Good morning, everyone, and welcome to Loews Company's Second Quarter 2010 Earnings Conference Call. This call is being recorded. Statements made during this call will include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's earnings release and in its filings with the Securities and Exchange Commission.
Also during this call, management will be using certain non GAAP financial measures. You can find a reconciliation to the directly comparable GAAP financial measures and other information about them posted on Loews' Investor Relations website under Corporate Information and Investor Documents. Hosting today's conference will be Mr. Robert Kniblock, Chairman and CEO Mr. Michael Brown, Executive Vice President of Store Operations and Mr.
Bob Hull, Executive Vice President and CFO. I will now turn the program over to Mr. Kniblock for opening remarks. Please go ahead, sir.
Good morning, and thanks for your interest in Loews. Following my remarks, Mike Brown will review our operational performance and Bob Hull will review our financial results. While the economic climate has improved compared to a year ago, ongoing uncertainty in employment and housing continues to weigh on consumers, resulting in a fragile consumer mindset and a sluggish economic recovery. So in the first half of the year, we saw consumers slowly return to more discretionary projects as encouraging economic data reduced their cautious stance. But when data was negative, we saw moderation in customer shopping patterns.
As a result, we see the economy bouncing along the bottom in 2010 resulting in a transition year for our industry. In our Q2 consumer survey, more homeowners indicated that they are spending money on essential versus non essential items, but more than half of the home improvement projects consumers have planned in the next 6 months are considered discretionary. This inconsistency further indicates that consumers are uncertain about the macro environment as well as their personal financial situation. Over the near term, it's unclear where the next data point will land. As a result, we don't expect strong industry growth until we experience consistent improvements in the labor and housing markets, which likely will not occur until 2011.
Although sales for the quarter trended below our expectations, with our flexibility and focus on execution, we were able to deliver solid results for the quarter, including earnings per share within our guidance. Sales for the quarter increased 3.7% and comparable store sales increased 1.6%. Although gross margin was negatively impacted by product mix due to strong appliance sales, the promotional environment remained rational and we had a slight increase in our gross margin rate for the quarter. We leveraged expenses in the quarter and delivered earnings per share of $0.58 I would like to thank our more than 238,000 employees for their hard work and dedication, which allowed us to deliver solid earnings for the quarter. During the Q2, we continued to benefit from the cash for appliances rebate program, which aided overall comp sales by approximately 25 basis points and helped drive double digit comps in our appliance category.
Home environment, seasonal living and rough plumbing categories plumbing categories benefited from the extreme heat across much of the U. S. As we experienced strong air conditioning, seasonal cooling and dehumidifier sales. However, extreme heat did negatively impact sales in our nursery category. Seasonal Living also benefited from robust sales in grills and grill accessories associated with the Memorial Day, Father's Day, and July 4 holidays.
Likewise, our Father's Day tool event was a success, driving above planned sales and demonstrating that we had the right inventory to meet customer demand. We were also pleased with our sell through of seasonal inventory, which has us well positioned to minimize end of season markdowns. While overall inventory levels were up 5.7% in the quarter, we significantly improved our deleverage versus Q1 and expect inventory to only be up slightly at year end. Comp traffic was down slightly for the quarter, but comp average ticket was up 2.1%. Ticket benefited from strong sales of appliances, air conditioners, and grills.
Certain product categories such as nursery and lawn and landscape, which traditionally drive traffic in the Q2, were negatively impacted by the extreme heat. Comps for tickets greater than $500 were nearly 2%, while comps for tickets less than $50 were essentially flat. We continue to be pleased with our performance in Canada. For the quarter, we had 2.4% comps in Canadian dollars and over 11% comps in U. S.
Dollars, contributing 10 basis points to our consolidated performance. Our expansion in this market continues with our first stores outside Ontario opening in the second half of twenty ten, and we expect to end the year with 25 stores in Canada. We remain committed to driving profitable market share gains, and we use 3rd party data to gauge our retail market penetration. On a rolling 4 quarters basis, we gained 50 basis points in total store unit market share with gains in 12 of our 20 product categories. Differentiation is an important part of our merchandising strategy and we're committed to offering a wide selection of national brand name merchandise.
Last quarter, we announced our channel exclusive partnership with Stainmaster Carpet, the brand most requested by consumers. This great brand, together with our easy to understand and baggy based carpet installation offer, positions us to increase sales and capture market share as consumer spending rebounds. We also recently announced our new Valspar high def paint line. Valspar's high def advanced color system provides exceptional color accuracy, superior fade resistance and durability. Painting is an easy and affordable discretionary project that helps consumers personalize their homes.
Our strong financial position together with our commitment to providing great service and quality products will allow us to drive profitable market share gains and create value for shareholders. We view 2010 as a year of transition for the home improvement industry, and we don't expect consistent improvement in core demand until the fundamentals of the labor and housing markets improve. In the interim, we continue to focus on operational efficiency, and we are ready to respond if demand is better or worse than expected. Thanks again for your interest. And now I'll turn it over to Mike Brown to provide an update on successes in the quarter as well as how the operations team is focused on managing in today's uncertain environment.
Mike? Thanks, Robert, and good morning. I'd like to spend time this morning reviewing our 2nd quarter performance, as well as discussing how we continue to execute through this uncertain environment. Domestic performance was balanced with 19 of our 23 U. S.
Regions generating positive comps. We saw particular strength in markets that first entered the downturn, Florida, the Northeast and Arizona. This was the 4th consecutive quarter of above average comp growth for these markets. In contrast, the Gulf Coast region had the lowest comp performance as we cycle last year's post hurricane sales. Extreme heat in the East and Midwest had a mixed effect on sales.
