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Executives

Robert A. Niblock - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Robert F. Hull - Chief Financial Officer and Executive Vice President

Analysts

Michael Lasser - UBS Investment Bank, Research Division

Lowe's Companies, Inc. (LOW) UBS Global Consumer Conference March 13, 2013 2:20 PM ET

Michael Lasser - UBS Investment Bank, Research Division

Good afternoon, everyone. I'm Michael Lasser, the hardline retail analyst at UBS. I'm really very pleased to have with us Lowe's management team today. From my vantage point, Lowe's has embarked in a journey a few years ago, a really courageous journey of evolution with the focus of some of its merchandise and store changes that have helped position it better for the future of retail. I think it's starting to see some early signs of success and my expectation is that it'll only continue.

With us from the company is Robert Niblock, who joined Lowe's in 1993 when he was 14 years old, and has been Chairman and Chief Executive since 2005. To his left is Bob Hull, who serves as the company's Chief Financial Officer. And then we also have members of the company's Investor Relations team.

So the format will be that I'm going to turn it over to Robert who's going to make a few opening remarks, and then we'll have a broader and free ranging discussion. There are no cards on your table. If you have any questions you like us to cover during the discussion, please just write them down and then we'll go over them. Thank you very much. And with that, Robert, please, thank you.

Robert A. Niblock

Thanks, Michael, and thank you for your interest in Lowe's and joining us today. As Michael indicated, over the past few years, our strategy has really shifted from one of significant store expansion prior to the economic downturn to today where we're more focused on maximizing our asset productivity through some improved capabilities, both within our existing stores and across the other channels that we're investing in, in the omni-channel world that we find ourself in today and really that the customer demands that we play in and know them.

If we look at 2003 (sic), we're going to focus to -- our focus will be to continue to improve our core business through cross-functional collaboration and consistent execution. We'll complete the initial round of our value improvement product resets in 2013. We've talked extensively about that the past year. We're also adding additional labor hours to our stores, all of that being done with a focus on improving our close rate as we move forward. We're also in the process, when you think about the omni-channel world we're in today, of transforming our business to deliver more seamless and simple customer experiences across all the channels in which we compete and also developing deeper, more meaningful relationships with those customers by providing greater inspiration and support to earn greater customer loyalty across the life stage of a project as they're shopping for their home improvement needs.

Looking from an economic perspective, if we look at as we lower GDP as forecasted for 2013 and while lower home improvement industry growth is also forecasted, it's expected to keep pace with nominal GDP. As we think about 2013, rebuilding in the wake of Superstorm Sandy, we'll definitely contribute to industry growth. But that impact will fade as we get through the year and start cycling the fourth quarter. Also, the consumer homeowner is experiencing tight credit conditions. We also have elevated mortgage delinquencies. Both of those will impact the speed at which housing and overall home improvement industry can grow over the next couple of years. But we do believe the fundamental underlying drivers of industry growth, mainly jobs and housing, should support a strengthening growth trajectory over the next couple of years.

Let me comment briefly on our fourth quarter, our earnings results that were released on February 25. We delivered solid results for the quarter despite tough prior-year comparisons. I think those results can be attributed to: one, our team's success in driving a more balanced performance across the quarter than what we've had in the prior year; our response to the demand created in response to the recovery efforts from Superstorm Sandy; and then I think importantly, the momentum that we're creating from the initiatives that we have in place, some of which Michael spoke about in his opening comments.

We saw strength in core product categories across the store as well as key holiday items. We experienced consistent performance across our U.S. business operating positions. We also saw continued strength in our ProServices business which outperformed the overall company average. So in short, in the fourth quarter, we executed our plan. We exceeded our implied guidance for the quarter and all that being done with good early results off from the initiatives that we have underway. And in 2013, we'll continue to focus on executing our plan and the initiatives that we have in place to improve the business.

Longer term, we're obviously enthusiastic about Lowe's prospects because we think our business is sound, our brand is strong, second-largest player in the home improvement market which provides us tremendous buying power as well as economies of scale. We're generating solid cash flows in the business even as we emerge from the worst housing downturn in generations. We use that cash to: first, make strategic investments in our core business and in other opportunities that draw on our ability to participate in developing home improvement markets; second, to pay dividends; and third, to repurchase shares.

So once again, thanks for your interest. And with that, I'll turn it over to Michael.

