Lowe’s Companies, Inc. (LOW)
Q3 2008 Earnings Call Transcript
November 17, 2008 9:00 a.m. ET

Executives

Robert A. Niblock – Chairman of the Board & Chief Executive Officer
Larry D. Stone – President & Chief Operating Officer
Robert F. Hull, Jr. – Chief Financial Officer & Executive Vice President
Gregory M. Bridgeford – Executive Vice President Business Development

Analysts

Deborah Weinswig – Citigroup
Matthew Fassler – Goldman Sachs
Christopher Horvers – J.P. Morgan
Gregory Malik – Morgan Stanley
Eric Bosshard – Cleveland Research Company
Stephen Chick – Friedman, Billings, Ramsey & Co.
Michael Lasser – Barclays Capital
Colin McGranahan – Sanford. C. Bernstein
Scott Ciccarelli – RBC Capital Markets

Presentation

Operator

Good morning everyone and welcome to Lowe’s Companies third quarter 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 Security and Exchange Commission. Also, during this call management will be using non-GAAP financial measures in discussing the company’s performance and financial condition. You can find the presentation of the most directly comparable GAAP financial measures and a reconciliation of the differences between the two posted on Lowe’s investor relations website under corporate information and investor documents.

You will also find a statement of the reasons management believes this presentation of these non-GAAP financial measures provides useful information to investors regarding Lowe’s financial condition and performance. 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 would now like to turn the program over to Mr. Niblock for opening remarks. Please go ahead sir.

Robert A. Niblock -- Chairman of the Board & Chief Executive Officer

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 our business in today’s challenging environment then Bob Hull will review our financial results. The third quarter continued what has been a very difficult period for our industry as many external factors weigh on home improvement sales. Our -5.9% comp for the quarter was within our guidance but short of what we hoped to deliver. Contributing to our results, hurricane preparation and recovery spending aided comps by an estimated 100 basis points in the quarter and as we anticipated outdoor categories benefited for more seasonable weather as we cycled last year’s drought conditions in many parts of the US.

In addition, in a tough sales environment we continue to gain market share, a function of our commitment to great service and our ability to capitalize on the evolving competitive landscape. But, the pressures on the consumer have intensified over the past 90 days as unemployment has risen, equity markets have spiraled downward and concerns about the broader economy have grown. When combined with falling home prices driven by excess supply and weak demand and exacerbated by tight credit markets, it paints a challenging picture for consumers in the near-term.

Highlighting those challenges and likely compounded by the distraction of the equity markets and interest in the election, we saw a slowdown in sales in the last week of October which has continued into the first two weeks of November. We continue to see the greatest sales weakness in bigger ticket discretionary products and the weakness is most pronounced in areas hardest hit by the housing slowdown. The bottom 20% of housing markets, those with the biggest home price declines, delivered double digit negative comps while the top 20% delivered nearly flat comps in the third quarter. Although they are difficult to find, there are a few bright spots. It seems housing turnover is bottoming and September’s housing numbers include the first year-over-year increase in a seasonally adjusted annual rate of existing home sales in almost three years and was driven in part by the stress sales of foreclosed homes.

Estimates suggest that as many as one-third of September’s sales were related to foreclosures. Based on data from our customer database it appears purchasers of foreclosed properties spent similar to traditional existing home purchases. In addition, energy prices have dropped dramatically in the last few months with the price of gas dropping nearly 50% from the peak just four months ago. Many other factors are impacting consumers today and we hope that falling energy prices will provide a steadying influence on consumer’s wallets and their confidence in the future and a Lowe’s specific bright spot. In October, Lowe’s was named by J.D. Power as the number 1 appliance retailer in the US for customer satisfaction. Measured on many attributes including sales staff, installation and delivery service, store environment, product selection and price, this is clear evidence and just one example of how our stores are providing unmatched service and selection to capture market share.

Nevertheless, since the balance of the macro factors that impact our business remain weighted to the down side and at least the near-term signs indicate that consumers are retrenching further, we feel it is prudent to continue to take a cautious approach playing it conservatively and ensure we are well positioned to capitalize on opportunities as they develop. Despite the challenges of a weak demand environment, our employers did a great job at controlling calls and improving efficiency allowing us to deliver third quarter earnings per share of $0.33 which exceeded our guidance. It is these efficiency gains with a continued commitment to great service which ensure we will be well positioned for an eventual improvement and demand. Our focus today is on the fundamentals of retailing. While we must always keep an eye on the future, now is not the time to stray from the basics of providing great service, great products and great value for consumers. As many economists are forecasting a recession, we are confident in our ability to continue to capture market share as weaker players struggle in the current environment.

We are also hopeful that early signs of stabilizing housing turnover and eventual loosening of credit in the mortgage markets and decline in the fuel and commodity prices, will lead to stabilization and demand for home improvement products. Regardless of the external environment, we continue to strive to become more efficient and remain nimble enough to react appropriately in an uncertain environment. Finally I would like to congratulate Jimmy Johnson, Chad Knaus and the entire team of motor sports for winning their third consecutive Nascar Championship. Only the second time in Nascar history that the title has been won by the same driver three consecutive years. Lowe’s is proud to be partnered with such a great organization and have them represent the Lowe’s brand each week on and off the track. Thanks again for your interest and I will now turn it over to Larry Stone to provide a few more details on the quarter. Larry?

Larry D. Stone -- President & Chief Operating Officer

Thanks Robert and good morning. As Robert mentioned the broad based macro pressure weight on industry will continue in 2009. This morning I will provide some details of our third quarter results and discuss how we are managing through this challenging environment while balancing our focus on maximizing our near-term results and driving long-term shareholder value. As expected, our third quarter results reflect a tough sales environment. Only four of our product categories had positive comps for the quarter, building materials, outdoor power equipment, seasonal living and nursery. Our performance in building materials and outdoor power equipment was driven by demand of hurricane related products including asphalt, roofing and generators. Thanks to our storm recovery team we were able to quickly reopen stores in hurricane-affected areas and our best in class distribution network ensured our stores were stocked and ready to assist customers with their cleanup and rebuilding efforts. Dry results in seasonal living and strong sales of pellet fuel and pellet stoves as consumers shifted toward alternative heating products in preparation for winter.

Also, solid sales in outdoor living products in our warmer year round markets helped drive this positive comp. Nurseries performed well as homeowners continue to take on smaller projects that enhance their outdoor space. Easier comparisons from last year’s drought in addition to strong demands for fountains and outdoor accessories helped deliver a positive comp for the quarter in this category. Other categories have performed by the company average include lawn and landscape products that also benefited from last year’s drought as homeowners completed some of the fall lawn maintenance they put off last year.