Highlights From LOW's Q3 Conference Call: Guides In-line for Q4 and FY09

November 16, 2009 1:01 PM EST

Lowe's (NYSE: LOW) reports Q3 EPS of $0.24, versus the consensus of $0.24. Revenues came in at $11.4 billion, versus the consensus of $11.28 billion. Shares are down less than 1% today.

Highlights From LOW's Q3 Conference Call:

• (CEO) Comparable store sales for the quarter were negative 7.5% within our guidance and driven by 6.7% reduction in average ticket and a fractional decline in customer traffic.
  
• While spending remained weak, we were pleased with our improvement in comps versus Q2.
  
• Highlighting that progress we saw sequential improvement in comp sales in 45 of 50 states in the U.S. with some of the biggest improvements coming in areas hardest hit by the housing downturn.
  
• Also, our Canadian stores continued their strong sales performance and delivered positive comps in the quarter. We saw a reversal of a five quarter trend of outdoor related products out-comping indoor products
  
• In Q3comps for indoor products exceeded outdoor products by 300 basis points led by positive comps in appliances, flooring and interior paint, but also reflective of the impact last year's hurricane had on outdoor categories. In fact, we estimate our Gulf Coast stores negatively impacted comps by approximately 100 basis pointsin the quarter.
  
• Gross margin increased 22 basis points in the quarter. While the promotional environment is appropriately described as elevated which is not surprising considering the length of the downturn, our gross margin rate continues to hold up relatively well. Beside it's competitive environment remains
  rational.
  
• Impacted by weak sales, we again experience expense deleverage led by 66 basis points of payroll deleverage.
  
• (COO) Comps for tickets greater than $500 improved sequentially to approximately negative 10% from negative 16% in Q2 driven in part by increased sales in flooring and appliances.
  
• On the flip side comps for tickets under $50 decreased only slightly from Q2.
  
• Looking at the results from a regional basis we saw improve in trends Q2 to Q3 in 21 of our 23 U.S. regions with some of the largest quarter-to-quarter improvements in our Western division. Our comps are still negative in all four Western regions, sales results improved more than 500 basis points quarter-to-quarter to single-digit negative.
  
• The two regions experienced a quarter-to-quarter decline in comp sales trends or in the Gulf Coast where we faced tough comparisons as we cycle against last year's hurricane related spending. While all regions remain negative, we're encouraged that only three of our 23 regions had double-digit negative comps for the quarter, a small victory, a drastic U.S. double-digit negative comp region since Q3 2006.
  
• In flooring, consumers responded favorably to our STAINMASTER Carpet $39 whole-house installation offer, which drove robust carpet sales for the quarter.
  
• We continue to see strength in our paint category, one of the most popular DIY projects. Positive comps in this category is another indication of consumers willingness to complete simple projects to enhance their home.
  
• In Q3, special order sales improved quarter-over-quarter driven primarily by special order carpet and millwork, but still delivered a negative comp.
  
• And once again by leveraging our distribution network and buying power, we were able to lower retails for over 20% and pass these savings along to consumers. This is a huge win for our flooring department and significant closes compared with GAAP for specialty flooring stores.
  
• We also saw improvement in our installed sales program in the third quarter with improvement in millwork, window treatments and carpet. While still negative comps improved quarter-over-quarter to negative 2% which is an increase of approximately 2000 basis points.
  
• Despite the external pressures laid on our sales, we continue to grow our market share. According to third party estimates, we gained unit market share in 14 of 20 product categories and remained flat in one in the third calendar quarter versus the same time period a year ago, and we gained a 130 basis points of total store share in the quarter.
  
• Payroll develeraged 66 basis points driven by negative comps and approximately 20% of our stores drop rate and base staffing levels in the quarter.
  
• Demand for products at particular environment and conserve energy is another growing trend. In short, consumers want product accepting measure, reduce and in some cases generate energy.
  
