Operator: Good morning, everyone, and welcome to the Lowe's Companies' First Quarter 2013 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 assurance 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 be using certain non-GAAP financial measures. You can find a reconciliation to the most directly comparable GAAP financial measures and other information about them as well as reference slides pertaining to first quarter results posted on Lowe's Investor Relations website under Investor Documents.
Hosting today's conference will be; Mr. Robert Niblock, Chairman, President and Chief Executive Officer; Mr. Rick Damron, Chief Operating Officer; and Mr. Bob Hull, Chief Financial Officer.
I will now turn the program over to Mr. Niblock for opening remarks. Please go ahead, sir.
Robert A. Niblock - Chairman, President and CEO: Good morning, and thanks for your interest in Lowe's. Let me start by expressing our sympathy for those impacted by the devastating storms in Oklahoma and throughout the Midwestern Plains.
Our team members stand ready to assist the affected communities in the days and weeks ahead. And as we’ve done in the past when natural disaster strikes, Lowe's stores around the country as well as Lowes.com will become official donation sites for the American Red Cross Disaster Relief Fund. Lowe’s is contributing $1 million to the relief efforts through the American Red Cross and other partner organizations.
Following my remarks, Rick Damron will review our operational performance in the quarter and Bob Hull will review our financing results in detail. But first, one housekeeping note.
For the first time, we’re providing slides on our Investor Relations website to supplement our call. We encourage you to download the slides to facilitate your review of our result and to use as a reference document following the call.
Now, for some highlights of the first quarter. Our plan assumed normal weather based on historical multiyear averages; but as you know, temperatures were cooler and precipitation greater than normal for much of the quarter resulting in a delayed spring selling season. As a result, comparable sales for the quarter were negative 0.7% driven by decrease in comp transactions.
The month of March was particularly soft with the roughly 10% comp decline, but April improved significantly resulting in positive comps of approximately 10%. We have maintained that positive comp momentum through the first few weeks of May and I'd like to thank our employees for their hard work and continued dedication to serving customers.
For the first quarter, 7 of 12 product categories had positive comps; but as you might expect, seasonal categories such as Lawn & Garden and Seasonal Living fell short of our expectations. In fact, comps for indoor products were positive approximately 3% while comps for outdoor products declined approximately 7%.
Our west division, particularly the upper Northwest and California, delivered the strongest performance in the quarter, but we also saw strength along the Gulf Coast. While weather was certainly more cooperative in those regions of the country, they are also benefitting from sustained demand created by the housing recovery. We continue to benefit from Superstorm Sandy recovery efforts in the Northeast and our Pro Services business outperformed the Company average.
Gross margin expanded 10 basis points in the first quarter. While our value improvement program contributed to sales and gross margin, the delayed spring impacted the full realization of the benefits we expected.
We continue to effectively control expenses in the quarter and deliver earnings per share of $0.49. Delivering on our commitment to return excess cash to shareholders, in the first quarter, we repurchased $1 billion of stock and repaid $178 million in dividends. The team continues to focus on improving our core business through cross-functional collaboration and consistent execution in-store and across other selling channels.
One proof point is our level of preparedness for the spring selling season, the result of a more coordinated planning effort. The organization worked together to build store level inventory earlier in the season to create a compelling marketing campaign from messaging, to signage, to promotional events and to ensure that staffing levels were adequate and timely. We rolled our spring plans by climatic zone in an effort to match resources to spring's expected arrival across the country.
In addition to a more coordinated planning effort, we're diligently working on value improvement. The goal is to enhance line designs and maintain better in-stock positions as well as simplified deal structures that allow us to offer competitive prices every day. We're also leveraging compelling displays and enhanced merchandising flexibility from our product differentiation program.
Finally, in the first quarter, we made an incremental investment in store labor during peak weekday hours to increase the proportion of selling hours relative to tasking and began to address the weekday close rate opportunity that we've previously identified.
Now, looking at the balance of the year from an economic perspective. The housing market continues to show convincing signs of life. However, growth and other key indicators, particularly employment, slowed in the first quarter. We expect growth to remain modest through midyear as consumers adjust to higher taxes and the fiscal drag intensifies.
However, we do expect that the lagged effect of recent gains in housing will benefit home improvement demand as the year progresses. The macroeconomic transition from recovery to sustainable expansion together with our initiatives and improving operational collaboration give us confidence in our business outlook for 2013. Bob will share those details in a few minutes.
Thanks again for your interest and I'll now turn it over to Rick.
Rick D. Damron - COO: Thanks, Robert and good morning everyone. During my time I will provide some additional product and geographic color surrounding our results and update you on our additional investments in weekdays selling hours and our value improvement program.
As Robert pointed out, our Indoor products accounting for approximately two-thirds of our first quarter business comped roughly 1000 basis points higher than our Outdoor products. We performed particularly well in large decor products, well-designed promotions along with the introduction of the (LG line) drove strong comps and margin dollar growth in kitchens and appliances.
Flooring benefited from strength in hardwoods, laminates and ceramic tile, which finished a value improvement reset last year introducing trend relevant designs, including larger sizes, rectangular formats and wood blinds looks.
