Lowe's Companies Inc. - Shareholder/Analyst Call

| About: Lowe's Companies, (LOW)

Lowe's Companies, Inc. (NYSE:LOW)

December 06, 2011 10:00 am ET


Robert J. Gfeller - Executive Vice President of Merchandising

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

Unknown Executive -

Rick D. Damron - Executive Vice President of Store Operations

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

Thomas J. Lamb - Senior Vice President of Marketing and Advertising

Tiffany Mason -


Budd Bugatch - Raymond James & Associates, Inc., Research Division

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

Gregory S. Melich - ISI Group Inc., Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Michael Baker - Deutsche Bank AG, Research Division

David S. Strasser - Janney Montgomery Scott LLC, Research Division

Unknown Executive

Please welcome Vice President, Investor Relations, Tiffany Mason.

Tiffany Mason

Thank you. And welcome to Lowe's 2011 Analyst and Investor Conference, and welcome to those of you listening on the web. Before we get started, please note that, throughout this presentation, you will hear comments about our expectations and beliefs which constitute forward-looking statements. Although we believe we have a reasonable basis for making each of them, we can give no assurance that those forward-looking statements will prove to be correct. They are subject to a variety of risks and uncertainties that are highlighted on this slide, shown both here and on the web, and are further described in the company's annual report on Form 10-K and in its other periodic filings with the SEC.

Also in today's presentation, we will be using several non-GAAP financial measures when discussing our performance and financial condition. You can find a presentation of the most directly comparable GAAP financial measures and a reconciliation of the differences between the 2 posted on our Investor Relations website and, for those of you attending in person, in the appendix of the booklet you received. You will also find in those places an explanation of why Lowe's management believes these non-GAAP financial measures are useful.

Today's program includes 4 presentations followed by a short break and then Bob Hull's financial update, as well as an extended Q&A session with all presenters.

Thank you again for your attendance. And with that, I'd like to introduce Robert Niblock.

Robert A. Niblock

Well, thanks, Tiffany, and good morning, everyone. Today, we will provide you an update on how we're progressing on our mission to deliver better customer experiences and showcase our business transformation strategy designed to drive long-term sales growth, increased profitability and enhanced shareholder value. After my introductory comments, several new members of our senior executive team, Tom Lamb, Bob Gfeller and Rick Damron, will provide details on how our mission is coming to life across Lowe's. Then, Bob Hull will provide comments from a financial perspective, addressing our strong capital structure, near-term outlook and longer-term financial objectives.

In the presentations today, you will see how we've taken a very self-critical approach in 2011 to evaluate our recent performance. This was an important exercise that allows us to build upon our core strengths and strategically invest in ways that will better position Lowe's for success.

In 2011, we accelerated our investments in technology and store infrastructure and increased our efforts to improve the customer experience. We also refined our pricing and merchandising strategies and processes. With these enhancements in place, we believe our leadership team will be well positioned to drive stronger comparable store sales growth and expand operating margins.

Further, our strong financial position and cash flow afford us not only the opportunity to make investments that are part of a disciplined capital allocation strategy, but also fulfill our commitment to return excess cash to shareholders through dividends and our share repurchase program.

A year ago, I discussed how we're evolving from a home improvement retailer to a home improvement company. In doing so, we strive to be more than a provider of home improvement products. We will be a partner for our customer that is relevant at each step of the home improvement process from inspiration and planning to completion and enjoyment. At the heart of our strategy is Lowe's fundamental mission: to deliver a better customer experience, in fact, the best it can be. Better experiences begin the day a customer first thinks about the need for home improvement and continues until that project or need is fulfilled.

We live in an increasingly seamless, socially connected world with real-time expectations and a proliferation of customer service and selling channels. This is a world where you must meet the customer on their terms. It's a world where one great or one bad experience can be broadcast to millions within seconds. It's a world where 4 out of 5 consumers trust online ratings but only 14% trust traditional methods of advertising.

In this world, being a world-class home improvement retailer is an expectation, and one that we're investing in to ensure we continue to improve every day, but that's not enough. So during 2011, we initiated the first steps into a much larger journey. From our investment in technology to the transformation happening in the aisles of our stores, we're moving to a new future. We're making good progress, but we know there's more work to be done to achieve and fulfill our potential. We are going to deliver better experiences wherever and whenever customers engage. We will be the best in the industry at pulling it all together for the customer across any channel, project type or place they choose to engage Lowe's.

We know from years of consumer research and over 60 years of being in business that home improvement experiences range from simple fixes to major projects. We also know consumers expect better experiences, whether it's one of our installers replacing a water heater, one of our associates helping a young couple buy a ceiling fan for their first living room, using new capabilities to quickly ship sump pumps directly to homeowners in the Northeast after the recent floods, or one of our project specialists helping a homeowner replace their windows with a more energy-efficient product. Again, whether it's a maintenance purchase or a large remodel, customers want more than they're getting in the home improvement market today, and we're on a mission to deliver that better experience.

Delivering a better experience requires a promise with customers, a promise to provide value beyond price at each stage of their home improvement project, and a commitment to deliver better execution than any of our competitors. As we discussed a year ago, our promise continues to focus on 3 themes: possibilities regarding home improvement solutions, support and advice along the way, and providing value beyond price, which in our view requires 3 critical execution themes: retail excellence, seamless support across channels and projects, and helping simplify the home improvement experience. Together, these themes are the foundation of our mission and our long-term strategy.

Our strategy takes into account the fundamental changes that are occurring across the entire spectrum of our business and the marketplace. Through dedicated research, we dug into customer insights to analyze what was and what was not working across our customer interactions. In addition to customers, we surveyed over 200,000 employees and we launched an employee social business network, appropriately called Connections, where employees are sharing knowledge and ideas on a daily basis.

As we look at the world, we see major trends taking hold, trends that show ever more complex and wired homes, trends that point to new homes -- how new homes are changing and indicate that there will be more renters, more multigenerational families and more millennials entering household formation. Our investments in technology position us to capitalize on these trends.

Finally, we looked at the competitive landscape and all the ways in which consumers can spend their money, from iPhones to cars, from houses to vacations and from online-only players to local independent retailers. Across all of our work, we continued to see 3 primary consumer expectations: control, simplicity and value. Control over the shopping process; simplicity in how, when and where they interact with the company; and value, defined as a competitive price and something more. Better quality, better service and a better experience.

As we look to this changing world, we found ourselves facing a situation in the future where the big box model would not be enough, so we set out to undertake a transformational change to the new seamless and simple business that we're building. A change of this magnitude, while achievable, will not occur overnight. It takes many forms, including evaluating whether you're investing in the most critical business imperatives needed to support our strategy. And I'm confident that we have the right management team in place to meet those challenges.

In 2011, we made a series of very hard, very critical, but very important decisions to create Lowe's of the future. We started with the difficult decision to further rationalize our existing and future store investments, including closing underperforming stores. Rather than be a home improvement retailer focused on store expansion as the engine for growth, we'll be a home improvement company focused on maximizing asset productivity in order to grow.

We also invested capital to improve employee expectations because, in our critical evaluation, we heard employees refer to locking more technology in their locker than we gave them on the sales floor to serve our customers. This was unacceptable and we knew we had to address it, and we did.

In 2011, we undertook the largest single-year investment in IT and store systems infrastructure in Lowe's history. We're accelerating investments necessary to begin fixing problems with slow response times, hard-to-use systems and a lack of access to necessary technology expectations. In each of these investments, we focused on the critical infrastructure needed to support the changes we're rolling out over the next 36 months. This meant bandwidth upgrades of 4x to 8x prior speeds and upgrading our in-store wireless network to handle video downloads for employee selling tools and customer Wi-Fi usage. And it meant rolling out iPhones to replace existing functionality and to enable the ability to assist the customer at any place in the store.

These are only some of the foundational steps needed for our transformation. Throughout the day, you will hear more about the decisions and investments we're making to drive success. These are important strategic investments to enhance the Lowe's brand and also drive shareholder value.

But making tough decisions is only one aspect of Lowe's transformation. Another more subtle aspect is how we're changing our culture to move faster on calculated risk in order to improve execution and support changing customer expectations. As CEO, it's my role to set strategy and lay the foundation for how we will lead and win in the marketplace longer term. It's my role to make decisions about whether we're going to accept short-term disruptions to achieve long-term goals.

In 2011, I looked hard at our organization and determined that we needed to make some disruptive changes. With the retirement of 2 long-term leaders, we took the opportunity to shift the makeup of our executive leadership team, introducing new voices to lead merchandising, marketing, store operations, information technology and customer support services. These changes added 89 years of Lowe's tenure to an executive team that is highly focused and motivated to continue driving the changes that will be critical to Lowe's future success.

This past year, we also worked through the rightsizing actions needed to become more nimble in our store operations, merchandising and human resources organizations. And we realigned personnel to help design and build the next evolution of seamless and simple customer service models. Each of these decisions caused some level of disruption and has required investments in the short term to build the right model for the future.

Making these decisions, launching our mission and investing in the right foundation for the future has made 2011 a pivotal year for Lowe's. While there continues to be uncertainty in the macro environment, we have defined our path to success and we are making good progress. Ultimately, it boils down to living up to our vision to provide the customer-valued solutions necessary to become the first choice in home improvement.

That vision holds true. We are going to be the first choice in home improvement for the long term. We are taking the actions needed to differentiate Lowe's for a changing customer. We are looking ahead at the converging trends of control, simplicity and value, and how consumers will continue to increase their expectations of the home improvement industry.

We know that the retail store will continue to have a role in the future. There will always be an opportunity to fulfill that everyday maintenance purchase or that small impulse project this weekend. We also know the store will continue to play a role in the social connection of retail and the inspiring presentation of new products and home improvement ideas. We are making the investments necessary to reinvigorate our stores for these roles.

When the customer needs a winning retail store experience to buy a product, to find an idea or to talk to a real person, we'll be there with the best model in the industry. If we are true to our vision, this will be a continuous journey, constantly working to ensure that Lowe's is and remains the most nimble company in home improvement. And our actions will lead to deeply engaged customers, which will translate into highly profitable relationships that will continue to grow over time.

As I stated earlier, our strong cash financial position and cash flow allow us to invest in this transformational effort, which will improve our financial performance and deliver increased shareholder value. These investments are part of a disciplined capital allocation strategy, and we're committed to returning excess cash to shareholders through dividends and our share repurchase program. As our history shows, we're successful at managing change and at transforming to meet new expectations for home improvement, and we choose to do so again.

Thank you for your time and attention and for your interest in Lowe's. Please welcome Tom Lamb.

Thomas J. Lamb

Thanks, Robert. And good morning. You've just heard that we're committing to delivering better customer experiences by pulling together the best combination of possibilities, support and value wherever and whenever customers choose to engage with us. To really understand this strategy, you need to understand who our target customer is, what their expectations are and how rapidly those expectations are changing. And you need to understand why it's critical that we grow our relationship with them.

So first, who is our target customer?

Let me give you some background. Based on our analysis of the market, we've identified 4 distinct segments of home improvement customers. Each segment is a group of customers that share a similar mindset, and each mindset has a primary shopping motivation that influences how they engage with their home and where they prefer to shop and spend their home improvement dollars.

The first are the maintainers, customers that are interested in keeping their homes working and highly functional. They're diligent. They want it done right and they do their homework, but their ultimate goal is getting the project completed so they can move on with life. This group makes up about 15% of households and roughly 10% of home improvement spend.

The second are diehards. They're interested in keeping their home in good order, but at the absolute lowest cost possible. They're opportunistic. They define their needs, look for options and then relentlessly search for the best deal, allowing them to get the job done for less. That group is roughly 20% of households and home improvement spend.

The third are the curators. They are inquisitive. They treat their homes as a retreat from their busy lives. They are seen as always being in the know because they're constantly seeking out experienced opinions and evaluating their home improvement options until they fully -- feel fully informed prior to making their final purchase decision. They're highly motivated by innovation, both in terms of product and in terms of methods that solve old problems in new ways. Price is a relevant factor, but they don't let price get in the way of creating the experience that they're looking for. This group makes up just over 30% of households and about the same on home improvement spend.

And finally, the fourth are the upgraders. They're the trendsetters. Staying current isn't just about making sure their home and their belongings are in vogue; it's a way for them to express their personality to those around them. Shopping is not a chore for them. It's a passion, and they love exploring and experimenting. They seek out what's new and they follow, and in many cases, they drive the most current trends. This group is just over 30% of households and 40% of home improvement spend.