While reduced demand in outdoor living categories, particularly nursery, we were prepared and capitalized on strong demand for air conditioners and fans. The cash appliances rebate program continued in the 2nd quarter, although in fewer states. And consumers continue to take advantage of this program to replace their appliances with new, more energy efficient models, particularly refrigerators, ranges, dishwashers and laundry products. As we mentioned last quarter, we formed a cross functional team to ensure our stores and store employees have the information, the processes and inventory necessary to help customers purchase qualifying appliances, while minimizing the efforts needed to collect state rebates. This program was a great example of our ability to quickly respond to opportunities in the marketplace with a coordinated plan of attack and to execute those plans with precision and consistency in our stores.
As a result, 3rd party estimates suggest we gained 160 basis points in appliance unit share in the 2nd quarter. Now focusing on our specialty sales. During the Q2, commercial install sales exceeded our overall sales trends, reflecting the investments that we have made in these businesses. Commercial sales during the quarter posted comps above the company average, reflecting solid growth in both ticket and traffic. In our Q1 call, we discussed our district commercial account specialists who continue to cultivate relationships with existing customers as well as develop new customers.
And we continue to evaluate this position and make adjustments as needed. In fact, this quarter we added 5 additional markets to our program, bringing the total of our district commercial accounts specials to 130. We're also leveraging our store commercial sales teams as we continue to focus on the segment of our business. Our commercial business is an important part of our overall growth and results for the quarter are proved that our strategies are working. Installed sales produced high single digit comps for the quarter.
Carpet, roofing, fencing and windows performed above our overall installed sales comp trend. The increases in roofing, fencing and windows were driven in part by our project specialty exteriors, which we have in approximately 1400 stores. We continue to monitor their performance and make adjustments as the environment and our experiences warrant. We're currently rebalancing the number of PSEs we have in several markets and are evaluating additional products for them to sell. Across our company, we continue to capitalize on sales opportunities, both through the larger initiatives like the ones I highlighted earlier and through the smaller opportunities that present themselves daily to our employees as they interact with customers in our aisles.
We're still seeing customers wave between larger ticket replacements and smaller ticket fixes. And we've positioned our employees with training and tools needed to help customers with any purchase. We continue to focus on product sales where we can assist the customer with better understanding their entire project and recommending all the related items to complete their project. By doing this, we can provide the customer with a better shopping experience and at the same time, we can increase our average ticket. Now moving on to staffing.
Q2 payroll remained flat year over year as a percent of sales, despite sales falling below our expectations and the addition of our project specialist exteriors and the facility service associate positions. We attribute this performance to the flexibility of our staffing model. We use more seasonal part time employees as we build our spring staffing. This allowed us to support strong seasonal sales in Q1 and to adjust quickly to the changing sales environment throughout Q2. So after Memorial Day, we're able to ramp hours down more quickly from our staffing spring hours build.
We've also gained a number of efficiencies as we continue to refine our store processes. Some examples include updates to our freight flow program, our
product handling procedures,
flow program, our product handling procedures and a new cash handling tool. And we started by asking those who invest our store employees. This approach continues to prove beneficial as we make improvements to our operating model. And I would like to say thank you to our employees for helping make a difference in our performance. I'd also like to add a little more color around our facility service associate.
We're still refining this position's responsibilities. However, are pleased with the impact these associates are having on our facilities and recurring maintenance expenses. In addition to handling most of the store janitorial tasks, we have successfully they have successfully assumed many responsibilities, including basic plumbing, store equipment repair and other forms of maintenance. We continue to work through our remaining expense contracts and we'll make changes as we see opportunities. This position was implemented at the end of our Q2 last year, so we expect to see leverage on this expense line headed into the second half.
Of course, while we want to manage expenses, we're in the business of serving customers. And even though we managed to generate expense leverage on our well to low comp, we're very proud of our continued trend of improving customer service scores. In fact, this latest quarter is another in our series of improving year over year customer service scores as we began measuring them in the current format in 2,006. We believe this improvement is the result of a consistent alignment of our resources and continued focus on providing great customer service. For example, this year we implemented the new service and sales employee incentive program, which combines what previously were many different incentive programs into a single program that compensates all employees in each store that meets predetermined customer service thresholds and store performance goals.
So, we're pleased with having improved 2nd quarter customer service scores, while maintaining flat payroll to sales. However, we know that we must continue to operate efficiently through the remainder of this year. We continue to work with our operations team to identify better ways to complete tasks and put more of our total employee hours into customer facing positions. We're very excited about many smaller initiatives that have resulted from these efforts. And these initiatives should help us continue to realize efficiencies in our stores, both through the remainder of this year and in the future.
Finally, we continue to invest time and resources improvements to our planning tools and infrastructure, so we can more efficiently and effectively start customers over the long haul. We have previously mentioned our integrated planning and execution or IP and E initiative. This new set of processes and system tools will help us better tailor our merchandising programs to individual stores. In other words, we'll be able to more specifically determine what products, facings and quantities to offer in different geographies. This fall, we'll test IP and E in 7 of our 20 merchandising divisions and we will fully realize the benefits of IP and E after we have rolled this tool out all merchandising divisions.
The system will improve sales and better optimize inventory investments, resulting in enhanced profitability. In the face of an uncertain economic environment, we continue to focus on maintaining flexibility and prudently manage and prudently manage expenses, while also investing in new tools and strategies to become even more nimble in the future. Thanks for your interest in Loews. I will now turn the call over to Bob Voll to review our Q2 financial results. Bob?
