勞氏公司 (LOW) 2015 Q2 法說會逐字稿

Good morning, everyone and welcome to Lowe's Companies' second-quarter 2015 earnings conference call.

This call is being recorded.

(Operator Instructions).

Also, supplemental reference slides are available on Lowe's Investor Relations website within the investor packet.

While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the Company's results and to be used as a reference document following the call.

During this call, management will be using certain non-GAAP financial measures.

The supplemental reference slides include information about these measures and a reconciliation to the most directly comparable GAAP financial measures.

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.

Hosting today's conference will be Mr. Robert Niblock, Chairman, President and Chief Executive Officer; Mr. Rick Damron, Chief Operating 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.

We delivered solid results for the quarter and I would like to thank our employees for their hard work and commitment to serving customers.

Comparable sales grew 4.3% primarily driven by a 3.3% increase in average ticket.

We achieved this growth by executing well in a challenging environment that included an increasingly severe drought in California and historic flooding in Texas.

In fact, comparable sales growth for our US home improvement business was 4.6% for the quarter with all 14 regions generating positive comps and positive comps in 11 of 13 product categories.

Our seasonal business performed well.

Strength in outdoor power equipment and seasonal living offset some of the weakness and some of the softness in lawn and garden, which was most pronounced in the West.

We also experienced solid growth in big-ticket discretionary project categories such as kitchens, flooring, millwork and fashion fixtures.

And for the third quarter in a row, we drove double-digit comps in appliances.

Our team in Canada continued to deliver strong comps in local currency.

Building on the momentum we've been gaining, we are accelerating our store expansion in this market.

We recently acquired 12 former Target store locations and one distribution center with plans to open these locations in 2016 and 2017.

Combined with our organic expansion plans, we expect to have roughly 70 stores in Canada by 2017.

Our business in Mexico also performed well during the quarter, achieving double-digit comps in local currency.

However, as the US dollar strengthened, we experienced a 30 basis point drag on our consolidated comp due to foreign currency.

For the quarter, gross margin contracted 8 basis points, primarily due to the strength in appliances and outdoor power equipment.

We leveraged operating salaries in the quarter and delivered earnings per share of $1.20, a 15% increase over last year's second quarter.

Delivering on our commitment to return excess cash to shareholders, in the quarter, we repurchased $1.5 billion of stock under our share repurchase program and paid $218 million in dividends.

In May, our Board of Directors approved a 22% increase in our quarterly dividend from $0.23 per share to $0.28 per share.

Looking forward to the second half of 2015, key drivers of the home improvement industry remain supportive for growth.

Economists are forecasting a modest acceleration in both incomes and consumer spending this year and recovery in the housing market continues with moderate home price appreciation and stronger gains in housing turnover.

We also continue to be encouraged by the results of our second-quarter consumer sentiment survey.

Roughly half of respondents indicated that they believe their home values are increasing, double the number from 2012.

And this positive sentiment around home values is [rooting] through to spending patterns with plans to begin a home improvement project in the next six months continuing its recent upward trend.

Further, survey respondents indicated that growth in their home improvement spending is outpacing increases in their overall spending, suggesting an affinity -- a strengthening affinity for the home.

Our key priorities in 2015 should allow us to capitalize on opportunities within an improving economy.

We are pursuing further top-line growth through continued development of omnichannel capabilities, differentiating ourselves through better customer experiences and improving our product and service offering for the pro customer.

We also remain committed to improving our productivity and profitability with opportunities in a few specific areas, including store payroll, marketing and leveraging our scale to get cost savings on indirect spend.

The execution of our strategic priorities alongside an improving macroeconomic backdrop, together with our keen focus on productivity and profitability, give us confidence in our business outlook for 2015.

Thanks again for your interest and with that, let me turn the call over to Rick.

Thanks, Robert and good morning, everyone.

During the second quarter, we recorded our strongest performance in big-ticket categories such as appliances, kitchens, outdoor power equipment and seasonal living.

This is a reflection of consumers' increasing desire to invest in their homes, as well as the strength of our product offerings in these categories and our evolving omnichannel capabilities.

In appliances, we drove double-digit comps for the third consecutive quarter.

In addition to our leading brands in this category such as Whirlpool, KitchenAid, Bosch, Samsung, LG, Electrolux, Frigidaire and GE, we provide service advantages like delivery and haul away and facilitate in-home repairs and maintenance.

We have further strengthened our offering with a home channel exclusive launch of the Frigidaire Pro Appliance series and the introduction of 17 kitchen suites.

And understanding that more than 80% of customers start shopping for appliances online, we have enhanced our presentation on Lowes.com, including improved product search, enhanced videos, improved presentation like 360 degree views and simplified product groupings.

It is no wonder that for the seventh time in the last eight years JD Power and Associates has ranked Lowe's highest in customer satisfaction among appliance retailers based upon our knowledgeable sales specialists, breadth of assortment, competitive pricing and delivery.

In order to sell the entire kitchen, we display our kitchen products, including cabinets and countertops, immediately adjacent to our appliance offering.