We also saw solid positive comps in interior products within core categories such as Plumbing, Millwork, Paint, Tools, Lumber, Building Materials, Hardware and Fashion Electrical. Many products benefitted from improved lawn designs and deeper inventory in key items after having completed their value improvement resets.
Strength in these products is also consistent with strong performance in our Pro Services business, which continued to out comp our DIY business, especially within higher tickets as we continue to apply a particular focus on building stronger relationships with our largest Pro customers, both in-store and to our field based Pro Services team.
While we had solid performance from our Indoor products, our Outdoor products did not meet our expectations. We were well prepared for the spring selling season, but we expected the season to be normal in terms of timing, precipitation and temperature. We built seasonal inventories earlier and deeper in our source to be fully prepared whenever spring arrived, particularly in products such as mowers, string trimmers, grills and fertilizers. We also added seasonal labor to the stores and staged Spring Black Friday events by three climatic zones just in advance of the expected arrival of spring in each of these zones.
At the beginning of the quarter, we expected headwinds from the unusually warm and dry conditions experienced in last year's first quarter. However, this year it was colder and wetter than expected throughout the Northeast, Southeast, Midwest and plain states, which we estimate further impacted our comps by nearly 200 basis points. In fact, in areas where conditions were more favorable, such as the West Coast, Texas Gulf Coast and Florida, we recorded solid positive comps.
In the Northeast, the negative impact of weather was somewhat offset by sales associated with Superstorm Sandy recovery efforts, which aided first quarter comps by approximately 45 basis points, down from 70 basis points in the fourth quarter, but consistent with our expectations. Approximately 27 stores have seen a prolonged surge in demand as they meet the recovery needs of the most severely impacted communities.
Three categories, comprised mostly of Outdoor products, drove our negative comps for the quarter. Lawn & Garden was double-digit negative and Seasonal Living, which includes grills, patio and seasonal cooling, was high single-digit negative. Lower lawnmower sales drove low single-digit negative comps in the outdoor power equipment category. These categories recorded strong comps in April and also thus far in May.
In the second quarter, we expect to recover most of the outdoor sales we missed in the first quarter due to unfavorable weather conditions. As you think about the types of sales we will recover, it is helpful to divide outdoor products into two groups. The first includes products that can only be used within a narrow window of time when weather is favorable; pre-emergent fertilizers and spring flowers, for example. The second group includes products that customers will want to use throughout the spring and well into the summer months. Examples include, grills, patio furniture. Customers will be willing to buy these products as long as enough time remains during the summer to enjoy them.
Most of our outdoor products fall into the second category. With the entire summer ahead of us and the improvement in weather we are seeing in recent weeks, we expect to recoup a significant amount of outdoor sales in the second quarter.
As Greg discussed last quarter, there is a gap between the percentage of customers who know what they want to purchase when they visit our stores and our close rate. We are addressing this opportunity to improve close rates by investing in more customer facing hours during peak weekday times and through our value improvement program.
We have added an average of 150 hours per week to the staffing model for nearly two-thirds of our stores, entirely apart from our typical seasonal staffing increase. Previously, weekday labor hours were heavily skewed toward testing, and we have identified an opportunity to better serve customers and close more sales during those hours by increasing the assistance available when they are asked.
We completed hiring of these part time employees in the first quarter. As these employees progress at the learning curve, we expect these hours to contribute to sales growth. We will continue to monitor the performance of this program and make adjustments as necessary.
The value improvement program remains our most important 2013 initiative. Through this initiative we are improving our line designs, making them more relevant to each of the markets we serve, easier for our customers to shop, and more efficient for our associates to maintain. This includes reducing duplication of features and functions within price points and reinvesting the inventory to increase in-stock levels, especially in key high velocity items customers expect us to have on hand, including job lot quantities needed to complete large projects.
We are also working to lower unit cost by reducing funds set aside by vendors for promotional and marketing support, and by negotiating lower first costs.
We continue to make progress. At the end of the first quarter, we had completed resets representing over half of our business. Examples of resets completed in the first quarter includes seasonal products like planters, patio furniture and grills, and year-around products like kitchen cabinets and garage door openers.
We expect to finish the initial round of resets in 2013. As Greg mentioned last quarter, the financial benefit of value improvement is greatest once we have reached stabilization. That is when we are past clearance and selling only new assortments. We estimate that roughly 30% of our product lines were at this stage in the first quarter. We continue to expect average mid-single-digit comps and roughly 100 basis points of margin improvement rate for product lines that have reached stabilization.
From an operational perspective, these rates at resets are now flowing across our stores with minimum disruption. Greg and I are committed to continuous learning and collaboration and we expect the same from our organizations.
As we monitored the execution of value improvement resets during the first half of last year, we identified opportunities to minimize disruption by managing the reset process at a more granular level. We now plan the clearance of old inventory, the arrival of new inventory, the arrival of displays and signage on a store-by-store basis versus at a regional level. Before we proceed with any reset, a team including members from merchandising, store operations and logistics meet to ensure our elements of the reset are ready, if not, we delay the reset until they are.
These steps have helped us to eliminate out of stocks and minimize disruption in our stores. As you can see, our commitment to continuous learning and collaboration supports our focus on increasing close rates.
