勞氏公司 (LOW) 2012 Q4 法說會逐字稿

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  • Operator

  • Good morning, everyone, and welcome to the Lowe's Companies fourth-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 Chief Executive Officer; 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.

  • Robert Niblock - Chairman, President & CEO

  • 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, I will provide some highlights of the quarter as well as our view on the economic landscape in 2013.

  • We delivered solid results in the fourth-quarter.

  • Comparable store sales were positive 1.9% driven by an increase in comp average ticket.

  • We delivered these results despite tough prior-year comparisons from both unseasonably warm weather and a more promotional holiday season.

  • In fact, 10 of 14 product categories had positive comps for the quarter.

  • We had strength in core categories like plumbing and hardware as well as holiday items like tool gift sets and holiday decor.

  • We had consistent performance across the US operating divisions and continue to see strength in our ProServices business, which outperformed the Company average.

  • Gross margin expanded 5 basis points in the fourth quarter, driven by a number of factors that Bob will discuss, including continued benefits from our value improvement program.

  • We continue to effectively control operating expenses in the quarter and deliver earnings per share of $0.26 for the quarter and $1.69 for the year.

  • Delivering on our commitment to return excess cash to shareholders, in the fourth quarter we repurchased $750 million, or 21.3 million shares of stock, and paid $180 million in dividends.

  • For the year we repurchased $4.35 billion, or 146 million shares of stock, and paid $704 million in dividends.

  • Our solid fourth-quarter results are a testament to several fasters.

  • First, the team's success in driving more balanced performance across the quarter.

  • Second, the team responded well to the demand created in the Northeast as a result of recovery efforts in the wake of Superstorm Sandy.

  • And, finally, the momentum we are creating with value improvement through better line designs, better in-stock positions, and simplified deal structures, as well as the momentum from our product differentiation program.

  • As we have discussed, think of value improvement as the inner circle enhancing the core and product differentiation as the outer circle, driving excitement and flexibility in our stores.

  • Incorporating this quarter's solid results, 92% of our US stores qualified for a service and sales employee incentive, or SSEI payment, during 2012 making this a record payout year.

  • As a reminder, SSEI is our profit-sharing program for our hourly associates.

  • I would like to thank our more than 257,000 employees in the field and our corporate office for their perseverance in a year of significant change and for their continued dedication to serving customers.

  • As we head into fiscal 2013 the team continues to focus on improving our core business through cross functional collaboration and consistent execution.

  • We will complete the initial round of value improvement resets in 2013 and we will add labor hours to our stores, as well as incremental inventory, all with a focus on improving our close rate.

  • From an economic perspective, lower GDP growth is forecasted for 2013, and while lower home improvement industry growth is also forecasted, it is expected to keep pace with GDP.

  • Rebuilding in the wake of Superstorm Sandy will contribute to 2013 home improvement industry growth, although the impact will fade during the year.

  • Still, the fundamental underlying drivers of industry growth, mainly job gains and stable growing housing, should support a strengthening growth trajectory for the industry.

  • Yet credit conditions remain tight for borrowers and mortgage delinquencies remain elevated, which will restrain the speed at which housing and, therefore, the home improvement industry can grow.

  • Those macroeconomic data points are reading through to our fourth-quarter consumer sentiment survey.

  • According to the survey, home value perception ratings are the strongest they have been in four years and we continue to see positive trends emerging in other home improvement affinity metrics.

  • However there are still concerns.

  • Survey participants that are delaying home improvement projects cited lack of income growth and a reluctance to use financing as the primary drivers influencing their decision.

  • The macroeconomic transition from recovery to sustainable expansion, together with our initiatives in improving operational collaboration, give us confidence in our business outlook for 2013.

  • Bob will share those details in a few minutes.

  • Thanks, again, for your interest and I will now turn it over to Greg.

  • Greg Bridgeford - Chief Customer Officer

  • Thanks, Robert.

  • Good morning, everyone.

  • I would like to dive a little deeper into our quarterly results, update you on the progress of the value improvement focus area, and discuss our priorities for 2013.

  • In previous quarters I emphasized our focus on driving improved results over the short and midterm, so I'm pleased that we delivered solid, more balanced comp sales performance across the quarter despite a difficult comparison to prior year.

  • This quarter's results were driven by enhanced promotional planning and execution, our response to increased demand from Superstorm Sandy, continued benefit from product differentiation, and further benefit from value improvement.

  • We started with a disciplined promotional strategy as we offered targeted values on specific items to drive sales and profitability throughout the quarter, rather than blanket promotions across entire categories.

  • Targeted promotions drove above-average performances in cabinets and countertops and in core home improvement categories such as tools and outdoor power equipment.

  • Sandy also benefited the quarter.

  • As we discussed in our third-quarter call, most major storms have four distinct phases -- first, preparation; second, impact; third, cleanup; and fourth, recovery.

  • The cleanup from Sandy began soon after impact at the end of the third quarter and continued well into the fourth quarter.

  • Recovery began in the fourth quarter and will extend into 2013.

  • While the storm initially impacted the operating hours of over 140 stores, approximately 27 stores have seen a prolonged surge in demand as they meet the recovery needs of the most severely impacted communities.

  • We estimate that sales associated with Sandy recovery efforts aided fourth-quarter comps by approximately 70 basis points.

  • While rebuilding from Sandy benefited comps, our comp performance for the quarter was well balanced across the country.

  • Performance was particularly strong in the Gulf regions from Texas to Florida and in the Northwest as we responded well to increasing demand in those recovering markets.

  • We also benefited from our product differentiation resets which were rolled to approximately 1,250 of our stores last year.

  • Through product differentiation we have revised our end cap locations to highlight innovative new products and significant values, and to showcase particular private and national brands.

