Lowe's Companies, Inc. (LOW) Q4 2011 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to Lowe's Companies Fourth Quarter and Fiscal Year 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 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 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. Robert 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 in detail. But first, let me share a summary of our fourth quarter performance and tell you how we're thinking about 2012. Sales for the fourth quarter increased 11%, including the 53rd week, while comparable store sales were positive 3.4%. Comps were positive in all regions of the U.S., as well as in 13 of 16 product categories. Comp transactions increased 3.8% in the fourth quarter and comp average ticket decreased 0.4%. While gross margin contracted largely in line with our expectation, we had good operating expense control and delivered earnings per share of $0.26, exceeding our guidance for the quarter. Delivering on our commitment to return excess cash to shareholders, in the fourth quarter, we repurchased $500 million or 20.7 million shares and paid $177 million in dividends. Overall, I'm encouraged by the progress we made in 2011 toward delivering better customer experiences and transforming our business to drive long-term sales growth and increased profitability and shareholder value. I would like to thank our hardworking employees for their ongoing dedication and customer focus. At our Analyst and Investor Conference in December, we outlined how we intend to build upon our core strengths and strategically invest in ways that will better position Lowe's for success. Among our top strategic priorities, we accelerated our investment in technology and store infrastructure in 2011 and increased our efforts to improve the customer experience. I'll share some specifics momentarily. We also refined our pricing and merchandising strategies and processes, actions that Bob Gfeller will review in a few minutes. With these enhancements in place, we are well positioned to drive stronger comparable store sales growth and expanded operation -- operating margins in 2012. So first, let me address our commitment to delivering better experiences that will differentiate Lowe's. As we've previously discussed, we strive to be more than a provider of home improvement products. Our vision is to be relevant at each step of the home improvement process and to deliver an experience that is simple and seamless across all selling channels. In 2011, we undertook took the largest single-year investment in IT in-store systems infrastructure in Lowe's' history. We accelerated investments necessary to begin addressing the issues with slow response times and outdated systems. In each of these investments, we focused on the critical infrastructure needed to support the strategic changes we're rolling out over the next 36 months. This meant bandwidth upgrades of 4x to 8x prior speeds and upgrading our in-store wireless network to handle video downloads for employee selling tools and customer Wi-Fi usage. And it meant rolling out iPhones to replace existing functionality and to enable the ability to tender a sale at any place in the store. These upgrades paved the way for a simple and seamless customer experience with Lowe's. Recognizing that customers are increasingly shopping across channels, we are focused on providing a seamless multi-channel experience, making it convenient for them wherever and whenever they choose to engage with Lowe's. We equipped our contact center associates with better tools and greater access to information, as well as the ability to close a sale when interacting with customers. We evolved our on-site selling model, providing specialists with the appropriate tools to help customers visualize a project, provide a realtime quote and close a sale on-site. We also made incremental improvements to our e-commerce platform, fueling a 22% increase in traffic and a 35% increase in conversion rates, resulting in a 70% increase in e-commerce sales year-over-year and an 1,100 basis point increase in online unit share. At the end of the fourth quarter, we had over 250,000 items available online and our mobile app, which launched this past August, is one of the highest-rated retail apps in the Apple Store. We also began shipping items directly to customers from select 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 cost to fulfill orders. We're also offering preprinted labels for return parcel shipments free of charge, a simple and convenient option for customers and a competitive advantage in the home improvement industry. And finally, this past October, we launched MyLowe's, a revolutionary new online tool that is unique in the home improvement industry and makes managing, maintaining and improving homes simpler than it's ever been. This is a very relevant and personalized offering where customers can create home profiles; save room dimensions and paint colors; organize owners' manuals and product warranties; create shopping, to-do and wish lists for future projects; set recurring reminders for common maintenance items; and store purchase history from all sales channels. And our road map for additional MyLowe's capabilities will grow and evolve over time based on customer and employee feedback. In 2012, we'll continue to capitalize on the benefits of these changes and the momentum they're creating and we will leverage additional new offerings. For example, in December, we announced the acquisition of ATG Stores, an online retailer of home improvement and lifestyle products. The acquisition is an extension of our commitment to providing customers with flexibility, simplicity and value. Initially, Lowe's and ATG will capitalize on complementary strengths and employees' expertise by sharing best practices for online marketing and merchandising. Then we'll take advantage of obvious synergies like interchange and transportation rates and cross-merchandising. The acquisition of ATG Stores will also allow us to more than double the number of items on lowes.com in 2012. We've also recently announced the channel exclusive partnership with house.com, a leading online platform for home remodeling, providing inspiration, information, advice and social tools for homeowners and home improvement professionals. On May 2012, House's inspirational image gallery, articles and designer expertise will be integrated into the MyLowe's experience, allowing customers to upload inspirational collateral to their home improvement projects stored in their MyLowe's account. We'll also fine-tune existing MyLowe's capabilities while providing customers mobile access to their MyLowe's accounts and the ability to share and collaborate with Lowe's associates. We remain focused on cost-effective and efficient operations. The management team continues to review how we operate on a cross-functional basis to ensure a consistent and connected execution while also evaluating our organizational structure to streamline decision-making and ensure that we have the right people in the right roles throughout the organization. In 2011, we worked through the rightsizing actions needed to become more nimble in our field-based store operations and human resources organizations. A few weeks ago, we announced, internally, a planned reduction in the size of our staff at our U.S. headquarters through a voluntary separation program. We must continue to invest in key initiatives to improve the customer experience and stay on the leading edge as a home-improvement company. Doing so requires that we decrease operating cost in other areas. We built our corporate infrastructure to support a single-channel business that was opening over 100 stores per year. Today, we are growing differently, and our seamless multi-channel strategy requires a different infrastructure. We are making tough decisions in order to improve profitability and meet our 10% operating margin goal by 2015. That goal assumed, among other things, 130 basis points of SG&A leverage, of which 15 to 20 basis points will come from rightsizing actions. I'm confident that the team is making the necessary decisions within the parameters of our long-term strategy. While these decisions caused some level of disruption, we are willing to accept short-term disruption for long-term gain. We are also in the process of changing our culture to move faster on calculated risk in order to improve execution and support changing customer expectations. We're refining our test-and-learn capabilities to more quickly and cost effectively try new things, see what works and then test the winners more broadly before rolling them out chain-wide. Economic news during the final months of 2011, and so far in 2012, has been somewhat positive, creating a bit of relative optimism in the market. However, we know that future uncertainties are still weighing heavily on the consumer. As we look at 2012, we see nothing on the horizon that would dramatically improve home values or the employment situation. Our data [ph] for 2012 is focused on what we can control, which is delivering better customer experiences. We're focused on leveraging the investments we've made in technology and the capabilities we are building to improve local market assorting and product presentation. We're focused on leveraging tools that allow employees to access more information and more products than ever before, and we're focused on leveraging our employees' passion for taking care of customers. Thank you for your interest. Bob?

