productive.

So our strategic focus areas are centered around improving our product-based business model through the value improvement program, communicating value and innovation to our product differentiation rollout, and improving the customer experience through flexible fulfillment, the MyLowe's customer website and mobile technology.

Now last I would like to make a personal comment.

Since Rick Damron and I took the new positions of Chief Operating Officer and Chief Customer officer, respectively, at the start of the second quarter we have been committed to a tight focus on running the business.

We recognize that the most critical leadership we can deliver is a realistic assessment of our current and near-term performance and a focus on driving improved results over the short and midterm.

As Robert said earlier, we expect some disruption over the next few quarters but our teams will be working hard on the fundamentals of delivering a better and different shopping, purchase, and fulfillment experience that will lead to better sales, more predictable margins, and better asset leverage in the midterm, even in this challenging consumer environment.

We look forward to better realizing the benefits of the investments that we have made, the product differentiation roll out, the value improvement program, and new capabilities to deliver more seamless and simple multi-channel customer experiences.

Thank you for your interest in Lowe's and I will now turn it over to Bob Hull.

Bob?

Thanks, Greg, and good morning, everyone.

As noted in our earnings release, there was a weak shift in fiscal 2012 as a result of 2011's 53rd week.

Sales for the second quarter were $14.2 billion, which represents a 2% decrease from last year's second quarter.

The decrease was driven by the calendar week shift and negative comp store sales, offset slightly by new stores.

We estimate that the week shift negatively impacted sales for the quarter by $259 million or 1.8%.

In Q2 total customer transactions decreased 2.4%, primarily a result of the week shift impact, while total average ticket increased for 0.4% to $62.66.

Comp sales were negative 0.4% for the quarter.

Looking at monthly trends, comps were negative 2.1% in May, positive 0.4% in June, and positive 0.7% in July.

Through the first three weeks of May comps were running above 1%, but, as Greg noted, we had a tough Memorial Day weekend and as a result comps were negative for the month.

With regard to product categories, the categories that had above-average comps in the second quarter included lumber, cabinets and countertops, paint, tools and outdoor power equipment, flooring, seasonal living, home fashion, storage and cleaning, hardware and fashion electrical.

Plumbing and appliances performed at approximately the overall corporate average.

For the quarter, comp transactions declined 0.8%, which is primarily attributable to lawn and garden which was impacted by a seasonal pull forward as well as extreme heat and drought conditions in much of the country.

Comp average ticket increased 0.4%.

The positive comp average ticket was driven by strength in our commercial business, above average performance in cabinets and countertops, tools and outdoor power equipment, and flooring, as well as a lumber inflation, offset slightly by the impact of the 5% off credit value proposition.

Year-to-date total sales of $27.4 billion were up 2.5% to the first half of 2011 driven by a 1% increase in comp store sales, a 1% net favorable week shift impact, and new stores.

Gross margin for the second quarter was 33.93% to sales, which decreased 56 basis points from last year's second quarter.

In the quarter promotional activity, price reductions, and lawn and garden write-offs and drought markets negatively impacted gross margin by approximately 45 basis points.

In addition, our proprietary credit value proposition, which offers customers a choice of 5% off every day or promotional financing, negatively impacted gross margin by 15 basis points.

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

I will provide the SG&A and EBIT impacts in a moment.

These items were offset slightly by product mix, inflation, and lower fuel costs.

Year-to-date gross margin was 34.3% to sales, a decrease of 63 basis points from the first half of 2011.

SG&A for Q2 was 22.26% of sales which deleveraged 4 basis points.

During the quarter store payroll deleveraged approximately 20 basis points.

Expense dollars were essentially flat to last year with the deleverage due to the sales decline associated with the week shift and negative comps.

Bonus expense deleveraged 20 basis points, primarily related to higher expected attainment levels for store-based employees relative to last year.

In Q2 we recorded an additional $15 million in expense associated with the voluntary separation program, or VSP, causing 11 basis points of deleverage.

Also, in the quarter we experienced deleverage in employee insurance; for merchandising costs associated with the product differentiation program and systems and communications related to WiFi, iPhones, and other in-store technology upgrades.

These items were essentially offset by the following.

We incurred a $17 million charge related to an evaluation of the carrying value of long-lived assets.

This compares to approximately $83 million for similar charges in Q2 2011, which resulted in leverage of 45 basis points.