Our target customer is the combination of the last 2: the inquisitive curator and the trendsetting upgrader. Those 2 segments, which we refer to collectively as the creator, are the most active in the home improvement category in terms of visits and amount of spend. In fact, they represent over 70% of today's home improvement dollars.

The creator is a mindset, and therefore, it transcends socioeconomics. They seek out quality, tailored experiences and are highly, highly influential within their peer group. Creators are curious, they're thoughtful and they're aspirational customers. Their homes are an important part of who they are. To them, home improvement is a lifelong journey of continuously reshaping their homes to reflect their ever-changing personal wants and their needs. Creators are always on the lookout for new ideas to improve their homes. Ultimately, creators engage in home improvement because they know the energy they put into their home is repaid many times over, repaid in emotional return, the core motivation that really drove the inception of the home improvement industry. Making their homes better also makes creators feel better about their lives.

While we're targeting 2 of these 4 distinct segments of home improvement customers, we believe that, if we focus on their needs, the needs of these much more discerning customers, we'll meet or exceed the needs of all the other customers.

Now you might be asking yourself, where does the commercial business customer fit into all of this? Commercial business customers are roughly 25% of our sales today, and they include those who work in the construction, repair and remodel, commercial and residential property management, and business maintenance professions. The creator mindset applies equally to the commercial business customer. They are the leaders in their industry, always on the lookout for new ideas they can use to improve their customers' homes, make projects more profitable and easier to complete and manage their own or someone else's property in the best way to maintain its long-term value and efficiency.

What are the expectations of our target customer?

Through independent research as well as our own survey work, we're able to zero-in on their needs, and those expectations serve as the key selection criteria when deciding whether or not to engage with us.

What we know through our research is that creators value reputation. They value customer experience, product range, availability and good value. Let's talk about each more specifically.

First, reputation. Customers want to avoid risk. They seek well-known, well-respected companies with strong records in the marketplace, in other words, brands they can trust. Our market position, established history, activity in the local community and strong financial position are key ways in which they can assess our stability.

Next, customer experience. Customers expect to have a safe, informative, pleasant shopping and product ownership experience. Our stores, online presence, support and external services all contribute to the achievement of that goal. Rick Damron will discuss how we're focused on retail excellence and addressing seamless support across channels and projects.

Next is product availability and range of product. Customers are on the lookout for companies who provide more than just the basics. They want companies who provide a breadth of products and options. This also includes having the latest style, trends and innovations reflected in our product lines and being able to create coordinated solutions from across different product categories. Likewise, customers will assess our ability to have the products they need available when they need them. Our products are critical to their projects and to the maintenance and upkeep of their property and, ultimately, their lifestyle. If we don't have the items they need when they need them, they will shop elsewhere.

Finally, customers expect, in fact, demand good value. Bob Gfeller is up next to discuss with you our efforts around product differentiation and value improvement.

So that's a look at customers' expectations. But we also know that consumer behaviors are changing, and this change is being driven from all sides: the reality of today's economic environment; the proliferation of news, media and technology; and as the millennials age into the home improvement space, their need for skills and support.

The consumer is under pressure and the natural response is to demand control and simplicity. We know that the home improvement business is complex. Customers don't care. They need us to take out the complexities to make it simple, in other words: easy and intuitive.

And consumers don't shop in one channel. They shop across all channels. They need us to create a seamless experience to make it convenient, in other words: wherever and whenever, on their terms.

So why is it important that we grow our relationship with this customer, this demanding target customer?

Our customer research shows that, today, almost 2/3 of home improvement customers cross-shop and lack of differentiation is the culprit. There is a real opportunity to create a more differentiated brand experience to set Lowe's apart from our competitors and to earn greater customer loyalty.

Every home improvement project has 7 stages. The stages aren't always linear. They may even happen very quickly or over several months. Research shows that, today, our industry only gets credit from customers in one stage of the process: the highly transactional, least emotional getting supplies stage.

Consumers have expectations of retailers, high expectations, and the reality is they seek solutions while we sell products. We are focusing, as you've heard, on becoming a home improvement company more than a retailer and to be known throughout the 7 stages of home improvement. If we can connect with customers and convince them of our partnership at all stages of a project, particularly stages with the highest emotions, we will create trust and keep Lowe's top of mind. But if they don't perceive a difference, they'll default to whoever is most convenient.

Okay, you have all the relevant background information. Now let's talk about the progress we've made in 2011 and what we have planned going forward. In mid-September, we launched our new brand positioning and advertising campaign, Never Stop Improving. This is more than a tagline. It's the embodiment of the creator mindset. And Lucky Strike extra, it's become a great rallying cry for our employees.

Through this campaign, we're committing the constantly innovative and improve in order to satisfy the ever-changing needs of our customers and inspire them to innovate and improve their homes. The brand positioning and advertising campaign are a targeted response to the research showing that consumers are looking for more in the home improvement category. They want inspiration and motivation. We will lead them through the journey of home improvement, from inspiration and planning to completion and enjoyment. And we're going to do it project after project over the course of their lifetime in home improvement. Let's take a look at the ad that we used to launch this new campaign.


Thomas J. Lamb

Each advertising medium in our mix has a specific purpose. Television advertising drives engagement in the home improvement category and awareness of the brand promise, Lowe's brand promise. It's the perfect arena to bring a new sense of energy and sense of purpose to the brand and create that emotional connection with the consumer. This campaign was built to do just that. It was not focused solely on traffic-driving metrics. There, frankly, are better media for that: radio, print, online. And we'll talk about our media mix momentarily.

Before the launch, we tested this concept and a range of others against 4 standard metrics: stopping power, "I would stop and watch this ad;" relevance, "It connects with me in a meaningful way;" engagement, "is the ad leading to engagement with Lowe's;" and differentiation, "is the ad leading you to think differently about the Lowe's brand?"

The new tagline, Never Stop Improving, tested better. It tested better than the legacy Let's Build Something Together, which had been in the market for over 6 years. That was very impressive. It doesn't usually happen that way. Our expectation for this campaign, 77 days post launch, was to be making good progress on stopping power and relevance. The exciting news is we've already exceeded our expectations for these measures and we're seeing breakthrough on engagement.

Consumers and, frankly, our associates are pleasantly surprised by this new campaign from Lowe's. Beyond the research, we are experiencing an unprecedented amount of buzz, online chatter from our target customer, and we're confident that we will continue to build a strong emotional connection as this campaign unfolds in the coming months and coming years.

I've explained the expectations and the changing behavior of the creator in a nutshell. In a nutshell, they want the advantages of big box retailing, widest selection, lowest prices, convenience, but they yearn for the simplicity of retail on Main Street. They want us to know them well enough to anticipate their needs and to help them manage their home as a neighbor, not just a supplier. In fact, based on a third-party survey, 2/3 of consumers agree that, despite all of the home improvement information available today, they wish they had an even greater ability to customize the information to suit their personal needs and their personal interests.

In mid-October, we launched MyLowe's. MyLowe's is a revolutionary new online tool that is unique in the home improvement industry and makes managing, maintaining and improving homes simpler, more intuitive than it's ever been.

Customers can create home profiles; save room dimensions and paint colors; organize owner's manuals and product warranties; create shopping, to-do and wish lists for projects on the horizon; set recurring reminders for common maintenance items; and store purchase history from across all Lowe's channels. And the capability of MyLowe's will grow and evolve over time based on customer and employee feedback.

Let's take a look at the commercial we ran to announce this exciting new tool.


Thomas J. Lamb

Now let me share with you a couple of specific examples. How many times have you forgotten to replace your air filters? You're not alone. Research shows that the average household changes their filters about 2.5 times a year despite recommendations from the EPA and the Department of Energy that they should be changed at least once every 2 to 3 months. This is a mundane maintenance item that MyLowe's can make simple in a couple ways. For consumable products like air filters, you can store the size and the number that you use for your home. Then, you can set e-mail reminders. And very soon, you can create subscriptions. We'll automatically ship you your air filters.

Here's another example. There are several common homeowner challenges that revolve around the outdoors, one of the most popular places for our consumer to improve. Let's face it, who doesn't want the yard of the month or at least a yard that you can walk barefoot in? In the world of lawn and landscaping, knowing the size of your yard is important information. So is which grass seed you put down and when you need to fertilize. With MyLowe's, you can store all this information, which in turn, allows us to anticipate your needs next season and display for you the most relevant products and information specific to your climate and your local weather conditions.

Customers are excited about this very relevant and personalized offering, and we are very pleased with the early results. Just 49 days into the program, we've had nearly 2 million customers activate MyLowe's cards. Importantly, to date, roughly 20% of MyLowe's members are either new customers or reactivated customers who haven't shopped at Lowe's in over a year. And the current trend shows that MyLowe's customers visit our site 40% more frequently than our average lowes.com customer.

To put this in perspective, it took 10 years and 5 NASCAR Sprint Cup Series championships to reach 1 million members of the Team Lowe's Racing fan club. MyLowe's just launched 49 days ago. Said another way, we reached 1 million members the first month of the launch, accelerating to nearly 2 million in just another 3 weeks.

The ultimate goal of MyLowe's is to consolidate spend that is currently spread across many competitors into Lowe's. We will more deeply penetrate our existing customer base, garnering a greater share of wallet as well as attracting new customer with the promise of a lower cost of acquisition.

Consumers are faced with more media options, more technologies and more touch points than ever, which makes them increasingly difficult to reach and to engage from a marketing and advertising perspective. Just look at the growth in television networks, the shift of viewers online, the prominent usage of DVRs and the growth of smartphones. This fragmentation means there are no longer easy ways to get in front of masses of consumers.

In 2011, we refined our media mix and messaging to balance awareness and drive traffic. As a result, we have shifted spend to targeted media and the digital space. We are also more effectively communicating with the emerging millennial segment, a significant opportunity for our future growth. But frankly, we need an outright shift in our marketing and advertising strategy from a customer acquisition model to a customer development model.

We can no longer talk at the consumer. With one-way communication that's not personally relevant, it's too easy for them to tune out. We need to create a relationship with the consumer, a two-way value exchange, or they will tune us out. MyLowe's is one example of the customer development model in action.

The use of social media is another. We are generating a significant amount of interest with our social media campaigns. We were ranked fourth out of 25 on a retail standing index, which measures social media buzz and sentiment among retailers. Also, in a study of 300 top brand pages on Facebook conducted by a third party, we were referenced as one of the few rock star brands based on the way we manage and engage our Facebook fan base. Our social media team makes it a priority to respond to all questions and engage in all comments from our fans on our Facebook wall and Twitter feed.

We also had excellent results with our Black Friday Throwdown, where we revealed our top Black Friday deals and invited our Facebook fans to vote on their favorite products in a bracket-style matchup. Again, third-party research recently rated our Black Friday Throwdown in the top 5 best Black Friday events with social media. We're connecting with a key customer segment through online media, which allows us to better monitor and influence sentiment from this highly influential and viral group of customers.

By creating a relationship with the consumer at all 7 stages of the home improvement process and anticipating their needs based on their personal designations through MyLowe's, we will create stickiness. We'll create loyalty, which in turn, creates buzz. Our existing customers will spread the word, generating new customers at a much lower cost of acquisition. As a result, we plan to reduce our marketing and advertising spend by nearly $150 million by 2015, which is a 40- to 50-basis-point reduction as a percentage of sales.

We shared with you at this event a year ago that, based on third-party estimates, there are as many as 8 million customers a week who shop in our stores and another 6 million a week that shop on lowes.com but don't buy. Now some of that is they're simply not ready for their purchase, but others are cross-shopping. They're cross-shopping all home improvement retailers. We're confident that this shift from a traditional customer acquisition model, with its heavy reliance on mass media, to a more personal customer development model will enhance our relationship with customers and consolidate spend that is currently spread across many competitors, allowing us to garner a greater share of wallet. This will also allow us to convert more of this traffic to transactions, driving comp sales.

Thank you for your time and attention today, and thank you for your interest in Lowe's. Please join me in welcoming Bob Gfeller.

Robert J. Gfeller

Good morning, and thank you, Tom.

Tom pointed out that the creator customer focuses on 5 attributes when deciding where to buy home improvement products and services: company reputation, a positive experience, a broad and relevant range of products, they're available when they need them, and good value. During my time today, I'm going to share with you how we are working to improve on the last 3: a broad and relevant range of products that are available when customers need them and good everyday value.

Now why do we need to change from a merchandising standpoint? Don't we already provide a broad range of products with great in-stock levels at a good value?