  • We have also revamped promotional spaces to better promote seasonally-relevant, high-value items to drive sales.

  • These end cap and promotional spaces continue to outperform the other areas of the store and these stores outperformed the remaining US stores.

  • For example, we used the promotional spaces to showcase storage products after the holidays and to display cleaning products, driving strong comps in those lines.

  • We will be rolling this concept to approximately 160 more stores in 2013.

  • While product differentiation is being operationalized, the value improvement program remains our most immediate priority.

  • Through this initiative we are improving our line designs making them more relevant to each of the markets we serve, easier for consumers to shop, and more efficient for our associates to maintain.

  • This includes reducing duplication of features and functions within price points and reinvesting inventory in key high velocity items customers expect us to have in stock, including job lot quantities needed to complete large projects.

  • We are also working to lower unit costs by negotiating lower first costs and reducing funds set aside by vendors for promotional and marketing support.

  • We use line reviews and resets to achieve these goals.

  • During line reviews we use consumer insights to determine what products to carry and which vendors to buy from.

  • Then we bring the new assortments and presentations to life in our stores through the reset process.

  • We have not scheduled our line reviews to frontload their benefit.

  • Instead, we consider a number of factors in determining the sequence of line reviews, including the seasonality of the product, the time lapsed since a given product line was last reviewed, whether the associated merchant teams and vendors are already involved in other line reviews, and the interdependencies between lines.

  • For instance, we need to determine what faucet finishes we will sell prior to determining our fashion hardware finishes.

  • We are making progress.

  • At the end of the fiscal year we have completed line reviews representing approximately 80% of our business and resets representing over 30% of our business.

  • We expect to have finished the initial round of resets in 2013.

  • We continue to adjust the pace of these resets to ensure the customer's experience is not negatively impacted, and we continue to offer sufficient inventory by store and by set in that we minimize the margin impact of clearance and the friction experienced by store operators.

  • The benefits we are seeing from these resets give us confidence that this is the right approach.

  • As I mentioned last quarter, the financial benefit of value improvement is greatest once we are our past clearance and have begun selling only new assortments.

  • For product lines in that stage, we recorded average mid single-digit comps and over 100 basis points improvement in gross margin, and our customer surveys indicate that the perception of our product availability has improved over the fourth quarter of last year.

  • In fact, in the fourth quarter we recorded strong seasonal living performance, which was driven by holiday decor sales, as we used our clustering tools to better tailor assortments to individual stores.

  • Likewise, a number of the product lines within the plumbing category, from air filters to toilets, have completed their value improvement resets and we are seeing strong comp performance in this category.

  • Value improvement will remain the primary focus of the organization in 2013.

  • Even as we are working through our first round of product line reviews and resets, the value improvement process changes are being operationalized.

  • We believe we will continue to find ways to improve product lines and, likewise, close rate by making them more relevant for each store location and offering better features, quality and style relative to price.

  • By putting more inventory behind the highest volume SKUs and, ultimately, increasing in-store service level targets across entire product line as they are reset.

  • We have also had the opportunity to improve close rate through additional labor hours.

  • In 2013 we will add approximately 150 hours per week to the staffing model for nearly two-thirds of our stores.

  • Previously, week day labor hours were heavily skewed towards tasking.

  • We have identified an opportunity to better serve customers and close more sales during the peak weekday hours by increasing the assistance available in the aisles.

  • We have already started hiring these permanent part-time employees.

  • We believe the increased labor hours and higher in-stock service levels will help us capitalize on the traffic that we have in our stores today, resulting in close rate improvement.

  • Finally, I am pleased to welcome Mike Jones to Lowe's.

  • Mike has joined the team as our Chief Merchandising Officer.

  • We took our time and recruited a very talented executive to our organization.

  • Mike has extensive consumer products experience with both Husqvarna and GE where he managed categories that are relevant to the home improvement business, including appliances, outdoor power equipment, and lighting.

  • He brings a proven ability to uncover valuable at all points in the supply chain, from raw materials to finished product, additional value that can enhance profitability for both Lowe's and our vendors.

  • His experience in leading businesses, as well as identifying and pursuing market opportunities, make him an outstanding fit for this position.

  • Mike will be responsible for the merchandising offering of all Lowe's US selling channels, as well as all global sourcing activities.

  • He will work closely with leaders of customer experience design, marketing, operations, and logistics to develop and deliver differentiating and seamless customer experiences.

  • Bob Gfeller's experienced design organization will use consumer insights to identify opportunities and Mike's team will develop specific merchandising programs to meet those opportunities with a particular focus on the breadth and depth of our assortments needed to support customer experiences.

  • While Mike will no doubt put his stamp on our merchandising organization and processes, he is committed to the goals of our value improvement initiative and to fully operationalize it as we complete the first round of resets in 2013.

  • He will work to optimize our merchandising processes, apply more rigor and process management, and improve effectiveness.

  • I am personally excited about Mike's arrival and I look forward to the progress our merchandising organization will make under his leadership.

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

  • Robert Hull - CFO

  • Thanks, Greg.

  • Good morning, everyone.

  • Sales for the fourth quarter were $11 billion, which represents a 5% decrease from last year's fourth quarter.

  • In Q4, total transaction count decreased by 6.9% while total average ticket increased 2.1% to $62.37.

  • The sales and customer count declines were driven by comparisons to 2011's 53rd week, partially offset by comp sales and new stores.

  • As mentioned in our third-quarter call, 2011's 53rd week year impacts the fourth quarter in two ways.

  • First, the extra week in 2011's fourth quarter contributed $766 million in sales.

  • This negatively impacted sales growth by 6.7%.