Thanks, Mike, and good morning, everyone. Sales for the Q2 were $14,400,000,000 which represents a 3.7% increase over last year's Q2. In Q2, total average ticket increased 2.3% to 62 $0.84 and total customer transactions increased 1.4%. Comp sales were positive 1.6% for the quarter, which was below our guidance of 2% to 4%. Looking at monthly trends, comps were flat in May, 3.2% in June and 1.4% in July.
A holiday shift impacted the monthly comps as the Memorial Day weekend occurred in fiscal June in 2010 compared with May in 2009. We estimate that this holiday shift negatively impacted May comps and positively affected June comps by approximately 300 basis points each. For the quarter, comp average ticket increased 2.1% and comp transactions decreased 0.5%. As Robert noted, the increase in average ticket was driven by strength in appliances, air conditioners and grills, while the extreme heat had a negative impact on comp transactions. Year to date sales of $26,700,000,000 represents a 4.2% increase over the first half of twenty by new stores and a comp store sales increase of 2%.
With regard to product categories, the categories that performed above average in the second quarter include lumber, tools, rough plumbing, rough electrical, windows and walls, home organization, seasonal living, appliances and home environment. Gross margin for the 2nd quarter was 34.9 percent of sales and increased 2 basis points over last year's Q2. In the quarter, we saw margin improvement in seasonal living and outdoor power equipment as a result of better sell through of seasonal inventory this year relative to last year. In addition, windows and walls in Millward had margin increases as these categories were cycling markdowns associated with prior year reset activity. Sales mix negatively impacted gross margin by 28 basis points.
More than half of the negative mix impact was driven by our appliance business. Year to date gross margin was 35% of sales, a decrease of 11 basis points from the first half of twenty nineteen. SG and A for Q2 was 22.2% of sales, which leveraged 34 basis points. During the quarter, we recognized 15 $1,000,000 of asset impairment and discontinued project expense, which compares with $48,000,000 in Q2 last year. The year over year reduction in these expenses drove 25 basis points in expense leverage in the quarter.
We experienced 20 basis points of leverage associated with our proprietary credit program due to fewer losses and lower money costs offset somewhat by lower portfolio income. Bonus Bonus expense leverage 10 basis points in the quarter due to lower attainment levels relative to plan compared with this time last year. Slightly offsetting these items was deleverage in fleet and bank card expenses. Fleet expense deleveraged by 10 basis points due to an increase in the number of deliveries as a result of strong appliance sales and higher fuel costs relative to last year. Bank card expense deleveraged 5 basis points in the quarter due to a combination of higher bank card volumes, which grew faster than total sales and increased interchange fees.
Lastly, for the quarter, store payroll was flat to last year as a percentage of sales. Year to date SG and A was 23.5 percent of sales, which deleveraged 18 basis points to the first half of two thousand and nine. Depreciation for the quarter was $398,000,000 which was 2.8% of sales and leveraged 18 basis points compared with last year's Q2 due to slower square footage growth, assets becoming fully depreciated and positive comp sales. Interest before interest and taxes increased 54 basis points to 9.9 percent of sales, which was higher than our estimated 40 basis points of improvement as a result of the staffing flexibility that Mike highlighted. For the first half of twenty ten, EBIT was 8.5 percent of sales, which was 25 basis points higher than the same period last year.
Interest expense was $84,000,000 for the quarter and deleveraged 4 basis points to last year as a percentage of sales. For the quarter, total expenses were 25.6 percent of sales and leverage 48 basis points. Year to date, total expenses were 27.1 percent of sales and leverage 34 basis points to last year. Pre tax earnings for the quarter were 9.3% of sales. The effective tax rate for the quarter was 37.7 percent versus 37.6 percent for Q2 last year.
Net earnings were $832,000,000 for the quarter, which is a 9.6% increase over Q222,000 and 9. Earnings per share of $0.58 for the quarter was within our guidance of $0.57 to $0.59 and increased 13.7% versus last year's $0.51 For the 1st 6 months of 2010, earnings per share of $0.92 represents a 9.5% increase over the first half of two thousand and nine. Now, to a few items on the balance sheet, starting with assets. Cash and cash equivalents balance at the end of the quarter was $1,200,000,000 Our 2nd quarter inventory balance of $8,700,000,000 increased $464,000,000 or 5.7 percent versus Q2 last year. The increase was due to new stores and approximate 1% increase in comp store inventory and distribution.
The 5.7% increase in lower than our 1st quarter's 9.8% increase. As the year progresses, we will continue to reduce the rate of inventory growth versus last year and we expect inventory to be up 1% to 2% at year end. Inventory turnover calculated by taking a trailing 4 quarters cost of sales divided by average inventory for the last 5 quarters was 3.63, a decrease of 9 basis points from Q2, 2009. Return on assets determined using a trailing 4 quarters earnings divided by average assets for the last 5 quarters decreased 27 basis points to 5.4%. Moving on to the liability section of the balance sheet.
Accounts payable of $4,900,000,000 represents a 2% decrease from Q2 last year. The reduction in accounts payable relates to the timing of purchases. Our debt to equity ratio was 29% compared to 26.5% for Q2 last year.
At the
end of the second quarter, lease adjusted debt to EBITDAR was 1.63 times. Return on invested capital measured using a trailing 4 quarters earnings plus tax adjusted interest divided by average debt and equity over the last 5 quarters decreased 37 basis points to 8.4%. Now looking at the statement of cash flows. Cash flow from operations was $2,800,000,000 which is lower than last year due largely to the increase in inventory and the decrease in accounts payable. Cash used in property acquired was $612,000,000 a 40% decrease due to the reduction in our store expansion program.