Thanks, Robert, and good morning, everyone. During my time today, I will provide some detail around our fourth quarter performance to help give you a sense of the opportunities we leveraged, and how we drove the business through our strategies and actions. I will also provide an update on the progress we're making on the initiatives we shared with you during our Analyst and Investor Conference in December: value improvement, product differentiation and creating the foundation for a more seamless and simple customer experience. So first, on the fourth quarter. Our approach was to start stronger than last year by driving excitement throughout November, leading to the key Black Friday and Cyber Monday events in select products like tools, holiday decorations and appliances. We wanted the customer to see Lowe's as a destination for compelling values and groundbreaking product innovations, and we successfully drove strong comp sales performance in these categories. One innovative and exclusive product we featured was the new Kobalt double-drive screwdriver, which delivered 35% higher sales than last year's featured item and at a higher margin rate. Another example of innovation that worked in the fourth quarter was LED decorative Christmas lights, where we enhanced our assortment to meet customer demand for more durable lighting. The customer is willing to spend more for the energy savings and longer life, and we are capitalizing on this same value proposition to drive strong comps within the interior light bulb category as consumers are quickly transitioning to longer-life LED bulbs. Within appliances, we more heavily invested in inventory this year to support our aggressive approach to the holiday season. We capitalized on our broad assortment of major appliances from key national brand partners and drove double-digit comps in the month of November, and comps for the quarter trended with the company average. Compelling values in flooring throughout the quarter drove comp sales at the company average as well. We featured a competitive $397 whole-house laminate flooring installation program, and we also drove increases in ceramic tile sales with our investment in job lawn inventory in the third quarter, very sharp item pricing and product innovations. Likewise, as customers in the north and south continued to repair damage after Hurricane Irene, we were prepared for strong sales of roofing, lumber and other core categories with contractor-backed pricing and job-locked quantities. For the fourth quarter, we delivered double-digit comp sales in lumber, building materials and builders' hardware. Additionally, throughout the quarter, but particularly important during the Black Friday and Cyber Monday events, we used a high number of available SKUs and our investment in an enhanced online experience to drive sales. Supporting our online selection, our enhanced Flexible Fulfillment capabilities allowed us to say yes to customers more often. Given uncertainties surrounding the competitive environment in the fourth quarter, we forecasted a flat to 1% comp. This level of growth was similar to third quarter results and actually implied a slight improvement on a multiyear basis. In fact, we successfully executed our plans and drove significantly higher comps than forecasted in tools, appliances, building materials, lumber, flooring, fashion electrical, paint and nursery. Our Commercial business also outperformed the total company in the fourth quarter and fiscal year, driven by our programs targeted to commercial customers, including contractor packs, government sales and Commercial Account Specialists. Notably, we estimate that we drove roughly 150 basis points of comp growth by responding effectively to the unseasonably warm weather experienced across the country. This weather spurred strong demand in products used in outdoor projects such as fencing, paint, builders' hardware and outdoor lighting. Enough, in fact, to overcome unfavorable impacts in cold weather products including seasonal heating, ice melt and snow blowers. We also continued to drive comp sales through our 5%-off everyday offer on Lowe's private-label credit card purchases, which were introduced last year. This value proposition was our first step toward reemphasizing Everyday Low Prices. One last comment about our fourth quarter performance. As noted during the third quarter call, inventory had increased 5% over the prior year due to holiday inventory builds and more aggressive preparation for winter storms and the expansion of some product lines. We successfully sold through the majority of the holiday merchandise, and we finished 2011 with better-than-expected inventory levels. Now I'd like to update you on the progress we are making with some of the other initiatives we shared with you during our Analyst and Investor Conference, including value improvement, product differentiation and creating the foundation for a more seamless and simple customer experience. Value improvement is focused on ensuring everyday low pricing built on a foundation of everyday low cost and tailored market assorting. This foundation requires us to simplify our agreements with vendors, obtain their best cost the first time they quote us and better determine the SKUs to carry in each and every market we serve. The heavy lifting of value improvement occurs during the line review process, which we have enhanced to provide more analysis upfront to assist our merchants in selecting the products we will carry and driving to the lowest first-cost from vendors. Additionally, within these line reviews, we continue to refine the mix of private brands for each category, providing us another means to generate value and simplify the shopping experience for customers. At the end of fiscal 2011, we had completed 8% of the