We do, but we must do it and do it even better because today's customers expect more. First, they're demanding that we always have the right products to fix their problem or complete their project. Second, they're demanding a new definition of convenience, a definition where speed equals now, where buying is simple and on their terms. Convenience is no longer determined solely by the physical location of a store versus a competitor. And third, the unprecedented utilization of technology in our everyday lives and the simplicity of online shopping means that the consumer knows what and where the best price is.

Customers used to visit multiple retail locations to compare prices and specifications and then return to a store to make their purchases. As a result, it was difficult to compare pricing across most items. Now consumers can compare prices and specifications across a wider range of items available from a wider range of retailers from their laptop, smartphone or tablet. So keep in mind, while customers seek good prices, they also expect high quality and innovation.

So now, more than ever, we need to be focused on a value proposition that equals price plus something more. So if we're committed to meeting an ever-increasing expectation of our customer, and we are, then we must differentiate. So most customers do not currently see a high level of differentiation in our sector, which creates a great opportunity for Lowe's.

So let's review 3 key areas where we are making improvements: first, our merchandising team to help you understand what we have changed in order to work faster, better coordinated and more effectively; second, our efforts to define the value proposition at Lowe's better; and third, an outline of our current efforts to create a differentiated shopping experience. So since February of 2011, we have made a lot of organizational changes. These changes were necessary to better position merchandising, to take advantage of the new processes we are building and at the same time be more nimble in the marketplace.

So first, we consolidated SVP general merchandising managers from 4 to 2 and made some further consolidations below this level. We did this to better coordinate our businesses. And in addition, we've taken steps to drive the appropriate level of decision-making down to the working teams. This was necessary to hold the people making the decisions more accountable and to get to market faster with new programs and product lines.

Second, we created 3 dedicated teams to ensure that our new processes are highly effective. For example, to accelerate the realization of the investments in the Integrated Planning and Execution, or IP&E, we created a market analysis team. Additionally, we've created an innovation team and a value improvement team, both of which I will refer to later in my talk.

So let's turn now to our attention on how we are working to improve value. In a world of price transparency, we must, more than ever, ensure that we're priced competitively. In order to deliver everyday low pricing, or EDLP, we must ensure everyday low cost, or EDLC, from our vendors. Over the past many years, as players in this sector have chased sales in a shrinking market, the home improvement environment has become increasingly more promotional, as we have, to compete effectively each day. Now while we recognize that there are certain categories and times of the year when we will have to run promotions to drive sales and be relevant to our customers, going forward we will engage in a more rational pricing and promotional strategy. We'll be methodical in our approach as we identify and eliminate less effective promotions.

Everyday low prices result in more steady demand, eliminating the peaks and values associated with promotions, which makes both us and our vendors more efficient. So our value improvement efforts start with simplifying our agreements with our vendors and requiring their best cost the first time they quote us. If we can secure the best cost, then we know that we can be priced right at retail for a fair margin. If we do not isolate and remove all of the added costs of doing business with Lowe's, for example, vendor incentives, markdown coverage, promotional financing, promotional reimbursements, resets, product support materials, then we will never be quoted the lowest first cost. So the goal is to be the most efficient retailer our vendors do business with. And we're working with them in a collaborative manner to identify these costs that do not add value for the customer.

Additionally, we are working to have the right SKUs in every assortment, locally customized and supported by the right amount of inventory per store, driving even better productivity for the high-turning SKUs. So this will mean more depth in stock on the top turning items and less breadth of items with low velocity. We do not need items that duplicate form or function. So as we continue to use the IP&E tool to tighten our assortments within each market, we should have fewer SKUs stocked in each store but more of the right SKUs for the customers in those markets.

The market analysis team will work with the merchants as they use the IP&E tools and other tools to create the most efficient and effective product lines in each local market, improving our relevance to the customer. If an item is not available in-store, it will most likely be available online, so we're rapidly expanding our online assortments to allow customers to shop a wider array of products by category than ever before. We refer to this wider offering beyond the store as the endless aisle. Our goal is not to make the product selection just endless, but to also make obtaining it as simple as picking it up in an aisle, a goal that requires purchasing and delivery to be quick and easy.

So the work we're doing on flexible fulfillment is accomplishing exactly that. Flexible fulfillment allows the customer to order any product that can be shipped parcel post, that is stocked in either a regional distribution center or a store or in a vendor's distribution center and have it shipped directly to a home or place of business. Most items can be ordered and delivered within 2 days.

In the 3 months since we turned on this capability, we have fulfilled more than 275,000 orders through Flexible Fulfillment. This is product that previously was unavailable to those customers, and this new capability means that we have more options to satisfy customers and drive incremental transactions. So in February of 2012, larger products will be available for shipment to home or business via less-than-truckload carrier.

Flexible Fulfillment makes an additional $1 billion of inventory readily available to each and every customer, shipped to them from the most cost-effective node, which is a win for all parties. We expect our line design improvements, supported by Flexible Fulfillment, to drive sales while saving on distribution cost and allowing us to decrease inventory by nearly 15% to $7.3 billion over the next 4 years.

So let me share some quick examples of how we are executing against this strategy and what it means to the business. So first, using the IP&E tool, we are clustering stores by consumer preference. So for faucets, we had previously grouped our stores by income level.

Using IP&E, we've identified 6 different consumer clusters driven from a comprehensive set of data and analysis, information that is richer than we've had in the past. Once we cluster the stores, we have a very clear understanding of the type of customer in that market, which in turn drives assortment decisions. Then with the assistance from our new market analytics team, we item assort using a new tool called efficient item assorting, or EIA, to develop that right local market assortment. So these analysis, tools and processes provide the merchant teams with the information they need to optimize the SKUs in each market and maximize inventory productivity.

So following the faucet example, using the IP&E tools and processes as part of that line review resulted in 5 stores with 4 different clusters just 30 miles apart. So this output is radically different from the prior line review where the same group of stores yielded just 2 clusters.

So the positive implications of this work are truly exciting: local assortments versus regional assortments to better meet the customers' needs, stock SKU rationalization and expansion of items on lowes.com driving better turns. And when we combine these with the value-improvement efforts that we know, our pricing in the market will be very competitive.

So I would also like to touch on our line review process -- or on our product line review process. As mentioned earlier, we formed a value-improvement team within merchandising to ensure that we moved to EDLC/EDLP in a coordinated and cadenced fashion. As we said during our third quarter call, we will experience some sales and margin friction as we move back to EDLC/EDLP. From a timing standpoint, by mid-2012, we feel that the benefits garnered will more than offset the friction that I referenced. We should complete the majority of our initial product line reviews by the end of 2012, and the speed with which we complete the line reviews is critical as it directly impacts our ability to successfully realize these goals.

So we're moving from our current line review process to the new line review process as shown here. And as you can see, the new process will move a lot faster, 4 weeks, give or take, versus what used to take approximately 4 months. So as stated, our goal is to line review over 300 product lines by the end of 2012.

Now there is a last area of the value improvement work that I would like to review. It's an area that does not get many headlines, but it is a foundational element of how we are going to market with our vendors. Going forward, we will be in-sourcing and centralizing the design, production, consolidation and distribution of all display and promotional material within a Lowe's store, a model that also leverages our product service associates network and in-house project teams to improve execution of the resets in merchandising projects. This will further remove costs that were vendor-borne previously, allowing them to quote us a better unit price. This approach, along with a leaner management structure and the benefits of IP&E, gives us the ability to better rationalize and prioritize spend at an enterprise level.

We know that our economies of scale give us access to lower costs than are available to most of our vendors. So the result will be consistency of presentation to the customer; consistent integrity and modularity of product displays; and from ideation to execution, faster speed to market. So for the chain-wide faucet reset we just completed using this single-source model, we cut a 16-week reset down to 3 weeks.

So now I'd like to turn my attention to the third part of my discussion, which is differentiation in product and presentation. So starting with the intent statement here, you can see that we are talking about new ways to present current home improvement products, as well as the identification of new products and presentations that have not been part of home improvement retailing in the past. So again, we're working hard to shift our frame of reference and think anew to grow our business into the future.

Before I proceed, however, when it comes to blue sky-ing new innovations, we challenge the merchants to test multiple solutions at one time. This test-and-learn mindset is a better way to manage risks and bring the best solutions to market quickly. It is already producing some successes, and I would like to share some of those with you.

So first, a quick recap of the tour some of you attended today at our Northlake store. We pointed out a lot of change in the store, all with the purpose of improving price perception, as well as differentiating Lowe's from being new and fresh and innovative. You experienced the interactive innovation endcaps that use new technology and consistent presentation to show the customers something new while inspiring them to attempt a project that they may not have previously considered. We showed the value endcaps with compelling prices and clear messaging. Add those to the new drop zones around the front of the store, and we've created a compelling message to customers that can more easily -- that they can more easily find great products in our stores at Everyday Low Prices. In addition, we've lowered racking in key areas of the store, like the seasonal and lighting departments, to more attractively display our products and make our wide offering more accessible and visible to customers.

We are committed to create a better shopping experience for the customer. So currently, this set is in approximately 500 stores. We also have some different concepts that have been tested in other stores, and we will likely infuse some of those winners into the Northlake design as we roll it out further in 2012.

Now, to date, customer spending at the stores has increased, and we are pleased with our growing return on the investment in the Northlake prototype. We've completed a series of robust consumer studies on the Northlake store. Consumer perceptions of the shopping experience and several brand attributes are headed in the right direction, but most importantly, more than 80% of customers are more likely to shop Northlake in the future.

And then additionally, at the Northlake store, we have completed exit interviews and shop-alongs with our customers. I've highlighted some of the verbatims here to show you their direct feedback. So when you combine the qualitative and quantitative feedback, we are pleased with our forward progress.

Now in terms of new product development and launches, another source of differentiation, we have had a lot of great success year-to-date and we'll continue with this push into 2012. I would like to highlight 2 of these.

First, the test-and-learn approach to a new category called wall art. We had never really thought about this category as a big opportunity for sales. But our frame of reference changed after learning how European home improvement retailers approach this category. Our merchant team pulled a test program of stock items together and developed a robust online assortment as well. We shipped products into the stores for the third quarter and have had good sales of these items to date.

Second, private-branded presentation of total Lowe's sales is approximately 16% today, and it will grow to approximately 20% in the next 4 years. We continue to develop new and innovative products while we consolidate our investment into roughly half the number of private brands that we previously utilized.

Kobalt and allen+roth continue to expand across categories and grow in terms of customer relevance. The 2011 launch of the new Kobalt Mechanics Tools, followed by the new Kobalt Power Tools, are examples of big successes for this brand.

And then additionally, we just launched an opening-price point brand called Project Source, a super value at the lowest price offered to the customer. And to date, we are pleased with the growth in Project Source sales.

It's important to note that we expect growth in our national brands as well. We value our vendor partners and the national brands that speak to quality and trust, and we aim to strengthen the total branded program offered at Lowe's.

We expect the improved line design, integrating private brands, continued leverage of our distribution capabilities and reduced markdowns from better market-specific assorting to lead to 80 to 90 basis points of improvement in gross margins by 2015.

Combining the endless aisle with our pricing efforts and local market assorting, in addition to our efforts to enhance product and display differentiation, we are confident that we will convert more opportunities in the store and online, which will be reflected in increased transactions. These are some of the ways we expect to increase sales within our existing footprint and improve sales per square foot by 15% over the next 4 years.

Combined with lower inventory, we should increase turns by 120 basis points to 4.9x by 2015. And further, these gains, along with the gross margin improvement mentioned earlier, will help drive improvement in ROIC, adding value for shareholders while improving customer value.

So in conclusion, we've explored the ways in which Lowe's merchandising is thinking and acting differently, ultimately delivering on the Never Stop Improving brand promise. Our focus on value and differentiation will secure a solid foundation of retail excellence and positive customer experiences, giving the creator customer, our core target segment, more reasons to shop Lowe's, driving higher close rates and building bigger baskets while growing gross margin and improving inventory productivity.

Thank you, and now I'd like to introduce Rick Damron.

Rick D. Damron

Thank you, Bob, and good morning. You heard Robert talk about laying the foundation for the next evolution of Lowe's. So I'm going to spend my time with you talking about the foundational changes we have made in store operations over the past year. Most importantly, I would like to share with you how we plan on building on these changes and use them to differentiate Lowe's, providing a better experience for the customers we serve, as well as the great employees throughout our organization.

Over the next few minutes, I will review several items, focusing on 3 key areas. I will address how the recent changes in the store operations organization have positioned us to execute on our mission with speed and retail excellence. I will outline what we're doing to deliver a multichannel seamless experience for the customer. And I will review how we are simplifying the shopping and selling experience for the customer and our employees.