Question-and-Answer Session

Michael Lasser - UBS Investment Bank, Research Division

Thank you very much, Robert. I think Lowe's is in the unique position of being at the crosshairs of, obviously, the consumer but also housing. And I think Lowe's also has done a very good job of really understanding the consumer, understanding its consumer, bringing analytics to the scale -- to the table. You did a -- you do a quarterly survey of trying to understand purchase intentions. The most recent indication is that the consumer is starting to feel a little bit better about their house. Their intentions are rising. But yet, there are some of these headwinds out there. Can you compare and contrast what you're hearing from the consumer, and then what behaviors they're exhibiting within their store and how that might suggest this is going to play out over the next few quarters?

Robert A. Niblock

Yes, well certainly, one of the bigger factors that has taken place is this reversal of housing going from declining in values to now improving in the values. And that's what showed up in our fourth quarter consumer survey that you mentioned, that we spoke about on the fourth quarter call. We saw consumers, when surveyed and asked, did you believe the value of your home is improving or increasing, declining or holding steady? We saw about an 8% -- 8-point increase in those that said that they believe the value of their home was increasing, to almost 1/3 of them now believe the value of their home is increasing. The positive factor associated with that is consumers feel much better when it comes to discretionary spending about spending on their home if they believe the value is going up. It's just that kind of, I call it, the psychological permission to spend and feel good about it. Even if you feel good about it, you still have to have the wherewithal to spend, which really gets into jobs and incomes, what's going on from an employment standpoint and are incomes growing, which gives you the wherewithal to be able to spend. So if you think about it, in 2012, it was the first time we've seen across all factors in years both housing starts, housing turnover and prices all moving in the right direction. So the housing metrics are there. Like I said, jobs and growth in income are key factors that we have to watch out for. As I mentioned in my comments, you've got credit conditions and delinquencies are still high. So that will impact the pace with which housing recovery can take place. Your risk factors, healing [ph] the slow job creation, something that could happen from a government spending that would slow the economy. We did see a spike in gas prices earlier in the year. It's starting to abate a little bit. And then if something were to happen from kind of a rising interest rate environment, dramatic rise that would cause the consumer to take pause with regard to their comfort on spending. So -- but the housing metrics are definitely moving in the right direction, and it certainly makes them feel better about taking on those discretionary spend. We're seeing more of that. It's some of the smaller tickets, and we've seen a pickup there. We're also seeing growth in larger tickets as well. But I think as customers ease back in the spending on their home, we're going to be there to help them as they ease into those smaller projects and make sure we're there to meet their needs.

Michael Lasser - UBS Investment Bank, Research Division

And then as you look at your store portfolio, are you seeing any noticeable differences in the stores that operate in areas where housing is getting better versus those that were there may not be as much activity?

Robert A. Niblock

Generally speaking, those areas of the country where housing is getting better and you're seeing better store performance taking place in those areas, so as a general rule, yes, that would be the case. There are also, from time to time, offsetting factors. That could be favorable weather this year or cycling favorable weather last year that could have an impact. So it's not a perfect correlation but generally, yes. If housing is doing better in the area, you're going to see your sales performance kind of tracking in line with that.

Michael Lasser - UBS Investment Bank, Research Division

And for this year, you recently provided an outlook of 3.5% comp for the year. Can you talk about what's inherent within that expectation as far as housing, as far as the economy? And what's within your control?

Robert A. Niblock

Yes, well, as we said, the industry is anticipated to grow roughly in line with nominal GDP and a 3.5% comp would get us our share of that industry growth. We'd be able to maintain it even in a year in which we still have a lot of change going on within the organization and particularly with the resets that are taking place in the stores. So if we can grow with the industry while we're continuing to reposition ourself for the future with some of the changes that we're undertaking, we think that would be a win. As we kind of build that 3.5% comp, we think about 50 basis points or so is from tailwind from the macro environment and the rest is really from internal initiatives that were -- that we've put in place, that net, offset of any disruption stuff, that would be the other 300 basis points or so.

Michael Lasser - UBS Investment Bank, Research Division

And Lowe's has come a long way in the last few years. You've really -- I mean, you deserve a lot of credit for kind of recognizing changes in the environment and then working towards that. Would you -- from your own personal standpoint, just given the progress that you've seen thus far, given what you've seen in the economy, are you more bullish, upbeat than you've been in the last 6 months, 12 months?

Robert A. Niblock

Well, yes, I am. I think that we've done a lot of heavy lifting over the past 18 months or so from the organizational realignment from recognizing that we need to really be approaching the market on a much more omni-channel basis versus kind of the single-channel environment that we were heavily focused on in the past. So when you take that, we you take the team we have in place, how well they're working cross-functionally as an organization and also trying to deliver that omni-channel, better experience to the consumer, so knowing -- because our best customers shop across our channels and knowing them, doing a better job of trying to know them as one customer, not multiple customers, and then take those, some of the heavy lifting we've done and then layer the tailwind behind that of which -- what have -- what's taken place in housing as we discussed, starts to turnover, appreciation and pricing, all those things, I think that does make me feel better about the opportunity that lies ahead.