  • Second, last year's extra week caused a calendar week shift this year.

  • We estimate that this negative impact to Q4 2012 was $119 million, or 1.1%.

  • On a comparable 13-week basis sales would be up 2.8% for the quarter.

  • Comp sales were 1.9% for the quarter, which is driven by continued progress against our initiatives, lumber inflation, and the net impact of weather.

  • We estimate that our value improvement and product differentiation initiatives drove approximately 100 basis points of comp for the quarter.

  • Also, our proprietary credit value proposition, which offers customers a choice of 5% off every day or promotional financing, positively impacted Q4 comps by 40 basis points.

  • Lumber inflation aided comps by approximately 50 basis points.

  • Now to weather.

  • In estimating the impact of weather, we looked at two items.

  • First, we reviewed actual temperature and precipitation versus historical averages.

  • Second, we attempted to isolate the impact of storm activity.

  • As you might suspect, this is not an exact science.

  • Last year we noted that the favorable weather-aided Q4 2011 comps by 150 basis points.

  • In providing our outlook for this year's fourth quarter we had assumed normal weather; however, weather this year was slightly warmer than normal, alleviating some of the headwind from last year, resulting in an estimated 40 basis point comp drag.

  • Moving on to storm impacts.

  • As Greg mentioned, we estimate that sales related to the rebuilding in markets impacted by Sandy positively impacted Q4 comps by approximately 70 basis points.

  • We also continued to see modest, positive impact from Isaac.

  • These were offset slightly by Hurricane Irene comparison in last year's numbers for a net estimated favorable storm impact of 45 basis points.

  • In total, the net impact of weather had a modest positive impact on Q4 comps.

  • For the quarter, comp average ticket increased 2.1% while comp transactions decreased 0.1%.

  • The growth in average ticket was driven by both lumber inflation and strengthen in cabinets and countertops.

  • Looking at monthly trends, comps were flat in November and 3% for December and January.

  • With regard to product categories, the categories that performed above average in the fourth quarter included lumber, cabinets and countertops, seasonal living, plumbing, tools and outdoor power equipment, and home fashion, storage, and cleaning.

  • Lawn and garden and fashion electrical performed at approximately the overall corporate average.

  • For the year, total sales were $50.5 billion, an increase of 0.6%.

  • On a comparable 52-week basis sales were up 2.2%.

  • Comps were 1.4% for the year.

  • The balance of the sales increase came from new stores.

  • For 2012, comp average ticket increased 0.9% and comp transactions increased 0.5%.

  • For the year the categories that performed above average included lumber, tools and outdoor power equipment, paint, seasonal living, cabinets and countertops, and home fashions, storage, and cleaning.

  • Fashion electrical, hardware, flooring, and plumbing performed at approximately the overall corporate average.

  • Gross margin for the fourth quarter was 34.27% of sales, an increase of 5 basis points over last year's fourth quarter.

  • Value improvement helped gross margin by approximately 30 basis points in the quarter.

  • As we begin to sell-through new product lines post reset, we will continue to see benefit in gross margin.

  • However, the value improvement benefit was almost completely offset by the following items.

  • Our proprietary credit value proposition negatively impacted gross margin by 15 basis points as the penetration of proprietary credit increased roughly 160 basis points over last year's fourth quarter to 24.9% of sales.

  • In addition, we had modest negative impacts from mix of products sold and inventory shrink.

  • For the year, gross margin of 34.3% represents a decrease of 26 basis points from fiscal 2011.

  • SG&A for Q4 was 25.43% of sales, which levered 45 basis points.

  • The SG&A leverage was driven by comparisons to last year's charges for impairment and discontinued projects, as well as proprietary credit and risk insurance.

  • In last year's fourth quarter we incurred $53 million in expenses for store closings, asset impairment, and discontinued projects.

  • This compares to $8 million for asset impairment and discontinued projects this year, resulting in 39 basis points of expense leverage for the quarter.

  • We experienced 34 basis points of leverage associated with our proprietary credit program.

  • This leverage was driven by portfolio income, the result of continued growth in the program.

  • Risk insurance leveraged 28 basis points due to lower-than-expected expenses for general liability and workers' compensation programs.

  • These items were slightly offset by deleverage and incentive compensation and advertising expenses, as well as comparisons to last year's 14-week fiscal fourth quarter.

  • Incentive compensation deleveraged 33 basis points related to two store programs.

  • Our sales and earnings performance was better than expected, resulting in improved attainment levels for the store management bonus and service and sales employee incentive programs.

  • Advertising deleveraged 13 basis points due to timing and the launch of Lowes.ca in Canada.

  • Also, we experienced approximately 20 basis points of SG&A deleverage in the quarter as a result of Q4 2011's extra week.

  • For the year, SG&A was 24.24% of sales and leveraged 84 basis points versus 2011.

  • Depreciation expense was $412 million for the quarter, which was 3.73% of sales and deleveraged 44 basis points.

  • The majority of the deleverage was driven by comparisons to last year's 14-week fiscal fourth quarter and the week shift impact this year.

  • In addition, we continue to invest in information technology, which has a shorter depreciable life relative to our average asset base.

  • Earnings before interest and taxes for the quarter increased 6 basis points to 5.11% of sales.

  • For the year, EBIT of 7.05% represents an increase of 52 basis points over 2011.

  • Interest expense at $109 million for the quarter deleveraged 11 basis points as a percentage of sales.

  • The increase in interest was attributable to an almost $1.4 billion increase in total debt relative to last year.

  • For the quarter, total expenses were 30.15% of sales and deleveraged 10 basis points.

  • Pretax earnings for the quarter were 4.12% of sales.