As a result, year to date free cash flow was almost $2,200,000,000 During the quarter, we repurchased 22,700,000 shares at an average price of $24.23 for a total repurchase amount of $550,000,000 We have $4,000,000,000 remaining on our share repurchase authorization. Looking ahead, I'd like to address several of the items detailed in Lowe's business outlook. We expect 3rd quarter total sales to increase 3% to 5%, which incorporates a comp sales increase of 1% to 3% and approximate 2% of square footage growth, which assumes the opening of 12 new stores in the quarter. We expect our comp performance to be more balanced in Q3 across both merchandise divisions and regions of the country. We expect even improvement to come from both gross margin expansion and expense leverage.
Margin improvement will come from a number of sources, including the full rollout of the price optimization tool, lower markdowns due to better seasonal sell through in Q2 this year, a higher proportion of imported product compared to last year and with appliance sales expected to be more in line with the total company performance, we don't expect as large of a negative sales mix impact as we experienced the past 2 quarters. SG and A leverage comes comparison to last year's asset impairment and discontinued project charges, which totaled $57,000,000 in Q3, 2019, offset somewhat by deleverage from proprietary credit. Depreciation for Q3 is projected to be approximately $400,000,000 and leverage about 20 basis points to last year's Q3. As a result, earnings before interest and taxes for the 3rd quarter are expected to increase by approximately 120 basis points to last year as a percentage of sales. For the quarter, interest expense is expected to be approximately $80,000,000 The income tax rate is forecast to be 37.8 percent for the quarter.
We expect earnings per share of $0.28 to $0.32 which represents an increase of 20% to 37% over last year's $0.23 For 2010, we expect to open 40 to 45 stores, resulting in an increase in square footage of approximately 2%. We're estimating 20 10 comp sales to be approximately 2% and as a result, total sales increase of approximately 4%. For the fiscal year, we are anticipating an EBIT increase by approximately 70 basis points. For 2010, interest expense is expected to be approximately $325,000,000 For the year, we expect effective tax rate to be 37.8 percent. The sum of these inputs should yield earnings per share of $1.38 to $1.45 which represents an increase of 14% to 20% over 2,009.
For the year, we're forecasting cash flows from operations to be approximately $4,100,000,000 Our capital expenditures for 2010 are forecasted to be approximately 2.15 $1,000,000,000 with roughly $350,000,000 funded by operating leases, resulting in cash capital expenditures of approximately $1,800,000,000 As a result, we are forecasting free cash flow of $2,300,000,000 for the year. Our guidance for 20 10 includes share repurchase activity through Q2, but does not include any impact from future share repurchases. Regina, we're now ready for questions.
Our first question comes from the line of Chris Horvers with JPMorgan.
Thanks and good morning. As you look at your the comp guidance for the back half roughly 2% at the midpoint, can you you mentioned it being more balanced. Can you talk about your outlook for traffic and ticket and what categories overall get you to that 2% comp guidance?
Chris, I'll start with thoughts on traffic and ticket and let others chime in on drivers of the business in the second half. As we talked about in the Q2, the strength of appliances, drills and ACs had strong impact on ticket, but the weather negatively impacted traffic. We expect more normal activity in the second half of the year and really all of the 1% to 3% comp to be driven by comp transactions with comp ticket being essentially flat.
Chris, it's Barry Stone. All of our second half business, as you know, kind of makes a shift. We think we should have a good nursery season as we head into the Q3 with all the extreme heat we've had in the parts of the country during the Q2. So we think there is some upside on the nursery business. We have a lot of strong fall seasonal programs planned.
It's a good time for installation sales, a good time for a lot of fixed up projects on the inside of the homes, which a lot of those projects are need to do projects kind of what Mike Brown said in his comments versus projects more discretionary in nature. We still expect our appliance business to be strong in the Q3, although not as strong as it's been maybe in the first half of the year due to cash for appliances. A lot of seasonal business such as our heat fall heating business, our snowblower business, just a lot of different categories. To Bob's point, we see a more of a balanced approach to our business as we head into the second half, and that's kind of held through the last part of the Q2 of this year.
So then the appliance business, you've been able to see positive comps even in states where there was a big lift or on average nationally?
Yes. If you take out the cash appliance program, we'd still have high single digit comps in appliances for the Q2. And as we talked about in the Q1 of this on our call, we had a lot of appliance inventory that we had purchased knowing that we had the holidays coming up Memorial Day, July 4th, and certainly a lot of appliance sales due to extreme heat. Based on the forecast we've looked at, the heat was going to be there. So we knew we'd sell a lot of appliance business has been extremely strong.
Like I said, even without gas for appliance is still high single digit comps.
And then just as a follow-up, the hurricane compare and cannibalization, is that something that helps the 2% as well?
It does. We estimate that the comparison to last year's hurricane elevated sales hurt Q2 by about 45 basis points. We cycle that and really there's no impact. In fact, to the extent there's any hurricane activity this year could be a net positive impact that is not contemplated in our outlook. Relative to Q2.
Thank you. Thank you.
Our next question comes from the line of Deborah Weinsberg with Citigroup. Good morning. Can you go through
some of or provide some additional comments in terms of what you're seeing with regards to big ticket? I do believe you call that as being a stronger category.
Debra, it's Larry Stone. Certainly, big tickets in terms of some discretionary projects like kitchen cabinets is one we like to talk about a lot. We do see some movement in kitchen cabinet sales, albeit not as strong as we'd like to see it. Our flooring business, especially our carpet business has still been very strong for us. So we've had good response there.