Michael Lasser - UBS Investment Bank, Research Division

The questions are coming in fast and furious. You guys are popular. And one question was about just potential constraints on the housing market. Could labor, land be governors to influence if this can truly be a sustainable recovery? Do you have a view on the durability of housing getting -- continuing to get better?

Robert A. Niblock

Yes, I mean, I think it should gradually get better. I think those are all great challenges. As you know, getting land at a reasonable price, getting the labor to be able to construct the housing, those types of things. As you know, we don't participate heavily in the actual home construction part. We participate more heavily when the housing turnover takes place. Remember, the person buys that home or an existing home turns because that creates kind of the natural incident for someone to need the products that we sell. We certainly participate in some of the what goes into home construction, but not a big percentage. But it's a good leading indicator of the health of the industry. If there's demand for new homes out there, so that means that we're leaning into a healthy housing market. So yes, there's certainly challenges out there, but I feel good about that it should be a nice cadence over the next several years given the fact that we've cycled through a lot of the excess inventory and look at what's happened from a population/immigration standpoint. We're going to be the shortage of the housing, otherwise.

Michael Lasser - UBS Investment Bank, Research Division

Let's turn the conversation to some internal stuff. You're about 20% -- you have about 20% of your line reviews remaining as of the end of last year. What's been the feedback from the vendor community? I think there was early on a little trepidation, but as you created a vendor council and move to further through processes, it seemed to go quite more smoothly. Where are you now and what are you hearing?

Robert A. Niblock

As you said, we have created a vendor advisory council. We just cycled through the kind of the first duration of those members that were in there. Some of them, for the consistency, stayed on for the second year. We brought in new vendors because -- a fresh set of vendors so that we get their feedback through the process. I think it is obviously a more rigorous process than what our vendors have gone through before. And I think they appreciate the transparency, the feedback that they get through the process and fully understanding what it is they did or did not yet business with us when they came out of the line review. And then when you think about a number of our vendors also are participate -- or have multiple lines within our store. So one thing they do appreciate is the consistency of the processes, they're going from one line review to a different line review. If you think about in the past, if a vendor had a line review with one merchant versus a different one, there might've been some differences in the process. Much greater consistency in the processes now as when they go in and approach the line review and understanding actually the transparency. So it has been -- well, actually, it is a rigorous process that they go through. We are expecting them to bring their best price forward the first time that they quote us. They do better understand the process, and we've gotten high marks for that from them.

Michael Lasser - UBS Investment Bank, Research Division

So maybe the outcomes would have been a little bit better as everyone understands and internalizes the process?

Robert A. Niblock

Yes, that's true. Because, I mean, at first, I think it was a little bit sorting each other out on both sides. But now that we're well through the process and actually, we'll be starting to plan the next round of line reviews in the future, vendors know better what to expect, bringing them into the vendor advisory council, getting good feedback from them. Well, the council's also been beneficial.

Michael Lasser - UBS Investment Bank, Research Division

And is there an opportunity to go back to some of those earlier discussions and maybe go down that path of what you initially expected if you didn't achieve what you were looking for the first time around?

Robert A. Niblock

Yes, certainly. As you go through the line review process, I think there's been learnings on both sides. We've improved the process and I think, as I said, learnings on both sides, from both us and the vendor, plus what we're hearing back from the vendor advisory council. So as we get through the initial round of line reviews at the end of 2013, then we'll basically operationalize that into our ongoing process. So we've always done line reviews, but this is -- the consistency of the process, the way in which it will be approached and the analytics that we'll bring into it. And as we're doing line reviews in the future, they won't be done at the pace at which were being done today, but certainly the opportunity to go back and even some of the line reviews we've done, do a better job the second time around.

Michael Lasser - UBS Investment Bank, Research Division

And you talked about being a mid-single-digit comp lift, 100 basis points of gross margin expansion in the lines that have been reset and gotten through the clearance activity. The question, obviously, it comes up consistently, but how do you feel about that as being a consistent outcome as you move, do the rest of the process? And just for those who aren't aware, you were about 30% of the way through the physical resets at the end of the year. So there's clearly a ton of opportunity still on the horizon.