This quarter, we drove above average comps in kitchens through a combination of targeted promotions and our investment in project specialists who meet customers in their homes.

These employees represent another important element of our omnichannel strategy.

We now have project specialists who focus on the exterior of the home available across all US stores and we are expanding our interior project specialist program into another 470 stores, reaching over three-quarters of our stores by year-end.

With our ability to coordinate style, provide design expertise and find the right contractor to do the job, we are rapidly becoming the project authority in home improvement.

We achieved high single-digit comps in outdoor power equipment with particular strength in walk-behind and riding mowers and pressure washers.

We offer a wide range of mowers to help customers maintain their yards and we continue to provide compelling and exclusive brands and innovations like our innovative Kobalt 80 volt handheld outdoor power tools and a home channel exclusive, Hustler Raptor 60 inch zero turn mowers, a brand landscapers know and trust.

The outdoor living experience we introduced last year drove strong comps in our seasonal living product category.

In fact, our patio and outdoor fashion area recorded strong solid comps again this quarter on top of double-digit comps last quarter assisted by robust attachment of replacement cushions and other outdoor accessories.

Entering the second half of the year, we will use this seasonal stage to address customer needs for the fall like planting, leaf removal, home winterization and exterior maintenance.

Then, as winter arrives, we will help customers refresh their homes for holiday guests, decorate and organize their home after the holidays.

We will focus on using this space to provide the inspiration, guidance, products and services that customers need to tackle the projects that are relevant for each micro season.

Our performance in paint was in line with the industry.

We are pleased with the launch of HGTV Home by Sherwin-Williams and look forward to building further momentum with this brand.

Brand is the number one purchase driver in paint and Sherwin-Williams is the most recognized brand in the category.

We expect the addition of HGTV by Sherwin-Williams to appeal to both DIY and pro customers.

Its long-standing reputation for quality, as well as the color expertise of HGTV, allows Lowe's to offer customers the taught brands they trust for their next paint project.

Combined with their outstanding Valspar and PPG Olympic brand partnerships, we expect to grow traffic to our stores and increase overall marketshare in paint.

We also continue to strengthen our portfolio of pro-focused brands.

In addition to the brands we rolled out in the first quarter, including Goldblatt masonary tools, GAF Roofing and the Owens Corning insulation, last month, we expanded our line of Hitachi pneumatic nailers and fasteners, a home channel exclusive to Lowe's stores nationwide.

Lowe's now offers the broadest selection of Hitachi power tools with the latest innovations that deliver lighter, faster and more durable products.

We continue to collect feedback from our pro customers and employees to identify other local and national brands that best meet the needs of pro customers.

Along with strengthening their brand portfolio, we officially relaunched lowesforpros.com at the beginning of the second quarter and have seen an increase in use by pro customers in line with our expectations.

So far, we've been promoting lowesforpros online and through pro social media and in the third quarter, we will begin the formal launch through our pro appreciation days, as well as other media.

We continue to actively serve the pro through our account executive pro services, or AEPs.

AEPs call on regional customers to help them order and replenish products across multiple stores.

We currently have approximately 135 AEPs in the field, an increase of 25 over last year.

Our AEPs have been very effective in growing our business with larger pro customers, especially maintenance, repair and operations, or MRO customers.

We are pleased with the program's results.

Excluding the AEPs we added this year, we saw double-digit second-quarter growth in AEP sales, which contributed to solid pro comp sales growth in the quarter.

Our focus on strengthening our portfolio of brands, serving regional pro customers through AEPs, as well as our recent relaunch of lowesforpros.com are part of a broader commitment to build on our strong foundation with the pro.

In addition to our efforts to drive top-line growth, we continue to focus on driving productivity and profitability.

For the quarter, we capitalized on big-ticket marketshare opportunities with strong growth in categories like appliances and outdoor products, which contributed to a slight decline in gross margin rate, but substantial margin dollar growth.

We mitigated the unfavorable mix impact by continuing to partner with our vendors to drive innovation, improve (inaudible) costs through shared efficiencies and to achieve higher sellthrough of seasonal products.

Our store teams once again effectively managed payroll, increasing sales per hour in line with comps.

We continue to leverage our prior technology investments, as well as improved selling processes enabled by our customer experience design team.

Most importantly, we have achieved this greater payroll efficiency while improving customer satisfaction scores.

We also drove productivity in marketing by increasing our presence in targeted digital media and leveraging our investment in MyLowe's and we continue to identify and implement additional expense efficiencies throughout the year by consolidating the procurement of similar types of goods and services across our corporate and store functions.

The quarter tested the flexibility and capabilities of our supply chain and we passed that test with flying colors.

To meet heightened demand in the Pacific Northwest where temperatures were unusually warm, our distribution teams worked efficiently to move portable air conditioners from the Northeast.

Likewise, they were instrumental in moving products to Eastern Texas so we could help customers recover from flooding and begin the process of repairing and rebuilding in the wake of storms.

While inventory at quarter-end was up 4% to last year, it reflects our commitment to being in stock for items that are most relevant to our customers.