product line reviews as planned. We are pleased with the progress we have made, and for the products covered in those reviews, we have seen reductions in cost and SKUs per store while increasing SKUs to be made available online. Our teams are adjusting to the accelerated line review process and effectively using the new tools for better analysis. We completed this work -- when completed, this work will get the right products in the right market at the right cost, allowing us to compete at the right price in an increasingly price-transparent market. In addition, some of these savings from SKU reduction will be reinvested into more inventory depth of our best-selling items. Not surprisingly, our vendors have experienced a greater level of stress from this process. Most say it's tough but fair, and they have better visibility to the decision criteria for winning or losing business. We have established a vendor advisory council to provide a forum to hear vendor concerns and address them effectively. Our goal is to be their best business partner in the home improvement industry and to reduce our cost and theirs for promotions, resets and other allowances. We expect to finish line reviews representing over half of our sales volume in the first half of the year and for nearly all of our product lines by the end of 2012. As we move into the second half of 2012, our customers and employees will see the in-store and online execution of a majority of these product line reviews, which will allow us to begin benefiting from the hard work done during the prior months. These benefits will carry on into 2013. As for private brands, we ended 2011 with over 16% private branded sales penetration. For the products already covered in the new line review process, we have increased private branded penetration in most categories, and we expect to finish 2012 with at least 17% penetration. That said, we remain committed to supporting meaningful national brands in all categories where our customers believe that they provide great quality and value. With that understanding, here is the performance benefit we expect to harvest in 2012 from our value improvement efforts. First, being priced competitively every day, carrying the best selection of SKUs for each market and enhancing our private branded offerings is expected to drive close rates and comp growth. We are closely monitoring quarterly pricing metrics to assess how customers perceive our value proposition, and we are pleased with our progress to date. Further, as the reductions to unit cost flow through our cost of goods sold and as we continue to increase our mix of higher-margin private branded products, we should start to overcome the gross margin friction associated with our return to Everyday Low Pricing by the middle of the year, and actually experience margin rate benefit from our value improvement efforts for the full year. Finally, through SKU reduction, we expect to reduce our inventory by roughly $400 million by the end of the year. Next, I'd like to discuss our progress on product differentiation, which will firmly establish Lowe's as the place to find the newest and most relevant products for home improvement. We're working more closely than ever with our vendor partners on new product development and new display techniques. During the fourth quarter, we completed resetting roughly 500 stores with the reconfigured customer service desks, end caps, drop zones and new lower racking we shared with some of you during our store tour at the December Analyst and Investor Conference. These resets highlight innovation, value, national and private brands and creative idea solutions. The initial read on performance has been positive with success across all areas we reset. Now moving forward, we will reset over 900 additional stores in 2012 with the elements that work best in each market. We are using our learnings from the previously reset stores to tweak the concept and maximize our return on investment. We embarked on these resets based on customer feedback and we will continue to survey customers to measure their perceptions of Lowe's' uniqueness and new product vitality. And by improving on these attributes, we expect these resets to drive more repeat traffic to our stores, ultimately driving comp growth. Finally, I'd like to cover the benefits we expect in 2012 from our foundational efforts supporting the more seamless and simple customer experience that Robert covered with you earlier. We expect MyLowe's to consolidate spend into Lowe's that is currently spread across many competitors. While we are building momentum in developing deeper relationships with our customers, this consolidation of spend will be longer term in nature. So we do not expect a material sales benefit from MyLowe's in 2012. On the other hand, we expect many of our other foundational efforts to help us close more sales in 2012. For instance, first, we will more immediately provide the information a customer is looking for through iPhone technology in the aisles, Wi-Fi access and enhanced visual aids throughout the store. Second, we will provide enhanced product availability through an endless aisle of products on lowes.com, which can be fulfilled quickly and efficiently. Third, new on-site selling solutions will assist our Project Specialists and Commercial Account Specialists in closing sales at the customers' home or workplace. And finally, we will further leverage our new contact center capabilities. Customers can now call us for product information, product service assistance, project troubleshooting and to actually make purchases over the phone. I am proud of the progress we are making to drive these initiatives and excited about our ability to create differentiated customer experience. Thanks for your interest in Lowe's. Bob?

