Lowe's Companies, Inc. (LOW) Q2 2011 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Lowe's Companies Second Quarter 2011 Earnings Conference Call. This call is being recorded. [Operator Instructions] 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 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 posted on Lowe's Investor Relations website under Corporate Information and Investor Documents. Hosting today's conference will be Mr. Robert Niblock, Chairman, President and CEO; Mr. Bob Gfeller, Executive Vice President of Merchandising; 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.

Good morning, and thanks for your interest in Lowe's. Following my remarks, Bob Gfeller will review our operational performance, and Bob Hull will review our financial results. But first, let me share a summary of our second quarter performance, as well as how we're thinking about our near-term and long-term opportunities. Despite some recovery from the first quarter in our seasonal business, our performance for the quarter fell short of our expectations. Sales for the quarter increased 1.3%, while comparable store sales were essentially flat to last year. Comp traffic increased 0.6% in the second quarter and comp average ticket declined 0.9%. Bob Gfeller will provide more details regarding our comp performance in a few minutes. Gross margin contracted 37 basis points in the quarter. Our 5% off everyday offer for Lowe's consumer credit card holders impacted gross margin by 11 basis points. However, the gross margin impact of this offer was more than offset by leverage in tender and other costs associated with our proprietary credit program, which are components of SG&A. Bob Hull will provide more detail regarding gross margin in a few minutes. We had good operating expense control in the quarter. However, as detailed in today's release, we recognized a charge associated with impairment of long-lived assets, including 7 stores that closed on August 14, which reduced pretax earnings for the quarter by $83 million and diluted earnings per share by $0.04. We generated substantial operating cash flow during the quarter, which allowed us to repurchase 59.7 million shares or $1.4 billion, exhausting our share repurchase authorization. Including the impairment charge, we delivered earnings per share of $0.64 in the second quarter. Our second quarter consumer survey indicates that high fuel prices remain at the top of consumers' minds as they consider future spending plans. However, recent headlines regarding slowing growth and the U.S. credit rating downgrade underscored the continued weakness in the U.S. economy. The volume of negative news and the unsettling impact on equity markets is having a significant effect on already fragile consumer mindset. More specifically with regard to home improvement spending, consumers continue to focus on small ticket, less than $500 repair and maintenance items and projects. Even after taking into account the challenge of the macro environment, we're still not pleased with our performance this year. For both do-it-yourself and commercial business customers, we must drive more trips, close more sales and build bigger baskets. So what are we doing about it? Earlier this year, I restructured the executive team and together, we are looking at our business with a fresh perspective. We have critically evaluated our performance over the past several quarters and have identified some gaps. The gaps are in addition to convenience of store location, which we discussed in our first quarter earnings call. We have plans in place to address the gaps we've identified, but we also know that there is no silver bullet, and it's going to take time to see the full benefit of these changes. Bob Gfeller will discuss several of our near-term plans to compete more effectively in the current environment. He will also outline ways in which we will go to market differently beginning in the second half of this year. We also remain focused on cost-efficient and effective operations. The management team is reviewing how we operate on a cross-functional basis to ensure consistent and connected execution, while also evaluating our organizational structure to streamline decision-making and ensuring that we have the right people in the right roles throughout the organization. We're making tough decisions in order to improve profitability, and I'm confident that the team is focused on the right areas and making the necessary decisions within the parameters of our longer-term strategy. Today's announcement regarding the closing of 7 stores is an example. Closing underperforming stores is always a tough decision, given the impact on hard-working employees and the local communities. But it was a fiscally responsible decision to further strengthen our financial position and drive shareholder value. Those are some of the near-term opportunities we're addressing. We previously shared with you our longer-term commitment to deliver better customer experiences, while pulling together the best combination of possibility, support and value whenever and wherever customers choose to engage. We continue to differentiate Lowe's from the competition, and we're building momentum behind our transformation in 2011. Let me share some of the progress we've made this quarter. We completed the rollout of our repair services concept. We now manage the repair experience for outdoor power equipment, as well as appliances. Our contact center is taking the calls, diagnosing the problems and facilitating the resolutions making after-sales service simpler for customers because they're dealing directly with us rather than the manufacturer. We tested this model in more than 100 stores and found that managing the experience ourselves positively affected customer satisfaction, which drove incremental store visits. In addition, we expect to realize cost savings through lower product return rates and the identification of quality concerns that we'll work with our vendors to resolve. We continue to be excited about the performance of lowes.com. In fact, we experienced a 130-basis points increase in online unit share on a rolling 4 quarters basis. We've also generated significant amount of interest with our social media campaigns. According to third-party data, we've ranked fourth among the top 25 brands and have the most online buzz and positive sentiment. At the end of the second quarter, we had over 190,000 items available online, a 73% increase since the fall of 2010 with significant expansion planned for the remainder of the year. We've also recently begun shipping items to customers from service stores and regional distribution centers in addition to our dedicated Internet warehouse. This means with more items available for partial shipment than ever before, we can provide faster delivery and reduce our cost to fill orders. We're also offering for the first time preprinted labels for partial returns free of charge, a simple and convenient option for customers and a competitive advantage in the home improvement industry, and there's more. We are launching the Spanish version of lowes.com this week, in an effort to better resonate with this very important demographic. This launch is a full translation of our lowes.com site, including commerce. You will also see our first mobile app in market in the coming weeks. Additionally, we will build on the fundamental capabilities that were delivered on lowes.com this quarter such as the ability to create lists and reminders as we develop My Lowe's, a set of capabilities that will revolutionize how customers interact with us to more efficiently manage projects and improve their homes. My Lowe's will launch near the end of fiscal 2011. And finally, we are pleased to announce that we have begun deployment of approximately 42,000 handheld devices for our stores in the U.S. and Canada. We expect this rollout to be complete by the end of the fiscal year. Our goal is to make home improvement simple for customers and for our employees. Leveraging Apple's iPhone technology, our employees will check inventory availability, access how-to videos and utilize lowes.com from the aisles of the store. This is a significant step towards simplicity and seamlessness and we will continue to add functionality to these devices over time. The progress that I've outlined is building momentum behind our brand differentiation and will ultimately drive market share gains. In the interim, we are working diligently to improve sales and profitability in a way that will generate sustained customer preference and shareholder value. Before I turn over to Bob Gfeller to provide more details on the quarter and our near-term opportunities, I would like to thank our hardworking employees for their ongoing dedication and customer focus. Additionally, I'm pleased to announce that our Sanford, North Carolina store, which was destroyed by a tornado on April 16, will reopen to continue serving the Sanford community on Thursday, September 8. Thanks again for your interest. I'll now turn it over to Bob.

