Although same store sales declined marginally over the quarter, there was sequential improvement during every month in Q2 and 9 of 14 product categories had positive comps. Building materials, lawn and garden and Milwork were weak, although comps were difficult for building materials since tornadoes and hurricanes last year resulted in high comps for 2011. The early spring season and the drought negatively impacted lawn and garden.
The commercial business, which is 25 percent of Lowe's sales, outperformed the company average during Q2.
This year, Lowe's has been focused on value improvement and product differentiation through line reviews on each product category. So far, the line reviews have been successful in net inventory reduction and are making progress toward cost reduction. Lowe's is also transforming the business to deliver seamless and simple multi-channel experiences through Flexible Fulfillment and MyLowe's. Flexible Fullfillment allows Lowes.com to deliver partial orders from the most efficient location and allowed Lowe's to more than double its partial shipments versus last year. MyLowe's allows customers to access their purchase histories, home profiles, project list, reminders and folders, and has over 3.3 million cardholders registered. Lowe's is making progress on its initiatives, but progress is slower than expected and the transformation will likely not be completed until mid-2013.
Lowe's has a nonbinding proposal to acquire RONA, but an acquisition is not imminent. Lowe's is currently evaluating its options to determine whether it can acquire RONA at a fair price and obtain an adequate return on investment. It believes an acquisition of RONA would immediately and significantly increase its presence in Canada. If Lowe's does purchase RONA, there will likely be an impact on its share repurchase program for 2 or 3 quarters. Any acquisition of RONA would not close until 2013.
Lowe's believes that housing demand will remain soft for the remainder of fiscal year 2012 and its guidance reflects that projection.
Lowe's expects to open 10 stores in fiscal year 2012.
Financials
Sales declined by 2 percent in Q2, although 1.8 percent was due to a week shift in 2012 as a result of 2011's 53rd week. Comparable sale store sales declined by 4/10ths of 1 percent in Q2. In the United States, same store sales declined by 2/10ths of 1 percent. A poor Memorial Day showing negatively impacted comps. Lowe's expects its full year 2012 sales to be flat and comp sales to increase by .5 percent.
In Q2, margins were 33.93 percent, a decline of 56 basis points. Some of the decline in margins was due to overpromotion of big ticket items later in the quarter. Lowe's credit value proposition, which allows customers 5 percent off or promotional financing, negatively impacted margins by 15 basis points, but the decline was more than offset by a leverage in tender and costs associated with its credit program. Lowe's expects gross margin to increase in the second half of 2012, but less so than it previously projected.
Earnings per share in Q2 was $.64, which was flat with last year. Lowe's severance program accounted for $.01 of costs and the week shift accounted for $.03/share.
In Q2, Lowe's repurchased 36.8 million shares of stock at an average price of $27.20 for approximately $1 billion. It expects $1.5 billion of additional stock repurchases for the year.
The transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/817421-lowe-s-companies-management-discusses-q2-2012-results-earnings-call-transcript?part=single
Copyright 2012 Jaygo's Earnings Conference Call Summaries
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