Robert A. Niblock

Yes, we're about, at the end of the fiscal year, about 30% of the way through the resets; about -- well over 20% what we call normalized. We've just gotten through all the sell-through of the prior product that was non-stock. And we have, like you said, it's kind of mid-single-digit comp, 100 basis point improvement in marginal, on average. And there's no reason not to expect that on average going forward as the additional line reviews get normalized. So the point being, we didn't go in and try and cherry pick the best opportunity at the low-hanging fruit. As we go through and approach the line review process, there's really -- there's cadence to which categories we line review. So it's anywhere from looking at the seasonality of the items, so what's the right season to do the reset associated with that product. It can be -- how long has it been since that line was reviewed? It can be -- thinking about some particular merchants and the lines of merchandise they have, spreading out that workload so that we don't have them all bunched with one merchant so that we're spread out across the organization. And there's also some related -- some adjacencies in the product of related items that we need to consider as well. So in other words, if one category is dependent or has a relationship with another, the sequence in which you do those. So take an example that maybe Greg Bridgeford talked about previously is doing fashion plumbing before doing hardware because you want to know what styles and finishes you're going to have in fashion plumbing so that your hardware can complement that. So there's a method to it. But as we look at it, the ones we've done, some of them are above and below the average, as we've quoted you. In the future, we expect some of them to be above and below. But on average, we don't have any reason to believe that we won't see kind of similar performance to what we've seen in the first 30%.

Michael Lasser - UBS Investment Bank, Research Division

And this is going to be a critical -- we're kind of at that critical juncture right now where you're going to go from 30% of the line reviews complete, 100% by the middle to the end of the year. And a lot of that heavy lifting, the physical changes, are going to take place at the peak -- what hopefully is going to be a very good peak selling season. How do you think about the potential disruption that could be caused? And what are you doing to mitigate that potential disruption?

Robert A. Niblock

I think there was a lot of learnings that took place from the line reviews that we did last year, and that's part of the reason that we slowed down the pace at which we were doing those line reviews versus what we originally communicated, just to ensure that we could do the line reviews in a manner that: one, we reasonably protect the margin on the sell-through of the nonproductive inventory, the items that we're taking out of the line on a go-forward basis; and second, make sure that we still have a good customer experience. In other words, as we're selling down the old line, we don't want to be sold out too quickly before the new merchandise arrives. And so therefore, we're out of stock and can't provide a good customer experience. So yes, a lot of line reviews to take place during 2013. But if you think about it, with about -- I'm talking resets, not line reviews, with about 70% of them left, that's, over the 4 quarters, 15% to 20% a quarter. That's not dramatically different than what we saw in the fourth quarter as we go in and we pick, as I've said earlier, the timing of when those take place so that we don't -- not resetting a seasonal category right in the middle of a season and those types of things. We think we've got a good cadence so we can be able to do that in a manageable fashion and be able -- and if we think about it in the merchants, they're also able to have more focus on the resets and what's taking place because they've got most of the heavy lifting and the actual line reviews behind them, so they can also be more focused on what's actually taking from -- and how the performance is taking place from the resets occur on a store-by-store basis. So we feel good about it. There's risk in everything you do. I think that the biggest challenge would be continue to get good realization on the inventory that we've displaced and selling through from a margin standpoint. And that's part of the reason we slowed that cadence down was to ensure that we can do that and provide a great customer experience.

Michael Lasser - UBS Investment Bank, Research Division

And during -- when -- you had an interesting time over the holidays because you got to see how the store flexes, how the impact of the line reviews changed -- potentially changed during more intense throughput period. Were there any observations from that? And what it seems like maybe some of the changes came out as a result of that.

Robert A. Niblock

Yes, no, I think as we have gone through the year, I think the first reset we did was second quarter of last year. So as we've gone through the year, we've learned along the way, and the process has gotten smoother and smoother because we've got all the connected touch points. We have several members on the team that have to agree that everything is in place before we launched the reset process. So even though when you think about it, to your point, during the holiday season, when we're bringing in trim-a-tree and a lot of other seasonal merchandise having to go through all the challenges the store have with getting that sell-through on that, plus dealing with the line review process, it actually probably went smoother in the fourth quarter than it did in the second quarter.

Michael Lasser - UBS Investment Bank, Research Division

And we think we had a lot going on. With all of the outcomes occurring, it seems like you're moving in the right direction. Could you see the need to potentially further invest more in price? It seems like you've -- you took a lot of those changes upfront with the expectations that you'd fund them down the road. What will be the need -- what would -- what's the outlook there that you could potentially take this windfall and eventually invest more in price?