  • The effective tax rate for the quarter was 36.7% versus 33.6% for Q4 last year.

  • For the year, the effective tax rate was 37.6% compared to 36.7% for 2011.

  • Last year's lower tax rate was the result of federal and state tax credits.

  • Q4 net earnings of $288 million decreased 11% versus last year.

  • Earnings per share of $0.26 for the fourth quarter were flat to last year.

  • We estimate that last year's extra week and the lower tax rate aided Q4 2011 by approximately $0.05 and $0.01 per share, respectively.

  • These items were offset somewhat by a net $0.02 per share impact associated with charges for asset impairments and discontinued projects.

  • Also, we estimate that the week shift negatively impacted 2012's fourth quarter by approximately $0.02 per share.

  • For fiscal 2012 earnings per share were $1.69, up 18% versus 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 $541 million.

  • Our ending inventory balance of $8.6 billion was up $245 million, or 2.9%, over last year.

  • The increase was driven primarily by the timing of receipt of spring orders.

  • Inventory turnover calculated by taking a trailing four quarters' cost of sales divided by average inventory for the last five quarters was 3.74%, an increase of 2 basis points over Q4 2011.

  • Return on assets, determined using a trailing four quarters' earnings divided by average asset for the last five quarters, increased 31 basis points to 5.68%.

  • Moving on to the liabilities section of the balance sheet, we ended the quarter with accounts payable of $4.7 billion, which was up 7% to last year.

  • The increase in accounts payable relates to the timing of purchases.

  • At the end of the fourth quarter our lease-adjusted debt to EBITDA was 2.17 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, increased 62 basis points for the quarter to 9.29%.

  • Now looking at the statement of cash flows, for the year cash flow from operations was almost $3.8 billion.

  • Cash used in property acquired was $1.2 billion, resulting in free cash flow of almost $2.6 billion.

  • For the quarter, we repurchased 21.3 million shares at an average price of $35.19 for a total repurchase amount of $750 million.

  • For the year, we repurchased almost 146 million shares at an average price of $29.86 for a total of $4.35 billion.

  • I am pleased to announce that our Board has approved a new $5 billion share repurchase authorization while simultaneously terminating the prior program.

  • The new authorization has no expiration date.

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

  • In 2013 we expect the total sales increase of approximately 4% driven by a comp sales increase of 3.5% and the opening of approximately 10 stores.

  • For the fiscal year we are anticipating an EBIT increase of approximately 60 basis points.

  • Let me share three cost pressures in our 2013 plan, which together cause approximately 30 basis points of SG&A deleverage, roughly 10 basis points each.

  • First, as you heard from Greg, we are investing additional payroll hours in the majority of our stores which causes payroll expense deleverage.

  • Second, the volume of reset activity associated with value improvement is higher in 2013 relative to 2012, driving higher reset expense.

  • Lastly, we experienced some favorability in 2012 related to our self-insurance liability for risk insurance.

  • We haven't planned to similar favorability in 2013.

  • As a result, we expect that the majority of the improvement in EBIT will come from gross margin.

  • The effective tax rate is expected to be 38.1%, which is roughly 0.5% higher in 2012, resulting in an earnings per share drag of approximately $0.01.

  • For the year we expect earnings per share of $2.05, which represents an increase of 21% over 2012.

  • We are forecasting cash flows from operations to be approximately $4.2 billion.

  • Our capital plan for 2013 is approximately $1.2 billion.

  • This results in estimated free cash flow of $3 billion for 2013, which represents an 18% increase over 2012.

  • Our guidance assumes approximately $4 billion in share repurchases for 2013 spread evenly across the four quarters.

  • Before taking your questions, I wanted to cover one administrative item.

  • We recently reviewed the timing of our earnings releases, which included benchmarking with a retail peer group the time between period-end and release date as well as the day of the week.

  • As a result of this review, we have made a decision to move our release date from Monday to Wednesday of the same week.

  • Therefore, our first-quarter results will be released on Wednesday, May 22, and the rest of the year will follow suit.

  • Regina, we are now ready for questions.

  • Operator

  • (Operator Instructions) Eric Bosshard, Cleveland Research.

  • Eric Bosshard - Analyst

  • Good morning.

  • On gross margin can you talk a little bit about -- it seems like you have got a pretty bullish expectation for gross margin progress since 2013.

  • Curious in terms of what is driving that.

  • And then also, gross margin was, I think, a bit of a source of upside in 3Q that didn't continue in 4Q.

  • Can you give us a little bit more color within that please?

  • Thanks.

  • Robert Niblock - Chairman, President & CEO

  • Sure, Eric, I will start and let Greg chime in.

  • So we did experience good progress in Q4 in gross margin relative to value improvement.

  • As I said in my comments, it helped by 30 basis points.

  • As we talked about the progress in the resets Greg mentioned just over 30% done through 2012, which means we have got the other 70% or so to take place in 2013.

  • That really gives us some confidence in gross margin expansion in 2013 is the benefit associated with the remaining resets from the value improvement program.

  • Greg Bridgeford - Chief Customer Officer

  • Eric, I will add to Bob's comments.

  • As mentioned, we expect the impact of VIP to increase sequentially as the quarters rollout to 2013.

  • Also, we are -- and we have seen results in the fourth quarter.

  • We are seeing a much better balance in our promotional activity.

  • So as we discussed in the first half of last year we had some weakness in our attachment rate, particularly in the lawn and garden part of the season.

  • We are addressing that this year and we have solid plans in place.

  • Then when you think about the impact of what I call the center of the store and being able to get really good traction with some of the categories that carry high margin, such as rough plumbing, rough electrical, hardware, we are increasing -- as I discussed, we are increasing both the devotion of hours to those categories in the first quarter and we are also increasing the investment in inventory to increase service levels of all those categories.