From an operations perspective, this was the year we made the tough decisions, decisions that include the investments to position us for improved execution today and enabling the experiences that will carry us into the future. Managing our company's rapid expansion required the use of a command-and-control leadership style, which was absolutely necessary to consistently open stores and execute in new markets. That system served us well in a retail environment that emphasized having as many stores as possible.

But that environment has changed and so has Lowe's. Recognizing that change, we introduced a new organizational structure that increases the breadth of responsibility of our field-based teams and pushes decision making down the chain of command to the appropriate levels, ultimately providing flexibility within the framework.

Flexibility within the framework provides our employees with greater opportunities to understand and affect change at the store level to impact the business and to empower our employees to deliver a better experience. In the past, we have developed many programs in order to define and enforce compliance with standards. These programs were necessary to consistently execute in and through a period of rapid expansion. Flexibility within the framework is a mindset that empowers employees and puts decision making at the right level. The new structure recognizes that store managers and their teams are the people best-positioned to utilize these programs where appropriate in their market.

With this mindset, we expect our store managers to have a greater sense of ownership and connection to the local community. In fact, as Bob mentioned, they will also have an improved feedback mechanism to influence merchandising programs with their knowledge and needs of the local customer. So we expect them to do what it takes to act with a sense of urgency to take care of the customer, whether meeting a unique challenge or solving an issue, to change product presentations that don't make sense and to develop deeper relationships within their communities. With freedom to do these things, these stores should more effectively close transactions and drive sales growth.

As we move into 2012, we believe we have the right operations foundation for the future. But getting to this point was not easy. We have made difficult decisions regarding leadership, organizational structures and store closings, all of which position us better to compete more effectively in the future. With the right model, the right guidelines and the right people in place in our stores and throughout our organization, we can now focus on delivering a multichannel, seamless experience for the customer.

Recognizing the challenges and expectations of this new retail environment was the first step. And now that we know better how to meet the customers on their terms, we can continue to expand the choices and experiences with Lowe's outside the traditional store walls, engaging the customer whenever and wherever they want.

Over the past year, we made additions and enhancements to enable the whenever and wherever experience. Experiences which include interactions with the contact center, our exterior sales programs, our website and our mobile applications. These will offer more options for customers to control when and where they make their home improvement purchases. Let me provide you some more details.

You heard from Tom about the creator customer, a customer who likes to seek out multiple sources of information. One way where you're meeting the needs of this customer is providing real-time access to information and help through the contact center. Our contact center ensures that any customer seeking information, advice, help or guidance on products available at Lowe's can quickly receive personal attention. Whether they seek information regarding products they have purchased or products they are going to purchase, the contact center can take care of the customers' need in one call.

For a customer who prefers to shop online, we're leveraging our contact center infrastructure to pilot click-to-chat capabilities for several key product categories. In the future, we expect to take this capability to additional product categories. This is another example of how we're creating a seamless cross-channel experience.

Customers have also another expectation, that we meet them in their location of choice, sometimes in their home, at their job sites or at their offices. We have continued to expand the exterior sales organization. Our Project Specialist Exterior, or PSE program, was rolled out last year.

And we're testing a Project Specialist Interior program as well, both of which are geared for the retail customer. This expansion also includes our Commercial Specialist Account (sic) [Commercial Account Specialist] programs, which is geared to the commercial customer. The PSE program provides customers with more options to see products and experience them in their location of choice, another example of how we continue to give more control of the shopping experience to the customer.

And we are constantly monitoring change in needs. Where we see a relevant need, coupled with an opportunity to enhance the customer experience, we will expand the offering. A great example of this process at work was this year's introduction of our HVAC installation program, a segment where we had virtually no market share. We developed a compelling program, launched it, and we're seeing great results in this product offering and we'll expand it across the store network.

We're also providing our employees with better tools and leveraging technology in the areas of project visualization and estimation. This technology allows our employees selling in the home the ability to present the customer with a better visual rendering of what the end-product will look like, in most cases, using digital images of their room or their home. As a result, not only do we expect to sell more effectively, but we expect our customers to be more satisfied with the experience than ever before.

Other tools deployed this year allow our employees to provide quotes on outdoor projects, such as roof replacements, without visiting the customer's site through the use of satellite technology. This is an amazing tool which allows us to serve more customers and do it more efficiently.

We also continue to focus on the needs of the commercial customer, a customer which represents roughly 25% of our business. This continues to be a growing segment, one that we will continue to develop and enhance. We recognize the commercial customer expects a different experience online, ranging from the look and feel of the landing page to content, to product, to pricing.

Like retail customers, commercial customers expect value. Our contractor pack program provides lower unit pricing for the items they need most. Couple that with our 5% discount when they use their Lowe's commercial credit account, a program implemented this year, and they have a compelling value proposition at Lowe's.

Most importantly, commercial customers purchase products almost every day. And at Lowe's, we understand their desire for a personal relationship. Our commercial sales employees are responsible for establishing and developing these relationships in their markets. And as mentioned earlier, we have deployed Commercial Account Specialists to provide additional support and expertise, delivering a more personalized experience for the commercial customer at their job site or their place of business.

As a result of these additions and enhancements, the growth of our commercial sales businesses has exceeded the growth of the total company. We recognize that this customer deserves options, so we will continue to address their needs by providing options, delivering better experiences and meeting them whenever and wherever they choose.

Bob addressed how Flexible Fulfillment allows us to give our customers faster and more cost-effective access to our endless aisle of products. With Flexible Fulfillment, our store employees are able to offer products from other stores from our DCs and directly from the vendor.

We continue to expand our product offerings on lowes.com as well. Earlier, I shared with you the call center pilot on click to chat, including the ability to sell through the contact center. These options combine the additional product offerings with expert help online, expert help on the phone, the ability to transact online and the ability to transact on the phone, providing our customers with the flexibility to select options on how they want and choose to engage with Lowe's. This simplifies the selling process to our customers and delivers a better experience, ultimately allowing us to say yes to the customer more often.

Tom reviewed MyLowe's earlier and provided you with some examples of the capabilities we deployed in 2011. He also shared with you how we expect to use this platform to make home improvement even more simple for the customers. Now I want to tell you how we have trained our employees on this program and how they will utilize it to provide better experiences for a MyLowe's member.

We introduced the platform differently than anything we've done in the past. We deployed the capabilities to our own employees, trained them first and helped to them establish their own MyLowe's accounts. Why? Because there's no better way for our employees to share the benefits and advantages of this power tool -- powerful tool with our customers than to do so with firsthand knowledge, having used the tool personally.

From inspiration to planning, MyLowe's customers can allow our employees to access information about the customers' homes and products. In this way, the employee will have access to inspirational elements of the customers' projects, pictures of products, color swatches or schemes, paint palettes, all pieces of information which will help our employees better serve the customers through all phases. Our employees will be able to identify specific products required, like air filters, by accessing stored input measurements in the system. In the same manner, the employees will be able to help the customer estimate the amount of product required to keep -- complete the project, for instance, the amount of paint needed for their dining room, all with the click of one button.

MyLowe's is a great example of engaging customers in a way that is more meaningful to them, ultimately allowing us to provide a more meaningful experience. This confluence of technology and understanding the customer mindset is the foundation of our future as a home-improvement company. The ability to be -- to meet the customers' needs whenever and wherever they want is the key to success in this new retail environment, and it requires seamless execution across every channel.

The one channel I haven't touched on yet is the store experience itself and what we're doing to simplify the shopping and selling experience for the customer and employees alike. As you saw in the Northlake store yesterday, changes to the front and configuration provides an improved and differentiated shopping experience for the customer, while allowing us to better leverage our assets.

In addition to the innovative endcaps that utilize interactive technology to inspire our customers, new technology in the hands of our employees will take the customer service to a whole new level within our stores.

With the help of iPhone's technology and dedicated apps, gone are the days that sales employees had to leave the customers in the aisles to obtain information from the fixed terminals. In fact, we have already seen a positive impact on the time it takes to serve customers, as well as the number of customers we are able to serve. Previously, too much time was spent walking from the customer to the terminal and back in order to provide service. The iPhone technology is, in fact, being used to answer customer questions without having to walk away. To date, roughly 85% of the inquiries have been sales- or product-related, whereas roughly 15% have been task-related.

The same technology is accelerating access to the endless aisle you heard Bob refer to in his comments. The iPhone's technology gives our employees the ability to more conveniently access products and quantities of products beyond the limits of the store's physical inventory. The iPhones also give us the ability to immediately access detailed information about the products that a customer is interested in, information that supplements the employee's knowledge and is incremental to the point-of-purchase materials that we provide.

Upgrades to the store infrastructure we completed in 2011 also allow us to stream video and audio through the iPhones. These same infrastructure upgrades allow us to deploy video and audio content in multiple ways that were not possible just a few months ago, content that can be delivered in the different terminals throughout the stores or on the endcap programs that you saw yesterday during your tour. At every point, our goal is to create a better shopping experience for the customer.

Another program we're piloting to further simplify the shopping experience is a centralized delivery office. We expect to improve the customer experience by shortening delivery windows to a 2-hour time frame. In addition, we expect to gain operational efficiencies along the way in route planning, in the consolidation of truck fleets and maintenance, and through leveraging inventory in a centralized pool.

In 2012 and beyond, we are committed to the ongoing development of processes and tools that simplify the sale of home-improvement projects. This will include self-service options for customers to take more control of the experience where they choose to do so. An example will be the ability for the customer to schedule a delivery appointment online.

We continue to be build on what customers love about Lowe's, and we strive to create a superior shopping experience in our stores and online by providing our employees with quick access to customer requirements through MyLowe's and to -- in our product and stocking information through iPhone technology. And by developing new delivery capabilities, we continue to find ways to help our employees help customers to close more sales. This is another way we will drive transactional growth and sales.

Change doesn't mean we've lost sight of the things we've done extremely well over the years. It means we've accepted the challenge of embracing those things by embracing technology and meeting the customer on their terms. That's the next step for Lowe's as we look beyond 2012. We see opportunities to expand on the anytime, anywhere response that today's retail environment demands.

As I mentioned earlier, we made significant upgrades to our IT infrastructure. These upgrades will give our stores' employees faster access to information; access to different types of media, video and audio included; more SKUs and delivery options; and better tools to engage our customers anytime, anywhere. These are some of the reasons behind the technology upgrades. The iPhone platform enables convenience for the customer today with the information lookup and tomorrow within our checkouts. Yes, at some point in the future, we expect to deploy mobile checkouts, A capability which will give us the flexibility to expand beyond the walls of the store to the garden center, to the parking lot or even to a remote location away from the store.

You heard Robert talk about our employee social business network, Connections. Our new technology upgrades now connect our 230,000 employees across the country. The Connections site allows employees to share information and best practices from store to store and with the CSC. Access to Connections on the sales floor means that every employee has the power of their fellow employees across the country, a power that gives them tremendous confidence they can serve the customer. The question of which circuit breaker a customer would need for a 50-gallon water heater no longer requires a difficult-to-find or time-consuming answer. Connections already has the answers, or a new post or thread can quickly uncover that answer. We expect all of our efforts to make the customer experience seamless and simple to improve close rates and, likewise, transactions as customers will more quickly find the products and assistance they need.

As Tom mentioned, according to third-party data, we close roughly 2/3 of our customers. We expect to improve our close rate by 300 to 500 basis points by 2015. We also expect these efforts to allow us to repurpose labor hours from non-selling to selling hours. On the labor productivity front, we expect sales per hour to grow by 14%, improving from $130 per hour to $148 per hour by 2015. We will grow sales per hour through productivity gains by shifting hours from non-selling to selling activity.

These productivity gains will come from 2 primary areas: first, from deployment of technology such as the iPhone; and second, from scrutiny of existing tasks performed in our stores. In 2011, we spent a lot of time prioritizing and rationalizing tasks we execute in the stores, getting feedback from the field on which tasks are important and which ones are irrelevant because of technology upgrades or changes in the business. As we work with our employees through this process, we have already identified a 1.1-million-hour opportunity across our stores, time that will be redeployed to serve more customers to drive more sales.

When discussing selling hours versus non-selling hours, we classify selling hours as customer-facing time in the aisles and checkouts, which currently represent 66% of our total staffing, up from 2010. Our goal through technology and task reduction is to continue to improve this by 200 to 300 basis points by 2015.

In addition to our focus on improving store labor, which is expected to produce leverage of 30 to 45 -- 40 basis points by 2015, we're also focused on other expense reductions. We expect and leverage -- we expect expense leverage of 20 to 25 basis points driven primarily by fleet, facilities and operating expense reductions.