We expect to get better every day at meeting customers' needs through improved service and product offerings, which is why we have added customer facing hours during peak weekday times. And we continue to enhance our product assortments through our value improvement program. We look forward to sharing our progress with you in the coming quarters.
Thank you for your interest in Lowe's and I will now turn it over to Bob.
Robert F. Hull, Jr. - CFO: Thanks Rick, and good morning, everyone. Sales for the first quarter were $13.1 billion, which represents a decrease of 0.5% from last year's first quarter. Comp sales were negative 0.7%. Comp transactions were negative 3.7% while comp average ticket was up 3.1% to last year.
As you heard from Robert, exterior categories were negatively impacted by weather early in the quarter, but began to rebound as spring finally reached most of the country. In planning for the quarter, we expected a 300 basis point headwind associated with last year's great spring weather; however, we estimate that the cooler and wetter spring this year caused comps to be almost 200 basis points below our expectation. This cooler, wetter weather impacted our seasonal business, which was a driver of the negative comp transactions in the quarter.
Gross margin for the first quarter was 34.8% of sales, a 10 basis point increase over last year's first quarter. The gross margin increase was driven by value improvement which helped gross margin by approximately 25 basis points. Our estimate of the improvement nets the clearance impact of the reset against the benefit of the stabilized line.
For the quarter, the percentage of resets completed increased from 30% to 50% which was consistent with our plan, while the percentage of re-stabilization increased from 20% to 30%. The progress in completing resets was greater than product lines reaching stabilization as a result of the delayed spring. The financial benefit of value improvement is greatest once we have reached stabilization. We are comfortable that with recent trends, the percentage of stabilized resets will improve and we will achieve the anticipated margin expansion for the year.
This improvement was offset by our proprietary credit value proposition which negatively impacted gross margins by approximately 20 basis points or about 10 basis points higher than we expected. This was driven by higher sales penetration of our proprietary credit program which reached 24.7% of sales or a 190 basis point increase over Q1 2012.
SG&A for Q1 was 24.62% of sales which leveraged 3 basis points. While the leverage was modest, there are a number of expense lines worth discussing.
Casualty insurance leveraged 31 basis points as a result of favorable actuarial adjustment. On our fourth quarter call, I shared three cost pressures in our 2013 plan one of which was casualty insurance. With this favorable adjustment, we now expect this item to be essentially flat to last year versus our prior expectation of deleveraging 10 basis points for the year. And sale of compensation leveraged 19 basis points as sales and earnings came in below our expectations compared with higher attainment levels in last year's first quarter.
Last year, we recorded $17 million in expense associated with the voluntary separation program resulting in 13 basis points of leverage this year. As Rick noted in addition to the normal spring hire, we added incremental hours during peak weekday periods. As a result of the additional payroll and delayed spring, store payroll deleveraged 30 basis points.
We also experienced deleverage in store repair and recent expenses of 9 and 5 basis points respectively. The store repair was driven by planned repair and maintenance activity. While the reset deleverage was caused by the higher volume of resets relative to last year.
Depreciation for the quarter was $352 million which was 2.69% of sales and leveraged 12 basis points as compared with last year's first quarter as a result of assets becoming fully depreciated.
Earnings before interest and taxes increased 25 basis points to 7.49% of sales. Interest expense at a $113 million for the quarter deleveraged 8 basis points to last year as a percentage of sales as last year's bond yield occurred in mid-April versus a full quarter's interest expense this year.
For the quarter, total expenses were 28.17% of sales and leverage 7 basis points. Pre-tax earnings for the quarter were 6.63% of sales. The effective tax rate for the quarter was 37.8% versus 38% for Q1 last year. Earnings per share of $0.49 for the quarter, represents a 14% increase over last year's $0.43.
Now to few items on the balance sheet starting with assets. Cash and cash equivalents balance at the end of the quarter was $1.1 billion. Our first quarter inventory balance of $10.3 billion increased $488 million or 5% over Q1 last year; that increase in primarily attributable to delayed spring selling season. The inventory turnover calculated by taking a trailing four quarters cost of sales divided by average inventory for the last five quarters was 3.57, a decrease of 11 basis points from Q1 2012.
Return on assets, determined using the trailing four quarters earnings divided by average assets for the last five quarters increased 23 basis points to 5.68%.
Moving on to liabilities section of the balance sheet, accounts payable of $7 billion represents a slight increase over Q1 last year. The increase in accounts payable is lower than the 5% increase in inventory which relates to the timing of purchases in the quarter versus last year. At the end of the quarter lease adjusted debt-to-EBITDA was 2.17 times.
Return on invested capital measured using a trailing four quarters earnings, plus tax adjusted interest divided by average debt and equity for the last five quarters increased 56 basis points for the quarter to 9.53%.
Now looking at the statement of cash flows, cash flow from operations was $2 billion, which was down 19% from Q1 2012 due to working capital. Capital expenditures were $196 million, $141 million reduction from last year. As a result first quarter free cash flow of $1.8 billion was down 16% versus last year.
In February, we entered into an accelerated share repurchase agreement to repurchase $1 billion of the company's common stock. At this point we expect to receive about 25.9 million shares, but the ultimate number of shares will be determined upon completion of the program in the second quarter. Also in the first quarter, the company repurchased approximately 300,000 shares; of which common stock were $10 million through the open market. Through the quarter, we repurchased a little more than $1 billion. We have approximately $4 billion remaining on our share repurchase authorization.