For instance, we ended the second quarter with higher levels of appliances to support exceptionally strong sales, as well as higher levels of portable air conditioning units and grills.

We expect to sell through most of this seasonal inventory in the third quarter and to end the year with minimal growth in inventory per store.

We are pleased with our agile execution in the second quarter.

We continue to make progress on our initiatives to drive top-line growth and are focused on improving productivity and profitability.

We look forward to sharing further progress with you over the course of the year.

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

Thanks, Rick and good morning, everyone.

Sales for the second quarter were $17.3 billion, an increase of 4.5%.

The sales increase was driven by both ticket and transactions with total average ticket up 3.3% to $67.83 while total customer transactions grew 1.2%.

Comps sales were 4.3% driven by a comp average ticket increase of 3.3% and comp transactions growth of 1%.

Looking at monthly trends, comps were 3.6% in May, 4.6% in June and 4.6% in July.

In Q2, July 4 fell in fiscal July this year and fiscal June last year.

While the shift did not affect comp sales for the quarter, it did impact the monthly spread.

We estimate that normalizing for the timing of the holiday, June and July comps would have been 3.9% and 5.8% respectively.

Year to date, total sales of $31.5 billion were up 4.9% versus the first half of 2014 driven by a 4.7% increase in comp sales.

Gross margin for the second quarter was 34.47% of sales, which decreased 8 basis points from Q2 last year.

The decline in gross margin was driven by mix and promotional activity.

The mix of products sold, primarily appliances and outdoor power equipment, negatively impacted gross margin by approximately 20 basis points.

Also, we've noted our efforts to adjust our promotional calendar to be more competitive with the market.

We anniversaried this promotional change in the third quarter.

The pressure from these items was largely offset by value improvement.

Year-to-date gross margin was 34.92% of sales, a decrease of 6 basis points from the first half of 2014.

SG&A for Q2 was 20.94% of sales, which leveraged 39 basis points.

We experienced leverage in a variety of expenses, including store payroll, bonus, maintenance and repairs, utilities, advertising and payroll taxes.

These items were somewhat offset by store closing costs of $13 [million] related to a lease termination for a recent relocation, as well as updated lease assumptions for stores closed in 2011.

Also, in the quarter, our Canadian business incurred $4 million of expenses associated with the recent purchase of certain Target assets.

This was primarily related to lease termination costs for our existing distribution center as we work to transition into the larger former Target facility.

In addition, the repairing costs associated with the 12 store leases that we assumed.

These two items totaled $17 million and impacted EBIT and EPS by 10 basis points and a penny per share, respectively.

Year to date, SG&A was 22.39% of sales, which leveraged 48 basis points versus the first half of 2014.

Depreciation for the quarter was $375 million, which was 2.16% of sales and leveraged 10 basis points.

In Q2, earnings before interest and taxes, or EBIT, increased 41 basis points to 11.37% of sales.

For the first half of 2015, EBIT was 10.18% of sales, which was 56 basis points higher than the same period last year.

For the quarter, interest expense was $133 million.

The effective tax rate for the quarter was 38.8%.

Earnings per share was at $1.20 for the second quarter, an increase of 15.4% over last year.

For the first six months of 2015, earnings per share of $1.90 represented a 15.9% increase over the first half of 2014.

The $1.90 was in line with our year-to-date plan.

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

Cash and cash equivalents at the end of the quarter was $900 million.

Our inventory balance of $9.7 billion increased $389 million or 4% versus Q2 last year.

As Rick mentioned, the increase was driven by appliances to support sales growth, as well as seasonal inventory.

Inventory turnover was 3.9, up 16 basis points over last year.

Asset turnover increased 11 basis points to 1.74.

Moving on to the liability section of the balance sheet, accounts payable of $7.1 billion represented a 15% increase over Q2 last year primarily due to the timing of purchases year-over-year.

At the end of the second quarter, we suggested debt to EBITDAR was 2.08 times.

Return on invested capital increased 237 basis points for the quarter to 14.98%.

Looking at the statement of cash flows, year-to-date operating cash flow was almost $4.2 billion and capital expenditures were $570 million resulting in free cash flow of nearly $3.6 billion, which was up 2% to last year.

In May, we entered into a $1 billion accelerated share repurchase agreement.

At this point, we expect to receive approximately 14.5 million shares, but the ultimate number of shares will be determined upon completion of the program in the third quarter.

We also repurchased approximately 7.2 million shares for $500 million through the open market.

In total, we repurchased $1.5 billion in the quarter.

We have approximately $4.9 billion remaining on our share repurchase authorization.

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

As Robert noted, the key drivers of the home improvement industry remain supportive for growth.

For the year, we expect a total sales increase of approximately 4.5% to 5% driven by a comp sales increase of 4% to 4.5% and the addition of 15 to 20 stores, which includes five Orchard and two City Center locations.

We are anticipating an EBIT increase of 80 to 100 basis points and are targeting 25 to 30 basis points of EBIT expansion (inaudible) comp above 1%.

While this is our expectation for the year, there will be some choppiness quarter to quarter.