In conclusion, I would like to reiterate store operations commitment to provide a better experience for the customers we serve, to engage customers whenever and wherever they choose, and to simplify the shopping and the selling experience for the customer and our employees. As a result of the efforts of our employees, J.D. Power recognized us in 2011 as the highest-ranking major appliance retailer in customer satisfaction and second overall among home-improvement retailers in customer satisfaction. This recognition reflects our continued push for retail excellence, in which our employees will always be the most important ingredient.

However, whether it's iPhones, MyLowe's, new monitors, connections or Wi-Fi throughout the store, we're leveraging technology to meet the demands of the customer and to empower our employees to fully realize their sales potential. With these new tools and appropriately empowered employees to close more sales more efficiently, driving sales growth and labor efficiency and ultimately contributing to a high return on invested capital.

Thank you for your time and attention today and for your interest in Lowe's.

Unknown Executive

We will now take a 15-minute break. Refreshments are available in the lobby.


Unknown Executive

Please welcome Executive Vice President and Chief Operating Officer, Bob Hull.

Robert F. Hull

Good morning. Welcome back to Lowe's 2011 Analyst and Investor Conference. I'm delighted to be hitting cleanup this morning, because it is important for everyone to fully appreciate how the business strategy mission laid out by Robert earlier today is being supported by the team to achieve the transformation, both to win customers' loyalty via better experiences and to increase shareholder value.

So first, I'll update you on our capital structure and explain why we've taken -- why we believe the steps taken to date are on point. Then I'll review our outlook for 2011. And finally, I'll share our long-term financial expectations which highlight our focus on growing profits faster than sales, driving increased productivity from our asset base, generating strong free cash flows and returning significant capital to shareholders. Let me get started.

As we announced on our earnings call on November 14, we revised our leverage target of 1.8 to 2.25x lease-adjusted debt-to-EBITDAR, providing us with an incremental debt capacity of approximately $3 billion when fully implemented by the end of 2012. The decision to increase leverage was approved by our Board of Directors after deliberate review of our capital structure, which encompassed several factors including company performance and outlook, peer benchmarking, constituent perspectives, short-term funding and a review of optimal versus practical cost of capital.

The starting point of our analysis was the company's strong financial condition. Even though the housing recession began back in 2006, we generated $3.9 billion in cash flow from operations in 2010 and finished the year with $650 million in cash and cash equivalents. Coming off a solid 2010, we've felt that we had good visibility to operating cash flows in 2011, but given the macro outlook, persistently high unemployment and declining home prices, we knew that there were risks.

As we've discussed, 2011 was a foundational year for our transformation and there were significant investments required to build the requisite capabilities and the foundation for the future. This resulted in CapEx that was some 50% higher than our plan in 2010.

Looking beyond 2011, most of the investing is done, and our capital expenditure should moderate, allowing us to generate significant free cash flows, including over $2.1 billion this year. These strong free cash flows give us comfort in managing to the 2.25x target even if business conditions remain challenged. We view this new target as a cap that we will manage up to.

An important element of this analysis was peer benchmarking. As this slide shows, we forecasted leverage of 1.9x, which has been adjusted for store closing and discontinued project charges, as well as our current target of 2.25x is below the peer retail average of 2.4x. After discussions with S&P and Moody's, we felt that leverage near the peer average of 2.4x would jeopardize our low A rating. We felt that by moving to 2.25x would bring us closer to the average while maintaining sufficient operating flexibility. Our borrowing ability at this rating level balances cost of capital and financial flexibility.

Based on the new leverage target, S&P downgraded us to A- with a negative outlook, and Moody's downgraded us to A3 with a stable outlook. In addition, the rating agencies lowered our commercial paper rating one notch to A2 and P2, respectively. These ratings reiterate our strong investment-grade status and afford us continued access to debt capital markets, as confirmed by our recent $1-billion debt issuance at historically low rates of 3.8% and 5 1/8% for 10- and 30-year maturities.

Another important consideration in determining optimal capital structure is access to short-term funding. Historically, we indicated our desire to maintain A1/P1 commercial paper ratings in order to ensure uninterrupted access to the commercial paper market. Even during the depths of the credit crisis in 2008, A2/P2 issuers maintained access to the commercial paper market, albeit at higher pricing. This observation, coupled with a recently completed renewal of our $1.75 billion 5-year committed revolver, ensures liquidity and caps our borrowing spreads if needed.

A company's optimal capital structure can change over time, and we must balance what is practical versus what is optimal. To highlight this point, this chart shows that the theoretical optimal weighted average cost of capital has been in the BBB and BBB- area almost 90% of the time for the past 10 years. But the low A level only results an average of 36 basis points higher cost of capital. We believe that forgoing these 36 basis points for the improved flexibility is a very prudent trade-off.

History is littered with examples of those who were too heavily weighting the quantitative portion of the analysis, focusing strictly on the lowest or optimal cost of capital. It is important to maintain downside protection throughout economic cycles and to reserve financial and operational flexibility. The practical cost of capital prudently balances these considerations and at the A level, once fully implemented, should reduce our weighted average cost of capital by roughly 50 basis points.

Moving onto dividends. Earlier this year, we tightened our targeted dividend payout range from 25%-to-35% to 30%-to-35%, essentially moving to the higher end of the range. In evaluating our dividends policy, we again performed peer benchmarking. The range of payout ratios for the peer group was from a low of 18% to a high of 50% with an average of 27%, as shown on this slide. Our targeted 30%-to-35% payout ratio compares favorably with the group average.

While returning capital to shareholders is critical, our priority continues to be investing in the business where appropriate. After investing in the business and paying the dividend, the remaining funds will be leveraged for share repurchase. We do not anticipate further adjustments to our lease-adjusted debt-to-EBITDAR target for the foreseeable future.

Now let's take a look at our outlook for 2011, which is unchanged from our third quarter release. The point estimates provided on the following slides represent the midpoint of our guided ranges. For 2011, we estimate total sales of roughly $49.9 billion or an increase of 2% to 3% over 2010, with the comp sales expected to decline about 1%. For the year, we plan to open 27 stores, 2 which are relocations. Earlier this year, we closed 27 stores, resulting in a net reduction of 2 stores in 2011, for expected year-end total of 1,747 stores in U.S., Canada and Mexico.

Our fiscal year ends on the Friday closest to January 31, which for 2011 is February 3. This results in an extra or 53rd week.

We estimate that the 53rd week will aid 2011 sales by approximately 1.5%. We expect EBIT or operating margin to decrease 80 to 90 basis points from 2010 to 6.5%. This includes approximately 80 basis points associated with store closings and discontinued projects. The decrease is driven by a decline in gross margin, SG&A deleverage, offset slightly by leverage in depreciation.

For 2011, interest expense is expected to be approximately $370 million, which includes the interest associated with our November 16 debt issuance. Net earnings are expected to be roughly $1.8 billion, which represents a decrease of 10% to 12% from 2010. This results in earnings per share of $1.37 to $1.40, which includes approximately $0.20 per share in store closing and discontinued project charges. Adjusting for the $0.20 per share impact, earnings per share would be up approximately 12% over 2010.

Before moving onto my next topic, I wanted to quickly comment on 2012. Similar to last year, we will provide you with our 2012 outlook on our fourth quarter earnings call in February. I also want to make you aware that we will be moving away from quarterly guidance. For 2012, we will provide annual guidance, which will be updated quarterly.

Now let's move on my third topic, our long-term financial outcomes. At this meeting last year, we laid out a plan that suggested that sales would be $64 billion and EBIT would hit 10% in 2015. A large portion of the sales growth expected in the 5-year plan was predicated on a view that housing and the macroeconomy overall would improve, and that there would be a large ramp in demand as a result. Obviously, that has not happened, and we now expect 2011 to comp negative 1% versus last year's view of 2011 at positive 1%. And 2012 won't be the turnaround in the macro or housing that many were forecasting.

So what's different this year? Sitting here today, we see nothing on the horizon that would dramatically improve house prices or the job situation a year from now. As a result, the roadmap to 2015 that you'll see in a moment is not based on a frothy housing market or a robust macroeconomy. The financial projections that you'll see are focused on what we can control, which is delivering better customer experiences. We are focused on leveraging the investments we've made in corporate systems and store technology. We are focused on leveraging capabilities built to improve local assorting and product presentation. We are focused on leveraging tools that allow employees access to more information and more product than ever before. Lastly, we are focused on leveraging our employees' passion for taking care of customers.

So while 2015 sales are projected to be lower than this time last year, we are still forecasting to hit 10% EBIT and almost 18% return on invested capital. We'll accomplish this by providing -- by driving more profitable sales and achieving better asset productivity.

You heard from Tom, Bob and Rick today about how we're going to be both more profitable and more productive. In addition, they outlined the plan to achieve the mission that Robert shared, which is to deliver customer-valued solutions to make Lowe's the first choice for home improvement.

But what will this mean financially? Here we have created an adjusted 2011 that excludes the charges related to our recent store closings, discontinued projects, as well as the impact of the 53rd week. We feel that making these adjustments to the 2011 income statement allows for a better comparison when outlining expected future performance. Adjustments to the other financial statements are significant, and therefore, the unadjusted forecasted figures are presented. Additional details on the non-GAAP adjustments are available on our Investor Relations website.

Beginning with the income statement, our roadmap to 2015 starts with sales. We have invested in people, tools and processes to deliver better experiences for the customer and better returns for shareholders. Tom spoke about developing stronger relationships with existing customers via new messaging and tools like MyLowe's, which we expect to convert the traffic we have today to more transactions and drive comp sales. You heard from Rick about new programs, upgraded technology and more selling hours, which allows us to say yes to customers more often, which increases our conversion rate and drives transaction and comp growth. And finally, Bob shared merchandise initiatives to improve product presentation, emphasized value and innovation to give customers more reasons to shop at Lowe's, which will increase sales within our existing footprint.

As a result, we expect sales per square foot to increase from $253 in 2011 to an estimated $292 in 2015. These efforts are expected to drive a 3.5% annual average comp sales increase between 2012 and 2015. In addition, we expect to open approximately 15 stores in North America, 70% of which will be outside the U.S. That should add approximately 1% in sales, which means that total sales are expected to grow by 4.5% per year. This increases sales from the adjusted 2011 total of $49.2 billion, which again is based on 52 weeks, to 2015 sales of $58.7 billion.

Next line on the slide is EBIT margin. As you've heard, our transformation will lead to more engaged customers, which we expect will lead to highly profitable relationships. This results in EBIT growth of roughly 270 basis points over the 4-year period, which comes from a combination of gross margin, SG&A and depreciation.

As you heard from Bob, efforts around local assorting, value improvement, growing private label, as well as supply chain enhancements, will aid gross margin, which leads to an expected increase of 80 to 90 basis points, accounting for roughly 1/3 of the increase in EBIT.

You heard from Rick about efforts to redeploy hours from tasking to selling to serve more customers. This improves both our selling to non-selling hours ratio and sales per hour, driving payroll leverage.

We see tons of effort to create loyalty, which will result in existing customers creating the buzz, thus lowering customer acquisition cost. As a result, we anticipate that lower advertising costs would drive 40 to 50 basis points of SG&A leverage by 2015.

We've taken a number of rightsizing actions over recent months that will lead to SG&A leverage. Rick also mentioned several initiatives that are in flight to reduce other store expenses. In addition, positive comps would drive fixed cost leverage. In total, we expect SG&A leverage of approximately 130 basis points over the next 4 years.

Lastly, depreciation dollars are expected to be flat for the next couple of years then decline in 2014 and '15, which combined with the anticipated sales growth, results in depreciation leverage of 50 to 60 basis points over the next 4 years.

In total, our efforts are expected to yield an average EBIT increase of approximately 70 basis points per year or about 20 basis points for each 1% in comp sales, reaching approximately 10% in 2015.

We expect that the profitable sales growth will increase earnings by an average of 12.4% per year reaching $3.2 billion in 2015.

Now looking at earnings per share, we've commented that we expect earnings per share to grow faster than net income as a result of share repurchases. Our long-term outlook shows an average annual EPS growth of approximately 24%, which results in projected earnings per share of $3.66 in 2015.

For the balance sheet, I wanted to highlight a few items that showed the impact of efforts to improve asset productivity, as well as the effect of our higher leverage target. The first item I want to talk to you on is our plan to improve inventory productivity. You heard Bob talk about SKU reduction and the merchant's efforts to reduce inventory acquisition costs. Also, Rick told you how Flexible Fulfillment allows our associates to sell inventory from beyond their store. In addition, a new capability called central delivery should come online by the end of 2012 with inventory reductions beginning in 2013. As a result of these initiatives, we anticipate reducing inventory by over $1 billion between 2011 and 2015. With higher sales and lower inventory, we expect to improve inventory turns from 3.7 in 2001 to 4.9 in 2015.