Robert A. Niblock

Well, as you know, in 2010, late 2010, 2011, we did some pricing work. And we determined that our pricing had gotten out of line with where it need to be from a competitive standpoint. So we then took some pricing actions later in 2011 and a year later in all of our competitive shops, so those big-box competitors, we're at price parity, which is where we want to be. I said to your point, yes, as we get further through the process, we managed the markdown. We can continue to say, okay, we also got a heavy investment in technology, how we're -- I'm trying to differentiate our experiences. So we've got a lot of things we're investing in as well. So we want to be at price parity but deliver a better experience. But that doesn't mean that, for example, as it gets to online retailers, how do we continue to get -- make sure we're price competitive on the key items with online retailers. And I think one of the things that will likely help there when you think about our merchants now as they go through the line review process, they're really going to more dead net pricing. So that's the price perception in their mind that they're gauging their margin off of and versus previously having a price from a vendor and having other holdback allowances that were utilized for other promotions and those types of things. With that lower dead net pricing, I think that helps them position themselves better to be price-competitive, for example, with online. So those are the types of things we'll look at because we want to continue to be priced competitively, and whether that's online or in-store, we'll continue to make advances along all channels.

Michael Lasser - UBS Investment Bank, Research Division

And where do you think you are in the continuum of price competitive -- price perception of your competitiveness if you were not where you needed to be a couple of years ago? Are you 70% of the way there now or...

Robert A. Niblock

I think when it comes to the big box channel, we're at parity. So I think we're there from a price competitive standpoint. The issue is how we'll continue to chip away at online and other channels.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And Bob needs to earn his key, so we'll throw one his way. It is, please separate the expectation of the 2015 outlook of a 9.7% EBIT margin. What is the sales -- the expense leverage inherent in that and the unique changes that we've talked quite a bit about?

Robert F. Hull

Sure. So in our analyst conference last December, we talked about progression to almost a 10% operating profit. The majority of that does come from expense leverage, some discrete cost-reduction activities that we're taking advantage of, but also leverage of growth in -- of internal initiatives as well as the strength in housing, not only in 2013 but in 2014 and beyond. As we talked about, there's gross margin opportunity as a result of the line reviews. Our gross margin has dropped some 80 basis points the past few years. So we expect to get that back over the next 3 years. So it's about 1/3 of the increase in operating profit between 2012 and 2015 and the balance comes from depreciation leverage from a dollar perspective. Depreciation dollars peak in 2013. We'll get a phenomenal leverage in 2013 and more meaningful depreciation leverage in '14 and '15.

Michael Lasser - UBS Investment Bank, Research Division

One element of some of the gross margin compression that you've experienced in the last couple of years has been good offer of $300 -- 5% off, $300 or more. Is that -- it's obviously had its intended effect of increasing the penetration of private label credit as a portion of your total tender. But how do you think about the longevity of that offer, especially as housing is getting better, your ticket rising in a good world, which I'm hopeful. Do you -- is that something that's permanent?

Robert A. Niblock

Yes, our thinking today is that really is a long-term loyalty play for the consumer. As you indicated, it really gives the consumer a choice. 5% off every day, on anything they buy on Lowe's proprietary credit program, or if the ticket is over $299, they can choose between the 5% off or deferred financing depending on what -- deferred financing, our interest-free offer we have running at that particular time. But it really is to give them -- it's a long-term loyalty program to have them think about Lowe's and the consideration set for the everyday purchase that they're doing, help maybe consolidate more of the purchases that they maybe would buy somewhere else while they're already on a trip to Lowe's because they see that incremental value that's there. As you know, our agreement with GE, who's our credit provider, provides that we cover all of the acquisition costs. So whether we're doing 5% off, whether we're doing interest-free financing, we cover that. But we also participate in the profits on the back end of that. So even though it is costing us from a top line and on a margin impact from a 5% off, we more than make that up on the bottom line impact on the portfolio with less deferred financing that's out there in the cost associated with that. So EBIT-accretive for the process.

Michael Lasser - UBS Investment Bank, Research Division

And is the basket associated with -- obviously, the basket associated with the uptake of that offer is going to be better than an alternative of that?

Robert A. Niblock

Yes, the [indiscernible] the margin on the scope we'll have is, it does have an impact on ticket because people are now sitting there using -- coming to us for some of the smaller ticket items they may have bought somewhere else because they get 5% off. So it does put a little bit of downward pressure on ticket. But in many cases, it's good margin items.

Michael Lasser - UBS Investment Bank, Research Division

This year, you're going to be embarking on a path of adding 150 labor hours to the store to improve the close rate during weekday hours. Now if that's successful, could there be an incremental opportunity there? How do you think about the trade-off between the costs and the benefit of it?