  • So expect that to be a positive impact.

  • On the fourth-quarter performance, as Bob mentioned, we experienced a 14 basis point impact from the impact of val prop.

  • We also saw a high single-digit impact from the mix shift, because you did see strong performance in categories like lumber and cabinets and countertops, which are below corporate average.

  • So when you look at that and you recognize we were 5 basis points over last year, I think that is the bulk of the impact is the fourth quarter.

  • Eric Bosshard - Analyst

  • If I could just follow up on the balance of the resets, what have you learned in the first 30% that as you get to the next 70% that is evolving within the reset effort?

  • Greg Bridgeford - Chief Customer Officer

  • I think, Eric, what we have learned is to be able to manage the inbound inventory much, much more tighter on a per store basis.

  • So weekly our general merchandise managers sit down with Rick Damron, SVP of Operations, and they literally make the call on every reset that is triggered to rollout per store.

  • Looking at all of the indicators of whether the on-hand inventory -- how many weeks of on-hand inventory we have, what are the sales rate for this category per store?

  • Is the signage -- what is the readiness of the signage package?

  • What is the readiness of the inventory backup flows?

  • What is the readiness of the display factors that we have going into this reset?

  • What is the readiness of the labor that is necessary to address this reset?

  • All indicators go, we go green.

  • It has been really, really critical that we do that in order to maintain a reasonable cadence of clearance.

  • Especially, and I can't emphasize this enough, especially to be able to execute on a strong customer experience so there is not holes because we waited too long to flow in the inventory or there is not a glut in the aisles of clearance inventory because we flushed in too much too soon.

  • So this cadence issue is really critical to us and that is what you see, that is what we have learned from the resets we have done so far.

  • Eric Bosshard - Analyst

  • Perfect, thank you.

  • Operator

  • Alan Rifkin, Barclays.

  • Alan Rifkin - Analyst

  • Thank you very much.

  • Just a follow-up on the line review and reset.

  • So for the group of stores and for the merchandise categories that have undergone both the reviews and the resets would you maybe be able to comment on the comp performance in that category relative to the 100 basis points overall comp that you saw from the implementation of the value improvement program?

  • Greg Bridgeford - Chief Customer Officer

  • So, Alan, I indicated that we had mid single-digit comp performance in those categories that have been reset to date, and that is what we are experiencing on the sales side.

  • Then the margin basis point impact was approximately 100 basis points.

  • Alan Rifkin - Analyst

  • Okay, and a follow-up, if I may, for Robert.

  • Since obviously the macro backdrop is going to be so important in 2013 as the housing environment, hopefully, continues to improve, when you are looking at your store portfolio and you're looking at some of the markets that entered the housing crisis first and have subsequently come out and rebounded earlier than other parts of the country, what type of performance on a regional basis are you seeing for those specific markets that have come out of the crisis earlier than others?

  • Robert Niblock - Chairman, President & CEO

  • As we talked, Alan, certainly in Florida some of the Gulf Coast areas, the coastal areas that were so hot and got hit before the downturn, we are seeing good performance.

  • Then out on the West Coast, some of the areas out there that we are seeing obviously good performance.

  • If you look at areas that have really been overheated prior to the downturn, some areas in Arizona, Las Vegas in the Nevada market, those areas, you are starting to see them come back and then performing at the average.

  • As we said, I think was in the comments, good performance out of Florida and continued progress; eyeing the California market.

  • Alan Rifkin - Analyst

  • Okay, thank you.

  • Why don't I turn it over to somebody else?

  • Thank you.

  • Robert Niblock - Chairman, President & CEO

  • Thanks, Alan.

  • Operator

  • Dennis McGill, Zelman & Associates.

  • Dennis McGill - Analyst

  • Good morning and thank you.

  • I was just curious if you could maybe walk through, as you set the plan for 2013, how you built up to the 3.5% comp.

  • Then maybe talk about where you see upside/downside risk, both macro as well as company specific.

  • Robert Niblock - Chairman, President & CEO

  • Sure, Dennis.

  • So a couple perspectives on the 3.5% comp.

  • First, ticket traffic; we think it's going to be relatively balanced ticket and traffic growth.

  • We think the items that Greg described relating to investments in inventory and payroll will help with close rates, which will help drive transactions.

  • Also, as it relates to ticket growth, as you mentioned housing is improving so that should stimulate more demand, hopefully more discretionary spending, as well as some continued benefit from lumber inflation should drive ticket.

  • The other perspective I will give you is regarding our initiatives.

  • So they helped Q4 comps by 100 basis points as we described more resets occurring in 2013 relative to 2012.

  • As Greg said, another 160 stores get the product differentiation treatment.

  • We are seeing sequential progress in sales from those end cap programs.

  • So we think we have got strength and continued progress with internal initiatives, plus whatever benefit we get from macro and housing.

  • Dennis McGill - Analyst

  • If you had to bucket those last pieces between internal and macro, of the 200 basis point improvement, is there a way to think about the split?

  • Greg Bridgeford - Chief Customer Officer

  • So if we think about the 3.5% comp I would say a healthy 3-or-so-percent of that is coming from internal.

  • Dennis McGill - Analyst

  • Okay.

  • Then a separate question, can you just update us on where the Australian joint venture investment sits today, both from a cash outflow perspective as well as how you think the P&L will be impacted as you move into 2013 and beyond?

  • Robert Niblock - Chairman, President & CEO

  • I'll just make a few overview comments, Dennis, and I will let Bob get into some of the numbers.

  • The 25 stores opened in Australia; we are pleased with the performance of those store openings.

  • Their year-end is June.

