Lowe’s Companies Earnings Call Insights: Comp Trend Details and Reset Analysis

Lowe’s Companies  (NYSE:LOW) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Comp Trend Details

Greg Melich – ISI Group: I wanted to get a little more detail on the comp trends, (certainly it got) better and May was similar to the April number. Does that mean that it was actually at the April number or better or worse, or you just think the trend is such that you are going to get that acceleration for the full quarter?

Robert F. Hull, Jr. – CFO: Greg, this is Bob. The May trends to-date are approximately the same as what we’ve experienced in April.

Greg Melich – ISI Group: And then I wanted to follow up a little bit more on the margin side of the equation. Clearly, it looked like there was a little bit of delay in getting the value improvement in, but also some hit from mix and some of the weather issues. Could you help us understand that seasonal product that you missed, what does that do to the mix? Is Lawn & Garden higher margin because you own the inventory or help us out a little bit on that side?

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Gregory M. Bridgeford – Chief Customer Officer: Greg, I’ll start. This is Greg Bridgeford with the (val prop), that means value improvement impact. We completed the reset of about 80 categories in Q1 and as Bob detailed, that reset process brought us over 50% categories. But with the weather impacts and a slow sales environment, many of those categories that are seasonally oriented did not reach stabilization and therefore moved through their clearance inventories so we could appreciate the margin gains from the new sets. And so, with that delay in weather, we saw that the impact of the clearance obviously hit our margin line without the benefit of having the lines reset and the margin accretion from the new cost structures and the new category set. So we certainly have seen that turn around as the weather turns around. So that gives us some confidence so we are going to achieve our 100 basis points improvement after stabilization in categories in the mid-single-digit comps.

Robert F. Hull, Jr. – CFO: The follow-on on that, Greg, so if we think about the mix of products, mix had a slight negative impact on margins for the quarter, largely driven by lumber and the inflation that we are seeing in the category resulted in it being a greater proportion of our businesses relative to Q1 last year. The seasonal products themselves have a margin rate consistent with the company average. So it’s not really a mix impact, but as you think about the slowdown in March created the delay in clearing through – the clearance activity, therefore, delaying the sale of product set for margin after the reset. So we estimate that a combination of value improvement about a 10 basis points lower than our expectation and the value prop is another 10 basis points resulting in gross margin coming in at about 20 basis points lower than our expectation for the quarter…

Greg Melich – ISI Group: Rick, I just – given the initiatives to put those extra labor hours during the week, did you at least get the close rate up as expected even if you didn’t have the traffic given the weather?

Rick D. Damron – COO: Greg, I’ll answer that in two ways. One is, as we put the incremental staffing labor into the weekday teams, we approached that in the same way we did the Spring Black Friday events by going by climatic zones. So in the Southern markets where those hours were implemented first, we’re able to get the teams onboard, get them through the training required to be as efficient and effective as we’d like to see. We saw better results there than we did as we moved farther North later in the quarter with us finalizing the implementation of those hours in early April in the Northern market. So as we progressed up the climatic zones, we did see improvement there. If you look at overall close rate, it was basically flat to last year due to a lot of the mix issues we saw with seasonality inventory typically driving a higher close rate in the spring selling months than our interior category. So while looking at that I’m very comfortable with the results that we saw even though the close rate remain flat for the quarter, because of the timing of those reset or the timing of the seasonal business and the close rates that historically come with those.

Gregory M. Bridgeford – Chief Customer Officer: Let’s put little color Greg on Rick’s remarks of when with seasonal business we do find that to be more of a destination shop for items like bedding plants, fertilizers, grass seed, soil amendments and so that is – you do see stronger close rate, so as the weather didn’t improve in some of the northern regions as Rick described we didn’t see the close rate improvement, but where we did see the weather improve, we’re seeing improvement.

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Reset Analysis

Matt Fassler – Goldman Sachs: Two questions if I could. The first revolves around the resets, not just getting clarity on when you expect those lines to cross, i.e., the progress as turning to outpace the disruption and I guess related to that on this topic you talked about a couple of categories that have been through resets like Paint and Millwork and you talked about a 500 basis point delta versus the company average I think those comp are more line with the chain this quarter. So I’m not sure if there was anything in particular that weight on those now that we have some categories done just want to make sure that we can align sort of the expectation with reality and make sure that they will sink up?

Gregory M. Bridgeford – Chief Customer Officer: Matt, this is Greg. As Bob described, our expectations post-reset is 100 basis points improvement impact by category. So what we have seen and this is really important is, as we’ve seen weather improve and we see some of these seasonal categories that were reset and completed the reset in Q1 but hadn’t stabilized, we’re beginning to see the impact of that. We’re seeing the basis point improvement that we expected to see and as Bob said, our expectation was 10 points higher from the impact of these stabilized categories from a margin impact. So that’s our expectation moving forward. That’s a sequential increase over where we have been seeing and that’s the kind of progress that we’re expecting to make as we move through to see more categories stabilize at roughly 30% right now and we’re seeing – we expect to have all the categories stabilized by the end of the year…

Rick D. Damron – COO: I would add one thing to Greg’s comments as it relates to the sales aspect of the categories, particularly in paint. I think you look at paint with the same phenomenon as we did seasonal with the mix of interior and exterior paints making up the driver of the average performance. You see the same relationship in paint as you saw rest of the categories with the interior paint categories far outpacing the performance of the exterior categories due to the unseasonal weather.

Matt Fassler – Goldman Sachs: So is it like kind of third quarter or fourth quarter when you actually start to see this being a firmer gross margin driver across the business.

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Robert F. Hull, Jr. – CFO: Yeah. So, we do expect gross margin to improve throughout the course of the year. As we talked about, we’re at roughly at 30% stabilization. As stabilization improves, we’ll improved margins throughout the course of the year.

Robert F. Hull, Jr. – CFO: Yeah then we expect to see the impact of clearance inventory tapper down as we move through the third quarter into the fourth quarter.

Matt Fassler – Goldman Sachs: Just a quick follow-up we’ve seen a little bit of volatility on the depreciation line and I know it’s not kind of a focus on the operating front, but the Q4 to Q1 move was pretty dramatic what kind of number would you expect to see for the year that’s depreciation on the P&L. Is this a good base to (delve off) or should that number still be bouncing around a little bit?

Robert F. Hull, Jr. – CFO: The move you see in depreciation is largely just timing of assets brought on board. So depreciation from those, if you think about the shorter duration IT equipment adding some offset, and really more than offset by assets becoming fully depreciated if you think back to number of years ago, when we were opening up 150 stores when CapEx was north of $4 billion. You’ve got some of those assets becoming fully depreciated which causes some of that quarter-to-quarter volatility. I think the run rate that we saw in Q1 or little bit higher than that because of the assets been out of this year is probably a good number to use.

Matt Fassler – Goldman Sachs: So if last year the average through the year was something in the 3.75, 3.80 per quarter run rate we’re 3.50 this quarter, it sounds like somewhere between those two numbers on a quarterly basis?

Robert F. Hull, Jr. – CFO: I think that’s right.

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