Looking ahead, I'd like to share our outlook for the year. In 2013, we expect total sales increase of approximately 4% driven by our comp sales increase of 3.5% and the opening of approximately 10 stores. For the fiscal year, we are anticipating an EBIT increase of approximately 60 basis points. We expect the majority of the improvement in EBIT will come from gross margin. Majority meaning more than half, but not 100% or more of the 60 basis point improvement.
The effective tax rate is expected to be 38.1%. For the year, we expect earnings per share of $2.05, which represents an increase of 21% over 2012. We're forecasting cash flows from operations to be approximately $4 billion. The reduction relative to our prior outlook is due to higher forecasted inventory at yearend. The higher inventory levels relate to investments in target service levels. Our capital plan for 2013 is approximately $ 1.2 billion. This results in estimated free cash flow of $2.8 billion for 2013.
Our guidance assumes approximately $3.8 billion in share repurchases for 2013, spread roughly evenly across the four quarters. For the year, we expect lease adjusted debt-to-EBITDA will be at or below to 2.25 times.
Regina, we are now ready for questions.
Operator: Greg Melich, ISI Group.
Greg Melich - ISI Group: I wanted to get a little more detail on the comp trends. You said they got better, and May was similar to the April number. Does that mean that it was actually at the April number or better or worse, or you just think the trend is such that you are going to get that acceleration for the full quarter?
Robert F. Hull, Jr. - CFO: Greg, this is Bob. The May trends to-date are approximately the same as what we've experienced in April.
Greg Melich - ISI Group: And then I wanted to follow up a little bit more on the margin side of the equation. Clearly, it looked like there was a little bit of delay in getting the value improvement in, but also some hit from mix and some of the weather issues. Could you help us understand that seasonal product that you missed, what does that do to the mix? Is Lawn & Garden higher margin because you own the inventory? Help us out a little bit on that side.
Gregory M. Bridgeford - Chief Customer Officer: Greg, I'll start. This is Greg Bridgeford with the (val prop), that means value improvement impact. We completed the reset of about 80 categories in Q1 and, as Bob detailed, that reset process brought us over 50% of the categories. But with the weather impacts and a slow sales environment, many of those categories that are seasonally oriented did not reach stabilization, and therefore moved through their clearance inventories so we could appreciate the margin gains from the new sets. And so, with that delay in weather, we saw the impact of the clearance, obviously, hit our margin line without the benefit of having the lines reset and the margin accretion from the new cost structures and the new category set. So we certainly have seen that turn around as the weather turns around. So that gives us some confidence, so we are going to achieve our 100 basis points improvement after stabilization in categories in the mid-single-digit comps.
Robert F. Hull, Jr. - CFO: The follow-on on that, Greg, so if we think about the mix of products, mix had a slight negative impact on margin for the quarter, largely driven by lumber and the inflation that we are seeing in the category resulted in it being a greater proportion of our businesses relative to Q1 last year. The seasonal products themselves have a margin rate consistent with the company average. So it's not really a mix impact, but as you think about the slowdown in March created the delay in clearing through – the clearance activity, therefore, delaying the sale of product set for margin after the reset. So we estimate that a combination of value improvement about a 10 basis points lower than our expectation and the value prop is another 10 basis points, resulting in gross margin coming in at about 20 basis points lower than our expectation for the quarter.
Greg Melich - ISI Group: Rick, I just – given the initiatives to put those extra labor hours during the week, did you at least get the close rate up as expected even if you didn't have the traffic given the weather?
Rick D. Damron - COO: Greg, I'll answer that in two ways. One is, as we put the incremental staffing labor into the weekday teams, we approached that in the same way we did the Spring Black Friday events by going by climatic zones. So in the Southern markets where those hours were implemented first, we're able to get the teams onboard, get them through the training required to be as efficient and effective as we'd like to see. We saw better results there than we did as we moved farther North later in the quarter with us finalizing the implementation of those hours in early April in the Northern market. So as we progressed up the climatic zones, we did see improvement there. If you look at overall close rate, it was basically flat to last year due to a lot of the mix issues we saw with seasonality inventory typically driving a higher close rate in the spring selling months than our interior category. So while looking at that, I'm very comfortable with the results that we saw, even though the close rate remain flat for the quarter, because of the timing of those reset or the timing of the seasonal business and the close rates that historically come with those.
Gregory M. Bridgeford - Chief Customer Officer: Let’s put little color, Greg, on Rick’s remarks. With seasonal business, we do find that to be more of a destination shop for items like bedding plants, fertilizers, grass seed, soil amendments, and so that is – you do see stronger close rate. So as the weather didn’t improve in some of the northern regions, as Rick described, we didn’t see the close rate improvement, but where we did see the weather improve, we’re seeing improvement.
Operator: Mattew Fassler, Goldman Sachs.