For the year, we expect most of the EBIT improvement will come from SG&A.

Expense leverage will come from store payroll, marketing, bonus and leveraging our scale to achieve cost savings on indirect spend.

In addition, we expect fixed cost leverage associated with sales growth.

Our confidence that flow-through will accelerate in the second half of 2015 is based on a few items.

First, gross margin pressure from both the changes in the promotional calendar and mix should dissipate in the second half and we have much easier second-half prior year comparisons.

Also, in the fourth quarter of 2014, we increased bonus accruals, which will drive leverage in Q4 this year.

Lastly, we expect additional leverage from credit as a result of program growth.

The effective tax rate is expected to be 38.1%.

The higher rate relative to 2014 is a result of a settlement of prior tax matters recognized in Q1 2014.

The higher tax rate impacts earnings growth by roughly $0.06 per share.

For the year, we expect earnings per share of approximately $3.29, which represents an increase of 21.4% over 2014.

We are forecasting cash flow from operations to be approximately $5 billion.

Our capital forecast for 2015 is now approximately $1.3 billion with results in estimated free cash flow of $3.7 billion for 2015.

We expect to issue incremental debt during the year as we manage to the 2.25 times lease-adjusted debt to EBITDAR target.

Our guidance assumes approximately $3.8 billion in share repurchases for 2015.

Regina, we are now ready for questions.

(Operator Instructions).

Simeon Gutman, Morgan Stanley.

So I think the key question is on flow-through and thanks for some of that color, Bob.

You mentioned that there is going to be some seasonal choppiness first half of this year.

That looks like it was the case because it's below average.

You mentioned a couple items that will accelerate that for the back half.

I guess can you reiterate I guess what gives you the confidence?

Are there some indirect cost saves that are in place or those are still to come?

And then as far as the promotional cadence goes, can you just remind us is that a general comment about the overall business or is that within certain categories?

So Simeon, I will start with kind of the mechanics of the improved flow-through in the second half and I'll let Mike talk about changes to the promotional calendar and impact on the second half.

So there's a number of items that give us confidence that second-half flow-through is going to be higher than the first half.

I called out three in my comments.

So let me give you a little bit more color around those three.

I mentioned the promotional calendar and mix pressure dissipating, as well as easier compares.

If you look at 2014, gross margin improved 42 basis points the first half of 2014 and declined 6 basis points in the second half, so we do have easier compares in the second half.

For 2015, gross margin declined 6 basis points.

We expect about 20 basis points of improvement in the second half, or roughly a 26 basis point swing.

Second, in bonus, for the first half of 2015, we've seen 7 basis points of deleverage in bonus.

We expect about 13 basis points of leverage in the second half of 2015, or roughly a 20 basis point swing.

Lastly credit.

Credit was flat to 2014 for the first half.

We expect about 15 basis points of leverage in the second half of 2015 for a swing of 15 basis points.

So those three items are the lion's share of what gives us confidence in the flow-through.

We do have a couple other items given timing of projects like facilities, repairs and store enviro-projects where the first half is a little bit heavier than the second half, but we do have a number of items that we can point to that give us confidence in the second half flow-through.

I'll talk to the promotional environment.

I would describe the promotional environment as stable.

I'd say in the second quarter, we targeted promotions largely at appliances on the big-ticket categories with the intent to match the promotional intensity of the competition.

So while our promotional intensity increased relative to the second quarter of last year, it was consistent with the competitive environment.

We expect that to abate in the second half of the year as we wrap -- when we started to increase our promotional intensity last year, which was around Labor Day.

I would just add to that is the one thing we did in the second half of last year, which was timing around the promotional events is around the holidays with the two-day extensions of the events, we will not comp that until Labor Day this year.

So that's what also Bob was mentioning when we talk about promotional pressure is those incremental two days that did not happen last year this time during the first half and we will begin to comp that actually in Q3.

And just to clarify, the store closing costs, I think some of the Canada costs, those -- any of those linger into the third or back half and then I'm assuming you're excluding that from some of your leverage assumptions for the remainder of the year?

So those $17 million I mentioned was in the first half.

The only thing that extended to the second half is the carrying costs for the 12 Target leases.

That's relatively small.

That was only about $0.5 million of the $4 million in Q2, but that is embedded in our outlook for the year.

Okay.

Thank you.

Matthew Fassler, Goldman Sachs.

I want to focus on a couple of sales items.

First of all, can you talk about the impact of the weather-related businesses on the comp overall and especially on transaction count, whether that had a material impact and whether you saw the cadence of the business change as both you move past the peak of the outdoor season and perhaps some of the weather issues, particularly Texas, would have faded?

So I'll start with the transaction count impact.

So we mentioned that we had two categories that were below average.

Lawn and garden was actually negative.

If you think about tickets below $50, they were only up 0.8%, so they were positive, but really hurt by lawn and garden and the weakness in that business is largely because of the strange weather we had in the quarter.

Okay.

And then a second follow-up, I know that paint, based on your slide deck, was also below the Company average.

You do have some new product intros.