We also experienced 36 basis points of leverage associated with our proprietary credit program.

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

In addition, interchange fees were lower as the penetration of proprietary credit increased roughly 300 basis points over last year's second quarter to 23.8% of sales.

Year-to-date SG&A of 23.4% to sales, which leveraged 36 basis points from last year's first half.

Depreciation for the quarter was $369 million, which was 2.59% of sales and deleveraged 8 basis points compared with last year's second quarter.

In Q2 earnings before interest and taxes, or EBIT, declined to 68 basis points to 9.08% of sales.

We estimate that our value proprietary credit value proposition positively impacted EBIT by 5 basis points for the quarter as leverage in proprietary credit, bank card, and other expenses, but this was more than offset by negative gross margin impact.

For the first half of 2012 EBIT was 8.2% of sales, which was 21 basis points lower than the same period last year.

For the quarter, interest expense was $96 million and deleveraged 6 basis points to last year as a percentage of sales.

Interest expense came in lower than anticipated due to tax settlements that resulted in lower interest accruals of $22 million in the quarter.

Total expenses for Q2 were 25.53% of sales and deleveraged 18 basis points.

Year-to-date total expenses were 26.83% of sales and leveraged 36 basis points versus last year.

Pretax earnings for the quarter were 8.4% of sales.

The effective tax rate for the quarter was 37.6%, essentially the same as Q2 last year.

Net earnings were $747 million for the quarter, down 10% to Q2 2011.

Earnings per share of $0.64 for the second quarter was flat to last year.

We estimate that the week shift negatively impacted earnings per share by $0.03.

In Q2, EPS was also negatively impacted by VSP and impairment, offset somewhat by lower interest expense associated with tax settlements.

The net impact of these items hurt earnings per share by $0.01.

For the first six months of 2012 earnings per share of $1.07 represents a 9.2% increase over the first half of 2011.

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

Cash and cash equivalents balance at the end of the quarter was $1.7 billion.

Our second-quarter inventory balance of $8.7 billion decreased $126 million, or 1.4%, versus Q2 last year.

The decrease was driven by building materials as we had higher inventory levels last year to support strong storm-related sales as well as skew cost reduction efforts.

Inventory turnover calculated by taking the trailing four quarters cost of sales divided by average inventory for the last five quarters was 3.75, an increase of 15 basis points from Q2 2011.

Return on assets determined using a trailing four quarters earnings divided by average assets for the last five quarters decreased 50 basis points to 5.24%.

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 70 basis points.

Moving on to the liability section of the balance sheet, accounts payable of $5.1 billion represents a 5.5% decrease from Q2 last year.

The lower accounts payable balance relates to the timing of purchases this year relative to last year.

At the end of the second quarter we suggested debt to EBITDAR was 2.4 times.

Adjusting for the impact of charges for last year's store closings, discontinued projects, and long-lived asset impairments, we suggested that EBITDAR was 2.22.

Return on invested capital, measured using a trailing four quarters' earnings plus tax adjusted interest divided by average debt and equity for the last five quarters, decreased 43 basis points for the quarter to 8.61%.

We estimate the impact of the charges for last year's store closings, discontinued projects, long-lived asset impairments negatively impacted ROIC by 100 basis points.

Now looking at the statement of cash flows, cash flow from operations was $2.8 billion, a decrease of $497 million, or 15%, from last year, largely due to the timing of purchases contributing to the share decrease -- excuse me, timing of purchases contributing to the decrease in accounts payable.

Cash used in property acquired $622 million, a 20% decrease from last year.

As a result, year-to-date free cash flow of $2.2 billion is 13% lower than the first half of 2011.

During the quarter we repurchased almost 37 million shares at an average price of $27.20 for a total repurchase amount of $1 billion.

We have $1.75 billion remaining under share repurchase authorization.

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

In 2012 we expect total sales to be approximately flat to last year.

On a 52 to 52 week basis sales increase would be approximately 1%.

We expect comp sales to increase by approximately 0.5%, which implies a flat comp in the second half of 2012.

In addition, we expect to open approximately 10 stores for the year, resulting in a slight increase in square footage.

For the fiscal year we are anticipating an EBIT increase of approximately 45 basis points.

We do expect gross margin to increase in the second half, but to a lesser degree than our previous outlook.

