Sunday, June 3, 2012

Summary of Lowe's Companies (LOW) Q1 2012 Earnings Conference Call Transcript May 21, 2012

Overview of operations

Lowe's had comp transaction growth in the quarter and continues to see stabilization in comp average ticket. All divisions reported positive comps, with the North division being the strongest performer, as it had the best improvement in weather. The warmer weather benefitted Lowes over the quarter, but seasonal items slowed by the end of the quarter. Commercial business was particularly strong, especially in tickets above $500.

Although gross margin contracted, the decline was less than prior years and Lowes believes it is beyond the peak of gross margin declines.

Lowe's has a goal of a 10 percent operating margin by 2015. This will include 130 basis points of SG& A leverage, of which 15 to 20 basis points involve a streamlined organization and voluntary separation.

Lowe's is implementing its strategy to provide better customer experiences, i.e., being relevant to the consumer at each stage of the home improvement process. To do this, Lowe's announced a new organizational structure in mid-April to align functions based on the stages of the customer experience.

Lowe's exterior project specialists increased the number of in-home appoints by 20 percent a week in Q1 due to Lowe's in-home mobile office suite of tools. This increase in productivity contributed to Lowe's exterior project sales growth in the quarter.

Lowe's also generated incremental sales through its contact centers, under which contact center personnel can now tender a sale over the phone after answering customer questions, rather than redirecting them to the website or the store to make purchaes.

Lowes.com had sales growth of nearly 50 percent due to Flexible Fulfillment, under which Lowe's can deliver 96% of lowes.com parcel orders within one day using standard shipping.

Last year, nearly 500, or 1/3, of Lowe's stores were reset to highlight innovation, brands, value and Lowe's creative ideas, to create flexible merchandising space for seasonal products and more open line sights. Lowe's will be expanding the concept to another approximately 900 stores in 2012, over 100 of which were reset in the first quarter. The areas that were reset in the first 500 stores are driving sales with more items per ticket. Starting in 2012, the six innovation end caps in the reset stores will feature products that are new to Lowe's.

During Q1, Lowe's private allen+roth home decor brand expanded into furniture-styled bath vanities, solid surface and quartz countertops, laminate flooring and a new wood closet organization program.

Markets

Lowe's is still cautious about housing and macro demand environment. The acceleration in consumer spending recently was due somewhat to the warm weather and the improvement in housing turnover was off a small base. Lowe's does not believe increase consumer spending will be sustainable without personal income growth. It is unclear whether housing has turned the corner as there are still a lot of distressed properties. Presidential debates focusing on the economy could also impact consumer sentiment.

Financials

Sales for Q1 increased 7.9%. The week shift due to the 53 week in 2012 contributed 4.2 percent of the sales increase for Q1. Another 1.1% sales increase was primarily attributable to new stores. For fiscal year 2012, Lowe's expect sales to increase by 1% to 2%. On a 52 versus 52 week basis (excluding the extra week) it expects total sales to increase by 3%. It will be opening 10 new stores in fiscal year 2012.

Comparable store sales increased 2.6%. Comps increased 2.4% in February, increased 8% in March and declined 3.1% in April. The comp average ticket was flat. Tickets below $50 increased 2%, tickets between $100 and $500 increased 3%., and tickets above $500 declined 1%. Lowe's credit value proposition that offers customers the choice of 5% off every day or promotional financing increased Q1 comps by approximately 130 basis points. Lowe's expects comp store sales to increase by 1 to 3 percent in fiscal year 2012.

Tools and outdoor power equipment, seasonal living, and paint and lumber had the best performance. U.S. comps for the last 4 weeks of Q1 declined by 3% due to the fact that the weather pulled forward the sales of seasonal items and a reduction of promotions by Lowes.

Gross margin for Q1 was 34.7% of sales, a decline of 74 basis points from Q1/2011. Gross margins were negatively affected by: (1) the credit value proposition, (2) the reduction in promotions to emphasis Lowe's Everyday Low Prices, and (3) inflation, particularly in paint, treated lumber and building materials, and (4) higher fuel prices. Lowe's does not expect the reduction in promotions to have as great an impact in Q2, as Q1 is a big quarter for appliance promotions.

Earnings per share for the quarter were $0.43/share. Lowe's expects earnings per share in fiscal year 2012 to be $1.73 to $1.83, an increase of 21% to 28% over 2011. This is slightly lower that Lowe's projections in its prior conference call due to costs associated with its Voluntary Separation Program (VSP), which projects to cost $33 million for the year. So far, 526 people have taken the VSP.

Cash and cash equivalents balance at the end of Q1 was $3.1 billion and reflect the proceeds of a $2 billion bond deal executed in mid-April. Q1 inventory balancewas $9.8 billion, a 1.3% increase over Q1/2011. Inventory turnover was 3.68%, an increase of 18 basis points over Q1/2011.

Cash flow from operations was almost $2.5 billion. During Q1, Lowes repurchased 58 million shares at an average price of $30.20 and paid $174 million in dividends. The repurchases totaled $1.75 billion and Lowe's has another $2.75 billion remaining under its share repurchase authorization. Lowe's expects an estimated free cash flow of $2.7 billion for 2012, which assumes shares repurchases of $4.5 billion for the year.

The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:

http://seekingalpha.com/article/605961-lowe-s-companies-management-discusses-q1-2012-results-earnings-call-transcript

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