Matt Fassler - Goldman Sachs: Two questions if I could. The first revolves around the resets, not just getting clarity on when you expect those lines to cross, i.e., the progress is starting to outpace the disruption. And I guess related to that on this topic you talked about a couple of categories that have been through resets like Paint and Millwork, and you talked about a 500 basis point delta versus the company average. I think those comped more in line with the chain this quarter. So I'm not sure if there was anything in particular that weighed on those. Now that we have some categories done, just want to make sure that we can align sort of the expectation with reality and make sure that they will sync up.
Gregory M. Bridgeford - Chief Customer Officer: Matt, this is Greg. As Bob described, our expectations post-reset is 100 basis points improvement impact by category. So what we have seen and this is really important is, as we've seen weather improve and we see some of these seasonal categories that were reset and completed the reset in Q1 but hadn't stabilized, we're beginning to see the impact of that. We're seeing the basis point improvement that we expected to see and as Bob said, our expectation was 10 points higher from the impact of these stabilized categories from a margin impact. So that's our expectation moving forward. That's a sequential increase over where we have been seeing and that's the kind of progress that we're expecting to make as we move through to see more categories stabilize at roughly 30% right now and we're seeing – we expect to have all the categories stabilized by the end of the year.
Rick D. Damron - COO: I would add one thing to Greg's comments as it relates to the sales aspect of the categories, particularly in paint. I think you look at paint with the same phenomenon as we did seasonal with the mix of interior and exterior paints making up the driver of the average performance. You see the same relationship in paint as you saw rest of the categories with the interior paint categories far outpacing the performance of the exterior categories due to the unseasonal weather.
Matt Fassler - Goldman Sachs: So is it like kind of third quarter or fourth quarter when you actually start to see this being a firmer gross margin driver across the business.
Robert F. Hull, Jr. - CFO: Yeah. So, we do expect gross margin to improve throughout the course of the year. As we talked about, we're at roughly at 30% stabilization. As stabilization improves, we'll improved margins throughout the course of the year.
Robert F. Hull, Jr. - CFO: Yeah then we expect to see the impact of clearance inventory tapper down as we move through the third quarter into the fourth quarter.
Matt Fassler - Goldman Sachs: Just a quick follow-up we've seen a little bit of volatility on the depreciation line and I know it's not kind of a focus on the operating front, but the Q4 to Q1 move was pretty dramatic what kind of number would you expect to see for the year that's depreciation on the P&L. Is this a good base to (delve off) or should that number still be bouncing around a little bit?
Robert F. Hull, Jr. - CFO: The move you see in depreciation is largely just timing of assets brought on board. So depreciation from those, if you think about the shorter duration IT equipment adding some offset, and really more than offset by assets becoming fully depreciated if you think back to number of years ago, when we were opening up 150 stores when CapEx was north of $4 billion. You've got some of those assets becoming fully depreciated which causes some of that quarter-to-quarter volatility. I think the run rate that we saw in Q1 or little bit higher than that because of the assets been out of this year is probably a good number to use.
Matt Fassler - Goldman Sachs: So if last year the average through the year was something in the 3.75, 3.80 per quarter run rate we're 3.50 this quarter, it sounds like somewhere between those two numbers on a quarterly basis?
Robert F. Hull, Jr. - CFO: I think that's right.
Operator: Scot Ciccarelli, RBC Capital Markets.
Scot Ciccarelli - RBC Capital Markets: I guess my question is regarding some of the merchandise resets, what you've told us so far is that when merchandise is being fully reset and you're experiencing a mid-single-digit comp gains once all of the old merchandise is cleared out et cetera. Can you give us an idea of what the range on these results are, I assume it's not just a steady 5% kind of level. Then related to that, has the extra labor you have been adding to the store has been concentrated towards those areas where you've had the resets?
Gregory M. Bridgeford - Chief Customer Officer: Scott, I'll start, this is Greg. It is quite a range and I'll tell you in some of the categories that hardlines categories that we reset early on, we've seen strong response to new values, especially as we've market assorted and then I guess there are categories within some of our Paint departments, Plumbing departments that are seeing double-digit comp increases, but included in the value improvements line reviews are categories like plywood and dimensional lumber. We are not seeing double-digit comp increases, because in reality those are – those categories are open market and you've literally – if we did see those kind of increases, I'd be very suspicious. So it's a mix and it is a range and where we have the categories stabilized, it does take a while, depending on the traffic hitting that category for the customer to encounter those values to encounter the new ranges and the market assorting impacts, but we are seeing the impact.
Rick D. Damron - COO: Scott, this is Rick, I want to discuss the extra payroll for a moment. The thing to keep in mind is we talked about the incremental investment to the weekday teams that was in addition to our normal seasonal build of temporary labor to handle the normal seasonal ramp up. So the focus of the weekday teams is on the core categories which is probably the predominant number of the resets that have taken place thus far through the program. So the seasonal temporary labor are still skewed to the Outdoor, and Lawn & Garden departments and seasonal departments. The weekday teams are focused on the interior core categories which line up very well with the activity around the value improvement initiative.
Scot Ciccarelli - RBC Capital Markets: So, I guess my follow-up question on that is just on the labor front, are you seeing any kind of direct correlation to sales improvement when you add the extra labor?