We expect depreciation expense of about $1.5 billion.

The effective tax rate is expected to be approximately 37.8%.

The sum of these inputs should yield earnings per share of approximately $1.64, which represents an increase of 15% over 2011.

We have lowered our outlook for the second half of the year.

As Robert noted, the benefits of our initiatives are coming at a slower rate than we expected.

We believe that we are working on the right things, but we also recognize that there is a lot going on.

As a result, we have taken a more cautious approach to our outlook for the remainder of the year.

For the year we are forecasting cash flows from operations to be approximately $3.5 billion, which is lower than our prior forecast due to both lower earnings and lower accounts payable.

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

This results in an estimated free cash flow of $2.2 billion for 2012.

Our guidance assumes $1.5 billion in additional share repurchases for a total of $4.25 billion for the year.

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

For the year we expect -- we suggested debt to EBITDAR will be at or below 2.25 times.

Alicia, we are now ready for questions.

(Operator Instructions) Alan Rifkin, Barclays Capital.

Thank you very much.

With respect to results that you are seeing from the line reviews so far, Greg, can you maybe just talk about, with the 50% of the products that you have already completed, what is the incremental gain there?

And can we assume that the line reviews that you are conducting earlier in the program should yield greater results than what you are anticipating as opposed to the reviews later in the program?

Alan, I will address that last part first.

Not necessarily, because in a number of cases where we think that it has taken some time for the vendor community to digest the strategy that we are going after in some of these line constructions and the way we are trying to create value for the customer.

To be honest with you, as we come around to a cycle of some line reviews you are seeing the same vendors come to the table with actually much more alignment with where we are taking the strategy to create value within each of these categories.

With respect to where we are with our expectations and the performance of the line reviews, as we described earlier, from a net inventory reduction standpoint we are exceeding our initial expectations.

And from a cost standpoint we are increasing our progress towards our target.

We are looking -- again, we are looking for a stronger performance in that area as we go through continuing cycles of this accelerated line review process.

Okay.

Then just a follow up for Robert, if I may.

Robert, do your results in the first half of the year and the fact that you have now lowered your expectations for the second half and the housing recovery seems to be as elusive as ever, does that give you pause that maybe you should be pursuing RONA at a different time, a time when the US business is exhibiting a little bit more stabilization than what we are presently seeing?

It is an obviously fair point, Alan.

With regard to the US business, we still feel really good about where we are going.

We know that we had a lot of, probably the peak of disruption in the second quarter with everything that we threw at the organization.

I think we have gotten the organization settled back down.

We are understanding that the benefits are still there but it is taking a little bit longer to accrue.

So certainly with regard to the transaction with RONA, to your question, first of all, as I said, a transaction is not imminent.

Even if we could get to that point you would be into 2013 before a transaction would be close and we would be through a lot of what Greg has talked about with the cadence of the line review process and the other changes, the heavy changes that we are making in the store and our environment.

But, first and foremost, we are looking at several options as to how we get scale in our business in Canada.

This is one of the options that we are looking at and we really don't know until we can get to the point of confirmatory due diligence whether it makes sense.

From the outside it makes sense; we need to get inside and get to the confirmatory due diligence to be able to confirm those beliefs.

We have a preference for a friendly transaction.

We are not going to do something that doesn't make long-term sense for the Company, that is something that we don't think we can absorb.

That is why we have bifurcated the operations of the Company from international, US to minimize any distraction there.

And we are not going to overpay something that we don't think we can get adequate return on.

So, unfortunately, you can't always pick the timing as to when something may be available and when it is time, the right time to pursue something, given what else we have in the business.

But we are going to try and manage through that and try and make the right long-term decisions for the organization.

But I understand your point and it is a point well taken.

Thank you, Robert.

I appreciate it.

Peter Benedict, Robert W. Baird.

Thanks, guys.

First, just, Bob, thinking about the second-half comp plan of flat.

I know there is some comparison differences third and fourth quarter.

Is there anything we should think about in terms of the pace?

I know that some of the merchandising efforts you have got should be accruing benefits increasingly as you should go forward but the comparison is tough fourth quarter.

Just maybe talk about how you see the third quarter versus the fourth quarter.

That is the first question and then I have a follow up.

Peter, thanks for the question.