  • I think they have got another six stores will open between now and the end of June, so in less than two years 31 stores opened in the joint venture.

  • We feel really good about the way that the joint venture is ramping, the quality of the people that they are able to get in and hire in the stores, the experience that they are delivering.

  • Then they are continuing to learn and make necessary adjustments along the way.

  • That is one thing I am really impressed with is how quickly they are adjusting for the market and making the necessary changes.

  • So I feel good about it.

  • It is in another couple of years before they will get into a profitable stage, but I will let Bob take you through some of the detail numbers on that.

  • Robert Hull - CFO

  • Sure.

  • We have got through the end of 2012 just over $0.5 billion invested in the joint venture.

  • 2012 it was a modest earnings drag.

  • We expect, as Robert said, to migrate to a breakeven in 2015/2016, so it will be a modest earnings drag in 2013 as well.

  • Dennis McGill - Analyst

  • Okay, thank you.

  • Operator

  • Brian Nagel, Oppenheimer.

  • Brian Nagel - Analyst

  • Good morning.

  • First, a question on the buyback.

  • So the new $5 billion buyback you articulated in today's press release, you indicated that -- like you said there is no end date but you expect to do it over two years.

  • So how should we think about -- and I don't want to sound too nitpicky here, but you are doing $5 billion over two years.

  • That would suggest a slowdown from the pace at which you have been buying back stock lately.

  • How should we think about that?

  • Robert Hull - CFO

  • So in the outlook section of my comments, Brian, I said we expect about $4 billion for the year with roughly $1 billion per quarter, which is in line with what we signaled at the analyst conference in December.

  • The two-year commentary in the press release really just suggests it is not all going to be done in 2013.

  • Brian Nagel - Analyst

  • Got it, okay.

  • Okay, that makes perfect sense.

  • Sorry for missing that.

  • Then the second question, again not to sound too nitpicky here, but when we are looking at the remerchandising and the resets, it sounds to me versus the commentary you made at the analyst day it seems like the progress has slowed down a bit.

  • I think we initially planned to have all of the line reviews completed by the end of 2012 and now you said 80%.

  • So first the question is, is that right?

  • Then, if so, is there a reason behind that?

  • And how should we think about the progress, the timing of the progress through 2013?

  • Greg Bridgeford - Chief Customer Officer

  • Brian, this is Greg Bridgeford.

  • I would say that it has slowed down but purposefully.

  • It is a conscious decision we have made and here are the priorities.

  • And you can fault me for not forecasting accurately enough the probabilities that this might happen, but here is our priorities.

  • First, is the customer experience in the aisles.

  • And as I described, the cadence will really determine what that feels like when the customer encounters a newly reset category or category in reset in each of our stores.

  • Second is the employed labor cost and distraction.

  • If we don't execute a reset thoroughly, we call it one-touch resets -- and, believe me, we weren't at first -- then we cause a lot of rework.

  • The probability is that in the crunch of the spring season at Lowe's that rework won't get done, so you will have an incomplete reset.

  • And we don't want to cause that kind of additional potential costs from the labor standpoint or the distraction that it causes in the store.

  • Then third is the financial impact.

  • If we don't manage the cadence properly, believe me, we will be generating much more clearance, which will show up obviously in margin degradation across the quarter.

  • So those are our three priorities and that is what drives the cadencing of these resets.

  • As we have made progress obviously we are being, I think, more realistic by saying the majority of the remaining resets will obviously be done in the earlier part of 2013, but they will flow into the second half of 2013 no doubt.

  • But, again, we are making management decisions, as I mentioned with Eric's questions, weekly to make sure that we create that good experience for the customer, we don't incur additional costs, and that we manage the financial impact of the clearance items for the category.

  • Brian Nagel - Analyst

  • Got it.

  • Thank you.

  • Operator

  • David Strasser, Janney Capital Markets.

  • David Strasser - Analyst

  • Thank you very much.

  • You guys talked about some of the strengths, things that drove the benefits of the business in the fourth quarter.

  • We were just kind of going back and looking over the last couple of quarters.

  • It seems in the fourth quarter in each of the last -- go back to 2010 you saw an acceleration of sales on a two-year basis, on a one-year basis.

  • It was the strongest sales quarter also with the expense of generally the most gross margin degradation, and it seemed to be a trend for the last couple years.

  • I'm just trying to get a sense seasonally if anything is changing in your business that is driving the better sales productivity potentially at the expense of the margin side.

  • Robert Niblock - Chairman, President & CEO

  • Dave, this is Robert.

  • I will start and then let the others jump in.

  • I think what you highlighted was, if you go back over the prior couple of years, yes, we saw good performance but you saw the margin degradation.

  • Because actually we got into, particularly last year, very heavy promotional cadence with deep promotions that didn't pan out the way that we had hoped.

  • Not enough add-on sales.

  • So it drove some top line but it gave away too much margin, and that is what I said in my comments.

  • Going up against that heavier promotional activity from the prior year -- and also if you remember it was really favorable weather at the end of the quarter last year, unseasonably mild weather.

  • Going up against both of those things, being able to expand the margin, including the other offsets that Bob took you through and develop and deliver a nice comp on top of last year's strong comp, that is what gives us confidence.

  • So we accomplished those comps in a more balanced way, more balanced across the quarter, more balanced across the product categories, and more balanced across the country than what we have seen in the past.

  • Greg Bridgeford - Chief Customer Officer

  • And, David, I will add to Robert's remarks a little color.

  • In fiscal 2011 we drove a lot of transactions Black Friday and this past fourth quarter we consciously said we want a more balanced approach.

  • And while we gave up some sales on Black Friday, we drove a better customer experience, we drove a much more balanced mix, and we drove attachment rates in the fourth quarter which was our goal.