Fixed assets are lower in 2015 as CapEx moderates to $1.25 billion per year, which is less-than-expected annual depreciation and when coupled with normal asset replacements and retirements, results in $1 billion reduction in fixed assets. As a result, we expect total assets to decrease by roughly $1.8 billion from 2011 to 2015, which combined with expected higher sales, would drive a 24% improvement in asset turnover from 1.48x this year to 1.83x in 2015.

Moving on to the liabilities. Over the past number of years, we've leveraged supply chain financing and other tools to work with our vendors to improve turns. As a result, we are maintaining our current target of 60 days payable outstanding through 2015, resulting in $5 billion in accounts payable.

Finally, as I mentioned at the beginning of my presentation, we are targeting a lease-adjusted debt-to-EBITDAR of 2.25x, which has the effect of increasing total debt by $6.8 billion to $14.4 billion by year end of 2015.

The next aspect of our long-term outlook is cash flow. For 2015, we expect cash flow from operations to grow from almost $4 billion in 2011 to approximately $5.5 billion in 2015, an annual increase of 8.5%. The growth is driven by higher earnings and improving -- improved working capital productivity, offset slightly by expected lower depreciation, deferred taxes and deferred revenue.

Looking at capital expenditures, with significant investment behind us, we expect to average approximately $1.25 billion in cash CapEx per year. This reflects a reduction of 33% from our 2011 guidance of $1.8 billion to $1.9 billion. The number of new stores declines from 27 opened this year to an average of 15 per year in North America, resulting in lower CapEx in this area. While we continue to focus on the U.S. home improvement market, we also look for opportunities in new and existing international markets to improve our overall portfolio of businesses. This includes building our footprint in Canada and Mexico as well as evaluating other alternatives.

We are committed to maintaining our current infrastructure. As a result, we anticipate spending between 35% to 40% of CapEx on existing stores. This includes efforts to improve product presentation similar to what you saw in yesterday's store tour. This figure also includes maintenance CapEx for facility repairs, upgrades of vehicle replacements and other programs.

Our outlook also includes cost associated with the new regional distribution center which was -- which is scheduled to open in 2013. The main driver of building a new RDC is transportation. Modeling suggests that this strategic addition will enable us to continue to optimize freight cost as sales increase by approximately $9 billion over the next 4 years.

Finally, we pulled forward spending related to technology, increasing IT CapEx to $850 million in 2011. Going forward, we expect to invest approximately $375 million annually to maintain and enhance our IT capabilities.

The sum of these lines results in average annual CapEx of $1.3 billion. Of this total, approximately $50 million will be funded via leases. This results in cash CapEx of approximately $1.25 billion per year.

Okay, getting back to the cash flow slide. After taking into account the cash capital expenditures, we're able to arrive at free cash flow. Free cash flow grows with sales and earnings and is expected to roughly double by 2015 to just over $4.2 billion.

With this level of free cash flow, we are able to return significant amounts of capital to shareholders. Given our targeted 30% to 35% target dividend payout ratio, our annual dividend payments are expected to increase by 11% per year and reach $1 billion in 2015. On a per share basis, we're growing dividends from $0.53 in 2011 to an estimated $1.19 in 2015, which represents roughly a 22% annual increase per share.

For 2011, the $2.4 billion on the slide represents share repurchases through the third quarter. Provided that there are no other uses for cash, the expected total share repurchases for the 2012 through 2015 period are almost $18 billion. At the end of the third quarter, we had $5 billion remaining on our current share repurchase authorization. All future authorizations are subject to board approval.

As in previous years, our goal is to return -- drive return on invested capital. Internally, we talk about doing this by growing profits faster than sales and sales faster than assets to improve ROIC. Today, we shared with you plans to become more relevant with our existing customers to drive comp sales and achieve an average annual sales increase of 4.5%. We provided examples of how we are going to improve operating profitability faster than sales, resulting EBIT growth to 10% of sales. We also outlined efforts to drive higher sales, reduce inventory, increasing both sales per square foot and inventory turnover.

These, combined with approximately $21 billion returned to shareholders in the form of dividends and share repurchases from 2012 to 2015, results in strong ROIC growth, which is expected to reach approximately 17.8% in 2015. Hopefully you can see that we are focused on driving return on invested capital and shareholder returns.

Thank you for your interest in Lowe's and for your time today. And here's Tiffany to introduce the Q&A portion of the program.

Tiffany Mason

Thank you, Bob. Now the executives will join me on stage. For our live audience, there will be microphones on either side of the aisle to take your questions. Please limit your questions to one plus one follow-up.

Okay. Let's get started.

Question-and-Answer Session

Gregory S. Melich - ISI Group Inc., Research Division

It's Gregory Melich with ISI. Thanks a lot for outlining the sales productivity improvement, the 3.5% comp you expect over 5 years. Could you give us the assumption for macro underpinning that? Clearly, there's a lot of internal improvements you now have in that, but let's say the market was just flat. Would you still expect the 3.5%? Or would you expect 1.5% or 2.5%? Or take us through that a little bit.

Robert F. Hull

So in my setup, Greg, we're basically saying, we expect no dramatic improvement in the macro. So it is what it is. As a result, the 3.5 comp is driven by couple of things. Number one, about 2/3 driven by transactions, and 1/3 by ticket. You heard a lot of things about capabilities put forth to allow Rick's team to say yes to more customers in stores. In addition, roughly, 1/3 of that 3.5% is other channels. So roughly 2.3% of the 3.5% comes in store. 1.2% is dot com, contact center and outside selling.

Gregory S. Melich - ISI Group Inc., Research Division

Great, which is the setup for my next question I guess to Bob or Robert. A lot of things in the air, right? You have mylowes.com. We're doing a SKU rationalization, remerchandising, et cetera. How many SKUs are we going to ultimately take out as part of this process? And how do we make sure -- or how does the customer actually know day-to-day that they should keep coming to your store to drive traffic? Because frankly, that's been the problem. I mean how -- when will we know that the things that you're doing will actually be driving traffic or not? Is it a year from now? Is it 6 months from now, 2 years from now?

Robert A. Niblock

Right, I'll start and I'll let Bob talk a little bit about the SKU reduction and what we're trying to do, be a little bit more market specific, how we're using integrated planning and execution, what he's doing in going through the line review process with all of our vendors to make sure that, that we got the right product, the right depths of inventory. The -- we do have a lot going on. Clearly, I think you've heard that today. I think, you maybe -- if you went through yesterday, you saw some of the evidence of what we've been working on. I think a year ago, we kind of laid out the vision for you. This year, we've tried to make it more tangible with some of the hands-on stuff. You saw yesterday some of the stuff that we've talked about. Today, behind the scenes, with all that, we also invested heavily in an overall change management process that we're cascading through the organization, so that people throughout the organization clearly understand where we're going, why we have to do it, the intent of it, the cadence of when these changes are going to be taking place. So even though it feels like a lot going on, there is a lot going on but we do -- I do feel really good about the way that the organization is rallying behind it. Great alignment among the management team and the way that we're cascading that throughout the organization. So I really feel good. I think a lot of that has allowed us to do things like accelerate some of the changes that we've seen earlier this year, like bringing MyLowe's out 4 months earlier, making some of the changes that Bob's making over in merchandising with the reset Northlake and Greenworks [ph] and those types of things, how quickly we were able roll that through and get alignment, and using things like Connections to get great feedback from the field. And then, really understanding and having a voice out there and being able to provide us input back. So can you talk about some of the details, Bob?

Robert J. Gfeller

Sure. So as it relates to the line review process and the SKU rationalization, the merchants are moving into these line reviews. So over 2012, 300 or so line reviews that the merchants are going to execute, really 2 goals in mind. You've got SKU rationalization as it relates to stock SKUs, getting the most productive items, locally assorted, right for the market. And then, on the flip side is the expansion of SKUs as appropriate on lowes.com, so that we fulfill the multichannel approach that's really been laid out in all the conversations. I would tell you, there is not -- I can't -- there is no ideal number of SKUs that we will reduce, but I can tell you through the value improvement team, each line review is goal setting, and will be measured against the goals set as they move through the line review.

Robert A. Niblock

And I think the other thing just for drawing the customer back in also dovetails into what Tom is doing as well with the value prop with the new ad campaign with the MyLowe's. I think that all of that is creating the buzz that something is new and exciting at Lowe's, Greg, and then we're going to see what Bob is working on and Rick are working on in stores.

Michael Baker - Deutsche Bank AG, Research Division

It's Mike Baker from Deutsche Bank. So a question in 2 parts on the long-term outlook. First, I think one of the slides says a reduction of 100 million shares per year on $4.5 billion of buybacks. So I think that implies about a $45 stock price. Let me know if I'm missing anything in there. And then the other clarification there, it's just I'm wondering about the sensitivity of the buyback number. So a year ago, it was $18 billion in buyback on 5.5% sales. Now it's the same $18 million on $4.5 billion in sales -- sorry, 4.5% growth in sales. What if the sales number comes in at 2% or 3%, or something on those lines? What's the sensitivity on the amount you can buy back?

Robert F. Hull

So like -- the first part of your question, it's really just a math calculation to get to the share price, simply taking 15x both current year and next year and average of the 2 earnings. So it's just simple math. I'm not sure what the share price will end today, let alone 5 years from now. So just a simple modeling exercise. As it relates to what the comp looks like, I think if the comp looks like lower -- comes in lower, I think you might see lower expenditures from the company. CapEx going forward, maybe other ways to evaluate cost reductions. So yes, it probably will be less than the $18-or-so billion forecasted. That will all depend on the order of magnitude from lower sales and then what else we can do to kind of moderate other cash going out the door.

Michael Baker - Deutsche Bank AG, Research Division

And then as a follow-up, this is more on the MyLowe's. You talked about some of the uptake on sign-ups. I think you said 2 million customers at. What do you think in terms of purchasing activity through that site?

Robert A. Niblock

Tom, you'll address that.

Thomas J. Lamb

Yes, I will. A couple of comments foundationally. When we set out on this journey, we knew that we had to get a bunch of sign-ups, but we were expecting that there'd be a triggering event that would get the consumer to go out and look at their MyLowe's account. The percentage of people who have actually gone out and looked at their MyLowe's account online is significantly ahead of where we expected it to be at this near-term juncture. Specific to your question, we're seeing the types of numbers or slightly better that I reviewed in my presentation as it relates to repeat visit rate, visits per visitor. So the number of visits that are coming back per visitor and our overall conversion is significantly ahead for MyLowe's customers relative to the rest of the site. So we're very pleased with the progress at this early juncture.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Chris Horvers, JPMorgan. I wonder if you can follow up on a conversation we were having with Bob before. Hear your thoughts on a vendor perspective of all of the chain that's affecting them. Clearly, we're seeing vendor -- what's the incentive for vendors that go to EDLC? And how does that affect the relationship with your competitors? So from one end, you have SKU rationalization, kind of taking some wallet away from them. On the other hand, you have potentially -- I wouldn't think you'd go to EDLC if it was going to be beneficial to the margins in the vendor community. So it seems like potentially they're squeezed on both sides. So what do you think their thoughts are? How is the conversation? And how do you protect against the opportunity that Home Depot has coming in, saying, "Hey, we've got this great innovative product, kind of Lowe's has taken some sales away from you. Why don't you give that channel exclusive to us?"

Robert A. Niblock

Okay. So I'll try to address what I heard, maybe 3 questions there. There is certainly risk in the approach, but there's opportunity that I was attempting to lay out in my talk. The vendor community, we've been engaging with the vendor community. It is a collaborative approach. In fact, I was saying before, we've had pretty much all of our vendors in the discussions for a while. The upside for the vendors, continuing to do business with Lowe's and continuing to grow with Lowe's. Yes, there is some downside to the vendors as it relates to whether they might be SKU rationalized and -- which could create an opportunity for them to go elsewhere. The long-standing relationships we have with the vendors, we're working through those very carefully. We are -- at the merchandising vice president level, which is really where the business is run, they are being very careful and cautious and, as I used the word in my speech, cadenced as we go through this process. So I feel like as we get into the first quarter, we will -- and we get through the first half of the year, where we have that majority of these line reviews happening, we'll know where we stand. And as it relates to vendors taking innovation to Home Depot, that's an option for them now. I think we're going to share with them the upside that we have across, again, a lot of the initiatives that we talked about: the end caps, the drop zones, all the technology that Ricky's team can use to close sales and drive transactions. So I feel like we've painted a very positive picture for the vendors to continue to do business with Lowe's.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And then as a follow-up, just as you go to the EDLC and maybe some of the back-end promotional money or clearance money goes away, does that introduce more variability to potential -- potentially in margins once you see the shift lower?