Robert A. Niblock

Right. Yes, what we're really trying to do is, as you called out, we've seen a difference between our close rate on weekend and during the weekday. And our hypothesis is, if you think about, a significant amount of your volume actually takes place on weekend. So when it comes time to Monday, Tuesday, Wednesday during the week, there's a lot of recoveries taking place from that amount of volume that took place over the weekend. So a lot of tasking for recovery from the weekend and then get ready for the next weekend. So our belief is, is that while we have staffing in the stores, a lot of their time is going towards a lot of that tasking. So what Rick Damron is doing is looking at the peak hours during the weekday and adding incremental labor hours in there because we think we can provide a better customer experience, turn those peak hours which will help drive our close rate. We're putting the hours in about 2/3 of our stores, so it's something we'll test against what we're seeing in other stores and see if the performance is there. If it is, we may roll it out to additional stores, but we'll continue to monitor. We're not -- we're being conservative in the amount of sales we're trying -- that we're banking in to our estimates from that only because getting people up, trained, time for the customer to recognize the additional hours we put in the store, those type of things. So we think we're being conservative in our projections and hope to exceed them because we do think that particularly, think about spring of the year, a more robust housing environment like we talked about, we think it's the right time to invest in those additional labor. And if the customer will notice the difference, it will help improve our close rates.

Michael Lasser - UBS Investment Bank, Research Division

And along those lines, you've -- the question from the audience was along customer service scores. What have you seen as the trend? What are your expectations for your customer service scores, especially as you get past all these changes and you add labor to the store?

Robert A. Niblock

Yes, our customer service metrics have held up relatively well during the downturn and through the past few years, even in spite of a significant amount of change that we put into the organization, be it the reset to changing some of our -- the pay scale that we've -- some implementation we've made in some of the pay structure in the stores a year ago and those type of things. But we think there's opportunity for us to go to improve. And also, and -- but primarily, the opportunity to take that close rate higher, so that we're there engaging the customer and able to address their needs on a day in and day out basis through the weeks during those peak selling hours. So our anticipation is that customer-focused scores would go higher as we implement these additional sales hours.

Michael Lasser - UBS Investment Bank, Research Division

And one comment that you guys have made in the last few quarters is that the consumer was slow to recognize some of the physical changes within the stores and the end-cap, the innovation at end-caps, perhaps. Do you think that awareness is starting to build? Is there anything you can do to drive that?

Robert A. Niblock

Well, I think you're speaking to the product differentiation program and really, product differentiation, which we rolled out to 1,250 stores through the end of last year, we got another 160 or so this year, and it's really focused on creating excitement back in the store. If you think about the line reviews, the resets that we've talked about, that's kind of the inner core, if you want to think about it, the inner circle of it, the core, where it's the basics of retailing and merchandising every day. And product differentiation is more of the excitement, kind of the outer circle that creates the excitement, a different feel and look in the store. And so what we did with that was really, using our end-caps to highlight innovation, to highlight great values, to highlight some key proprietary and national brands that we wanted to bring front and center to the consumer, a lot of times those products that we had in the store but there wasn't a great enough awareness, the fact that we have these innovative products of great values to the consumer. We also opened up some of the sightlines in our stores, created some more dedicated drop zone areas so we could -- stuff like in cleaning chemicals, those type of things. So we've made it a better shopping experience, better sightlines for the consumers. So I think one is that the fact that we're rotating now those end-caps and have new products out there, I think that's creating greater excitement for the consumer, when they're back in there and they see it. I think we're doing a better job of selecting the items that go on there, the right depth of inventory, those type of things. So I think when you take that and when a greater percentage of the store gets reset, so when they're shopping in the line or in the end-caps they see a better, complete experience in the store, I think that's when it all comes together for us.

Michael Lasser - UBS Investment Bank, Research Division

Speaking of excitement, let's talk a little bit about appliances. It doesn't get much more exciting than that, right?

Robert A. Niblock

Exactly.

Michael Lasser - UBS Investment Bank, Research Division

It's an area that seems to be coming a little more competitive. You got perhaps -- it's been more stable, and so you got more players out there working to address it. Do you agree with that observation, first? And how do you maintain your share and then the margin balance? Because you've emphasized some promotions and deemphasized promotions. And is there a halo benefit or impact between appliances and then the rest of the store? I know it's a lot of questions, I apologize.