Thanks, Robert, and good morning. During my time today, I will review our second quarter performance, as well as describe how we are working to win the customers' hard-earned money, drive sales and grow market share. Then I will move on to explain our merchandising direction for the next few years and how we are working across all functions to accelerate sales and differentiate our brand. We finished the second quarter with negative 0.3% comps. Our performance was driven by some rebound in the first quarter in nursery and lawn and landscape products, offset by tough appliance comparisons resulting from last year's Cash for Appliances stimulus program. Geographically, performance exceeded the company average in the North Central and Northeast regions of the country, as we energetically served customers who had been waiting to start spring and summer projects and who needed to make repairs after a tough winter of snow and ice storms. Comp performance in the Gulf Coast region was significantly lower than the company average as extreme heat and severe drought dampened sales of outdoor products, most notably outdoor power equipment, nursery and lawn and landscape. We observed large regional swings in these categories but most significantly in outdoor power equipment, where double-digit comps in the Northeast and high-single digit comps in the North Central were offset by negative double-digit comps in the Southeast and South Central. In the second quarter, our outdoor categories recorded roughly a positive 3% comp, and our indoor categories recorded roughly a negative 2% comp. We reported strong nursery and lawn and landscape sales in the Northeast, North Central and West, while building materials performed well in the Southeast, South Central and North Central regions of the country, as our teams sold roofing materials and installation services to customers in the aftermath of the strong storms that hit those regions in the late spring. Looking at indoor categories. Tools comped in the mid-single digits, driven by new Father's Day offers and the launch of our new and improved Kobalt mechanics tools. The new program has premium specifications for torque, teeth count, metal hardness and ergonomics as good as any other leading brand. And we have more than twice the SKUs of our prior program with a wide variety of single-socket sizes, which is what the commercial customer demands. The new line was launched as part of our second quarter Father's Day gift offering, and it sold very well. The Lowe's tool business has now comped positively for 6 consecutive quarters. This momentum is reflected in our 60 basis points of unit share gains on a rolling 4-quarter basis. Paint, the #1 home improvement project, continues to comp positively both indoors and outdoors. Our Valspar interior Hi-DEF launch last year, along with the launches of our allen+roth paint palette, Kobalt Express Deck and Valspar Hi-DEF Duramax exterior paint earlier this year are driving this performance. We expect the recent launches of Olympic 1 and Valspar Plus, which is asthma and allergy certified by the Asthma and Allergy Foundation to drive continued positive paint comps into the second half of 2011. In addition, the paint desk area was reset in the first half to ensure customers have all the products they need to complete their paint projects, organized in a way that is intuitive to them: repair, prepare and paint. And this month, we introduced our first to market buy paint online and pick up in store with our exclusive 20-minute pickup guarantee. So you can see that we are taking our paint business to new levels, increasing our share of the #1 home improvement project. Appliances recorded negative mid-single digit comps as we cycled another strong quarter of the Cash for Appliances stimulus program. The good news is we have continued to gain appliance market share despite the negative comps. We are further encouraged by having just recently been named by J.D. Power as the highest-ranking major appliance retailer in customer satisfaction. This is the second year in a row and the third out of the last 4 years that we’ve received this distinction. The basis for this ranking is a weighted average of performance across all aspects of the total appliance experience: sales staff, service, store facility, merchandise selection and availability, price, delivery services and installation. Appliances is our #1 category sold online, and we have new tools in place to help customers and employees research, compare and price appliances to make their shopping experience faster and simpler. The online appliance selector helps customers choose the right appliances for their needs conveniently from their own personal computer. And the lowes.com product ratings and reviews provide consumers with realtime, unbiased and unfiltered customer feedback on products already bought and in use. Another category with opportunity for improvement is flooring, which recorded low-single digit negative comps in the second quarter. It is a large-ticket category that generally follows other projects like painting, when a customer is updating a room. Today, we need to provide strong value to entice consumers with limited discretionary income to plan and complete a major flooring project. And we have some changes underway that should bear fruit in the second half of this year. Within laminate and wood, we have completed a chain-wide reset. We now have enough SKU breadth to compete with all types of flooring store competition, and pricing has gotten sharper with opening price points on laminate flooring now under $1 per square foot. Carpet continues to perform well, and we are excited about the ways we continue to drive value in this category. Over the next few months, we will roll out a compelling opening price point program and introduce 2 new products with great wear and stain resistant qualities. In ceramic tile, we are resetting 25% of every ceramic floor tile set replacing over 100 SKUs. Additionally, with wall tile sales gaining strength, this month, we have added 50 new SKUs across many stores. Why? Customers want more variety in color, style and size of tile as they freshen the look of their homes by completing bath makeovers and small tile accent projects in kitchens. Now turning to inventory. We ended the quarter with roughly 2% more inventory than last year. We are comfortable with our inventory levels of grills, patio furniture and room air conditioners as we do not expect significant third quarter markdown pressure in connection with second quarter inventory levels. That completes my review of second quarter performance and some category specific efforts to drive sales in the back half of 2011. Now I would like to more broadly discuss new directions for Lowe's merchandising. As merchandising looks to attract customers to drive sales and margin dollar growth, we believe that we must present value to the customer every day, and we must differentiate ourselves by providing simple, fresh and innovative ideas and solutions. To the customer, value is price plus something more. It is that simple. So I want to take a moment to discuss how we are reinvigorating our efforts to enhance our price image in the eye of the consumer and to provide the extra something that distinguishes us from our competitors. High-low pricing has become more influential in our sector as we and other retailers have responded to a shrinking market. As a result, customers have learned to wait on the next big deal because they know that if they wait long enough, they can get a lower price than the Every Day Low Price. So our sector has come to rely in recent years on creating compelling promotions. However, we must be vigilant to ensure that our customers perceive us to be priced competitively every day, even against online retailers and smaller category killers. So job #1 in this economic environment is ensuring our pricing compares well on those high velocity items that are easiest to compare to other retailers. We call these high velocity and highly comparable items benchmark items. To do this, we are expanding our list of benchmark items to sharpen our everyday pricing on the most visible