Lowe’s Companies, Inc. (LOW)
Q4 2008 Earnings Call Transcript
February 20, 2009 9:00 a.m. ET

Executives

Robert Niblock – Chairman & Chief Executive Officer
Larry Stone – President & Chief Operating Officer
Robert F. Hull, Jr. – Executive Vice President & Chief Financial Officer
Gregory Bridgeford – Executive Vice President, Business Development

Analysts

Brian Nagel – UBS
Matthew Fassler – Goldman Sachs & Co.
Christopher Horvers – JPMorgan
Scot Ciccarelli – RBC Capital Markets
Mitch Kaiser – Piper Jaffray & Co.
Alan Rifkin – Banc of America/Merrill Lynch
Deborah Weinswig – Citigroup

Presentation

Operator

Good morning everyone and welcome to Lowe’s Companies fourth quarter and fiscal year 2008 earnings conference call. This call is being recorded. 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 assurances 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 use certain non-GAAP financial measures. You can find the presentation of the most directly comparable GAAP financial measures and other information about them posted on Lowe’s Investor Relations website under Corporate Information and Investor documents.

Hosting today’s conference call will be Mr. Robert Niblock, Chairman and CEO, Mr. Larry Stone, President and COO, and Mr. Bob Hull, Executive Vice President and CFO.

I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.

Robert Niblock

Good morning and thanks for your interest in Lowe’s. Following my remarks, Larry Stone will review our operational performance including what we are doing to manage the business in today’s challenging environment. Then Bob Hull will review our financial results.

We ended 2008 knowing a challenging environment would pressure our results. As the year unfolded, it became increasingly clear that the economic pressures on consumers including falling home prices, rising unemployment and tightening credit markets were even greater than anticipated. Those pressures came to head in the fourth quarter and are reflected in our results. As unemployment swelled, confidence plummeted and consumer spending continued to contract at the fastest rate in over 25 years.

Sales for the quarter were down 3.8% versus last year and comp sales were negative 9.9%. Comp sales were weakest in November, relatively better in December, but weakened again in January. While comp results were disappointing, we continued to gain market share as industry sales contract.

According to third party estimates, we gained 110 basis points of total store unit market share in the fourth calendar quarter, evidence of our compelling product offering and commitment to customer service during this prolonged industry downturn.

During the quarter as consumers pulled back substantially across all of retail heading into the holiday season, we knew in certain categories such as holiday decorations as well as what we call giftable categories like tools, the competition for sales would be intense. Since we compete with the broader group of retailers in these categories, we were also competing for share of wallet during one of the most promotional holiday seasons in memory. We chose to be proactive, and moved quicker and deeper than originally planned for the seasonal markdowns. These more aggressive markdowns pressured gross margin in the quarter, but improved our inventory position heading into 2009. Larry will provide additional detail on gross margin. But it’s important to note that many of the pressures on gross margin was unique to the fourth quarter or one time in nature. While we do expect gross margin to be down slightly in the first quarter, this will be a significant improvement from the fourth quarter due to less promotional activity.

For the year, total sales declined fractionally and comp sales declined 7.2%. Sales for the year were nearly $1.5 billion less than our original plan, but our earnings per share of $1.49 fell only a $0.01 below the low end of our year ago guidance, reflecting our diligent effort to control expenses during the third consecutive year of soft sales in our industry.

Given the unprecedented turmoil in the financial markets as well as a significant slowdown in the economy and the housing market during 2008, I’m proud that we delivered earnings per share within $0.01 of our original guidance for the year. This speaks for the dedication and hard work of our 220,000 plus employees as well as our focus on making necessary and appropriate adjustments in an environment of uncertain and ever-changing business and economic conditions.

To that point, our centralized structure has allowed us to remain relatively lean during the good times and gives us visibility to areas where we can scale back as sales slow. Over the past three years, we’ve managed our corporate staffing to match the slowing environment primarily through attrition.

By filling only the most needed positions, we have effectively had a corporate level hiring freeze for nearly two years. As a result, we have frozen or left unfilled almost 400 positions at the corporate office in 2008. In addition, in certain cases we have made even further cuts including a recent reduction in our real estate department reflecting our significantly low work store opening plans. As a measure of our efforts to ensure appropriate management of our corporate infrastructure, over the past two years, our store count and selling square footage have both grown by over 19% but our corporate staff has grown by less than 5%.