Robert A. Niblock

Yes, it is a competitive area. If you think about it, it's a big ticket item. It's something that people are probably going to price shop before they pull the trigger buying, and it's easy as it is with the Internet to price shop today. Certainly, there's going to be some of that, that takes place. We've got a great market share in appliance. It's been a great category for us. We will continue to be competitive in appliances. We'll continue -- we want to have the right promotional cadence for appliances and then layer on the other benefits that we can bring to bear for the customer. We're also -- this month, we're rolling out LG in our stores. We didn't have the LG brand before. It's the fastest-growing brand in appliances, followed by Samsung, which we already have. So we'll have all the major brands represented in our store. A number of customers historically that have come into our store, a high percentage of them, have come in because of our dominance in appliances, asking for the LG brand and we didn't have it. So we think it's going to be a great success. And when we look at -- we'll have great brands as to our innovation, great style in the store. To your question about -- normally, when someone is shopping for an appliance, that doesn't immediately lead to another purchase other than an extended protection plan or delivery and those type of things. There are some additional things that are involved. But primarily, if they're in there buying an appliance, it's not necessarily -- it's not a normal thing that it starts the basket that builds to a bigger basket, as you would maybe on a different shopping occasion. But I do believe there is somewhat of a halo effect to the point that you brought up in that. If you're going to buy a major ticket item like an appliance and with the additional services we have, haul away -- next-day delivery and haul away of your old appliance, extended protection plan, taking ownership of the entire warranty repair process because we've now invested in that. We take ownership of the entire relationship with the customer so that we're not handing it off to someone else. We're maintaining the focal point on that experience. I think we bring more to bear there for the customer. And so if we do a great job with a major appliance, a major -- a big ticket purchase like a major appliance, I think we'd get in the consideration set next time that you want to do a shopping experience or shopping occasion for something around the home. So I do think if the consumer trust us to put a new refrigerator in their home, they're going to trust us in other categories and merchandise as well.

Michael Lasser - UBS Investment Bank, Research Division

And so there is -- does that influence the promotional cadence within the category or...

Robert A. Niblock

You want your fair share of appliances. We don't want to give it away because it -- but we'll hold on to this as the price right and then bring to bear the other things that we have to offer. As I said, the appliance advantage, all the install or the haul away, next-day delivery, the repair and maintenance of the appliance, those type of things. And then stuff like MyLowe’s where you can sign up for MyLowe’s, if you want to track everything about your home and keep up with your warranties, everything associated with that appliance or anything else. So how do we bring more value to the consumer and do it in a competitive price, that's what we're trying to get to.

Michael Lasser - UBS Investment Bank, Research Division

An area that seems to have been excelling as of late has been the professional customers. Do you think you're taking share there? What have you done that has potentially driven that outcome, and what can you do more of?

Robert A. Niblock

Okay. Certainly, last year, our comps with a pro customer exceeded the overall company average. So we're very pleased with what we did there. It is a great business for us that we're set up well to be able to service that customer. If you remember, about 18 months or so ago, we also installed the value proposition for the commercial customer. So if they buy on one of our proprietary credit vehicles, they get 5% off everyday, which is resonating extremely well with them. So they buy when they want to and get -- they get that value, that saving, continuing to look at where we offer contractor packs, the debt problem, those type of things, which means that if they buy a contractor pack, it's a lower pricing than if you were buying the individual units. We have a dedicated team in the store that is particularly focused on those pro customers to be able to meet their needs. We also have dedicated kind of national account people that can help with the larger accounts and helping to ease -- pulling together, consolidating everything from them to be able to meet their needs. So I would say over the past 12, 18 months, there's just been a greater focus on that commercial customer and make sure they understand what we can bring to the table to make their overall relationship with us a better experience, and I think that's resonated well with them.

Michael Lasser - UBS Investment Bank, Research Division

I think Lowe's has been a thought leader in what it's been doing through the e-commerce channel and then creating a true omni-channel experience. Can you talk about what you've been seeing from mylowes.com, especially as it's had some time to really marinate? And what do you think is the next wave, and what can we expect from there?

Robert A. Niblock

Yes, MyLowe's is not a separate channel. It's a tool to help the consumer when they're shopping to be able to manage and maintain anything around their home, to help bring some greater simplicity, a little bit of organization to that entire process. It's something that we offer free to our customers. We have over -- I think the latest number is we're up to about 18 million or so unique swipes on MyLowe's card and almost 7 million of them have gone out and registered. So they've set up a profile and done something out there beyond just swiping their card to track their purchase. We track their purchases for them across all channels that they buy with us, so they have that. They can go out there and set up reminders of things that they need to do around their home. They can set up shopping lists for future projects. They can load pictures out there and start building just kind of from an envisioning or inspiration standpoint what they want to do with another project down the road. Anything to do with their warranties, owner's manuals, those type of things. It organizes all that. So if you think about anything you have to do as a homeowner to kind of maintain and organize your home, we provide a vehicle for the customer for them to be able to do that. And so we're seeing great receptivity from the consumer. Right now, we're willing to continue to grow awareness and bring more unique customers in to get registered, and so they fully understand the benefits associated with it. We want to be able to even better leverage the features that we have out there and enhance those. And then down the road, we've got additional features that we want to add. We've got -- a lot of things we'd like to add, we think there would be a benefit to the customer. But it's just the cadence, and all of this stuff requires technology. And how we layer that in with other things that we need to be working on with limited number of technology and resources that we can afford to invest in.