  • David Strasser - Analyst

  • Okay.

  • And just on a side note, I think you mentioned at some point during the call, I think Robert, you did that the Pro business was better than the consumer business.

  • Just wanted to make sure I heard that right, and if so is there a distinction between big Pro versus the smaller Pro?

  • Robert Hull - CFO

  • I did mention that, Dave, and we have for quite a while seen our Pro business doing well and running head of the overall company average.

  • Rick Damron is in the room, so I will let him talk a little bit about what he is seeing as far as trends in the large versus the smaller Pro business?

  • Rick Damron - COO

  • Yes, David, this is Rick.

  • As you know, we relaunched our ProServices initiative midyear, really with a focus on continuing to build the relationship across all of our relevant commercial categories and customers.

  • What we saw in Q4 was we saw solid growth in ticket and transaction.

  • We had positive increases in both.

  • And as it relates to all transaction buckets, we saw increases across all transaction buckets.

  • Transactions under $50, all the way up to transactions over $10,000 all saw positive increases throughout the quarter.

  • So we feel that we are accomplishing a balance between managing the small maintenance and repair customer, the small local repair business, as well as the larger commercial accounts across the country.

  • So we feel good about the balanced approach we are seeing across our ProServices initiative.

  • David Strasser - Analyst

  • I will just follow up with this question and then I will let somebody else.

  • But of all of those improvements was one of them a much bigger delta than any of the others, so that is where thinking into 2013, of those different categories, buckets?

  • Rick Damron - COO

  • David, I would say is what we are seeing is the actions we have taken over the last several quarters really beginning to pay off.

  • The commercial val prop is really helping us drive increased visits, increased transactions on an ongoing basis by providing great loyalty to the customer.

  • Then as part of Northlake I think what we are also seeing is Northlake is providing us the ability to showcase commercial product differently than we have done in the past.

  • On our end caps you will see value messaging to the commercial customer and the pro business.

  • You will see us bring contractor pack quantities, which are discounts on certain quantities of products, out to the front of the customer and display those better and message those better throughout the store.

  • So I think you're seeing a lot of that really come back.

  • The good thing that we are also seeing that makes me feel good about 2013 is we are seeing that across the country.

  • It is not being driven by one geographical area or one set of stores, whether it be rural or metro.

  • We are seeing a good balance across all of the store base.

  • David Strasser - Analyst

  • Thank you very much.

  • Operator

  • Peter Benedict, Robert W. Baird.

  • Peter Benedict - Analyst

  • Thanks.

  • A couple questions.

  • First, Bob, on the operating margin leverage sensitivity to comps, you laid out what you got for this year.

  • The three-year view that you laid out in December assumes a little bit more than that, not a lot.

  • But just trying to understand as we look out past 2013 what are the levers in 2014 and 2015 that basically will create better flow-through in terms of profitability for point of comp?

  • You talked about some of the insurance stuff, but just wondering if there is any other buckets there we should be thinking about.

  • Robert Hull - CFO

  • Sure.

  • So we talk in terms of each point of comp drives 20 basis points of EBIT; that largely plays out in 2013 as some of those cost pressures.

  • The reset is temporary; we will be past the resets in 2013.

  • As we think beyond 2013 continue to make progress on the top line, which will allow us to leverage all of our operating costs more so in 2014 and 2015 than we will see in 2013.

  • We will make continued progress against gross margin.

  • As Greg described, the cadence of the line reviews really is about quality versus quantity.

  • So we are trying to make sure the experience is right, which is going to help us drive both sales and margin productivity.

  • Then, obviously, as sales grow we will get depreciation leverage as well.

  • So really it is across all three of those lines that help drive operating margin expansion beyond 2013.

  • Peter Benedict - Analyst

  • That is helpful.

  • Then just, secondly, on the Affordable Care Act can you just talk about how it is impacting your hiring decisions this year, if at all?

  • I know you guys are hiring more people, but is it a part-time, full-time decision?

  • Then maybe any thoughts on what the impact could be as we get out into 2014 and 2015?

  • Thanks.

  • Robert Hull - CFO

  • So at this point it really hasn't impacted our hiring decisions.

  • As we think about our business as a complement of full-time employees, a complement of part-time, and as we announced recently a complement of seasonal workforce as we enter our peak selling season which is spring.

  • So no real impact on thoughts of hiring.

  • We continue to evaluate the rules as they are written and the implications to our business, but ultimately, as we think about the individual mandate, it is the perceived value of the state and federal exchanges that are going to drive some of participation rates in our own program.

  • That is going to determine the cost.

  • So that is yet to be determined because those exchanges have yet to be set up, so we are continuing to monitor both the development of exchanges as well as additional rules that are written.

  • Peter Benedict - Analyst

  • Okay, thanks.

  • Operator

  • Laura Champine, Canaccord.

  • Laura Champine - Analyst

  • Good morning.

  • My question is really about what Mike Jones is focusing on.

  • You have got a few initiatives with the store resets accelerating in the middle of the line reviews.

  • What are his primary focuses and what does he bring to the table on the merchandising front?

  • Greg Bridgeford - Chief Customer Officer

  • Laura, this is Greg Bridgeford.

  • Mike has been here all of two weeks, but he actually is -- stepped right in and is helping to define and to fine tune the value improvement plan.

  • Mike brings with him years of experience in process management from companies that do it the best.

  • What he is doing is stepping in and taking a hard look at all the processes associated with the value improvement program and putting more rigor and more discipline to those programs.

  • I expect he would love to accelerate it if at all possible, and it will be done with all of the priorities addressed that I mentioned earlier.

  • It will be a quality experience for our customer.