items, and we are starting to lessen the frequency of special advertised promotions. There may be some categories or seasons of the year, which will be more promotional than others, but we need to convince customers, both through our pricing and our messaging, that they can expect a competitive price every time they shop on lowes.com or in our stores. This effort is being made with speed and with caution and an eye to margin impact. We expect a lag between our actions and customer response, as we know that it takes time and marketing investment for the customer to recognize and respond to price changes. Our Lowe's everyday value proposition reinforces our Every Day Low Price program with customers. As a reminder, this program provides Lowe's consumer credit card holders with 5% off everyday. For purchases above $299, we continue to offer cardholders their choice of no interest financing or the 5% off value. This program aims to provide a clear statement of value to Lowe's customers every day. It encourages them to shop for all of their household needs at Lowe's and rewards their loyalty. So far, customer response has exceeded our expectations and this program is driving increased transactions, gross margin dollars and EBIT margins. Now to the other elements of the value equation, that something that when added to Every Day Low Prices truly differentiates us from our competitors. We are focused on 2 key areas that will shout value to the customer. They are product differentiation and solutions-based merchandising. Product differentiation establishes Lowe's as the place to find the newest and most relevant products for home improvement. These products can be national brands or they can be private brands. As we look to successfully introduce more new products, we are working closer than ever with our key vendor partners on new product development, new display techniques and technologies. We want to pull innovation forward and make it easy to find in our stores and online, creating a wow customer experience. So we are looking to partner with vendors of all sizes, who are developing new high-tech products for the home improvement industry, products that further position Lowe's as a customer solutions hub. We are plowing new ground that will reap long-term benefit to our strong brand and customer franchise. Solutions-based merchandising redirects our merchants' focus from a product- and vendor-centric view to a customer-centric view. This may sound simple, but it requires great team work across functions and products like never before. Our merchants are embracing this idea, the idea that we must assort, assemble and present solutions to the customer because the customer shops by occasion. So, for example, when customers want to refresh their bathrooms, they don't think about buying a vanity, a mirror, a new toilet, new faucets and bath hardware in isolation from each other. Instead, they think about how they want the bathroom to look in total, and their bathroom remodel is the occasion. Rather than making customers look for each component on separate aisles, we want to bring together different vignettes that will help them better determine what they want and more easily grab or order the items that they need. We have previously taken this approach to some extent, but never across as many occasions and never before pulling the inventory together for the customer, in a way that helps them buy all of the various products that they need to complete the total project. Frankly, as a big box, we have to get better at the tricks of the trade of great specialty retailing. We have been experimenting with product differentiation and solutions-based merchandising in test store end caps during the first half of this year and have seen positive customer response. We have also de-racked areas of these test stores, reducing SKUs to create larger spaces to display complete solutions. We expect the results to be even more favorable when we expand this idea further to present solutions-based sets in an open vignette space. Expansion plans for more powerful end caps and drop zones, as we call them, are underway. As we increase our focus on product differentiation and solutions-based merchandising, we are going to test and learn much more than in the past. We need to take a lot of at-bats to hit a home run. And with such a large store base, we have a great opportunity to cost effectively try many things within just a few stores to see what works, and then test the winners more broadly before rolling them out chain-wide. So you will see a more aggressive and proactive testing approach from us in the future. I would like to share the results of one such test and have chosen a project that involved all of the merchandising divisions to some degree. The goal was to showcase product innovation and value in a way that resonated with the customer. That involved bringing solutions out of the standard racking, presenting them in drop zones and vignettes that made the customer experience more simple and helpful and last, highlighting our great selection of national and private brands. As you can imagine, this project required that we reallocate space across the store, removing standard rack in some cases and making room for the new solutions-based presentations. And we developed new signs and messaging to communicate with the consumer. Customer feedback was extremely positive. They said it was easier to find product and solutions in the store, easier to understand product value, that Lowe's is more innovative than before and that they were more motivated to improve their home, and they were more likely to shop at Lowe's in the future. In order to bring innovation and solutions-based merchandising to life, we are making strong progress in implementing Integrated Planning and Execution or IP&E, which will support our merchants' efforts to go local. IP&E will provide the tools and processes to make our entire organization more efficient and refined in ensuring that the right product is in the right market in the right quantity to best meet customer needs. And it will create institutional memory to maintain local assorting decisions when merchants change. Over 80% of the merchandising teams have product line reviews in process with this new set of processes and tools, and they are uncovering significant consumer insights that are driving different product decisions. Resets from these line reviews are beginning now and will continue throughout 2012, and we should obtain sales inventory turn benefit beginning in 2012 and ramping into 2013. The IP&E process was recently used in a fashion category. The merchandising team combined science from the IP&E tools with input from talented people from across our company to create a comprehensive view of the customer needs in each store. They used that insight to be customer advocates across all aspects of the product line review for product line design to store experience. And finally, they varied selection for each store, providing more of the finishes, price points and platforms that consumers expect to see in their local markets. The full refresh should be completed in the fall of 2011. So in summary, we were not satisfied with second quarter performance. But my team has been reshaping the merchandising direction, implementing changes now that should advance us further in our multiyear implementation of our broader strategic vision of a customer-centric, anytime, anywhere and simpler shopping experience. As we enter this on ramp to our future, we will concentrate on delivering better value to customers, price plus something more and we will work to differentiate our product offering, and organize the customers’ multi-channel shopping experience around solutions. We expect to begin realizing the benefit of these initiatives in 2012, as we will balance a desire for speed to market with the prudent test-and-learn approach I discussed earlier. But we will stay focused on making the changes necessary to generate sustained customer preference and shareholder value. Thanks for your interest in Lowe's, and I will now turn the call over to Bob Hull to review our second quarter financial results. Bob?