Robert A. Niblock

I think -- as I said, I think there is going to be friction as we kind of measure our way through. Our goal is to get the lowest cost, therefore to be priced competitively in the marketplace because of this transparency of pricing. I think, as we've laid out the drive for transactions, the drive to influence sales at the point of purchase, the drive to convert to Flexible Fulfillment, I think you've got the margin upside that we laid out over the next 5 -- 4 years.

Thomas J. Lamb

And Bob, I just might add, as it relates to in-store and the margin tied into reset activity, by using IP&E efficient item assorting, the MPI [ph] process should be much better and much more fluid in the future as we get more market-specific. Those items will be more tailored to the market and therefore, you should see less of a margin erosion as you clear out those resets.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

It's Aram at Nomura. First of all, I want to thank you for giving us a lot more color into the how you plan on doing things instead of the what you plan to do. So I appreciate the color. I do have 2 questions. One of those relates to 2012. I know you're reluctant to give us, let's say, the full year, but at least the shape of '12 against all the other years you've given us, and maybe also the shape of the front half of '12 against the back half of '12. Just if you can help us with that. And then the second thing is, aside from the macro factors that are out of your control, what are the things that can go wrong to your plan? We've seen this plan in an iteration or 2 similar to this, and it's kind of yet to come to fruition. What are the things executional-ly that are in your control that are the biggest risks to making this a reality?

Robert A. Niblock

Okay. I'll start with '12.

Robert F. Hull

Yes, I'll take the first part. So Aram, specifically, as we think about the 3.5% comp over the 4-year period, much lower number in '12. So I think closer to 2 in '12. As it relates to the cadence across the year, not willing to get into too much detail. A lot of lumpiness in '12, as we talked about a weak spring, first-quarter of '11, and then comparing against a 53rd week in the fourth quarter. So there's going to be some noise in our quarter-to-quarter comparisons in '12, and we'll provide similar color on our Q4 call.

Robert A. Niblock

The -- Aram, as far as the change and things that are within and outside of our control. I think one of the biggest things -- outside of the macro environment, it's certainly -- look at how quickly technology has changed over the past years and the rapid changes that are even taking place today, whether it's Siri on the iPhone 4S or some of the capabilities that are in the Kindle Fire, and those types of things, and what impact do they have on how where people shop. That's why we're trying to be there, in -- I mean, maintaining your home, making improvements right around -- I mean, everything around the home can be complicated for -- and necessary evil for people to have to keep up with. We're trying to simplify that process by being the absolute best partner, no matter what channel that they choose to interact in. That's part of the reason why we accelerated our investment in technology this year, because we knew we were behind. And we knew that we really wanted to get there. It was really to ensure that we had the technology in place in the stores that our customers expect from a home improvement company. And then also, what our employees expected, that level of technology that they want to be working with as I talked about in my comments. So those are the types of things that are out there. We've got to make sure we're still staying up with technology and the way the world is changing and customer expectations. More immediately, with what's in our control is, are we clearly cascading and communicating the intent of where we're going, why we're going, what's going to be different, what we're expecting of our employees? And that's what I was talking about earlier, where we spent the entire first half of this year, as an executive management team, getting aligned around that. Every VP in the organization has been through a dedicated program on how we expect them to think, act and lead differently at -- it's a University of North Carolina program that we -- that was designed by our learning organization. We had the executive team went through, we had input into, so that everyone is aligned and then tremendous effort into the way that we're communicating, the cadence in these changes and laying the road out for the organization. Certainly, it's a big impact on Rick's organization out there in the stores. That's the reason that he did -- made the changes he did earlier in the year to streamline his organization, because we knew we had this communication plan coming and we knew with a more streamlined organization, we will be much more effective at being able to get that communication out. And we also made sure that we had Connections, which is our internal social network that employees can give us a direct feedback on. I mean, we're out there on a daily basis hearing what the input we're having from employees, and we're getting overwhelmingly positive input about the changes that are taking place in the future that they see that we're installing for Lowe's. I think that's the biggest thing we can control, and making sure that we balance the effort on that with all the other changes we have going on, is probably the biggest thing. And I'm spending -- myself and the executive team, we're spending a lot of our time on, so...

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Budd Bugatch with Raymond James. I want to -- think I'm piggyback a little bit on Aram's question, because Lowe's has got a culture of centralization and from what I year of IP&E and some of the things that Rick has done, more centralization, yet you have streamlined the organization significantly. So how do you balance the centralization aspect with the localization aspect? And then how do you, as a management team, know that you're actually getting what you want in the field?

Robert A. Niblock

Well, I'll start and then I'll get Rick talk about how it impacts his field organization. I think if you look at prior to the housing, financial economic downturn, we were certainly very successful. We had a model that worked. It was very heavy command and control. We put a playbook out there. When we opened a new store we got enough sales, enough return -- profitability to get a return on that investment, and we moved onto the next one. Well, the world's changed on us now. And customers expect -- it's not just the store experience, and that's the way we incentivized and motivated people, was on the performance of their store. Now we've got to be able to meet the customer on their terms. Whatever channel they choose to shop, they expect to be able to seamlessly move back and forth across those channels, for us to know it. Not worried about who gets credit for the sale. We're worried about making sure that we're putting the customer in the center and taking care of them. And that's why decided we need to change. I think there was a couple of things that we needed to do. One was what Rick's talking about, flexibility within the framework. How do we change that? How are we going to change to make sure that we are looking at the customer as developing that one-on-one relationship across any channel that they want to engage in? And then secondly, so it wasn't only from the -- from what we're trying to do from the store environment. We're still going to be very centrally driven. IP&E is going to make us even more centrally driven than we were in the past, because it's just going to automate a lot of what was done, but it's going to give us a way, when we get that local feedback, to be able to incorporate that into the processes and be able to maintain them. Versus in the past, when we did a line review, you'd lose a lot of that local market intelligence that we'd gained in the past. I think it's that. And then I think quite frankly, the corporate office here, because of our success in the past, we weren't as open to new ideas as we needed to be. That's the other thing we've changed, is allowing new ideas to bubble up more in the organization. And that's a lot of what you're seeing Bob doing. A much heavier test-and-learn environment out there. We're trying things. Fail fast and move to the next item. So that's kind of the change in culture. Our values haven't changed. But that's what we're trying to change from a culture and the "way we go to market" standpoint to make us a more nimble organization. So, Rick, I don't know if you want to talk a little bit about store in specific.

Rick D. Damron

Yes, absolutely. When you look at, and Robert said it very well -- when you look at the organization, it became necessary for us to really begin to consolidate and look at the levels we had in the field so that we can really communicate more effectively and be more nimble. The structure that we had was built to support rapid growth. And in that period of rapid growth, we had to have that level of oversight to make sure that we were operating effectively in new stores and new markets, and we were doing that consistently, which continued to drive that command-and-control approach. What we've realized is over time, as we continue to work through the current economic situation we're in, is that we can't just simply grow with the market and be successful. We have to figure out, how do we take greater share within each market that we operate within? So it's understanding that every local market is different. And what we have to do to gain share in every market is different. And so, we're putting together processes and programs that enable that to take place with greater flexibility at the local level. So rather than being so prescriptive that we tell the stores how many side stacks to utilize, where everything has to fit within the store, we're providing them with a framework that gives them the flexibility to meet their market and the demands of that market on any given day. A great example would be a holiday checklist, getting ready for the 4th of July. Over the past couple of years, that may have been a 40- or 50-page checklist for our stores. Now we've taken that down to just a few pages that gives them the framework of what we want them to do, but allows them to maximize the opportunity of what's in that market today that they can leverage and grow. So we're still very centralized in what we're doing and how we go to market, but we're giving our managers more freedom to take and operate within that in their local markets, to take advantage of what's taking place there.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

It's Colin McGranahan of Sanford Bernstein. I wanted to focus on gross margin. Two questions on gross. First, if my math is right, you'll finish the year this year at about 34.7% on gross margin. If I go back 4 years to 2007, you were at 34.8%. And so, you're projecting 80 to 90 basis points of expansion going forward 4 years, when it's been pretty much flat for the last 4 years. And as I look back over the last 4 years, some of the things you're talking about today, private label penetration, distribution leverage, R3 was a big driver. A lot of that improved, but then some of it was given back in other regions. So what is going to change in the next 4 years to make us believe that 80 to 90 bps is realistic relative to the flat in the last 4 years? And then I have a follow-up on gross.

Robert F. Hull

So I'll start and maybe have Bob get into some of the color. So you cited the trajectory over the past 4 or so years. So recognize that about 1/3 of the 80- to 90-basis-point growth from now to 2015 is just recovering what we lost in 2011. So there's some friction cost based on what's taking place in 2011. Bob talked about the cadence between EDLC/EDLP. Some of that is a timing difference, because some pricing actions are taking place a little bit sooner than some of the cost actions. So only -- 1/3 of it is just recovering what we've -- what happened this year. So think about the remaining 2/3 is the other items that Bob talked about. Do you want to expand on that?

Robert A. Niblock

Sure. So just when you look at the margin enhancement over the last 4 years, you start with the low-cost discussions we're having with our vendors; SKU rationalization, both stock SKU and then of course expansion on, again, lowes.com; and then promotional rationalization, getting back to delivering EDLP in the marketplace. We get our base right on stocks SKUs, locally assorted as Ricky said in our stores, closing more sales, driving transactions, combining that with the windows we're opening on Flexible Fulfillment and all that capability over the next years as we build out. You add all that up and it's accretive to gross margin over the 4 years.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then just secondly, following up on gross margin. I thought the example you used of furnace filters, air filters on MyLowe's was kind of neat, because it's a recurring product and you got to measure it. So on lowes.com, the Filtrete Elite Allergen filter is $24.97 plus $5.99 shipping and $2.99 sales tax for $33.55. If I go to Amazon.com, I just looked it up for subscribe and save, so I can already go there and every 3 months or 6 months, there's a 2-pack subscribe and save for $32. So you're 100% higher than they are and they already have a subscribe and save. So my question to the point here being, how much degradation have you built in over the next 4 years from increased price transparency, the commoditization of shipping, which is getting harder and harder to charge customers for? How much drag do you have built in and then this fits on top of that?

Robert F. Hull

I think to that specific example -- so you're talking about those consumables. Those typically have a higher margin rate than the company average. So the opportunity is to get sharper on price, sell more of those consumables and opportunity to mix the company margin up. That's all part of the line review that Bob spoke about. It's not just in-store pricing but it's online pricing as well. It's getting the multichannel pricing right.

David S. Strasser - Janney Montgomery Scott LLC, Research Division

David Strasser. Just to follow-up on that question, as you look at your business and thinking about online, where do you think the biggest moats are? Where do you think the biggest risks or opportunities are online? I know you talked about MyLowe's, and there seems to be a lot of opportunity in what you're talking about. But also, where do you think you've built up the biggest moats or the industry has?

Robert A. Niblock

Well, I think certainly as a whole, online opportunity is a huge -- we view it as a huge opportunity. Obviously, if you think about it, I think it's the beginning of 2010 that we relaunched our new platform, lowes.com. I think we had great growth then. We're trying to be up 70% this year on online sales. By the end of the year -- we've doubled as of today the number of SKUs that we have online versus the beginning of the year, and we'll end with about 260,000 or so. We think that's just the tip of the iceberg. So particularly as Bob does his SKU rationalization within the stores, we're going to make sure that we're going to be market specific, have the SKU rationalization and -- but then, we're going to continue to grow that breadth online. And with the other capabilities that we have such as Flexible Fulfillment, the mobile apps, those type of things that we've added MyLowe's, we're going to sit there and be able to meet the customers' needs. You always got to address, to Colin's point, some of the online pricing challenges that are out there versus others. But we think that before we try and do it with MyLowe's, get the customers signed up, get the stickiness out there. We've got to be priced competitively or in the ballpark. We think there's a huge opportunity to expand the online offering and the online opportunity by doing a better job from the fulfillment side of it. And I think starting beginning of next year -- today, we can do partial shipping but beginning of next year, we're going to start being able to do LTLs for larger products shipping directly into the homes. So as we add those additional capabilities, I think it further allows us to grow our online presence.