  • It will be -- create leverage on the operating cost line and certainly the financial impact of clearance will be well managed.

  • But that is his first focus area and Mike is making progress as we speak.

  • He brings a consumer products background from years at Husqvarna and at General Electric, and he has both appliances and lighting experience at GE and outdoor power experience at Husqvarna.

  • Mike brings with him a fascination with how value is created, all the way from supplier to the customers' hands and a deep knowledge of that.

  • When I said looked forward to him creating more value for both Lowe's and for our vendor partners I mean that.

  • I think that having been through the line review process with Husqvarna I think Mike knows it very well from an interesting perspective.

  • And I think that as this critical part of our business moves ahead I think that he will bring a very balanced and a very disciplined perspective to driving value for the entire supply chain.

  • Laura Champine - Analyst

  • Thank you.

  • Operator

  • Mike Baker, Deutsche Bank.

  • Mike Baker - Analyst

  • First, just wanted a quick clarification.

  • When you talk about line review areas going through, fully through the reset does that include getting through all the clearance product?

  • In other words, is the clean number 30% of your product that has gone through, fully through this process including the clearance?

  • Greg Bridgeford - Chief Customer Officer

  • Mike, on the whole the 30% of product still has -- there will be clearance inventory in the system as the product reset.

  • When we say 30% we mean 30% with inventory stabilized.

  • In other words, there is not the percentage of product that is being sold at market is much less than or, in some cases, much less than 50% of the product being sold.

  • So we are looking to eliminate the friction or noise out of the system, so that we understand this is sales of new inventory.

  • So we are looking for the tale of the clearance, but I won't tell you there is not clearance inventory in some of these 30 reset categories.

  • Mike Baker - Analyst

  • Sure, fair enough.

  • But is that 30% that is seeing that mid single-digit lift?

  • Greg Bridgeford - Chief Customer Officer

  • Yes, and we are saying it is on a balanced inventory level.

  • Mike Baker - Analyst

  • Right, okay.

  • Understood.

  • Couple other questions; just think about the cadence of comps through the year.

  • You said gross margin should get better through the year as you go through this line review.

  • Should we expect that within your 3.5% guidance the same type of cadence for the comps?

  • Greg Bridgeford - Chief Customer Officer

  • I think, Mike, if you take a look at the two-year comp of 1.4% in 2012 and at 3.5%, gives you roughly a 5% two-year comp, I think about that as you model out the four quarters.

  • Roughly speaking that will be close.

  • Mike Baker - Analyst

  • Okay, fair enough.

  • One last one, just I understand the SG&A impact of adding more labor but I guess theoretically my view is if you are adding this labor you expect it to drive a sales benefit such that you leverage the incremental cost.

  • So I am just trying to understand how that math works I guess.

  • Robert Niblock - Chairman, President & CEO

  • Mike, it is a good question.

  • It is a matter of timing.

  • So as you think about hiring people and training and getting them knowledgeable about the products we sell and the services we offer they are not productive day one.

  • So it is a timing issue relative to the SG&A spend coming in advance of sales associated with those hires.

  • Mike Baker - Analyst

  • Okay.

  • But so, in general though, the idea is that that program leverages itself?

  • Robert Niblock - Chairman, President & CEO

  • Yes, as Rick talked to you in our analyst conference, by 2015 we expect to continue to make improvements in sales per hour.

  • Mike Baker - Analyst

  • Right, fair enough.

  • Thank you.

  • Greg Bridgeford - Chief Customer Officer

  • Virginia, we have got time for one more question.

  • Operator

  • Kate McShane, Citi Research.

  • Kate McShane - Analyst

  • Thanks, good morning.

  • I wondered if I could go back to the subject of the increase in labor hours and wondered if you could just walk us through quickly how you came to the decision that this was needed, especially in light of you being through the line reviews and the value improvement now for a while.

  • Do you expect -- since you are hiring new employees, do you expect any lag time from seeing a benefit from these employees being on the floor?

  • Rick Damron - COO

  • Kate, this is Rick.

  • I will take the first part of that and let anyone jump in on the second piece.

  • Two years ago we launched our weekend teams, which was an initiative that we saw as we began to review our transactions on the weekends versus our sales performance.

  • We felt we had an opportunity from a labor perspective to add more labor over that weekend period and really impact our close rate.

  • What we saw was that performance really take hold.

  • We did see our initial hypothesis proved out and as we continue to look across the week what we began to see was, from a traffic perspective, a balance through the week and the weekend.

  • But what we began to notice was that the close rate on the weekends improved much greater than the close rates through the week.

  • So with that identification we looked and we saw that opportunity.

  • As we continued to look at the stores, the next component of that was -- and the reason we are going to roughly two-thirds of our stores is where do we see that opportunity?

  • This was not a one-size-fits-all exercise.

  • We wanted to make sure that we invested that labor where we saw the opportunity, based upon transactions and based on traffic, to really be able to leverage that to the top-line sales benefit.

  • So that is the reason you are seeing us be very selective in the stores and the markets we are putting those hours in where we have that opportunity.

  • As Bob said just a few minutes ago, the labor we expect, like with any new employee, for there to be an acclimation process as they learn Lowe's, as they learn the products, as we get them trained and onboarded.

  • And we expect as we go throughout the year for those hours to become much more productive and not be a degradation to our sales per hour targets that we have outlaid in December.

  • Kate McShane - Analyst

  • Thank you.

  • Robert Niblock - Chairman, President & CEO

  • Thanks for your continued interest in Lowe's.

  • We look forward to speaking with you again when we report our first-quarter 2013 results on Wednesday, May 22.

  • Have a great day.

  • Operator

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

  • Thank you all for joining and you may now disconnect.