What's the state of that category for you?

Was there a weather impact there as well?

Is it product transition that you think is impacting that business for Lowe's?

We saw the bulk of our pressure on paint largely in exterior categories as well.

Exterior stains in particular is where we saw the bulk of our pressure, largely in Texas and the Midwest.

We are very pleased with the Sherwin-Williams rollout.

We love our relationship with Valspar and PPG.

We are excited about our paint business, but we did see some weather impact in the second quarter.

That's great.

And just a final quick follow-up, Mike.

So just to play devil's advocate on the promotional cadence, you did get more promotional last year.

Your appliance business has been extremely strong, presumably hand-in-hand with that promotional stance.

How are you thinking about the sales in the businesses where you got more promotional as that promotional intensity abates?

We like the fact we gain share, obviously.

We think we've done a number of things.

We think the promotional piece was a part of it, but keep in mind that our promotional cadence was aligned to match the promotional environment that we were in.

I'd say it a little different.

We went from underpromoting to promoting at the industry level.

That said, when you look at the outperform in appliances, it's not coming from a (inaudible) holding at the level of the industry and our outperformance coming from the things that Rick talked about -- improved display of appliances, having the vignettes and the suites of appliances that we talked about, having the next day delivery of appliances.

The fact that we control our appliance inventory is a powerful thing.

One of the few that controls our appliance inventory.

So we like the growth in big-ticket, but it's not coming from additional promotional beyond what you see at the industry level.

Thanks so much for that, Mike.

Just as a reminder with respect to paint, we are bringing in the HGTV Home by Sherwin-Williams product, that reset didn't complete till the end of April.

So now obviously we've got the reset complete end of April.

We've been working obviously through this quarter to build the awareness with the consumer that that product is now available in our stores in addition to, as Mike mentioned, the Valspar and Olympic product that we have.

So building that awareness with the consumer and we are pleased with the traction that we are starting to get with that brand.

Understood.

Thank you.

Scot Ciccarelli, RBC Capital Markets.

You guys have clearly made a lot of merchandise changes to appeal to your pro customers more.

But I am curious, when you talk to your pro customers, what attributes do they seem to value the most from your segment?

Is it price, is it brand, selection, proximity to store?

Like if you guys could kind of create a hierarchy, that would be very, very helpful.

I'll talk a little bit about it and then I'll turn it over to Mike to talk a little bit about the brands.

When we talk to the pro, one of the largest I think contributing factors is location.

Proximity to the store is a definite aspect of the pro environment.

If you are not convenient from a location standpoint then you don't -- you're not as relevant and that's based on what we know from a research standpoint.

I would say that we continue to look at other aspects of where we are from a general purpose and we talk about the five ways to save.

We know that delivery and services play an important role as well as price, but I would say the biggest things that we've got right now would be location, it would be having the right brands and then making sure that we are competitive from a price standpoint and services standpoint.

I think all of that is fairly equally weighted when we think through where we are.

And I will build on that, Rick.

When we talk to pros and this is in no particular order, but brands certainly are important to them.

Inventory depth is very, very important to them.

Breadth of assortment so they can go to one place and complete the job is important.

And localization is equally as critical.

There are local norms and building codes that we've got to get right.

We deployed a field-based merchandising team to help ensure that we get better on localization.

We are pleased with the progress that we are making.

Then to Rick's point, services are important like jobsite delivery and access to credit.

So I'm careful not to put one above the other.

We've got to have them all and our program is working towards getting better at all of them.

In addition to the key drivers that Mike and Rick mentioned, two other things that also resonate very well, you've got to have the brands, you've got to have the depth of inventory, you've got to have the convenience and that is our value proposition on our proprietary credit resonates very well with the pro customer and the relaunch of lowesforpros that we just launched.

We are also getting great feedback from pro customers that it's a much more convenient way to do business with us as well.

So that's a new item that just really launched this quarter.

Got you.

All right, thanks a lot, gentlemen.

Kate McShane, Citi Research.

We noticed that you outpaced your largest competitor in ticket by over 150 basis points.

And I wondered if this was solely a function of the strength of appliances or did any other categories contribute to that.

And you also saw the meaningful acceleration in sales of greater than $500.

Can you talk to the drivers of that as well?

I can talk to that.

We are very pleased in our growth in ticket.

In fact, this quarter's average ticket is the highest recorded since 2007.

So the teams did a great job.

The higher mix of appliances and outdoor power equipment drove approximately one-third of the growth in ticket.

The remainder of the increase was driven by customers moving to higher price points within product categories.

In fact, we observed higher ticket growth in pretty much every product category.

Yes, I would also add to that that our service businesses also contributes to that.

Our services business for the quarter outpaced the total Company comp.

And when you look at that, the PSI, our interior specialists programs and exterior specialists programs performed very well.

We are very pleased with the results that we get there and those two aspects also drive a higher average ticket from a project standpoint.

Okay.

Thank you.

Christopher Horvers, JPMorgan.

So I wanted to focus on the acquisition of the stores in Canada.

The four Target stores, I think you said you'll be at 20 stores by 2017.