• Also our focus on preserving natural resources, increase in water efficiency and awareness of the WaterSense label earned us the 2009 WaterSense Retail Partner of the year award.
  
• (CFO) Sales for Q3 were $11.4 billion, which represents a 3% decrease from last year's Q3. In Q3 total customer account increased 3.6% while average ticket decreased 6.4% to $61.43. Year-to-date total sales decreased to 3.1% to $37.1 billion.
  
• Comp sales were negative 7.5% for the quarter. Looking at monthly trends comps were negative 8.7% in August negative 7.9% in September and negative 5.6% in October. The negative 7.5% comp for Q3 represent a 200 basis point sequential improvement from Q2's negative 9.5% comp.
  
• For the quarter comp transactions decreased 0.8% and comp average ticket decreased 6.7%. We are encouraged by the improvement in comp average ticket relative to Q2 8.6% decline.
  
• Gross margin for Q3 was 34.2% of sales, an increase of 22 basis points from last year's third quarter. The increase in gross margin was driven by a number of factors.
  
• Lower inventory shrink as percentage of sales had a positive 12 basis point impact in the quarter.
  
• Distribution favorably impacted gross margin by 6 basis points driven by lower fuel costs.
  
• Lastly, product mix positively impacted gross margin by 5 basis points in the quarter. Year to date, gross margin of 34.8% represented an increase of 50 basis points over fiscal 2008.
  
• SG&A for Q3 was 25.2% of sales which deleveraged 202 basis points driven by a number of expense lines.
  
• Earnings before interest and taxes or operating margin decreased 187 basis points to 5.3% of sales.
  
• Year-to-date operating margin of 7.4% represents a decrease of 166 basis points from 2008. Interest expense at $77 million deleveraged 12 basis points as a percentage of sales. For the quarter total expenses were 29.6% of sales and deleveraged 221 basis points.
  
• Cash and cash equivalents balance at the end of the quarter was $1.1 billion.
  
• Our Q3 inventory balance increased $97 million or 1.2% versus Q3 last year. The increase is due to a 4.9% square footage growth offset by 4.1% reduction in comp store inventory and a slight decline in distribution inventory.
  
• At the end of Q3, we owned 88% of our stores the same as our Q3 last year.
  
• Return on assets determined using a trailing four quarters earnings divided by average assets for the last five quarters decreased 250 basis points to 5.2%.
  
• Now looking at the statement cash flows. Year-to-date cash flow from operations was $4.4 billion, which was essentially flat to last year versus for the first nine months of 2008.
  
• As a result, year-to-date free cash flow of almost $3 billion represents a 62% increase over the three quarters of 2008. There were no shares repurchased in the third quarter.
  
• We expect fourth quarter sales to be essentially flat to last, which incorporates the opening of approximately 13 new stores, two in November, four in December and seven stores in January. In the quarter, we will open two stores in Monterey, our first stores in Mexico. Comp stores sales are estimated to decline 2 to 6% to last year.
  
• The anticipated sales and operating margin results are expected to generate diluted earnings per share of $0.09 to $0.13 which ranges from a decrease of 18% to an increase of 18% compared to last year's $0.11.(Consensus is $0.10)
  
• For 2009, we expect to open approximately 64 stores resulting in an increase in square footage of approximately 4%. We're estimating a comp sales decrease of 7 to 8% and a total sales decrease of 2 to 3%. For the fiscal year we're anticipating operating margin decrease of approximately 130 basis points. We're forecasting an effective tax rate of 37% for 2009. As a result, we expect diluted earnings per share of $1.16 to $1.20 for the year. (Consensus is $1.20)
  