So if you take a look at last year, we do have tougher comparisons in the fourth quarter.

Q4 last year we said favorable weather helped us roughly 150 basis points so we are certainly mindful of that comparison.

Greg, in his comments, took you through the cadence of the line review process so momentum is certainly building there.

We are seeing good results from the few that have been set to date; certainly more get set as we move into the back half of the year.

In addition, we have got greater number of stores set with the product differentiation, the end caps, and the drop zones.

So as the year progresses we expect more benefits from those items that, hopefully, offset the tough compares we have got in the fourth quarter.

We also recognize that we have got tough building material comparisons, as Greg alluded to.

Not only in Q2 of last year, but Q3 and Q4.

Our Q4 was in the 150 basis points of weather favorability, so as a result we landed a flat comp for the back half.

Okay, that is helpful.

I guess, in understanding the early part of May wasn't a great indicator for the quarter, can you just maybe talk to the August trends to date?

And then can you help clarify kind of the promotional strategy changes that you are making?

I'm not sure I completely understood that.

Just how you are viewing the second-half promotional strategy versus maybe where you thought it would be three months ago?

Thanks.

I will take the first part and let Greg address the promotional piece.

So 16 days does not make a quarter, so thus far in August sales trends have continued to accelerate.

August comes are higher than what we reported for the month of July and, again, through two or so weeks gross margin is essentially flat with last year.

Peter, on the promotional strategy, when I said we would take it apart from and rebuild it from the inside out what we are really doing is -- it actually has a number of components and I will try to address all of them.

We are centrally coordinating our product selection to make sure that we are very strategic in what areas that we are promoting for the right time.

We are specifically looking at the timing, the impact, and the duration of every offer.

There is a heavy focus towards a balance in the item selection to balance traffic driving items and attachment items, and that has a very big impact on your out margin.

We are also taking a look at the bigger ticket promotions and, again, making sure that the cadence is appropriate and the duration is appropriate.

From another factor in the quarter and a little bit of talking to where Bob is referring to sales momentum for the third and the fourth quarter, we are taking a hard look at our lawn and garden plans and making sure that we have got a solid mix in the advertising plan of cross-merchandising opportunities so that we make sure that our attachment rates are strong in lawn and garden.

Again, that has positive margin implications from executing on those plan revisions.

Great.

Thanks so much, guys.

David Strasser, Janney Capital Markets.

Thank you very much.

A couple questions.

When you looked at the differences May, June, July, I mean obviously May was hurt seasonally due to the traffic and the pull forward.

Any other big changes within any categories kind of as the business improved through the quarter sequentially?

David, this is Greg Bridgeford.

I would say that if you look at the cadence of the businesses, as we described, lawn and garden had a strong pull-forward effect and then we -- it really had an impact on our inventory sell-through.

And that had a margin impact.

In addition, you had a really tough comp on the building material side, which as they began cycling up against all the activity that we had in the east and central part of the country last year at this time.

On the decor categories in particular, we saw a pretty solid performance that continued to do well sequentially and I would say that we are continuing to see strength there.

And we are starting to see -- again we are working through a balance on the big-ticket category so that we can get a more balanced output, a more predictable output, and that is a heavy focus on all of our promotional tweaking.

Just as a follow up, when you look at -- how about appliances, particularly ACs, how much did that help as the weather, the really warm weather, particularly in the Northeast/Mid-Atlantic -- maybe I'm being too Northeast-centric here -- but did that help a lot?

Because when you look at the [matchup] numbers it seems like that was a pretty big category, particularly as the quarter progressed?

David, it was a factor early in the quarter and in the first two months as we cycled into some very hot weather.

We sold through; we had good performance in that category, strong comp performance and a nice handling of the sell-through of the inventory.

All right.

Thank you very much.

Mike Baker, Deutsche Bank.

Thanks.

So I guess a couple questions.

One, in your estimation, how much of your comp weakness and gross margin weakness was sort of self-inflicted from this promotional activity?

So, Mike, this is Bob, I will start.

From the margin perspective I said 45 basis points was from promotional activities, markdowns and such.

We estimate that roughly 20 basis points of the 45 results from promotional activity associated with big-ticket categories.

As it relates to the sales impact, it is a mixed bag.

We think it probably helped cabinet and countertop sales, appliance sales, flooring sales.