At what point do you have mass in that market to where you will see profitability grow?

I think you are not making money at this point due to the mass.

When do you see it getting to profitability?

Chris, I think we have 39 stores open today.

We've acquired the additional 12 former Target locations.

We obviously already had some stores in the pipeline that -- in our organic growth pipeline.

So we said combined with Target locations, what we had in the pipeline by 2017, we will be to about 70 stores.

Actually we were just about to the point of -- would've been breakeven next year in Canada with our current operations had we not taken on the additional locations.

It will take a year or so to get those open and up to speed.

So by the time we get to that 70 store mark, we will have a pretty good critical mass to grow off of there in Canada.

And then on a related note, can you share your updated thoughts on your Australia investment?

I know you've become more involved in that business over the past year or so.

How are trends occurring there and what's your latest thought process on your investment there?

Actually I was just down last week for our joint venture Board meeting.

I met with the team.

I walked some of the stores.

The team down there has gone in and looked at opportunity to improve the operations.

They've come in with a new format and working on resetting the layout of some of the stores.

New stores were opening obviously with the new layout, but resetting some existing stores, increasing the range of product and categories where we didn't have quite enough range down there with the customer and creating much better theater for presentation of the product in areas like flooring, Tool World, those type of things and very pleased.

We are seeing great performance over the new format compared to the original layout that we had opened in the stores.

So very pleased with the progress the team is making down there.

As we've talked previously on the calls, we've slowed down the rate of expansion to be able to make sure that we get the stores out of the ground operating at a higher annual rate and then being able to go back and take some of this expanded range in the new layout to the existing base of stores that we have.

So overall very impressed with the visit I had last week and the progress that I see the team making down there.

Perfect and then one quick follow-up.

On the -- Bob, you mentioned the leverage in credit in the back half.

Is there a timing of 3Q versus 4Q where you would expect those basis points?

Chris, we'd expect it over both Q3 and Q4.

Perfect.

Thanks very much.

Mike Baker, Deutsche Bank.

A couple questions.

One, did I just hear you say -- so a third of the ticket increase was due to going to higher price line items, which to me sounds a little bit like up the continuum.

Is that coming back now in the better economy?

Can you compare that one-third of the ticket increase to how it's been the last couple of quarters?

We don't call it up the continuum, but it certainly is an outtake from the value improvement initiative where we have improved line designs that allow us to sell up the continuum.

Certainly we've done a lot by way of training with our store associates to enable them to be able to sell up as well.

And our relationship with our vendor partners is absolutely critical where we collaborate with them to have both better products, more innovation and better line designs and price point progressions that allow us to sell up as well.

So while we don't call it up the continuum, there's certainly a lot of similarities to what was being done under that program as well.

And is that something that has been accelerating over the last couple of quarters?

I would say it depends on category.

There are some categories where we are seeing it accelerate.

There are some categories that some of the innovation starts to get older, where it's starting to modulate some, but what we've challenged our merchants to do is to go out there and find innovation each and every day and to work with our vendor partners to ensure that we have the ability to sell up the price point because innovation allows us to do it.

Just to touch on that, if you look at some of the launches as of recent, like our Kobalt 80 volt products, handheld products, doing very well.

Our American Standard 4 MAX toilet, it is, to my knowledge, the only self-cleaning toilet in the market.

That continues to do very well.

Our Centipede work surface for pros, holds 2000 pounds of weight for a 4X8 square foot area, doing very well.

So we have a number of new launches the give our associates something to talk about so they can sell up the price point.

Okay, makes sense.

One more quick one if I could.

Buybacks, if you stick to your guidance for the year, I think you're going to buy back about $1.1 billion in the back half, which is a lot less than you bought back in the first half.

Is there any upside to the buyback plan?

So Mike, we've repurchased $2.5 billion to date.

That suggests $3.8 billion, which would give us $1.3 billion in the second half.

Certainly if we've got better performance in the second half, we could see some upward movement there.

But, at this point in time, we are comfortable with the $3.8 billion target.

Okay.

Thanks a lot.

Dennis McGill, Zelman and Associates.

Wondering if you could maybe just walk through any regional disparities you saw in the quarter as you think about year-over-year comps just to help flush out the weather impacts a little bit more.

When you look across the regional performances, we were very pleased with the consistency we saw across regions.

If you look at it from a divisional perspective, we saw the strongest performance in our southern division across the country.

But the balance between regions was pretty consistent across the country as well.

So I guess the weather impacts you noted would be more consistent.

I guess there's weather impact everywhere as far as an overhang in your view?

Well, I think we definitely saw more weather impact, particularly if you're talking about rain, in the southern markets and the western markets, the drought in California.

But you're always looking at weather from what happened this year to what happened last year.

You always have migration between markets and geographies that you see from that perspective.

But when we look at it, like I said, the South, the North and then the West was probably our -- the way that we would breakout our overall performance from a divisional perspective.

Okay, thanks.

And then, Bob, with respect to the second-half margin expansion guidance and if you were to look at the top and bottom end of your range, what are the potential negative offsets to the positive discrete items you mentioned that would flex you from the top to the bottom?