Rick D. Damron - COO: When you look at that, we talk a lot about the close rate into the first quarter performance. The thing to keep in mind was the incremental labor and I think we'll be able to provide you probably better clarity into the performance into Q2 is the impact of weather across the country when we talk about the incremental labor investments where you earned. The thing to keep in mind like I said earlier is we wrote out that incremental labor not at one time in the beginning of the quarter but we staggered that reset to time better with when we thought the extra weather would be cooperative in adding that labor throughout the country. So, we did it in three stages in the southern markets, the central markets and in the northern markets. So, we turned it that way. The thing to keep in mind is the fact that in the southern markets where we first wrote the labor investment out, we have been pleased with the results that we have seen as the employees have come up to speed on training and through our orientation processes and accommodated to the stores. And we are seeing the second tier performed better than the third tier. So, a lot of that has to do with the timing of that we brought the incremental labor hours on as well as timing through the normal seasonal build process. So, we will be able to give you more clarity into the exact results hopefully at the end of Q2 but like I said earlier we are happy and pleased with what we have seen as we progress through the timing of the incremental hour's investments.
Robert A. Niblock - Chairman, President and CEO: Just to add on to that. As Rick said, the weekday teams primarily are focused on the interior of the store on core categories throughout the interior store. We did layered on by climatic zone as traffic is starting to build. If you go back to my comments, I did reference that in our Indoor product categories, we saw 3% positive comp on exterior categories we had a 7% negative comp. Part of that is obviously due to weather. But I think obviously part of it is probably attributable to where we did have the weekday teams in place as Rick said they went there, clear entire quarter. And to layer on Rick’s comment, once as customers are in there and they are starting to see I think a greater level of service (indiscernible). I think that will certainly that well help with our closed rate and will pay dividend for us in future quarters as those customers make return trips to the store and also we get those employees up the learning curve as we had to do with any employees.
Operator: Colin McGranahan, Bernstein.
Colin McGranahan - Bernstein: Just in terms of 1Q, couple of markets that maybe didn’t have a weather extremes. Can you talk a little bit about what the performance look like in those markets?
Robert A. Niblock - Chairman, President and CEO: This is Robert. I think we talked about – and I have Rick and others chime in. We talked about one, couple of things, recovering markets, we also talked a little bit about the West Coast and whether you are talking about California, whether you are talking about Florida, whether you are talking about Arizona, whether you are talking about Nevada. We saw a nice strong positive comps in the majority of the stores in those markets out there.
Colin McGranahan - Bernstein: Robert, just to maybe I understand those in the market that took the biggest hit, during housing and are fully in recovery mode. But is there any market you can point to that’s kind of a more normal market, that would reflect what the business looks like not in hard hit markets and not in weather impacted markets and I'm kind of scratching my head, if that’s like Tennessee or something?
Robert A. Niblock - Chairman, President and CEO: If you look at across our Southern tier where we had better performance, a better weather, we certainly saw much better performance, positive comps across kind of the (deep south) Southern tier when weather broke and we had more opportunity to capitalize on seasonal business across those markets.
Rick D. Damron - COO: Carl, this is Rick. I'd just add, when you look at a lot of the markets, Tennessee is an example, was impacted tremendously by the weather swings. I would say the Gulf Coast is probably more reflective of more normalized markets that performed very well as far as the Southern markets go in comparison to the rest of the country that gives us confidence in what we've seen from a value improvement initiatives as well as our investments back into store labor and inventory. As Robert said, California performed extremely well being our highest comping state for the quarter. And then we saw good performance across the other markets, particularly the West Coast and Florida as those markets continued to rebound.
Colin McGranahan - Bernstein: Then in May – and I'm probably thinking this because obviously there was a lot of noise in the quarter trying to understand what you're doing and how weather impacted it. But in May how are the indoor categories performing or the non-weather impacted markets?
Gregory M. Bridgeford - Chief Customer Officer: Colin, this is Greg. We've not seen a fall in performance of the indoor categories. They're doing well. They actually benefit from the foot traffic that's brought in from the seasonal business. And as Rick was describing earlier, you actually see an impact. The penetration rates aren't as great obviously as you move from winter months towards summer months. But in the interior paint categories, you see all the interior paint categories, sundry and accessories, benefit from the foot traffic that's driven in by the exterior categories that are now taking off as we've seen weather turnaround from south to north.
Colin McGranahan - Bernstein: Final quick question, just on the credit proposition, 20 bps of margin impact versus expected 10, higher penetration. Are you getting a commensurate lift in sales and benefit to the comp and are the returns what you expect at this point?
Robert F. Hull, Jr. - CFO: Yeah, Carl, we still see improvement in top line. So should we think about the 190 basis points, roughly a fourth of that would be incremental and the balance of that would be tender shifts, so we're seeing some incrementality. In addition, as we think about switching from other forms of tender, yes, we do have a 5% off on the proprietary credit that's in lieu of promotional financing that they might have taken us up on otherwise, so that's a reduction in expenses for the program. It's also a reduction of bank card fees that we might have incurred. So we're pleased with the continued progress of the credit program.
Operator: Dan Binder, Jefferies & Company.
Daniel Binder - Jefferies & Company: You talked a lot about the labor add back and the cadence of that. I was curious if you can give us a little bit of color on what kind of training you're putting behind the added labor, if there is a bigger concentration on – in the aisle training or online training, and how are you using that additional labor? I know it's two full-time equivalents, but is it being split up across different parts of the store so that you get four different bodies in there at different times, any color on that?