Thanks, Bob, and good morning, everyone. Sales for the second quarter were $14.5 billion, which represents a 1.3% increase over last year's second quarter. In Q2, total customer transactions increased 2%, while total average ticket decreased 0.7% to $62.44. Comp sales were negative 0.3% for the quarter, which was below our guidance of approximately 2%. The lower-than-expected performance was driven by less recovery than anticipated from Q1 in our seasonal businesses and by higher-than-expected impact from lumber deflation, which hurt second quarter comps by approximately 70 basis points. For the quarter, comp average ticket declined 0.9%, while comp transactions increased 0.6%. Looking at monthly trends, comps were negative 2.7% in May, flat in June and positive 2.2% in July. The improvement in monthly comps during the quarter was driven by a few factors. First, we experienced a delay in our seasonal business, which improved as the quarter progressed. Second, demand associated with effort to remedy store damage was moderate in May and strengthened in June and July. Lastly, the toughest Cash for Appliances comparison from Q2 last year was in May. Appliance comps for the quarter, while still negative, improved throughout the quarter. With regard to product categories, the categories that had above average comps in the second quarter include building materials, rough electrical, modern landscape, nursery, tools, rough plumbing, paint, hardware and seasonal living. Year-to-date comp sales were negative 1.7%, and total sales of $26.7 billion were essentially flat to the first half of 2010. Gross margin for the second quarter was 34.49% of sales, which decreased 37 basis points from last year's second quarter. In the quarter, promotional activity negatively impacted gross margin by approximately 20 basis points. This promotional activity was initiated by both us and the competition. As you heard from Bob earlier, we are expanding our benchmark list to sharpen our everyday pricing on the most visible items, and we are working to lessen the frequency of special advertised promotions. Higher transportation cost, both fuel and ocean freight, negatively impacted gross margin by an estimated 15 basis points. In addition, our proprietary credit value proposition, which offers customers the choice of 5% off every day or promotional financing negatively impacted gross margin by 11 basis points. As Robert noted, this was more than offset by a leverage in tender and other costs associated with our proprietary credit program. I will provide the details of SG&A and EBIT impacts in a moment. Lastly, clearance activity associated with resets hurt gross margin by approximately 10 basis points. Slightly offsetting these items were Base Price Optimization and patch area expansion aided the gross margin by approximately 15 basis points. Year-to-date gross margin was 34.93% of sales, a decrease of 8 basis points from the first half of 2010. SG&A for Q2 was 22.22% of sales, which deleveraged 1 basis point. During the quarter, we incurred an $83 million charge related to an evaluation of the carrying value of long-life assets, including 7 stores that were closed. This compares to approximately $11 million in Q2 2010, which results in deleverage of 49 basis points. We also experienced approximately 15 basis points of deleverage related to investments made to improve customer experiences. The expenses related to staffing up our contact center to support the in-sourcing of repair services, internal and external resources for additional lowes.com capabilities, advancing the My Lowe's concept and continued efforts to build out our customer relationship platform. Store payroll deleveraged 10 basis points due to a slight increase in average hourly rate and new stores. Payroll taxes deleveraged 7 basis points as a result of both higher payroll taxes and higher payroll expenses. Almost completely offsetting these items was leverage in the following areas: we experienced 44 basis points of leverage associated with our proprietary credit program. This leverage was driven by a combination of fewer losses, as well as lower promotional financing as a direct result of customers choosing 5% off everyday versus promotional financing. In addition, tender costs were lower as the mix of proprietary credit increased 240 basis points in the quarter to 21% of sales. Also bonus expense leveraged 35 basis points in the quarter due to lower payment levels relative to plan compared with this time last year. Year-to-date SG&A of 23.76% of sales, which deleveraged 27 basis points in the first half of 2010. During the first half of 2011, charges associated with asset impairment cost 29 basis points of the SG&A deleverage. Depreciation for the quarter was $365 million, which was 2.51% of sales and leveraged 26 basis points compared with last year's second quarter. We estimate that our proprietary credit value propositions positively impacted EBIT by 29 basis points for the quarter. However, this was more than offset by the negative 49 basis point impact associated with impairment charges contributing to an EBIT decline of 12 basis points to 9.76% of sales for Q2. For the first half, EBIT was 8.41% of sales, which was 14 basis points lower than the same period last year. Interest expense was $90 million for the quarter and deleveraged 3 basis points to last year as a percentage of sales. For the quarter, total expenses were 25.35% of sales and leveraged 22 basis points. Year-to-date, total expenses were 27.19% of sales and deleveraged 11 basis points versus last year. Pretax earnings for the quarter were 9.14% of sales. The effective tax rate for the quarter was 