Michael Lasser - UBS Investment Bank, Research Division

And is it enabling you to gain share through this channel at a faster rate than you otherwise might be able to? How do you think your market share is trending through the e-commerce channel?

Robert A. Niblock

Yes, I think as we look at e-commerce in general, we had a great year last year. Sales of e-commerce were up over 50%. Conversion rate was up, and we also had dramatically expanded the number of items that we have out there. Lowe's.com, we're over 600,000 now, I think. So tremendous opportunity there. Really, we got a lot -- we got work and opportunity to continue to improve the experience from the customers on the website. One of the things we're getting ready to, re-platform the website to dramatically improve our search capability. So you're typing in search and something to help you get a narrower listing of the specific products that you're looking for. When you type in search today, the results are still too -- wider than what's ideal for the customers. So we're working to try and improve the experience, and I think all of that helps drive more sales.

Michael Lasser - UBS Investment Bank, Research Division

We got a comment -- a question from the audience on Canada. Since the -- given -- nothing against Canadians or anything of that nature, but given the size of the market seems to have taken up with a disproportionate amount of investors focused on the last year. So maybe you can update us on your thinking in that market, how do you expect to gain critical mass, though that was obviously a focus for a while as well.

Robert A. Niblock

Yes, I guess, it's taking up a disproportionate amount of investor focus because of the fact that when we made the offer in RONA, they made it public and rejected the offer. We're at 34 stores there. We got 2 or 3 more planned this year, big-box stores. We're really pleased with the volumes we're doing in the stores. We just need more stores to be able to cover the overhead. So there's a couple of ways we're going to approach it. One is we'll continue to have -- roll out big box stores in the market where it makes sense and we believe -- where we believe we can get an adequate return. I think we've got some opportunity to look at the cost structure that we've put in place there in Canada and say is there an opportunity to operate on a more efficient basis than what we've done in the past. So it's just as we've gotten up and got going, so we'll continue to challenge the cost structure that we have in place and see if we can do -- operate on a more efficient manner. And then we'll also look at other formats which allows that opportunity to expand. When we first entered Canada, we thought the single biggest opportunity to exploit was big-box opportunity in English-speaking Canada. So that's where we went first to get our foothold and from there, we will then look at other opportunities to get scale. So it's consistent with what we had -- with what our intentions were when we first entered the market. It's just the downturn and the slowdown in overall housing and continued strong prices in the real estate market have been somewhat of a challenge up there. And then the other thing is quite frankly, we didn't have the e-commerce until October of last year. We just launched lowes.ca. And so that's a big plus for us because it's something that in that market consumers demand more than one channel to interact with.

Michael Lasser - UBS Investment Bank, Research Division

And where do you think you need to be in terms of scale to make it -- make the economics where you want them to be?

Robert A. Niblock

I think ideally, you want to be at least twice the scale we're at today and to get there in order to really be able to leverage your overhead you got to build on top of that.

Michael Lasser - UBS Investment Bank, Research Division

And we're running short in time. I think the one question -- we've got a couple of them here, and I'll just state it like this. Growing up, I told my folks not to compare my grades with my brother's grades, because I was taking AP courses and he was taking cooking. And if he's listening, I was just joking. But give us a sense for how we should measure your progress, because there's lot of math that people do and it really depends on the time frame that you're measuring against. What was the best way that we should all gauge your progress?

Robert A. Niblock

Yes, well, certainly, first and foremost, we're focused on executing our game plan. And so we've got -- we -- part of the economic downturn, we had a phenomenal run. When we got into the economic downturn, we probably got a little bit complacent because of the way that consumers' expectations were changing, moving into an entire omni-channel environment. I think we've gotten the organization moved back and refocused in the right direction and how we need to grow differently going forward. We've now got the executive management team at full bench strength with the latest people putting in place. We've -- a lot of the heavy lifting we've done over the past year or 2 -- with both at the corporate office and in the stores. We've learned from our missed steps that we made. So really, it's -- we're going to try and be opportunistic with the opportunity that's out there but have a bent towards conservatism and try and exceed -- and see -- and be able to deliver on our expectations and hopefully exceed those expectations. And I think that's how we ought to be benchmarked is, first, just where we're at in, in this turnaround transformation and versus what expectations we're putting out there in front of Wall Street.

Michael Lasser - UBS Investment Bank, Research Division

Well, we look forward to watching your progress. Thank you so much. [indiscernible]

Robert A. Niblock

Okay. Great. Thanks for having us.

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