But as I've stated many times on these calls, we're seeing good lift, but just not as bigger ticket as we would have, say, 3 or 4 years ago in products like that. So I still think people are doing the carpet jobs, they're just doing smaller rooms or in terms of square footage versus what we did on several years ago. Other businesses, our fashion businesses like fashion plum and fashion light and so forth in our home decor businesses still are really good, albeit done produce that big ticket 2nd quarter with windows driving a lot of sales force in that category. So some of the new initiatives we put in like the project specialist exterior should really help drive some of those categories. Michael, can you comment?
Yes,
I think just to add on to that, Deborah, the PSC program as I referenced, I mean, when you look at the categories they're focusing on, those tickets typically have a larger ticket when you're reroofing a house versus a typical install ticket. It's more so as an expansion bigger than the average ticket that we have on the traditional installed sales area. So, we feel comfortable that the PSC programs that we have in place are working. And again, we're looking at adding some additional product lines to the components that they're selling our customers in the home.
Deborah, this is Robert. Just a couple of other things that were in my comments. As we said, we expect appliance sales continue to be strong, but not but there won't be as much of the cash per appliances states out there. So, you won't have as much of that impact in Q3 versus Q2. So, a little bit of that rebalancing of ticket traffic mix that we talked about.
And as I also mentioned, air conditioner sales. This year compared to last year, we sold much more in Q2, whereas last year, you had more of them sold in Q3, and so that due to the extreme heat. So obviously, that front loaded some of those sales has us in great shape with our AC inventory from a sell through standpoint, drove ticket a little bit higher in the Q2 versus a year ago. So that also contributes to that rebalancing that we're anticipating as we go into the Q3 and second half of the year.
Okay. And then in terms of my follow-up question, can you just provide some additional details on the IP and E initiative and what are some of the examples of the changes that you're making in the categories that you're rolling out?
Deborah, we've taken a comprehensive look at how we're doing line reviews and how we're assorting products by store by store volume and geographic type. And as I mentioned, we're doing we're looking at 7 of our 20 merchandising divisions to roll out as a test this year. And really what that gives us is more efficiency and how we're allocating inventory planning and how we're inventory or allocating space planning in stores and even to that matter, it could even reference staffing as well. So, we feel like that that's a huge benefit for us longer term as we continue to go through the rollout into the categories in 2011.
Our
next question comes from the line of Michael Lasser with Barclays Capital.
On the 3rd and 4th quarter comp guidance, is there anything that you're seeing in the business today that would lend you some optimism that the 2 3 year stack comps are going to accelerate as is implied by the outlook?
I think, Michael, what we mentioned in my comments is we expect to see more balance across both region and product categories in Q3. And in fact, we're seeing that. So we're comfortable with what we're seeing in trends thus far relative to the balance across the business.
Okay. And then if the sales environment continues to be characterized as somewhat inconsistent, does that change how you think about capital deployment with respect to store growth and share repurchases as you move into next year?
Yes. So as Mike talked about his comments, we're certainly looking to be more productive in the store environment. We're also looking at other expenses and capital as well to understand the payback of all of our initiatives. So, we continue to evaluate that. Our CapEx forecast for the year actually came down about $40,000,000 Now, it rounds up to $1,800,000,000 versus rounding to $1,800,000,000 So we
continue to take a look at
things to scrutinize how we spend and whether the customer gives us credit for that. But to date, our outlook for 2010 has been outlined and we'll provide more details on 2011 in the fall.
Great. Best of luck. Thanks a lot.
Our next question comes from the line of Scot Ciccarelli with RBC Capital.
Hey, guys. How are you?
Good morning, Scot.
Obviously, comp softened a bit in July and we saw a little bit of a downward trend. But there's obviously a lot of moving pieces. You mentioned the heat and the weather. I'm wondering, was there any kind of noticeable change in mix or anything else of note following the expiration of the tax credits and just in terms of a difference in how consumers were allocating their spending dollars?
Scott, I'll start off. Yes, I think overall and built into our guidance for the back half of the year, certainly we've taken down what we thought our sales and comps were going to be slightly for the back half of the year. So we're are expecting the back half of twenty ten to be slightly softer than what we had previously anticipated. And I think that if you think about any of the economic data that has come out, whether it's got consumer confidence, consumer sentiment, certainly jobs growth is not coming in the way that it was anticipated to be earlier in the year. If you think about some of the recent stuff, the Fed announcement last week with some of the things that they're going be doing to try and make sure that they're continuing to be active and helping liquidity and recovery out there in the marketplace.
I think we've taken all that into account in trying to build our guidance for the back half of the year. I think also the thing that we've talked about on the call that helped certain categories and hurt others and certainly contributed to the traffic versus ticket mix was extreme heat that we had in the quarter. Certainly, let us clear out a lot of seasonal merchandise like fans and air conditioners.
As we move into Q3 of the
year, as Larry mentioned, that's going to lead to an opportunity for restoration of lawns as we go into our fall lawn and lawn and garden season. So we think that certainly gives us some great opportunity there. We still think there's going to be great demand out there for appliances
as we go over the balance of
the year. We've continued to see strong trends there.
As you know, we've got a great lineup of to see strong trends there. As you know, we've got a great lineup of appliances with key brands that are out there. And then other things like we mentioned our Stainmaster carpet exclusivity and the promotions of that kick off this quarter as we about people that are doing some of those discretionary projects, fixing up around the home, we think that certainly gives us great opportunity to capture some share in that category. So I think we've tried to take those into account, but certainly, as I said in my comments, it is a challenging environment. We don't expect to be ongoing robust demand until we get consistent improvement in both labor and the housing markets and we think we're into 2011 before that happens.
So I think all those things have been built into how we've characterized our guidance over the back half of the year.
All right. That's helpful. And just a quick follow-up. You've talked about a more balanced sales trend going forward. Does that imply there were significant regional differences in the quarter?