37.5% versus 37.7% for Q2 last year. Net earnings were $830 million for the quarter, which was essentially flat to Q2 2010. Earnings per share of $0.64 for the second quarter was below our guidance of $0.65 to $0.69, but please remember that the reported $0.64 includes the $0.04 per share of negative impact associated with impairment charges. Earnings per share increased 10.3% versus last year's $0.58. For the first 6 months of 2011, earnings per share of $0.98 represents a 6.5% increase over the first half of 2010. Now to a few items in the balance sheet, starting with assets. Cash and cash equivalents balance at the end of the quarter was $568 million. Our second quarter inventory balance of $8.8 billion increased $172 million or 2% versus Q2 last year. The increase was driven by new stores and an increase in distribution center inventory. Inventory turnover calculated by taking a trailing 4 quarters cost of sales divided by average inventory for the last 5 quarters was 3.6%, a decrease of 3 basis points from Q2 2010. Return on assets determined using a trailing 4 quarters earnings divided by average assets for the last 5 quarters increased 35 basis points to 5.74%. Moving on to the liability section of the balance sheet. Accounts payable of $5.4 billion represents a 10% increase from Q2 last year. The higher accounts payable balance relates to the timing of purchases this year relative to last year. Our debt-to-equity ratio was 39.5% compared with 29% for Q2 last year. At the end of the second quarter, lease adjusted debt to EBITDAR was 1.75x. Return on invested capital, measured using a trailing 4 quarters earnings plus tax adjusted interest divided by average debt and equity for the last 5 quarters increased 65 basis points to 9.04%. Now looking at the statement of cash flows. Cash flow from operations was $3.3 billion, an increase of $511 million or 18% over last year largely due to the increase in accounts payable. Cash used for property acquired was $780 million, a 27% increase due to the corporate systems and store infrastructure investments we are making to provide better customer experiences. As a result, year-to-date free cash flow of $2.5 billion is 16% higher than the first half of 2010. During the quarter, we repurchased 59.7 million shares at an average price of $23.46 for a total repurchase amount of $1.4 billion. Year-to-date, we have repurchased 2.4 billion and have exhausted our share repurchase authorization. We are continuing to assess market conditions and evaluate options regarding capital structure and future share repurchases. Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook. The macro environment has changed dramatically over the past several weeks. We went from worrying about the customer, who was stretched by fuel and other inflation to a nation watching the debt ceiling countdown and now to extremely volatile equity markets. Given this and the impact on consumer sentiment, we have lowered our sales outlook for the second half of 2011. We are now planning for comparable store sales to be approximately flat to last year for Q3 and Q4. Earnings before interest and taxes and earnings per share estimates have been similarly reduced to reflect the lower expected sales. Macro challenges aside, we are not happy with our recent performance and are working to improve sales, profitability and shareholder value. However, as you heard from Robert and Bob, these efforts take time to implement, and meaningful benefits from our actions likely won't be reflected in our financial results until 2012. We expect a third quarter total sales increase by approximately 2% with comp sales estimated to be essentially flat to last year, and approximately 1.3% average square footage growth. Earnings before interest and taxes for the third quarter are expected to decrease 10 to 20 basis points to last year as a percentage of sales. This EBIT outlook includes approximately $30 million or 25 basis points of additional expenses associated with the 7 stores that closed yesterday. For the quarter, interest expense is expected to be approximately $90 million. The income tax rate is forecasted to be 37.7% for the quarter. We expect earnings per share of $0.30 to $0.33, including the additional expenses associated with store closings. For 2011, we are estimating comp sales to decline by approximately 1%. For the year, we expect to open approximately 25 stores, close 7, resulting in a net addition of 18 stores for an increase in average square footage of approximately 1.3%. With the estimated 1.4% impact of the 53rd week, total sales are expected to increase approximately 2%. For the year, we are anticipating EBIT to decrease approximately 30 basis points. This includes approximately $115 million or 25 basis points associated with asset impairment and store closing expenses. For 2011, interest expense is expected to be approximately $360 million. For the year, we expect the effective tax rate to be approximately 36%. The sum of these inputs should yield earnings per share of $1.48 to $1.54, which includes approximately $0.06 per share in impairment and store closing charges. For the year, we are forecasting cash flows from operations to be approximately $4.1 billion. Our capital expenditures for 2011 are forecasted to be approximately $2.1 billion, with roughly $100 million funded by operating leases resulting in cash capital expenditures of approximately $2 billion. As a result, we are forecasting free cash flow of $2.1 billion for the year. Our guidance for 2011 includes share repurchases activity through Q2, but does not include any impact from future share repurchases. Ashley, we are now ready for questions.