• (Q&A) If you could address, address rather the set up for the fourth quarter from both the merchandizing perspective and a promotional perspective obviously last year, we saw some competitive disruption. So if you could sort of frame your comments on margins and promotional activity as it relates to fourth quarter seasonal goods and perhaps contrast that with so last year shape up? (A)I'll start on that and then let Robert and Bob add on. Last year in the fourth quarter we had three things kind of going against us, so we were getting out of the wallpaper business, which affected our margin.
  Trim-a-tree was not selling as robust as we expected so therefore we took an early discount on that and then power tools we had some issues with the amount of inventory that we had bought in anticipation of a better Christmas season. This year in contrast, we don't have the wallpaper headwind as got through that business early in the first quarter of this year. We bought conservatively for trim-a-tree and also on tools and on our tool business one of things that we did this year, I think will give us much better sell through. We lended a number of in and out items that we bought, these were items that we additional bring in for the Christmas season and sell through and so we try to go with more inline products working with all of our vendors to secure better price and better value for the consumer. So we feel real confident about our products as we head into the Christmas season. Our trim-a-tree business has been solid so far, so we don't anticipate any headwind for that business this year and certainly we think consumers will be compelled by the products that we're offering throughout the store as they start to buy for the Christmas season.
  
• That's great, and if I could just ask one follow up, within the context of your guidance to somewhat improved same-store sales, trends down to six. If you look at the different baskets and take out the 500 and also you talked about the $50 below that you discussed, where would you expect to see the biggest improvement among those different segments? (A)I think we should see some additional improvement in the number of transactions or traffic I think the majority of the increase will continue to come from improvement in average tickets some of what we saw in Q3 relative to Q2.
  
• So as you look at the big ticket category which went from down 17 to down 10, it looks to us that the small tickets stayed sort of a minus one and the medium ticket if you will everything in-between with sort of unchanged, would you say that that it's the negative 10 that improves a bit or would you say it's the categories that are likely make headway? (A)I think you probably see, potentially some improvement in both you see, an improvement in traffic. Thus customers that are shopping probably buying slightly larger ticket and we think about - what we're going up against last year i mean, fourth quarter last quarter you were basically coming out of the melt down in the financial markets in a significant amount of unknowns and uncertainty out there, from a consumer standpoint as to what the future held. When you go forward to this year, it was where our employments are, they may not like the environment but certainly l think they believe that better days are ahead. So probably slightly more optimistic for the longer terms and what they were a year ago and we are - we have started to see, it's like Larry talked about with the installed corporate promotion, when the right values after we have seen consumers respond better than what we've seen in the past. So for those reasons we're more optimistic than we were a year ago looking into the fourth quarter and I certainly believe that you will continue to see a pickup in traffic and those customers are spending slightly more as well so.
  
• Just a following up on the ticket and traffic question, firstly and I don't know if there's any way to do this, I'm not looking for actual number but, pretty substantial and proven in installed sales negative two, 20 point improvement. The $500 plus tickets negative 16 to negative 10, is there anyway to tease out the impact from the Stainmaster carpet installation and the installed sales piece and the comp contribution from better appliance sales in the $500 ticket, so could you just get a sense of kind of what the rest of the underlying ticket and installed sales business look like? (A)That's something that we can work on and we certainly has numbers handy the day we could give you but if you go and look at the whole installed categories, the whole basically we talked about it all year and in our calls that are installed program for our stock carpet program has been extremely strong all year along. We got Stainmaster which includes some stock carpet predominantly more special order carpet which drove that improvement into installed sales and also drove an improvement in special order sales for the quarter. Certainly, Major Appliances - when I spoke of high efficiency laundry and high efficiency refrigeration, you're certainly going to drive a much higher average tickets on those products which will increase the greater than $500 tickets. So, it's just a lot of different movement pieces in that but certainly we evaluate the business and look at it installed or we look at Major Appliances or either various businesses. We're trying to extract what drove it and what could be continued success in those businesses and we feel very confident about our sales as we head into the fourth quarter and hopefully the Christmas season will be strong as well. Power tools is another great example. You have a lot more power tools being sold and probably to 100 to $500 buckets versus greater than 500 or less than 100.
  So, there again there's another bucket we take a entirely different look in terms to power tools.

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