And maybe you just talked about that, but I think I might have missed it.
Yes, Scott. When we looked at regional balances, we had 19 of our 23 regions that posted positive comps. So we saw a lot of balance actually in Q2. And as we as Larry alluded to and Robert and Bob earlier, when you look at how the normal home center category business, how the business takes place in the second half of the year, there's a more balanced approach to the overall business. We don't have the seasonal spikes that you see in early spring and that's just the typical home home searing environment.
The other thing to add is that I mentioned the hurricane drag in Q2 that primarily impacted 2 of the 4 regions that negative comp in the 2nd quarter. So, we expect them to comp positive
in the Q3 as well.
Got it. Thanks a lot guys.
Thank you.
Our next question comes from the line of Dennis McGill with Zelman and Associates.
Good morning guys and thank you. First question just has to do with thinking about the expense leverage for the year, bringing down the revenue guidance for the full year, but seeing some opportunity to expand margin slightly more than you were looking at before. Can you just highlight some of the bigger areas that are standing out favorably relative to your initial guidance?
Sure. Just a couple of items. One is the flat payroll leverage that Mike and the team were able to achieve in the Q2. So if you assume similar comp performance in the second half, We would expect roughly flat payroll as a percent of sales in the second half of twenty ten versus second half of 2,009. That was not contemplated in our outlook ninety days ago.
Also, we continue to take a look at a lot of other areas for expense reduction. So that certainly provided some opportunities as well.
Okay. And then second question, I guess, 3 quarters now where you've repurchased roughly about $500,000,000 of stock and the price of stock has been fluctuating quite a bit. Can we assume that it will remain a pretty structured program? Are you fairly agnostic to where the stock is trading and where valuation is?
Yes. So, we don't provide specific outlook on future share repurchases. However, we have indicated that the $5,000,000,000 authorization that was provided by our Board last January that would be utilized roughly over the next 2 to 3 years.
And we repurchased $1,000,000,000 year to date, Dennis.
Our next question comes from the line of Colin McGranahan with Bernstein.
Just a quick question on inventory. If you could, obviously the pace of growth relative to sales has moderated a bit here, but still running a bit ahead. I know you it to be in line by the end of the year, but can you characterize where the faster
inventory growth has been through the Q2 and any other comments on
where you might have more inventory than you want? Collyn, it's Terry Stone. As we stated in the Q1 and held through the Q2
as well, we stated in the Q1 and held true in the Q2 as well, we did buy a lot of appliance inventory and certainly the strong performance we've produced in the Q1 to Q2 shows that was the right move. And as we said in the Q1 call, we did anticipate a lot of sales that would come as a result of the holidays and a result of the hotter weather. So I think that's been a real good move for the company. We don't anticipate any major markdowns with appliance inventory. We'll continue to sell through it as we work through the back half of the year.
We also made some strategic purchases in flooring to capture more market share. And on our seasonal inventory, I think we did a much better job this year playing our seasonal inventory. And as Robert stated in his comments, we
feel real good about our inventory levels and
seasonal products. So if you look at it, we're seasonal products. So if you look at it, 1% up in comp stores, we feel like we can get that back to hopefully flat by the end of the year. And we're going to work hard on our seasonal programs, as we mentioned, and also just take a hard look at what we buy as we head into the 3rd Q4 in terms of categories that give us opportunity for additional sales and categories that we might feel like we don't have a big sales lift, then we won't buy as heavy. But I still feel good about our inventory.
I still think we made the right decisions. And quite frankly, we hope to get it worked down to those numbers by the year end and be basically flat year over year.
Hey, Collyn, this is Bob. At the end of Q1 call, we said we thought Q2 inventory would be up roughly 7% to 8%. So we came in better than that at 5.7%. A lot of that is due to the seasonal sell through that
we saw in the quarter.
Right. And then just one quick follow-up to that. As you think about the back half and certainly elevated uncertainty, are you planning the back half seasonal categories to trimetry and things like that above, at or below your overall comp plan?
It would be below overall comp plan on things like Tremetry. We bought conservatively. We didn't as we said last year, we took a look at those seasonal programs and we didn't we're not quite sure how the seasons are going to play out. So we bought conservatively in all those programs. Now the thing about is you have inventories, products like that sometimes we move around, so we get different products moving in different parts of the country.
So we'll once again use our distribution network to make sure we got the right products for those categories as we head into that season.
Our next question comes from the line of Eric Baccard with Cleveland Research.
In light of your outlook for the second half, can you just give a little more color in how you're thinking about, I guess, planned promotions and inventory that you would bring in to drive sales, how you're thinking about managing that in this type of an environment?
Well, from an inventory perspective, we think inventory is going to be up 1% to 2% by year end. We're at 5.7% increase at the end of Q2. So, we're going to continue to be smart about our purchase activity through the balance of the year, focus on buying what's selling in order for us to reduce the level of increase year over year.
Eric, this is Barry Stone. We also took a hard look at all the seasonal categories. As you know, as you head into the fall categories, certainly some building material categories, as we mentioned earlier, such as installation, you've got opportunity for those sales as you head into the 3rd quarter as people get ready for the winter. Other categories such as tools, which is always a good traffic driver as we head into the Q4, we've taken a hard look at what we're buying this year. We talked a couple of years ago about buying less in and out inventory, inventory bring in and try to sell through and really focus more on our core programs.
So I think throughout our 20 merchandising visions, everybody's taking a hard look going back to Bob's point about what's selling, what do we need to bring in and how do we balance the sales and inventory and achieve the numbers that we put forth in the forecast today.