[Operator Instructions] Our first question comes from Brian Nagel with Oppenheimer. Brian Nagel - Oppenheimer & Co. Inc.: A couple of questions if I could. First off, an easy one. You gave us the comp progression through the quarter, and you mentioned too just some of the noise in the marketplace. Can you comment on, recognizing it's early in the third quarter, but can you comment at all about how sales have tracked here in August? And have you seen any, again, I know it's difficult to break apart all the pieces, but if you've seen any clear impact upon your business of the recent volatility in the financial markets.

We've not seen any -- we don't believe we've seen any activity from what's transpired in the financial markets on the performance August to date. I will tell you, Brian, that our comp performance through yesterday is slightly positive. Brian Nagel - Oppenheimer & Co. Inc.: Okay. That's helpful. Then the second question I have a little bit longer in nature. You've laid out -- you gave us a lot of detail on some of the re-merchandising efforts in your stores. You said that you -- we should see the benefits of that in 2012. Near term, as this is taking place in your stores, do you expect any type of sales disruption? And then, could there be any type of extra promotional activity as you clear through product that may not be part of that longer-term plan?

Brian, this is Bob Gfeller. I would answer your question as no. As I said in my remarks, we've been working on this re-merchandising effort really for the first half of this year. We did eliminate some SKUs to make room, do not foresee a major impact from that. We have been kind of working on how to execute these most efficiently for the stores. And that's part of our test-and-learn kind of mentality and approach going forward. So I can tell you that for the second half, working with Ricky and his team in store op, we don't see significant disruption. In fact, I would say, we would probably see a similar type impact that I started talking about that we saw in the test results.

Our next question comes from the line of Matthew Fassler with Goldman Sachs.

My first question relates to the move from the outdoor season to the indoor season. Obviously, with the seasonal rebounding, it helped Q2. As the indoor products become seasonally more significant, how is that factored into your comp outlook? And perhaps you can synthesize the appliance compare into that discussion as well.

I'll start, and let Bob Gfeller add any color. So certainly, Matt, when we take a look at our performance by category, we understand that in the second quarter, we had some negative impact in appliances as results for the Cash for Appliances compare. That's really 25-basis point drag in Q2. We think that's only about 5-basis point drag in Q3. Also as Bob mentioned, a number of things transpiring in flooring should help the second half of the year. So those are 2 indoor categories, as Bob mentioned in his comments struggled in Q2. We expect better performance in the second half of the year.