Rick D. Damron - COO: Sure, Dan. This is Rick. As it relates to training outdoor staff first, we have very specific training for these individuals as they come on board, in addition to our normal orientation training programs that we put them through. Our training is both in out and on lawn through our Lowe's learning courses that we do with the employees. The thing to keep in mind with these employees is the training is very concentrated. As we talked about, these employees are focused on the interior categories, so it could be very structural training such as paint, how to mix paint, how to engage customers and paint a house, or in specific areas throughout the store that we have them assigned to. As it relates to how they work across the store, we take and have been focused on the two very particular timeframes that the stores are allowed to use these incremental hours, and those timeframes were based upon when we saw the highest concentration of customer traffic throughout the day. So, they are scheduled to either in mid-morning timeframes or in early to late afternoon timeframes to hit those peak customer traffic times throughout the day. And we also scheduled them in ways to make sure that we are taking advantage of our sales planning processes, understanding where the business is being dictated, where the business is coming through so that we are able to schedule them in the quarters to where we think that we will be drawing traffic into the store, and make sure that they are prepared and ready to engage our customers there. So, it is a very holistic approach, and ours is not – they are not being just disseminated across the store. It is very focused, very structured, which enables us to train them more in depth. And also allows us to target them into areas where we know the customer traffic will be more concentrated throughout the day and the week.
Daniel Binder - Jefferies & Company: And just as a follow-up, what is the next areas for the resets in the coming season?
Robert F. Hull, Jr. - CFO: Where the next area is, Dan, in terms of categories?
Daniel Binder - Jefferies & Company: Yes.
Robert F. Hull, Jr. - CFO: There is – we still have, from the reset standpoint, half of our categories to go, so there’s about hundred and half left, so it’s quite varied. I mean, I think they’ll be less, obviously, seasonal as we move into summer, they’ll be more hardline focused and more – probably more focused in some of the areas of plumbing, fashion, electrical, some in Millwork that I’m aware of. But it is spread across the store. And at the end of fall, you’ll see some more seasonal resets come back and obviously, as you move towards the Christmas season, you’ll see (indiscernible).
Operator: Michael Lasser, UBS.
Michael Lasser - UBS: When you look back at the first quarter, why did you think that either you were more impacted by the weather than the broader home improvement category in your largest competitor, or alternatively maybe you didn’t benefit as much from the strength in the Indoor category as much in the market?
Robert F. Hull, Jr. - CFO: Well, my understanding is I think that both of us were certainly impacted by weather, and I think that was what they also said on their call yesterday. So I think it’s not about being more or less impacted by weather on seasonal categories. I think part of it is, one, for example, we talked about the strength in the West Coast, particularly areas like California, where we don’t have as many stores. So to the extent that you have those markets that had favorable weather, yes, we benefited from the favorable weather, but as a percentage of our total base, obviously, we don’t have as many stores there. Then, the other thing I think I would point to is, we don’t have a strong – as strong of affiliation as a percentage of our business with that professional customer. I think that would be something to look towards. I think if you look at in the Hurricane Sandy market, we don't have as many stores, and that immediately affected area as obviously they would. And then the last thing, Michael, I would point to would be just what we've talked about on the call today that we still have a lot of disruption going on as we go through the reset process, the transition of the lines, those type of things and selling through existing inventory. Even though we are getting good sell-through on that inventory and we're pleased with the margins we're getting compared with what we normally sell our nonproductive inventory through that, you're still selling units at less than what would otherwise be a full retail value. Obviously, you're selling unit and that's having an impact on your top line comp performance as well. So, I would point to that as maybe some of the differences, not saying that weather impacted one of us more than the others.
Michael Lasser - UBS: And, Robert, the penetration of the Pro business is a little lower at Lowe's. How do you think you can – will you be able to fully participate as that customer segment becomes fully reengaged in the business and what can you do to increase your penetration there and share?
Robert A. Niblock - Chairman, President and CEO: Well, we've got a number of initiatives, and I can have Rick speak to those as well. But once again, as you look at where recovery is taking place, in many cases it is in some of those. The early recovery and rebuilding from, let's say, a new construction standpoint is in some of those markets, Florida, California, those places; Arizona, where we are so heavily hit during the economic downturn. And once again, those are areas where we are out-stored. So, we've got some – things we're working on to try and obviously growing our share of business in those markets, but we've got some overall initiatives that we've got working on too in those markets, across all markets to be able to continue to improve our relationship with the commercial customer, anything from the things like we've talked about last year or so ago adding value prop to that commercial – to what we offer to that commercial customer to know a lot of other things.