And then secondly, in terms of store opens in this continued sluggish environment, can you just talk about how the new stores you're opening are performing and if there's any different thought about the pace of store opens or even any evaluation of store closings?
Our as we've talked about discussing new store productivity for 2010, we have a very productive class average 1st year sales in the $33,000,000 range. We're seeing some very strong openings. Also, as you might expect in some markets, we're seeing some openings a little soft. But on balance, we continue to be pleased with what we're seeing. New store productivity for Q2 was 88%, so a strong showing for the Q2.
We did close a store in this quarter, so we do continue to take a look at store performance and viability of markets long term. So it's something we continue to look at on an ongoing basis.
Eric, this is Robert. I think no different than we've been through the entire economic cycle. As you know, we've continued to reevaluate our expansion program in light of economic data, in light of where recovery is and when recovery will take place and how robust it will be. And so we'll continue to evaluate all the economic data points that come out between now and the end of the year as we're finalizing our next year, 2011 expansion program. We'll update you on whatever our final decisions are there when we get to our analyst conference in December.
But yes, it's something no different than what we've done in the environment today. We continue to evaluate all the data points and
we make the necessary adjustments and we won't change
that stance going forward. So, adjustments and we won't change that stance going forward. Okay. Thank you. Our next question comes from
the line of Mike Baker with Deutsche Bank.
Hi. Thanks, guys. Can you talk about inflation, how
much lumber inflation
may have impacted your results? Much lumber inflation may have impacted your results?
Sure, Mike. In the quarter, total inflation impact was a positive 40 basis points. That was driven entirely by lumber and plywood.
Okay, thanks. And then the weakness in the tickets less than $50 relative to last quarter, flat, I think it was up 3% last year. Is that entirely due to the nursery business or is there something else there?
Primarily nursery and lawn landscape products.
Okay. So I think that probably comes back. And then lastly, I don't think you simply talked about California when you talked about your regions. Can you put that in context of your overall comp better or worse?
Mike, the Western division in total is still performing relative to how it has in the past, but the Q2 not quite as strong as it was in the Q1, but still yet we're seeing a result what we deem as positive comps in all 4 operating regions in the Westin division in Q2.
So Westin division positive, not as positive last quarter relative to the chain average, do you talk about that?
What we saw, if you look at it again, a lot of that was driven by seasonality. So if you look at the seasonality impact to Q2 versus Q1 in the Western division, we can attribute the vast majority of the variance between Q1 and Q2 comp just tied to seasonal. Okay.
Thanks.
Our next question comes from the line of David Strasser with Jamie Montgomery Scott.
Thank you very much. One clarification, when you talked about flooring inventory, you said you had made a bit there. Was that hardwood flooring or carpet? Because I know you talked about some of the carpet as well.
It's basically Dave, it's Larry Stone. Basically all 3 carpet, ceramic and hardwood flooring. So all three categories we made inventory investments in.
As an attempt to go after market share?
That's correct.
Okay. And just another question. I know we talked
a lot about appliances. I just wanted to follow-up because last year, I remember and I don't know if you guys led it, but I know you're a big part of the promotional environment right around Black Friday. It seemed like an area where you guys where everybody decided to really play more aggressively than in the past, it seems in appliances. They became a Black Friday type of product. As we sort of look into this year, I mean, is that do you see are you prepared for something like that within the guidance that even if it expand even if that promotion expanded beyond like sort of that Black Friday into a broader November type of
promotion? Yes. David, I guess, this is Robert. Obviously, we're not going to talk about what we're planning to do for Black Friday at this point in time. But certainly, I think we every year as we get through major promotions such as the Black Friday promotion, immediately the merchants and operating teams sit down and do a download, kind of a postmortem as to what worked, what didn't, what we think will happen next year from a competitive response.
We try and take all that into account. And at least at this point, we think we've got a reasonable plan and that we think we've adequately taken those type of items into account into our guidance as we head into the back half of the year.
If I could just follow-up on that, when you did a postmortem on that last year, what was your thoughts on this relative success
of that program?
Dave, it's Mary Stone. We feel good about our program. And quite frankly, it was pretty promotional there for a while, but then it kind of settled down. But we've kind of taken all that into consideration. And certainly, we think the promotional environment hopefully is going to be more rational than it was on Black Friday.
But there again, we can't tell you what competition is going to do and certainly we have our plans and programs in place and our buyers made and so forth. So our whole goal is to take market share. As Bob said, I mean, profitable market share. So certainly, we think our programs that we have in place are good, strong, solid programs that drive share increase for our company.
Thanks a lot. I appreciate it.
Thank you.
Our next question comes from Matt Baster with Goldman Sachs.
Thanks a lot and good morning. First of all, on the market share numbers, I believe you gave us a trailing 4 quarter number today, up fifty basis points. I think last quarter you gave us both the trailing 4 quarter and the single quarter number. Any sense as to what the single quarter number was in Q2?
I don't think we've transitioned to a rolling 4th quarter, so we don't have any information with us. I just follow-up with the IR group if you need that, Matt.
Got it. Okay. Fair enough. That's helpful. Secondly, just to follow-up, I think a central line of question that Mike Baker asked.
If we think about the trends in traffic, which were exceptionally strong in 1Q and less so kind of reverse course in Q2 and then thinking about evening out in 3Q, should we think about that as being all about weather in essence? And do you think the underlying traffic trend probably is a low single digit number going forward?
I think a lot has to do with the product categories and weather. In Q2, lawn landscape and nursery are pretty highly traffic categories, get a lot of footsteps in store. Extreme heat discourage people from spending a lot of time outdoors working on their yards. As Larry indicated, a lot of opportunity for fall restoration. So we think that gets back to somewhat of the
trend we've seen from the prior few quarters.