Matt, I would add to Bob's comments that, as you look at appliances, flooring as Bob said, fashion bath, that the IP&E process and the line review process is opening up some positive for us in the back half. I think, I mentioned the tools strength, which we expect will continue into the holiday season. And the whole focus on product differentiation as we move to the back half is very focused on indoor products.

Got it. That's great. And then just by way of follow-up, your vendors as they reported their second quarters spoke a lot about price increases or the attempt to take price increases. I know this is nothing new. You did not seem to discuss any real impact from input cost increases, when you talked about gross margin. So if you could just post us on what’s transpiring in the supply chain from that perspective.

Matt, as you know, as we think about the many different impacts on gross margin, it's tough to necessarily discern basis points here or there. I'll let Bob Gfeller talk about the process regarding vendor requests. The price increases that we saw were somewhat included in the promotional activity of 20 basis points that I referenced. What that means is that promotions might have actually taken price down a little bit, while some of the input costs may have gone up slightly.

Got it.

Matt, just to add to Bob's comments. As I think we mentioned before that vendors are coming forward with price increase requests. Our approach is to negotiate as hard as we can to the lowest cost possible. We certainly take them under consideration. Where we have taken pricing, we have moved some through to retail, the paint being one good example and rough electrical and rough plumbing are similarly. But as it relates to looking into the back half, as Bob said, I think it's more neutral than it was in the first half.

The next question comes from the line of Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co: On the -- I just want to follow up on the pricing commentary. How does -- I guess, it's a refocus on EDLP. How does this interact with your recent price optimization effort? Do you think you'll unwind some of the margin gains? It looks like maybe you got 20 basis points of benefit to gross margin in the past year out of pricing initiatives. Will we get some of that back as we look forward?

Chris, this is Bob Gfeller. Just in terms of pricing and price perception, Every Day Low Price is our goal and our focus. And therefore, everyday low cost is primary to deliver that everyday retail pricing approach. We do use new lower prices and special values at times although again going forward, we're going to be much more selective on promotion. Base Price Optimization and patch area expansion are now cycling really a year of being part of our everyday way we manage merchandising, and we are going to continue with those programs. And I would say that Base Price Optimization is not always a price increase. It can lead to -- I'm sorry, not only is it price decrease, it can lead to price increases, so that we are competitively priced overall. So overall, I would say that looking forward, Base Price Optimization and patch area expansion will be part of our program in the back half as it has been for the last year.

The other thing I would add, Chris, is that in some cases, Base Price Optimization identified areas where prices were actually below the competition. So we can be Every Day Low Price, in some cases, raise our price up to the level of competition. Christopher Horvers - JP Morgan Chase & Co: Okay. Totally understood. So it sounds like net-net, just really trying to refocus the industry on EDLP. So perhaps are we talking -- how many SKUs would you say are in that benchmark group out of a store that maybe has 40,000? And just a quick clarification, Bob Hull, did you say tax rate 36% for the year? Does that mean that it's going to be abnormally low in 4Q?

Chris, good catch. I think I did say 36%. It's actually 37.6% to clarify.

Chris, this is Robert. With regard to the number of benchmark items, that's something that we don't disclose. I think the important point there is that we're expanding the number of benchmark items from what we have in the past. Several things we've done is we kind of take this movement back to EDLP. As you know, going through the financial downturn that took place over the past several years, housing, economic downturn, it naturally led to a more promotional environment. As we transition out of that, we do think that the customers are telling us that they're looking for great value every day. So whether it's expanding the list of benchmark items to better send the message to them on an ongoing basis that they can find great value every day, whether it's what we did with our 5% off value prop that we did with the -- on the Lowe's credit card, the return back to EDLP and the work that Bob and his team were doing to work with our vendors and say, we're going to take everything we can out of cost, so we can provide that EDLP benefit to the customer and protect margin every day. Those are the type of things that we're working on. And so I think, the important takeaway is not how many is on the benchmark list, but the fact that we're expanding it to really, to drive that price perception home with the consumer every day.

Your next question comes from the line of Eric Bosshard with Cleveland Research.

On the price optimization, just to clarify, there's been good gross margin benefit from this over the past year. Should we expect that going forward, you continue to get gross margin benefit out of that? Or how should that play especially as you focus on this great value everyday effort?

Eric, this is Bob Hull. I'll start. Yes, I think just continued opportunities to refine our efforts in Base Price Optimization. I think all these tools work in tandem as Bob Gfeller described, integrating planning and execution is about taking the right SKUs in the right locations to be better market assorted. We've done a good job in the past. This kind of takes it up a notch. As a result of the overall umbrella effort to go local, Base Price Optimization has a role to play there to refine the retails of the SKUs that are in market there. So we do expect to continue to tweak the dials to have some novel positive impact going forward.

And, Eric, I would just add one other comment. We've cycled the year of the program. So again, in the notion of test and learn, we're taking a look at all we've done, driving sales, helping margin, being more price competitive and as a merchandising organization, taking that into year 2 of the program. So it's just an ongoing approach, that's really part of how we're going to market now.

I guess to be more direct about it, it feels like you’ve had good gross margin success but perhaps not the sales success in the last year. Is more of the emphasis over going forward or over the next year to grow the gross margin less and grow the sales line more? I just want to be clear on what's different within this.