Well, certainly, if you think about negative impacts if revenue comes in lower than expected that would pressure the amount of fixed cost leverage we've got planned.

And then if there's any acceleration in the promotional environment, that would certainly impact gross margin.

We feel good about a lot of things we are doing.

We've spoken about the capabilities we've put in place with regard to indirect spend.

That's going to deliver savings without regard to the sales environment.

Also, to the extent we've got pressure on sales or gross margin in the second half, that would probably accelerate the amount of bonus leverage we've got.

So we've got some mitigants that we believe would offset any pressure that might come our way.

Okay, but fair to say the vast majority of the variance is top line-driven?

I think there's a number of risks.

That is certainly one of them.

Okay.

Thank you, guys.

Michael Lasser, UBS.

So over the last four quarters, as you've matched the promotional cadence of the market, outdoor power equipment and appliances have performed above the Company's average.

So as you think about the second half of the year when you don't expect an incremental stepup in the promotional activity, what categories do you anticipate will get better such that your comps will remain around this level, especially with the comparisons getting more difficult?

We expect to still see growth in outdoor power equipment and appliances.

We are excited about seasonal living behind some of the work that you'll see us do with our customer experience organization as we go into the back half of the year.

We are excited about some of the launches that we have in flooring, in particular laminate.

Laminate for the second quarter was double digits and we got a great launch that we just did with one of our vendor partners that we are pretty excited about, with our Pergo laminate product partnering with Mohawk, so excited about that.

I tend to look at it more as where do we have launches that will drive incremental growth.

And certainly laminate is exciting for us.

Lennox HVAC is exciting for us.

We did a key launch with Rinnai in tankless water heaters.

We are excited about that.

Hitachi pneumatics and some of the work that we did in tools, we are excited about as well behind Goldblatt.

So again, I'm cautious to try to predict where the industry is going to drive growth.

I tend to focus a little more on where the initiatives are and we've got some great initiatives and some great resets that we think are going to drive performance in the back half.

Yes, the one thing I would add to that is we think in lumber and building materials you'll see the deflation begin to abate, which will help as well and then paint will be another key category as we go into the back half of the year as we create more awareness around Sherwin-Williams and we see the weather become more conducive, especially on the exterior side of the business to drive that category.

Let me ask the question I guess from a different way.

Are there categories or product areas right now where you are under the market from a promotional perspective and could you see yourself going above the market based on the return that you've been able to achieve with the promotional activity that you've engaged in over the last year?

I think we are promoting at about the market for most of the categories and to the extent we see share opportunities in a given category, we are going to lean a little heavier into promotion for that particular category is how I would answer that.

To Mike's last point, when you think about OP and appliances, I think there's some share opportunities out there as we've seen shift from an industry standpoint.

Certainly I think we've got a great lineup as Rick took you through in his comments on appliances, some of the new product that we've got out there that's resonating well in OPE.

So we expect that to continue to be strong, but then layering on the other things that Mike talked about, including from paint.

Not only is it the new brand, the abatement of the weather challenge, but it's also we reset all the stores in the first half of the year, first quarter of the year, so we had disruption in our paint department obviously as we were going through that reset.

That's all behind us as well.

Okay, that's helpful.

And just quickly as my follow-up, Robert, there was discussion around the MRO market opportunity in your prepared remarks.

Maybe you could provide some broader thought on how you think Lowe's can pursue that market potential, especially in light of what's happening in the competitive landscape.

That was actually I think in Rick's comments and I will let him address that.

Yes, when you look at that, we've talked over the last several years about our holistic strategy for the pro and improving our product and service offering, as Mike talked about, with the brands and we've talked about in the outside selling organizations and what we've done in our five ways to save program and the launch of lowesforpros.com really helped us continue to feel confident in our strategic priorities around the pro customer.

We feel confident in our ability to continue to meet and exceed their expectations from that standpoint.

And I think it's also important to remember that the MRO has historically been a very strong customer for us and really the advent of our account executive pro services is in place to help us continue to facilitate the growth of the MRO space.

And we know that lowesforpros.com will continue to drive affinity with that customer, which has a tendency to shop more as much from a dotcom platform as in the store.

So we feel good with where we are, but we are always evaluating our strategies and our priorities to make sure that we remain relevant for that customer.

Okay.

Thank you so much.

Peter Benedict, Robert Baird.

Bob, quick one on the balance sheet, the improved AP to inventory ratio.

You mentioned a little bit of timing there, but the strength has been going on for about five quarters now.

So can you give us a sense of maybe what you're doing differently there and how long you think you can sustain these improved trends in payables?

So accounts payable is up 15% year-over-year primarily related to timing of purchases.

(inaudible), we also saw roughly a 2.5 day improvement in days payable outstanding.

The merchant team has been working really hard to evaluate today's inventory on hand relative to days payable and try to get better coverage there.

That's something that has been reignited of late.

We saw about a day improvement last year.

We ought to have roughly a day and a half or two day improvement this year.