Thanks, Bob, and good morning, everyone. Sales for the fourth quarter were $11.6 billion, which represents an 11% increase over last year's fourth quarter. Lowe's' fiscal year ends on the Friday closest to the end of January. Therefore, 2011 included an extra week in the fourth quarter for a total of 14 weeks and 53 weeks for the year. Sales for the extra week were $766 million, which contributed 7.3% to sales growth versus Q4 2010. In Q4, total customer account increased by 11.4% while total average ticket decreased 0.4% to $61.11. Comp sales were 3.4% for the quarter, which is above our guidance of flat to 1%. Our higher-than-expected performance was driven by sales of seasonal items, continued strength of our proprietary credit value proposition and favorable weather. We estimate that the favorable weather aided Q4 comps by approximately 150 basis points. We estimate that our value -- our proprietary credit value proposition, which offers customers a choice of 5% off every day or promotional financing, positively impacted Q4 comps by 110 basis points. Also we estimate that sales related to sustained rebuilding in markets impacted by Hurricane Irene positively impacted Q4 comps by 40 basis points. For the quarter, comp transactions increased 3.8% while comp average ticket decreased 0.4%. Strong sales and lower ticket transactions, the impact of the proprietary credit value proposition and holiday promotions on larger-ticket transactions all contributed to mixing the average ticket down in the quarter. Looking at monthly trends, comps were positive in all 3 months with 0.2% in November, 3.2% in December and 7% in January. With regard to product categories, the categories that performed above average in the fourth quarter included building materials, lumber, nursery, tools, paint and fashion electrical. Hardware, rough plumbing, appliances and flooring performed at approximately the overall corporate average. For the year, total sales of $50.2 billion were an increase of 2.9%. The extra week contributed 1.6% of the increase while average square footage was up approximately 1%. Comp sales were essentially flat to the year. For 2011, comp transactions increased 0.4% while comp average ticket decreased 0.4%. For the year, the categories that performed above average included building materials, rough plumbing, tools, fashion electrical, paint and hardware. Home fashion storage and cleaning, seasonal leaving and flooring performed at approximately the overall corporate average. Gross margin for the quarter was 34.22% of sales, a decrease of 133 basis points from last year's fourth quarter. The gross margin decline was a result of several factors. As Bob noted, we had strong seasonal sales in appliances, tools and holiday decorations. Strong promotions contributed to a 28-basis point gross margin decline in the quarter. Our proprietary credit value proposition negatively impacted gross margin by 27 basis points. This was more than offset by leverage in tender and other costs associated with our proprietary credit program. I will provide the SG&A EBIT impacts in a moment. Also, inflation hurt gross margin by 21 basis points driven by paint, building materials, rough plumbing and fashion electrical. As we've discussed, we are working to lessen our promotional activity and reemphasize Everyday Low Prices. Actions taken to date negatively impacted gross margin in Q4 by approximately 20 basis points. Lastly, the impact of higher fuel prices negatively impacted gross margin by approximately 20 basis points. For the year, gross margin of 34.56% represents a decrease of 58 basis points from fiscal 2010. SG&A for Q4 was 25.88% of sales, which leveraged 76 basis points. The biggest driver of leverage in the quarter was bonus expense, which leveraged 41 basis points as a result of lower attainment levels for incentive compensation. We experienced 23 basis points of leverage associated with our proprietary credit program. This leverage was driven by a combination of lower promotional financing, money cost and operational expenses. In addition, tender costs were lower as the penetration of proprietary credit increased roughly 350 basis points over last year's fourth quarter to 23.3% of sales. Also in the quarter, property taxes, other salaries and legal expenses all leveraged approximately 15 basis points. These items were slightly offset by de-leverage in a couple of areas. We experienced 22 basis points of de-leverage related to investments made to improve customer experiences. The expenses related to the continued build-out of our customer relationship platform, internal and external resources to further develop MyLowe's during the quarter and store infrastructure upgrades. Also in the quarter, we reported cost associated with previously announced store closing, discontinued projects and long-life asset impairments, which totaled $53 million for the quarter. This compares with $38 million for similar items in last year's fourth quarter resulting in 10 basis points of expense de-leveraged in Q4 this year. For the year, SG&A was 25.08% of sales and de-leveraged 48 basis points to 2010. Depreciation at 3.29% of sales totaled $383 million and leveraged 45 basis points compared with last year's fourth quarter. Earnings before interest and taxes decreased 12 basis points to 5.05% of sales. We estimate that our proprietary credit value proposition positively impacted EBIT by 38 basis points for the quarter as leverage in proprietary credit, bank card and other expenses more than offset the negative gross margin impact. For the year, EBIT of 6.53% represents a decrease of 76 basis points from 2010. Charges for previously announced store closing, discontinued projects and long-life asset impairments totaled $523 million, which negatively impacted EBIT by 104 basis points for the year. Interest expense at $102 million for the quarter de-leveraged 6 basis points as a percentage of sales. The increase in interest was attributable to an almost $1.1 billion increase in total debt relative to last year. For the quarter, total expenses were 30.05% sales and leveraged 115 basis points. We estimate that the extra week contributed approximately 50 and 10 basis