We think promotional activity actually hurt millwork sales in the quarter, so we think it is a mixed bag from a sales perspective.

And then a couple more quick follow-ups.

So you said you are pushing out when you are supposed to see the benefit from this phase of transformation to mid-2013.

That was, I presume, supposed to be by the end of 2012.

Is that the right way to think about it?

And where does that show up, mostly in sales or gross margin or SG&A?

Mike, I will start -- this is Robert -- and then I will have Greg follow on.

As you know, nothing has changed on the line review schedule and the cadence that we talked about from the line review schedule.

We still expect to have approximately 90% of those done by the end of the year, so there was already some benefit that would be lapping over into 2013.

It is probably pushing out probably a quarter or so when you get to mid-2013.

Really what we are trying to say there is that we are excited about what we are seeing.

We are seeing, as Greg said, on the inventory reductions we are moving in on the cost reductions.

We have just got to turn through the layers.

But these changes, until we get enough of the store out there we are not really out promoting anything different to the consumer so it is taking the consumer in the store shopping to be able to see the changes that we have made.

Basically it comes back to not wanting to overpromise, under deliver.

We also said, with a lot of the disruption that we had in the organization, organizational changes in getting the new go-to-market structure lined up earlier in the year that caused a little bit probably more disruption than we had anticipated.

I think we have gotten the organization settled down and focused on getting back to business and running the business.

So it probably pushes out about a quarter.

Quite frankly, we just decided to give ourselves a little bit more breathing room.

We have got a lot of lines to go through.

As we clear those lines, we are going to be able to get through the sell-down process.

We want to make sure that we are doing that in an appropriate manner.

Managing the margin appropriately would give us enough breathing room to move through that as we need to so we can go ahead and get this phase of the transformation behind us and then start thinking about other phases.

So, Greg?

Mike, the best way I could describe it would be that as I look through the handful of categories that have been set for more than a few weeks I know what some of the values and some of the line review improvements are.

It is interesting to see where you are seeing the comp and margin dollar progress.

So you go to a category that is very active and is a high foot traffic category, like paint, and you start seeing the benefits flow through.

That is when we describe that it will take the customer some time to encounter and discover the improvements we have made in some of the lower traffic categories.

That is what Robert is referring to when he said we are going to see maybe a lengthened out impact on some of the lower foot traffic volume categories.

Paint is the opposite end of the spectrum.

We are seeing customers encounter the new accessories, they are encountering the new paint lineup, they are encountering the new displays, and they like what they see obviously.

Okay, that makes sense.

One more quick thing.

On the buybacks you said $4.25 billion for the year.

I think at your analyst day you have been saying $4.5 billion a year to get to $18 billion by 2015.

Is this a change, albeit a small change, but a change in that outlook or are you still on pace for $18 billion through 2015, RONA not withstanding?

So when we laid out the four-year plan the $4.5 billion per year was simple math.

We had taken $18 billion divided by four.

Wasn't exactly $4.5 billion per year, so this is would be more temporary in nature.

Does not --

So you haven't changed it from what you were thinking in December?

Back in December you were thinking $4.25 billion this year as well?

The only change $4.25 billion is just the recognition that with top line coming down, with gross margin coming down, cash flow from operations is coming down.

As we think about balancing that with a leverage target we needed to moderate share repurchases at this point in time.

Okay, fair enough.

Thank you.

Brian Nagel, Oppenheimer.

Good morning.

So I just wanted to follow up on the gross margin commentary further.

You call out the 45 basis points and the 20 basis points of promotional activity, so just so I understand should we think about that as more one-time in nature?

What is really the nature of that promotional activity and how does it play into the strategy going forward?

Brian, this is Greg.

I will take that.

The majority, as Bob described it the 45 basis points of adverse impact from promotions, were the big ticket categories that when we looked at sales coming out of May and the impact of a much less promotional event calendar than we had in the comparable time period, I would say that we leaned into big-ticket promotions heavily.

Recognizing that our predictions about how their customers would take up the various offerings that we had late in the quarter we believe we overcorrected.

That is a very heavy portion of that.

There is other portions of it.

Nursery, as I described, that had an impact in the sell down of the distressed inventory towards the end of the quarter.

We didn't get as strong an attachment item performance in nursery, which has an impact in margin.