Eric, this is Robert. I think our real focus is on how do we drive gross margin dollars and EBIT and better return to shareholders. So it's -- a great example is what we did with the 5% off everyday value prop on the Lowe's credit card. It has a slight negative impact on gross margin rate, but it actually drove more gross margin dollars at lower expense, so it drove a higher EBIT. So those are the type of opportunities that we're looking for. So take that, combined with what we're doing, EDLP, we used Base Price Optimization for those tiers. We're going to drive traffic. There'll be other areas where we'll gain margin opportunity, and we'll look at the entire mix and say, how do we provide enhanced margin dollars and a better EBIT to drive greater shareholder value.

And then just one follow-up. In terms of the store closing decision, can you just review what led to that, what the thoughts were for that and what's changed in the equation?

Yes. As we've talked to you in the past, we have several stores that were on our watch list, and we said we would continue to monitor them. We've done a lot of things in those stores to try and reduce operating costs of those stores, to try and make necessary changes that we could, that we thought would improve sales. As we looked at ongoing slow economic recovery and what now, according to the Fed, will even be probably even more delayed or slower growth over the balance of this year and potentially into next year and we looked out over the time line, what we thought those stores could accomplish, we just came to the conclusion that we didn't think there was enough opportunity in those markets to get those stores operating at the level that we needed to. So we made the difficult decision to go ahead and close them. Rick, I don't know if you have anything else you want to add?

No, Robert, that's -- as we discussed in the past, we have a process in place with operations, where we consistently review our underperforming stores to evaluate them against the market performance. As part of that ongoing process, as Robert identified, in this quarter's review and looking at the markets and what's happening at the macro level, we just determined that despite the best efforts of our teams in those locations, that the opportunity just wasn't there. So we made that difficult decision last night to inform those employees that we would close the stores. But it is part of our ongoing process as we review our stores on a quarterly basis.

Our next question comes from the line of Peter Benedict with Robert Baird. Peter Benedict - Robert W. Baird & Co. Incorporated: A couple of questions. First, just help us understand what you had baked into the second half of gross margin outlook, Bob, for the impact of increasing the benchmark price list and is that offset either partially or fully by lower kind of ad promotional cadence? How do we think about that? And then secondly, on the SG&A front, do you think you guys can hold this flat as a percentage of sales in a flat comp environment? How should we think about that? And how long you could do that?

So, Peter, I think for Q3, we're looking at gross margin performance not dissimilar to what we saw in Q2, all the same factors at play. We've got, from an SG&A front, we do have a bit of a headwind regarding the $30-or-so million associated with store closings. We do expect continued benefit from proprietary credit, the same or maybe a little bit higher in Q3 versus what we saw in Q2. As it relates to our outlook for the second half, sales and earnings are below plan, which means we'll likely leverage bonus expenses in the second half probably not to the same degree of what we leveraged in Q2. And then, we're always taking, I think, as Robert identified in his comments, we're continuing to take a critical look as to how we operate, how work gets done, whatnot, and ensure that we are getting value for all the dollars we invest in the business. Peter Benedict - Robert W. Baird & Co. Incorporated: And then one follow-up, in terms of assessing the options for the capital structure, can you give us a timeframe maybe for when we might hear the result of those discussions?

No real timing, Peter. We went into the year with a plan to repurchase $2.4 billion. We did that in the first 2 quarters. If you take a look at both cash flow from operations and free cash flow, we generated 80% of free cash flow in the first half of the year. And in fact, more than 100% of free cash flow in the first half. So we try to better orient the timing of share repurchases with cash coming in the door. However, as we've done in the past, we'll continue to evaluate the market and options. And to the extent we feel we can be opportunistic, that's consistent with our long-term direction, we will do so. But more to come there.

Our next question comes from the line of Laura Champine with Cowen and Company.

You mentioned that your outlook for 2012, at least for the stores that you closed, came down a little bit on the top line just given the macroeconomic conditions. Can you talk about from a broader perspective, what we should be thinking for 2012 in terms of a total company comp as you’ve got these in-house initiatives that hopefully will offset a weaker environment. Should we be looking at low-single digit to maybe mid-single digits? Or if you could comment just qualitatively on the shape of the recovery for next year.

Laura, this is Bob. I'll start. So I think we talked in terms of taking a look at our outlook more broadly, we took, as I mentioned in my comments, our sales and earnings outlook for the back half of the year down 4 to 7 stores that Rick described. We took a little bit longer-term view of those stores and the markets they're in and as he said, despite the best efforts of the team, made the decision to close. Longer term, we'll update you on our expectations 2012 and beyond at our Analyst Conference in the fall. I think news is changing dramatically. We're seeing that reflected in the roller coaster ride in the equity markets, so I think it's premature for us to comment on what 2012 looks like. I'd like to get to our Analyst Conference later this year.

As always, thanks for your continued interest in Lowe's, and we look forward to speaking with you again when we report our third quarter results on November 14. Thanks, and have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.