points of expense leverage for the quarter and year, respectively. Pretax earnings for the quarter were 4.17% of sales. The effective tax rate for the quarter was 33.6% versus 37.5% in Q4 last year. The lower tax rate was a result of federal and state tax credits. For the year, the effective tax rate was 36.7% compared to 37.7% for 2010. Net earnings of $322 million increased 13% versus last year. Earnings per share of $0.26 for the quarter exceeded our guidance of $0.20 to $0.23 and increased 23.8% versus last year's $0.21. I wanted to call out several discrete EPS impacts for the quarter. We estimate that the extra week and the lower tax rate aided Q4 by approximately $0.05 and $0.01 per share, respectively. These items were offset somewhat by $0.03 per share negative impact associated with charges for previously announced store closings, discontinued projects and long-life asset impairments. For fiscal 2011, earnings per share of $1.43 were up slightly versus 2010. Now to a few items on the balance sheet, starting with assets. Cash and cash equivalents balance at the end of the quarter was slightly more than $1 billion. Our ending inventory balance of $8.4 billion was up slightly versus last year. Inventory turnover, calculated by taking a trailing 4 quarters cost of sales divided by average inventories for the last 5 quarters, was 3.72, an increase of 9 basis points. Return on assets, determined using a trailing 4 quarters earnings divided by average assets for the last 5 quarters, decreased 43 basis points to 5.37%. We estimate that the impact of charges for previously announced store closings, discontinued projects and long-life asset impairment negatively impacted return on assets by 93 basis points. Moving on to the liability section of the balance sheet. We ended the quarter with accounts payable of $4.4 billion, which was flat to last year. In the fourth quarter, we issued $1 billion of unsecured bonds in 2 tranches, $500 million of 10-year notes with a 3.8% interest rate and a $500 million 30-year issue with a 5 1/8% interest rate. As a result, our total debt balance was $7.6 billion. Our debt to equity ratio was 46.1% compared with 36.3% at the end of 2010. At the end of the fourth quarter, lease adjusted debt to EBITDAR was 2.03x. 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 decreased 33 basis points for the quarter to 8.67%. We estimate that the impact of charges for previously announced store closings, discontinued projects and long-life asset impairments negatively impacted ROIC by 133 basis points. Now looking at the statement of cash flows. For the year, cash flow from operations was over $4.3 billion, which was an increase of $497 million or 12.9% over 2010. In 2011, cash used in property acquired increased $500 million to just over $1.8 billion. The increase was driven by investments in information technology and store systems infrastructure. This resulted in free cash flow of $2.5 billion, which is flat to 2010. During the quarter, we repurchased 20.7 million shares at an average price of $24.10 for a total repurchase amount of $500 million. For the year, we repurchased 118 million shares for a total of $2.9 billion. We have $4.5 billion remaining under our share repurchase authorization. Looking ahead, I'd like to address several of the items detailed in Lowe's' business outlook. As I noted earlier, our fiscal 2011 included an extra week, which contributed 1.6% to sales growth and approximately $0.05 per share. Our 2012 growth rates will be negatively impacted by -- in comparing 52 weeks with last year's 53 weeks. In 2012, we expect a total sales increase of 1% to 2%. On a 52-to-52-week basis, sales increase would be approximately 3%. We're estimating 2012 comp sales to be 1% to 3%, and we expect to open approximately 10 stores resulting in a slight increase in square footage. For the fiscal year, we are anticipating an EBIT increase of approximately 100 basis points. EBIT growth will come from modest gross margin improvement in comparisons to 2011's nonoperating charges. Robert shared with you that we have initiated a voluntary separation program. While there will be some negative expense pressure in Q1 related to severance, our 2012 outlook includes minimal impact from this as any reduction in wages will be almost completely offset by severance. We will see the savings from this program beginning in 2013. Also I wanted to share some cost pressures that we had included in our 2012 plan. While we leverage bonus expense in 2011, this creates a 20-basis point headwind in 2012 as we plan for target bonus payouts. In addition, we will continue to make investments to improve customer experiences and expect those to negatively impact SG&A by approximately 15 basis points in 2012. We expect depreciation expense of about $1.5 billion. The effective tax rate is expected to be 38.1%. The higher rate relative to 2011 is expected to reduce earnings per share by approximately $0.04. The sum of these inputs should yield earnings per share of $1.75 to $1.85, which represents an increase of 22% to 29% over 2011. Now looking at our guidance relative to first call, while the annual consensus falls within our range, specific to Q1, there is a calendar week shift as a result of 2011's 53rd week. This year's first quarter will include one less week of winter and one more week of spring than last year, which impacts the spread across the quarters. For the year, we're forecasting cash flows from operations to be approximately $4.2 billion. Our capital plan for 2012 is approximately $1.4 billion with roughly $100 million funded by operating leases resulting in cash capital expenditures of approximately $1.3 billion. This results in estimated free cash flow of $2.9 billion for 2012, which represents a 16% increase over 2011. Our guidance assumes approximately $4.5 billion in share repurchases for 2012, spread evenly across the 4 quarters. We have a $550 million debt maturity in September 2012, and our plan assumes that we migrate towards a 2.25x lease adjusted debt to EBITDAR by the end of the year. We will update you on specifics regarding future debt offerings at the appropriate time. Regina, we are now ready for questions.