Thomas J. Lamb

I think, David, just to build on what Robert said. Pricing for sure, I mean it's just -- there's an enormous amount of transparency. Colin's example is a really good example. The world that our industry now lives in, but the reality is that the consumer, especially as the millennials come into this category, they're not looking for product and point solutions. They're looking for someone that can pull things together for them, and that's really what the seamlessness of the solution that hopefully you saw on tape took away from today's discussion. That's what the consumer is looking for. They need somebody that can help them pull together all points of the project solution, not just individual pieces and parts. The millennial needs that connectivity across the project to be successful going forward.

Robert J. Gfeller

And if I could just add another thought really from a product standpoint. We have tremendous opportunity in these consumables that Tom's talking about. And we're attacking that as we speak. We have a great opportunity in tools and great competition in tools. We have opportunity online in tools. And we've had -- some of our line reviews have started moving through the process and they're in the fashion area. So I kind of talked about wall art as a quick little example of something that we put in the market. We had a pretty robust online assortment and sure enough, it's being productive right out of the gates. But when you look at fashion lighting and fashion plumbing, I think what you're going to see is yes, we're going to rationalize SKUs from a stock standpoint, but we have got a great opportunity to expand that online assortment and become category dominant in categories that, really frankly, we've been limited to in the past, as it relates to those key projects that Tom is talking about that those millennial customers want to wrap their selves around, that creator our customer.

David S. Strasser - Janney Montgomery Scott LLC, Research Division

And just one unrelated question. When you look through the 5-year plan, it doesn't seem like -- assuming a static housing market, which is I guess what this was about, there is no store closures in here, so you feel pretty good with what the store base -- the existing store base at. In a static housing market, you wouldn't be closing anything or nominally.

Robert A. Niblock

Yes, I think, Rick did a good job in going through in looking, in really looking at -- on an market-by-market basis. Those stores where -- looked at the performance and looked at what share or what the true opportunity was in that market. And those where we thought, "We're already getting a substantial amount of the opportunity in this market. There's not a lot of upside," I went ahead and made those tough decisions this year. So we feel good about the remaining stores.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

It's Dan Binder, Jefferies. Two questions. First was just going back to the inventory reduction, SKU reduction. We've seen a lot of retailers kind of go down that path and not manage it well. I'm just curious what you're going to be doing to try and manage that from a customer perspective. When they're coming into your store that they're actually finding the breadth of assortment -- you're talking about pretty substantial inventory reduction over the next 4 years here. And I was curious, based on the things that you outlined, how much of it is weighted towards just lower cost versus lower SKUs versus central delivery?

Robert J. Gfeller

I'll take that. So as you look at the $1 billion inventory reduction, you've got about 80% of that is around cost reduction and SKU rationalization stock in store, and the other 20% is really leveraging the Flexible Fulfillment. I would just add, going back to that notion of how we're going to do this, this is line by line as we work over the next 18 months to a line review with the new process. And Rick was talking about kind of centralized help, so you have the vit [ph] team, the market analysis team. Those are 2 new different ways for our merchants to look at their business and be assisted in this process, so that when we do execute those line reviews in store, the assortment is extremely relevant to the local market and we've got the right inventory backing up those most productive SKUs. And so far what we're seeing early on from the reviews is again heading us in the right direction.

Rick D. Damron

And if I might just add, as it relates to the centralized delivery process that we're looking at, we've modeled roughly 68 markets that we think has the potential for the centralized delivery opportunity. And we're estimating that somewhere around a $200-million average inventory reduction as it relates to centralized delivery.

Robert F. Hull

Again, so you're focused on the SKU reduction in a store. Think about more inventory build that will be sold across the whole chain. So Rick told you there's a $1 billion of inventory available to be sold across the chain via new tools that are available to them. So yes, there might be less individual SKUs in that physical location, but they have visibility across the whole chain. So there's actually more selling opportunities for them.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Right. Understood. The other question is related to the reset. The stores looked really fantastic yesterday, but there was a lot of -- it seemed like there's still some things you were tweaking. I was just curious, the cost behind those resets and how you're measuring the returns.

Robert A. Niblock

So I think in the past, and we've talked to you about a number of different physical changes to the store. It's been our major reemerge program. It's been resets and it's been kind of ongoing product change outs. What you saw yesterday was a better coordination of all that work coming together. It's less about individual merchants having changes. It's less about changes to the prototype, which is the reemerge to get everybody on the same kind of footing. It's about what's most relevant to those customers in that market. So you're seeing physical changes to the store occurring in a more coordinated fashion. So the CapEx of roughly $500 million per year on existing stores, the changes required going forward aren't more costly. In fact, based on in-sourcing some of the process, the cost on a per basis -- per day basis is probably lower. What you're seeing is that better end result of a coordinated approach.

Robert F. Hull

And as it -- specifically as it relates to measuring what you saw yesterday, so we got about 500 of those stores out there. Call it 70 to 80 are in -- or they've been out long enough that we can metric them, and based on what we're seeing from a total sales standpoint, sales of the products that we've highlighted, we're in a positive direction. And so, we've got other things we're testing in other stores. We've got to step back and decide what rolls in 2012.

Rick D. Damron

And, Bob, I might just add, the pro forma also takes into account those items that were moved from the endcaps and put in line. So we're not just measuring the lift on the items that are on the end caps. We're also measuring any impact that was -- had on any categories that may be put in line, so we understand the overall impact across all the merchandise as it relates to Northlake.

Michael Lasser - UBS Investment Bank, Research Division

It's Michael Lasser from UBS. If you look at the 70 basis points of annual margin expansion that you're guiding to, how much of that is based on consumer response to one of your initiatives? And what's the risk that you'd be willing to suppress your margin if you did not get the intended consumer response?

Robert A. Niblock

I'll start and then I'll get Bob -- I mean, certainly I think a lot of what we're doing is anticipating a favorable consumer response, because we've done a tremendous amount of research to understand how consumer expectations have changed. And that's what we're trying to deliver, is that better experience for the consumer across all -- any channel which they choose to engage with us. But it's not only just that, but it's also really creating that one-to-one relationship, knowing them better than anyone else to be able to meet their needs. I think it really -- a lot of this is predicated on the fact that we are going to be able to deliver better experiences for that consumer in the home improvement channel than anybody else. And then we'll be able to pull it together and leverage everything that we're investing in.

Robert F. Hull

So your question is the 70 basis points of EBIT expansion per year. I think, think about the depreciation, as in the fixed cost within SG&A, so call about 1/3 is predicated on some level of sales growth. So that would probably be at risk to the extent the customer response isn't there. But go back to the facts in Tom's presentation: 8 million customers a week shopping in stores, 6 million customers a week online. They're already interacting with us but not buying. So the risk is not doing anything, right? There's greater upside, we believe, of moving forward with efforts to take advantage of the people that are already interacting with us on a weekly basis.

Michael Lasser - UBS Investment Bank, Research Division

Would part of the risk be that you'd again have to reinvest some in price as more of your volume is through alternative channels?

Robert F. Hull

That's an evaluation we'll take along the way.

Michael Lasser - UBS Investment Bank, Research Division

You say that 1/3 of your comp is going to come through alternative channels. What is the percentage today?

Robert F. Hull

Dot com is 1% of sales. The outside selling is roughly 1% of sales. Contact center just got started, but it's ramping up pretty quick.

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

Peter Benedict, Robert Baird. On the shift to dead net pricing, help us understand how you expect this to be rolled out across -- I assume it's going across the entire mix of the store, but how do you expect that dynamic to play out in more promotional categories like appliances? And then secondly, on the leverage guardrail lift, talk about the potential for strategic acquisitions. I think Bob has kind of left the window open for that a little bit. How are you thinking about markets outside the United States, specifically Europe?

Robert F. Hull

So I'll touch on EDLC. I think you're dead on. I think the approach is category by category. We've got all the line reviews laid out. We've got them connected by how projects are impacted across category. We're going to be working through those as we speak, again taking us about 18 months to get through the store. There are going to be difficult discussions as it relates to some of the categories that we have gotten promotional on, but have driven market share and kind of leadership for us. When you look at the big tickets, you look at Millwork, you look at kitchen cabinets and you look at appliances. Those are probably going to be the toughest one that we're going to have to work through. I go back to what I said in my conversation. It can't be pure, but we've got to move directionally as far back as we possibly can so that our retails are competitive in, again, a very transparent world.

Robert A. Niblock

And, Peter, to the question on international markets and how that would impact leverage, obviously, not many stores here in the U.S. but we're still, but we're still feeling [ph] in both Canada and Mexico, got to grow to get to scale there. Because in both situations, we've got to grow to get to scale. So we'll be continuing to look at ways to how we can get to scale in those markets. Continue to invest in our joint venture down in Australia, which we're very pleased with. Specifically with regard to Europe, we don't have any current sights set on Europe at this point, so...

Robert F. Hull

But specific to the leverage target, that's pretty firm. So to the effect there was any activity, we'd manage back to that target. And just to touch -- Robert mentioned Australia. I think the knowledge of a company having a local knowledge is important, to be able to partner with somebody, local end market. And then being able to kind of scale pretty quick is pretty important. As we think about other markets, the opportunity to get to scale, that's really what matters.

Tiffany Mason

We've got time for one last question, Matt.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

It's Matt Fassler from Goldman Sachs. My first question is for Tom. When you kicked off, you spoke about the different customer types. And there seems to be sort of an aspirational tilt to where you thought that the dollars are being spent in terms of the kind of the consumers who are really prioritized for you. How much has that changed over the past 2 to 3 years, given the sustained macro difficulty? And how different is that distribution from where it might have been a way back? Then I have a follow-up for Bob if I could.

Thomas J. Lamb

Sure. It's an interesting question. I think that the refinement that's taken place for us over the last several years is just more about the mindset and how the consumer engages the category, and how we message to them, how we assort to them. I don't know that the mix of who is in the marketplace, who's active in the marketplace has changed that dramatically, but over the period of the downturn, we spent an awful lot of time trying to chase the opening price point category products -- opening price point products to the consumer in a way that the creator customer was telling us, "Look, I want a range of options. Sometimes, I'm going to pick the high end of the continuum. Sometimes I'm going to pick the low end of the continuum to create a solution that's appropriate for me." So for us, it's less about how the consumer mix has changed and more about how we're getting more precise in the messaging and the assorting to engage that consumer.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

And then my second question for Bob, since I guess we're sort of wrapping up, as I think about everything you've laid out today, there is enormous logic and a lot of upside, and really very little downside to most of what you've laid out, except for EDLP, EDLC where you've talked about some financial risk, margin friction. And you talked about sort of taking stock of where you stand in mid-2012. What are the metrics you're going to look at to assess the progress of that effort? And what options do you have if you don't like what you see?

Robert F. Hull

Well, I think the metrics for success of the process that vit [ph] team is putting in place with the merchants is going to be driven by top line sales, inventory productivity, transactions and close rates that Rick talked about in his conversation. I think again as you said, by the time we get to the midyear 2012, we'll have a good grasp because so much of our product will have moved through. At that point in time, we'll assess the situation and if we have to make some further changes, we will -- I will tell you this, learning -- going through these line reviews as we're seeing them come through, we're learning and iterating as we go.

Robert A. Niblock

And I think I would add, I think that a lot of it comes back to -- what's underpinning what Bob is doing is what's taking place from a technology standpoint and how transparent prices are becoming, just like the example that Colin threw at us. So you're always going to have those examples that are out there where we may be priced around -- but in the consumer's mind, more often than not, we got to be priced appropriately. And we can't get there unless Bob does what he's doing with his vendors to get back to EDLC, which means that you're stripping out all those behind-the-line dollars that are -- were being held by promotional funds and those type of thing. Then the other thing is everything else we're doing with integrated planning and execution, getting -- and the SKU rationalization, it's not -- we're going to be taking SKUs out of individual stores that the consumers are not giving us credit for because they weren't market specific in that market anyway, and reinvesting that in more depth of what they're going to give us credit for, which then means lower markdown, other things that we're actually relying on vendors for today. So I think when you pull it all together, with where the world's going, I think where Bob is trying to take us is absolutely correct. And it's what we've got to be able to do. We'll take 12 months to be able to do it, but what he was saying is that by the time -- he's already started the process. By the time he gets halfway through the year, he's going to be well underway with most of the foundation of that done, and then we'll also be leveraging that at the back half of the year and cycling some of the stuff that he put in place this year in the second half of 2011.

Tiffany Mason

Thank you for your time and attention today, and thanks for your interest in Lowe's.

Unknown Executive

This concludes our 2011 analyst and investor's conference. We invite attending analysts to join us for lunch, which is being served down the hall. Thank you.

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