So while the timing will come and go, at year-end, we should see some improvement just from the days payable outstanding.

There's a number of tools in place, including a supply chain financing program, that's been quite effective to allow our vendors to leverage Lowe's balance sheet.

Okay, perfect.

Sounds good.

And then maybe, Rick, a quick one for you on the OPE strength, particularly with respect to the riders.

Do you think we are entering a replacement cycle there?

That's a category that has not had a lot of strength for several years?

So just curious what you think is going on there, if it's more than just kind of a one season type thing?

I would say it's two things; one of which is innovation.

We are seeing a lot more innovation on tractors than what you've seen in the past and there is a bit of a replacement cycle as well.

So I think we are getting a lift from both.

Yes, and then the only thing I would add to that, Peter, is, as Robert spoke about earlier, we continue to gain marketshare in that category and we think with the brand, the lineup, the innovation that we had, we will continue to gain marketshare in that category throughout the year.

Okay.

Thanks so much, guys.

Good luck.

Greg Melich, Evercore ISI.

Two questions.

First, on just overall sales, Bob, if we look at your guidance, it looks like you did a comp of 4.8% in the first half and it implies that the second half, you're assuming about a 3% to 4%.

And if that's the case, how should we think about SG&A leverage ex the bonus stuff that you talked about given that there's less comp in the plan?

What else might be helping it?

So first-half comps were 4.7%, Greg.

Second-half comps would be in the 4%-ish range, so not terribly dissimilar.

There's a variety of factors that would contribute to leverage.

Rick talked about the good work done with the store operations team to continue to thoughtfully put associates in front of customers.

It allows us to be more effective in our utilization of payroll.

That certainly continues in the second half of the year.

I mentioned the credit.

We've got project-related expenses around facilities, repairs and store environment projects that were first-half-weighted.

We'll get benefit there.

And then indirect spend, that's a capability that continues to get momentum.

That should give us some benefit, greater benefit in the second half of the year.

So what I would say is that there's not a lot of difference in the comp first half versus second half and then we've got some other discrete items that should drive SG&A leverage.

Great.

And I'd love -- whoever wants to do it -- give us an update on your online and your multichannel business, the dotcom sales, how much they grew and also given the lowesforpros relaunch, any incremental metrics there as to the takeup would be great.

Thanks.

I'll start.

Then I'll turn it over to Rick to talk.

For lowesforpros, continue to see a great performance from an online standpoint.

I think as Rick went through his comments, he talked about some of the additional features and benefits that we are adding to Lowes.com, which is resonating really well with the customer, particularly when we have more and more customers starting their purchase process online.

They may, as you know, finish it online or come in the store, but overall Lowes.com was up about 20% in the quarter.

I'll get Rick to talk about the receptivity we've had for Lowesforpros launch.

Yes, Greg, I think the thing that we've really been looking at, of course, we've had about a quarter's worth of data that we've been evaluating as we continue to move through and we are learning as we see shopping behaviors of the pro on the category and on the site, what they are looking at, what categories are really resonating well.

We've been very pleased with the receptivity of the site itself.

We are measuring things such as category of products that are being purchased, assortments that are being evaluated.

We are looking at the amount of channel pickup.

Are they picking up in-store?

Are they picking up through the delivery, or is it being parcel?

So we think we are very pleased with what we are seeing from that standpoint so far.

As Robert said on Lowes.com, we grew roughly 20% in the quarter and I think that continues to be driven by several factors and one of the most being the new innovation that we are putting on the site itself.

When you look at what we've been able to do in the first half of the year, the patio configuration tool.

You heard me talk about accessories helping the seasonal living categories in the quarter.

There is no doubt that that tool is really helping us from a dotcom standpoint.

And then you look at what we've done to really be able to show product differently on the site.

We've increased the number of 360 degree product views, another 3500 items were added during the quarter in Q2.

Gets us up to roughly 15,000 items where we are able to spin the view of that category.

Product videos -- we talked about how increasingly the appliance shopper is going to dotcom first to evaluate product categories.

We added another 200 videos into that category during the quarter, added 4000 enhanced images and pictures to the site as well.

Introduced the search engine capabilities that we are looking at for a more intuitive search.

And so as a result of that, we saw traffic to Lowes.com increase 19% for the quarter and we saw a slight increase in conversion as well.

So when you look at the holistic aspect of the dotcom platform, we feel very good with the innovations we've added, with the technology improvements that we've made and like I said earlier, with lowesforpros, we are very pleased with what we've seen there.

We've actually seen a double-digit increase in new customers to Lowe's that are on the site that had not previously shopped with us before, which is very exciting when we think through the rollout of the site itself.

And that would take dotcom up to about 3% of the business.

Is my guesstimate right there?

So Greg, it's about 3% of our business now.

Okay, great.

Thanks a lot, guys.

Good luck.

Thanks.

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

We look forward to speaking with you again when we report our third-quarter results on Wednesday, November 18.

Have a great day.

Ladies and gentlemen, this concludes today's conference.

Thank you all for joining.

You may now disconnect.