[Operator Instructions] Your first question will come from the line of David Schick with Stifel, Nicolaus.

You mentioned store resets are having a positive impact. Could you give some detail on how those stores performed versus control group or the non-touch stores?

David, this is Bob Gfeller. I can give you some color on that. The 500 stores that we have reset in 2011 are showing positive results across the store in terms of all the things that we have reset, the end caps, the drop zones, particularly the innovation end caps, and the most productive area in the store is actually the contractor pack area as we close the year.

Dave, this is Bob Hull, just to follow back up. Just remember those stores weren’t completely reset until December. So the earliest sets, we have a very positive read, but the most recent ones, towards the end of the quarter, still early. The other point is the inventory used for those end caps was largely in-line inventory, and we're just making dedicated buys, which should continue to improve our performance for those end caps for 2012.

Okay. Great. Could you update us on the number of MyLowe's accounts out there?

Yes, this is Robert. We're up to about 3,000 unique swipes out there on -- I mean, 3 million unique swipes. I'm sorry, 3 million unique swipes now on MyLowe's. And we have a goal, we really believe, with the additional functionality that we're adding during the year, our intent is to be to 10 million by the end of 2012.

The next question comes from the line of David Gober with Morgan Stanley.

Just one in terms of the scaling of guidance throughout the year, and I know, obviously, you're not giving quarterly guidance at this point. But I'm just wondering if you could speak broadly about how that phasing stacks up, particularly given the upwards slope of 2011 results. Would you expect the first half to show maybe stronger sales trends and weaker margins and the opposite to be true in the second half?

I think as it relates to sales, the week shift does have an impact and I suggest you may go take a look at 2006 to get a sense how that might play out relative to 2005. 2005 was the last time we had a 53-week fiscal year. As relates to sales I think, if you recall in Q1 last year we had a very tough spring, a very bad April. So we've got easier comparisons coming as it relates to spring. Conversely, we've got tougher comparisons now in fourth quarter as we cycle the mild weather that we had in Q4 '11. However, I don't see much disparity in comps across the 4 quarters of the year as relates to margin. Margin should be -- if you exclude the nonoperating charges, as well as the impact of the 53rd week, I think we'll see some slight gross margin pressure in the first half of the year and some margin improvement, which should guide what happens with EBIT margin for the year and by quarter.

Okay, and just a follow-up for Robert if I could. You mentioned some of the data points in terms of the overall economy and housing that we've seen over the last few months. And I wondered, as you guys think about the outlook for the next year or 2, what are the key metrics that you're watching? And is there any way to really tell, within the numbers that you've seen recently, whether consumers are thinking about their homes differently or thinking about investment in their homes differently than they have over the last couple of years?

David, I'll start and then I'll have Greg maybe follow on with any thoughts that he has. When you think about it, we did see an uptick in consumers' willingness, we think, to spend in the fourth quarter. So in addition to the favorable weather, we saw a bigger impact than we would normally see just with weather alone. So we do think that the consumer is more willing to spend. As we said, I think overall, there's still going to be downward pressure on home prices in 2012 because of the foreclosure overhang. But what I think you are seeing is that, with a lot of the other media news stories that are out there, the value of your home isn't the top news story every day. So it's kind of moved to the back burner. So I do think that it's helping as a little bit more favorable data on the economy, a little bit more favorable data from an employment situation is easing consumers' fear of the value of their home and what the future portrays for that and opening up their willingness to spend on some on those projects around the homes. Unless something comes to kind of knock their knees out from under them, we do feel like they're going to be more willing and more engaged on spending around the home. So Greg?