Then when you talk about price actions that we took in EDLP that are stretching out year over a year that has a very minor portion of that 45.

And we are cycling against those changes that we made as we got into this process in Q3.

So if you are looking at more of a longer-term impact versus a shorter term impact I was trying to parse that out.

Does that make sense?

It does.

So I guess the question -- I don't want to over think this, but so we had the weaker gross margins this quarter.

With all that you are doing in line reviews and the move to more of an EDLP strategy, should we put those two factors together or is it more with the gross margin decline as a result of promotional activity more of a one-time, more a seasonal effect this time?

Heavily impacted by decisions we make to increase big-ticket promotions that played out basically in July.

Okay.

Then if I could follow up in bigger picture question, just on the overall environment.

You made some comments in your prepared remarks about the housing recovery.

As you look at the data you have seen recently, maybe since the last time we spoke a quarter ago, how is your view -- as a company how is the view of the overall housing environment as that relates to home improvement demand evolving?

Brian, this is Robert.

Overall, I think the overall macro environment certainly has its challenges out there.

While there have been some positive signs out there in housing, certainly there is a lot of that in sales, and housing prices and stuff have been really driven by a change in the mix of houses available.

Starting to sell through some of the distressed inventory that is out there so that has led to an increase in home prices.

Housing turnover is [high], but certainly it is down from the peak it was prior to the downturn.

So we are encouraged by the positive signs out there in housing.

Obviously unemployment is still a challenge and the large overall macro environment are still a challenge and a headwind going forward.

We don't know how demand will be impacted by that, but certainly we think housing is nearing the bottom of the cycle.

As we get through the election, get into 2013 we hope that there will be some tailwinds coming out of housing but we are not looking at any type of a dramatic tailwind coming from housing.

Thank you.

Alicia, we have got time for one more question.

Matthew Fassler, Goldman Sachs.

Thanks a lot, good morning.

Thanks for including me here.

I have got two questions; one of a general nature and then a follow-up on promotions.

If you think about the progress that you are making on your internal initiatives and the notion that they are going a bit slower than perhaps you anticipated, where would you say the slowness is?

Is it in the internal execution against the plan or is it customer reception to the changes that you are making, if you could differentiate between the two?

Matt, I will start.

In VIP, our value improvement program, it is customer recognition of the changes that we're making in the marketplace.

And as that recognition turns into comparable sales and margin generation, as I described earlier, we are on target with our execution of the line reviews and our execution on the recesses we described last quarter.

And that progress is going well.

I think we are just being a little more realistic about customers' perception of certain categories that we reset.

Matt, it is Robert.

Still optimistic about will it deliver; it is just we were probably overly optimistic as to how quickly those benefits would begin to accrue.

But we still, longer term, think the benefits are there and are optimistic about what it will deliver and what it will mean for our future.

Got it.

Then my second question relates to promotional activity.

It seems like there was some zigging and some zagging over the course of the quarter, so with that in mind you give us the comp trajectory during the quarter.

What do the gross profit dollar trajectory look like and is there a change in the value approach that you are seeking to pursue?

I'm trying to see where the moves that you made intra-quarter sort of fit in within the philosophy that you had put forth initially.

Matt, this is Bob.

So roughly through the middle of the quarter gross margin was close to flat with last year.

As Greg indicated, there was a bit of an over correction regarding promotions and then just responding to a prior question noted that the largest big ticket impact was felt in July.

So it actually got a little bit worse in the big ticket categories toward the end of the quarter, which is why when Peter asked me about to start to this quarter I did note that gross margins are essentially flat to last year through two weeks.

Again, two weeks doesn't make a quarter.

Matt, regarding the composition of the promotions, when we look to the second half what we are planning for and executing is a more balanced approach to it.

The way I would describe that would be whether it is our execution of the focal points of each weekend coming up or whether it is the promotional vehicles itself, it is a tab mix.

We are looking for a more balanced approach to ticket driving items and especially what you would call anchor items, which are items which you build attachment rates around.

Project starter type items.

We will get a better mix out from that on the gross margin basis, which is key, because we are trying to make sure that just driving sales without it we recognize the impact of that.

Thank you.

As always, thanks for your continued interest in Lowe's.

We look forward to speaking with you again when we report our third-quarter 2012 results on November 19.

Have a great day.

This concludes today's conference call.

You may now disconnect.