Robert F. Hull, Jr. - CFO: And, Michael, I'll chime in and then Rick has some notes too, but it's an important opportunity for us. As you have heard, and this is consistent in Q1, our sales to the pro customer, the commercial customer outpaced our sales to the consumer from a growth rate standpoint, and we need to take advantage of what the market will provide us. So from two critical points, as we restructure our lines through value improvement and you go into categories like hardware or rough electrical, rough plumbing, as you address the opportunity in tools. And we've purposefully made sure that we, whether it was in particular brands and especially quantities and depth of inventory, we've reset those lines with that in mind, with the investment that Rick helped drive in the inventory at the onset of the year, we've been able to provide much greater on-hand depth in some of those key categories as we set these categories through value improvement and that's crucial because with that customer time is so important. So we're seeing the benefit of that depth of inventory; we're seeing the benefit of lines that are structured against that opportunity; and Rick, you may have a few more comments.
Rick D. Damron - COO: Yeah, Mike, this is Rick. I just wanted to highlight a couple of things and Robert touched on a few of those that I think will add tremendous value to the professional customers. We continue work toward building stronger relationships with that group. I think a couple of things that when you talk about; one is, what we’re doing to showcase value to this customer differently than we have in the past. And as Robert mentioned, we introduced val prop, value proposition to the customer last year, giving this customer the 5% off for all purchases on proprietary credit through our vehicles there, and we’ve seen tremendous adoption of that from a consistency point of view in what we're offering from a value perspective to those customers every day in every market. Second to that is also we talked about last year changes we made to our inventory investments as part of the value improvement initiative, particularly in increasing targeted service levels across all items in the stores which help us build greater depth in key product categories that are relevant for our pros that shop us every single day to make sure that we have that inventory available in stock across the store, particularly focused on improving our depth of what we call job lot items. Those items that pros need in multiple qualities every single day to be able to complete the jobs and we’ve invested greater depth of inventory into those specific items in a very targeted way to make sure that we’re able to meet the demands across the store in those areas where we know they have particular quantity needs on a day-to-day basis to invest in that area. The third component of this is what we’ve talked a lot about from product differentiation and our ability to begin to show this product differently to these customers than we ever have in the past. One of the key items there that I’ll highlight is our Contractor Pack program which offers these customers quantity – discounts for quantity purchases on those items whether it’d be electrical boxes, switches, whether it be drywall repair or whatever those items that we've identified, we're able to present those on the End Caps in a collective way to the consumer in that area of the store differently than we've in the past by freeing up those incremental End Caps to be able to show these customers different value, whether it be in Contractor Pack quantities or whether it be in that national brands or proprietary brands that are relevant for them. So those things I think are adding tremendous value and are leading to helping us to have the pro-customer segment out-comp our DIY segment for the last several quarters since we've launched those. The fourth component of that we introduced last year being a reorganization of our outside sales teams to focus on building those relationships with their largest customers where we know that we have a tremendous opportunity to gain share with them and take a greater share of their spend and we're working to continue to refund that. That organization was implemented at the end of Q4; we're taking place in Q1. So we feel very comfortable and very good about what we're seeing that organization being able to do long-term. So when you look at this, I think it's a holistic approach in what we're doing from showing value to how we show product to building an organization that helps us strengthen the relationship across that category.
Operator: Dennis McGill, Zelman & Associates.
Dennis McGill - Zelman & Associates: I was wondering if you guys could maybe talk a little bit longer-term, once you get past some of the investment you're making in store payroll this year and the resets and repairs and things that maybe fade away as the recovery takes hold, how would you like us to think about fixed cost leverage or SG&A leverage with a rising comp environment in '14 and '15?
Robert F. Hull, Jr. - CFO: Dennis, this is Bob. I think the framework that we've provided in the past which is basically 20 basis points of EBIT improvement for each 1 point of comp still holds true. Obviously, there might be some fluctuations quarter-to-quarter, but on balance, kind of '13 and beyond, that’s what we would expect.
Dennis McGill - Zelman & Associates: Is that inclusive of changes in D&A and gross margin as well? Are you assuming that’s flat within that?
Robert F. Hull, Jr. - CFO: It is.
Dennis McGill - Zelman & Associates: So what would the SG&A component of that look like?
Robert F. Hull, Jr. - CFO: So the majority of the movement would be in SG&A as you think about fixed cost leverage. Similarly, we get the leverage on depreciation as sales improve and then once we get past the value improvement process, our expectations for gross margin improvement are modest, around 10 or so basis points per year. So, the majority of that’s going to come from SG&A first, depreciation second, and then gross margin third.
Dennis McGill - Zelman & Associates: Then, separately, if we were to look at the seven categories that you flagged as being above average, I was wondering if you could put maybe some absolute numbers behind some of those. Were there any categories that were up, let’s say, 4% or better in the quarter?
Robert A. Niblock - Chairman, President and CEO: This is Robert, Dennis. Yes, we had categories were up that much. We’re not going to go and give you the detail category-by-category. But yes, we saw that, a lot of the swing, in categories.
Dennis McGill - Zelman & Associates: And those would be led by where you’ve had more stabilized resets?
Robert A. Niblock - Chairman, President and CEO: Well, it was, I’d say, the interior categories, as we said overall, were up 3%. But yes, I mean those that we would have had some – we’ve either invested the depth of inventory or we’ve had some of the reset activities certainly would have contributed to that performance.
Dennis McGill - Zelman & Associates: Thank you.
Robert A. Niblock - Chairman, President and CEO: Thanks, and always, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our second quarter 2013 results on Wednesday, August 21. Have a great day.
Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining and you may now disconnect.