And to layer onto that, David, it’s a balance we’re watching between the effective economic pressures on homeowners and renters today, and especially on the part of homeowners, especially on the part of young homeowners. A continual mindset that wrapped around their home as a place that they still feel is special and they want to invest in. We keep checking for any kind of breakage in that mindset and we're not seeing it, we're seeing a continual devotion to the home. And as Robert said, as the economic pressures tend to mitigate as we look out over the next 3 to 4 years, we know that we have that underpinning of psychographics that is very much in our industry's favor.

Your next question comes from the line of Colin McGranahan with Bernstein.

First question for Bob Gfeller. Bob, it sounds like you've done about 8% of the product line reviews so far. You mentioned the reduction in cost but you also mentioned some vendor stress, which is certainly understandable and something we've kind of been picking up in some of our checks as well. Can you expand on that a little bit and tell us, as you've gotten started on this, one, what has played out as you expected, maybe what's played out a little differently? On average, what kind of a cost reduction are you seeing in first cost? And then what's some of the feedback been that prompted you to put this vendor council together?

Sure, Colin. I'll hit some of those. So we're 8% through the line review process at the end of the year. We're on schedule and on track. Some key learnings, number one, I think our merchants are utilizing the technology tools that we talked to you about in December very well. They're using them as great input into the line review process. As it relates to vendor learning, the vendor advisory council we actually formed last year in anticipation of wanting to, again, be our vendors' best business partner in home improvement. So it was not a reactive move, it was a proactive move. I think what the vendors are telling us is that we are approaching this in a firm and fair way. They're getting a lot of feedback on the line review process going in and also coming out whether they win or don't win the business, and we're going to continue to monitor that as we go through the rest of this year. And then the last thing I would say is on the cost reductions. We set targets, they were kind of initial targets. We're on target, particularly against the SKU reduction goals that we've set. And as we've said, we're going to continue to monitor them as we go through the first half, but so far, so good.

Okay, great. And then just a follow-up question for Robert. In terms of the voluntary corporate severance, maybe you could talk a little bit more about that. What prompted that in the big picture? And why that approach? I think we've seen that at some other retailers end up resulting in higher, longer tenure and higher-level people taking those buyouts. What would your expectation be? But maybe just a little bit more color, generally, on that approach and why you chose to go down that way.

Yes, a little bit on the why. Colin, if you think about it, in the past year everything we've talked about, really the past 18 months, with Wall Street and our new strategic mission, Lowe's experience of the future. If you think about it, the overwhelming majority of the people, if you ask them at Lowe's, they feel like they're working for a different company today than they were a year or 18 months ago. Some people are there, they're onboard absolutely supportive with the direction that we're headed in. For others, they've operated a different way in the past and we changed the rules in the middle of the game for them. So for those that may be struggling a little bit with the direction of which we're heading as an organization, this gives them another viable option. So that, hopefully, at the end of the day, we're left with a much higher percentage of people that are onboard and support the strategies of where we're going. So that's the reason we did it on a voluntary basis, and we think it'll be successful.

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

I'd like to start out by asking you about the composition of your gross margin increase for the year. You had a lot of moving pieces that you detailed here in the fourth quarter. If you could talk specifically to the impact that you think proprietary credit will have on gross margin, and any other line items that you think will stand out would be very helpful.

Matt, this is Bob. So specifically you're looking for color on 2012 outlook?

Correct.

Yes. So the way we're thinking about it, Matt, gross margin dropped 58 basis points in 2011. Roughly speaking, we're looking to make up about half of that in 2012. We've launched the consumer aspect of the value proposition in April and the Commercial in July. So we'll have some negative pressure, gross margin pressure, in the first half of the year as we cycle those. Bob Gfeller described to you the cadence of the line review process, that price reductions early will create some pressure before we get the full impact of the cost reductions. Therefore, we'll see margin improvement close to flat in the second quarter, begin increase as the year progresses and have probably healthy gross margin expansion in the back half of the year, especially as we cycle some of the declines we saw Q3 this year roughly 100 basis points, Q4 this year 133 basis points.

And as part of that, it sounds like some of the one-off promotional pressure that we saw, for example, here in the fourth quarter you quantified that at 28 basis points, you would expect that would more or less abate?

That should abate, yes. That should be either be flat to a positive. And then the other piece I would mention is roughly the 100-basis-point increase in private label products should help as well.

My second question is also a financial question, kind of a detailed one. I believe you guided to depreciation of $1.5 billion, which would be up a bit year-on-year, and depreciation was really declining in dollar terms for the past 2 years. So any color you could give us on that would be terrific.

