Lowe’s Companies Earnings Call Nuggets: Moderating Home Improvement and Pro Business

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

Moderating Home Improvement

David Strasser – Janney Capital Markets: Bob, I just wanted to follow up a comment you made as you were talking about the guidance about the moderating home improvement demand. I mean, July was – it seemed like the strongest category. It seemed like it was – it seems accelerating throughout the quarter.

Robert F. Hull, Jr. – CFO: So, as we think about Q2, I talked about some of the improving execution. So we have implemented some procedures, specifically sales and operations planning, that allows us to work on behalf of the customer in a more collaborative and coordinated fashion. So that’s aiding this year’s performance. But if you think back to Q2 last year, we had a lot of moving pieces as it relates to the value, voluntary separation program, the change in commission for some of the sales folks on the store floor. We had some reset challenges, the execution of resets related to value improvement. We had inconsistent promotion activity in Q2 of last year. So some of the benefit in Q2 was specific to recovery of some disruption in Q2 last year. Also, as you think about the external factors I described, the recovery of the lost sales from Q1, lumber inflation, and Hurricane Sandy, 200 or so basis points, largely doesn’t continue into the second half of the year. Then lastly, Dave, I would talk about interest rates. We’re seeing positive momentum in housing, but the wildcard is interest rates and the impact that has on housing affordability. So we’re kind of watchful of that potential impact.

David Strasser – Janney Capital Markets: I guess along those lines one follow-up question here. Yesterday, Best Buy and Home Depot talked about really strong appliances. You are talking about really strong appliances out there. Is there something in the industry that’s happening that’s driving sort of such dramatic demand in that space? Each person had incremental brands and so on. But it just does seem like the category has expanded fairly dramatically recently. Just trying to understand a little bit more about what may have driven that?

Robert A. Niblock – Chairman, President and CEO: Yeah. Dave, I’ll start, then I’ll have Greg jump in. This is Robert. Yeah, I think part of it is underlying economic fundamentals we’ve talked about, which we attributed part of the increase in the quarter to, that as home prices started to move up, I think it does have homeowners feeling gradually better about willingness to spend, particularly as you get to big ticket durables. And I think some of the appliances – some of those things are probably some of the purchases that consumers have otherwise delayed during the downturn, because they could get better clarity with regard to where the value of their home was moving. So I think part of that is coming into – you’re seeing part of that come into play. It’s no different than what you’re seeing in the auto industry and other places, where you’re seeing consumers have a willingness to move towards some of those big ticket durables as they’re feeling gradually better about things. But specific to appliances and what we’re seeing, Greg, if you want to add something?

Gregory M. Bridgeford – Chief Customer Officer: Sure. Dave, I agree with Robert that from kind of household economic trend standpoint, I think we are seeing the impact of what’s been some delayed spending now coming into our favor and which worked for us. And what drove our share increases in Q2 was innovation. The launch of LG continues to provide a lot of momentum for the category. Also, new innovative products from Samsung, innovative products from Bosch, some new rollouts from GE and Whirlpool, that’s been driving our sales in appliances, and I think we’ve gotten into the cadence. Bob mentioned it earlier. I think we’ve gotten into the cadence of the proper balance of traffic-driving promotions and ticket-building promotions too, so that’s been a big hit in terms of driving sales and driving margins simultaneously.

Pro Business

Budd Bugatch – Raymond James: I guess, my first question comes on the penetration of the Pro business. Typically, I think it’s been around 20% for you. Can you give us some flavor and comment of what you are seeing in the Pro and maybe how that penetration is moving?

Rick D. Damron – COO: Yeah, Budd, this is Rick. We continue to see good growth in the Pro for the quarter. Our Pro business outperformed our sales totals, our comp totals. You look at it overall, it’s roughly, we say, approximately 25% of our total volume at this point in time. If you think back to several of our initiatives that we launched in midyear last year, we are gaining tractions with those. When you look at the focus that we’ve got on the MRO, the maintenance and repair customers when they come into the stores, as well as the reorganization that we went through and talked about, our Account Executives ProServices in the field, getting them focused on building strong relationships with our core customers, and really pulling that together as a cross-functional program across the organization to make sure that we’re really doing the things that benefit the Pro. I’ve talked a little bit about it in our opening comments, the job lot inventory is making sure we have the right depth of inventory, being able to present those effectively to the Pro customer, has really benefited. You look at North, like in our product differentiation aspects, and the freeing up of end cap space have allowed us to present our contractor pack value offerings to the Pro customer, which is a way to give them discounts on multiunit purchases. And then the everyday val prop on our proprietary credit has also really benefited that category. So, we’ve been extremely pleased with the programs the teams have built, the progress that we’re making and the traction we’re making, as the Pro continues to rebound in the marketplace…

Budd Bugatch – Raymond James: My follow up really has to do with the air conditioner issue. Did I hear you correctly that you’re going to pack away about $200 million worth of air conditioners? Just my question is, what risk of obsolescence do you have and have you done this before? And what risk is there in this particular strategy?

Robert F. Hull, Jr. – CFO: So Budd, this is Bob. The $200 million relates to many factors, not just ACs. So it does relate to, as Rick described, as we think about going through the lines, we’re adding greater depth of inventory to the products that are the eight items, the highest velocity items. So greater in-stock levels there. Also, we do have some seasonal – so that’s the bulk of it. We do have some carryover from both air conditioners and ceiling fans. As we think about seasonal product, we evaluate the quality of that product, whether it makes sense to mark it down at that point in time of carryover. ACs is a category where there’s not much change year-over-year. So as we think about carrying over air conditioners, there’s really no impact to the 2014 line, there’s no risk to the line, there’s no risk of damaging the product as we carry it over through the season. So yes, we have done that before and feel comfortable with that decision.

A Closer Look: Low’s Companies Earnings Cheat Sheet>>