Got it. And then finally, on the buyback, just to clarify, is there any buyback whatsoever embedded in your guidance for the quarter for the year?
Our outlook that we provided does not assume any prospective share repurchase, including year
to date activity through Q2.
Got it. Thank you so much.
Matt, this is Robert. Just want to say congratulations on the birth of your son last week. We hope everyone is doing well at home.
Much appreciated. Thank you so much.
Our next question comes from the line of Budd Bugatch with Raymond James.
Good morning and thank you for taking my question. Robert, on the Q1, you were, I think, more upbeat than you are on this call. You were talking about a more engaged consumer, I think, on the Q1 call. In and that was in mid May. When during the quarter did you start to get more cautious?
And was there a specific event or a series of events that made you come that way? And can you elaborate on that perhaps?
I don't know where specifically in the quarter, but as we've continued to watch the economic data that has come out, I think, obviously, we knew that there was as when we said at the end of our Q1 conference call, we said that there were some one time items that specifically helped the Q1, including a very heavy cash for appliances program and the restoration from a tough winter that took place as people were repairing their lawns and gardens and other things that were damaged at the end of coming out of a tough winter. When you look at we continue to monitor the economic debt, but probably the biggest thing is that jobs growth has not been what people had anticipated. It looks like things are starting to get pushed out a little bit. So as we looked at that, we obviously took what was going on with the heat extreme heat we had in the quarter, we didn't know it was going to be quite that extreme an impact it would have on certain categories. That had some impact on what you're seeing.
But I think the biggest thing is just continuing to monitor the overall macro environment. What we're hearing seeing what we're hearing in our consumer survey, what we're seeing from the data points as they come out and how the consumer has reacted through the quarter that has said we need to temper slightly our outlook for the balance of the year because we think things are going to be a little bit slower than we had previously anticipated.
Okay. And I think you also talked about the fact that you're seeing discretionary plans improve. And I think you mentioned perhaps kitchen cabinets or maybe Larry did. Can you maybe give us a little bit more color on where you're seeing discretionary plans improve? And what gives you some comfort that that will come to pass in the end of 2010 or maybe into 2011?
Yes, Matt. This is Larry Stone. I mean, if you look at our comps for kitchen cabinets, although they were below the company comp average, they were still decent for the Q2 and there again this whole thing about discretionary purchases. So we've done a lot with our kitchen specialists working this whole thing that Mike Brown's really put in place about selling kitchens versus cabinets. So I think we've done a good job.
When we do get the opportunity to sell the kitchen, we're doing a good job of selling the total package in those regards. And there again, consumers are still spending money, albeit at a much slower pace, as Robert alluded to several times in his comments. So there again, it's up to our sales teams in the stores to get those potential customers and close those sales and make sure that we garner every sale that we can possibly get, especially in these large project areas. But to Robert's point, just a lot of the data keeps coming out. We think it just kind of gets consumers saying, well, I think I'll wait on these larger projects.
And we think once some positive data does come out, that certainly there's a lot of projects in the backlog that we have an opportunity to capture more sales. But to Bob's whole comment also, we just see a real balance in the business right now. It's kind of balanced out in the latter part of the second quarter as we head into the Q3. So that balance is good as well because you're selling categories across the store, which we think will help us achieve our results in the 3rd and 4th quarters.
So just as a last follow-up, just recognizing that the cabinets were still below company average, were they positive at least during the quarter? I know that's not a big margin. And did they improve during the quarter? And what can you tell us about ticket and cabinets?
They were slightly negative in the Q2. And the average ticket is up slightly, but not a lot in cabinets because there again, we're trying to sell more of the project, but customers are, as I said earlier, still holding back on some of those purchases. So we might be selling not as much in terms of countertops with some jobs and we might not be selling all the different accessories you can buy with the kitchen, which you can't come back to add those on later. So you might be selling the base kitchen as an example, but you might not be selling all the additional moldings and so forth that goes with it, but your additional add on purchases that you can do later on.
And just was there any movement during the quarter in those comps? How did that trend over the quarter?
No. Basically, it's pretty much even throughout the quarter.
Thank you, Larry, and good luck for the balance of the year.
Regina, we have time for one more question.
Our final question will come from the line of Peter Benedict with Robert Baird.
Hey, guys. A couple of questions. First, can you just talk about the zone pricing efforts that you've got underway? I think you're going to be expanding those in the back half of the year. Could you just give us a sense of what your plans are on that front?
Peter, it's Barry Stone. Certainly, we've taken a hard look at what we call price optimization and looked at our various patch areas we have throughout the U. S. And in our Canadian stores as well. And we felt like based on the Q1, we need to expand some of our patch areas to make sure that we have the correct price in the markets that we work in.
So we continue to work that. No results to release today, but just something we've worked on quite a bit as we go up against various competitors. It gives us an opportunity to us an opportunity to be priced more competitively in those various markets by having more patch areas and by using our price optimization tools.
Okay, thanks. And then with the first half has your view on that changed at all? I think last September you were thinking something north of 300 a foot in sales, 9% to 9.5% EBIT margins. What could you tell us about your current thinking on that front? Thanks.
Peter, at this time, our long term view
of the world hasn't changed materially. Certainly, some of the recent data points are soft, but our long term view of the business has not changed significantly.
Okay. Thanks guys.
Thanks, Peter.
Thanks. And as always, thanks for your continued interest in Loews. We look forward to speaking with you again when we report our Q3 results on November 15. Have a great day.
This concludes today's Loews Company's 2nd quarter 20 10 earnings conference call. You may now disconnect.