Sure, Matt. So we spent a lot of time talking to you about the level and breadth of investments in technology, both corporate systems for services, for the Integrated Planning and Execution tool that Bob's and the merchant team are using to go through the line review process, MyLowe's, investments in lowes.com, et cetera, with additional investments required in 2012. So what we have there is a pretty high concentration of investments in a short-lived asset, 3- to 5-year depreciable asset. So that's really what's happening. It's causing depreciation to be up slightly in 2012 relative to 2011.

If you take a look at the multi-year outlook, is that essentially the peak for depreciation dollars as you see it?

It should be, which is why when we gave the long-term outlook in 2015, it declines because we cycled through the kind of jump in '12.

Your next question comes from the line of John Zolidis with Buckingham Research.

Just to make sure that we have clear on the guidance for operating margins. For 2011, we should be using a base of 7.5 from which you expect to get 100 basis points of improvement?

No, we guided based on GAAP figures. So it's the GAAP guidance versus the GAAP reported figure. So the reported figure of 6.53, it’d be the 100 basis points off of that.

Okay. And then secondly, I wonder if you could comment on the online business. You reported a 70% increase in revenues online. I assume that includes the benefit of the acquisition that you closed on in December. But even excluding that, my guess is that the online business is growing significantly faster than the store business. Where do you think that can be looking out 5 years as a percentage of your total business? And do you see any impact on the gross margin or the profitability from the shift from store business to online?

So specific to 2011's 70% increase it had 0 impact from acquisition of ATG Stores. That was all based on more items online, more multi-channel sales. So think about a still high percentage of our online sales are buy-online-pickup-in-store, so it's really leveraging all the channels to serve the customers. As we think about growing that business going forward, we have a target of roughly double the number of SKUs online in 2012 relative to 2011. ATG is certainly is going to help us. We bought a very interesting technology company that has a lot of good things going, that has roughly 3.5 million items online, a number of which we'll make available on lowes.com in 2012. Longer term, if you think about our outlook at the Analyst Conference, we gave you a roughly 3.5% comp for a 4-year average with about 1/3 of that coming outside of store. So online still is going to be huge growth opportunities beyond the 70% growth in 2011.

Your final question will come from the line of Alan Rifkin with Barclays Capital.

Bob, you mentioned that, with respect to the line reviews, 8% were done and you're looking for all of them to essentially be completed by the end of the year. Is there any quantification of what those line reviews aided your EBIT margin in the fourth quarter?

Alan, it's Bob. The completion of those line reviews had no impact in the EBIT margin in the fourth quarter. Alan, so if you think about it, there's a process to actually go through the work up front to evaluate the vendor offerings and compare that to where we are today, it's more of a planning process. The subsequent quarters, when those get rolled out to the store where the customer has an opportunity to vote on whether they like what they see or not, so we'll start seeing the impact of the 8% completed in Q4 in the first quarter of '12.

Okay. So question for Bob Hull as a follow-up. So as you go through the rest of the line reviews in the rest of the year, what is the benefit to your 2012 earnings that you anticipate from the line reviews for the full year?

That's the roughly 30 basis points of gross margin improvement for the year that we spoke of. Negative pressure in the first half of the year, and then recovery in the second half of the year obviously, paying big dividends in 2013 and beyond as we've got the process largely behind us.

Alan, I would just add -- I'm sorry, let me add one other thing on getting the right inventory in the right stores and managing that more effectively, that's that $400 million inventory reduction by the end of the year.

Okay. And one last question if I can, for Robert Niblock. With respect to the VSP, Robert, we certainly applaud you guys taking these steps at this point. Was curious on why the timing now? Does it come hand-in-hand with your reduction in new stores that you anticipate over the next 4 years?

Well, certainly, Alan, as I talked about in my comments, our structure was built to support a high-growth model, and we're going to be growing differently in the future. But really as I was responding to Colin, and over the past year, the past 18 months, we have dramatically changed what our expectations are of leaders throughout the organization. And while a majority of the people are very much on board, there are some that are very uncomfortable. They're, not going to raise their heads and say I'm uncomfortable with this. This gives them a viable option in order to, if they're not comfortable with the direction we're headed, to be able to give them a viable option for a path forward for them if they're not comfortable with the change we've made from the leadership. So we felt that was the best way to be able to approach the issue. So that at the end of the day, we have a much higher percentage of people that are on board because we've got to have the organization onboard in order to realize where we're trying to go with the organization. So...

Okay, and as a follow-up, Robert, if memory serves me right, I believe that election actually expires today. Any commentary relative to your plan, whether you're seeing fewer or more people take up the package?

I would say that, obviously, a lot of them will come in the last day, which is normally the case with these. But we've been very pleased with the response we've seen versus what we had anticipated from the group at this point. And once again, thanks for your continued interest in Lowe's. We look forward to speaking with you again when we report our first quarter 2012 results on May 21. Have a great day.

Ladies and gentlemen, this does conclude today's conference. Thank you all, for participating, and you may now disconnect.