Lowe’s Companies, Inc. — Form 10-Q Summary
Period: The filing covers the quarter ended November 2, 2018, and the first nine months of fiscal 2018. This is fiscal Q3 2018, although the request metadata identifies 2017 Q3. Unless noted otherwise, amounts are in U.S. dollars.
Business context and performance
Lowe’s operates home-improvement retail stores and online sales channels. Management’s focus during the quarter was a strategic reassessment intended to concentrate on core home-improvement operations, alongside efforts to improve store and merchandising execution.
- Third-quarter net sales rose 3.8% to $17.415 billion; comparable sales increased 1.5%. Comparable average ticket rose 2.3%, while comparable transactions declined 0.8%.
- For the first nine months, net sales increased 4.8% to $55.662 billion and comparable sales rose 2.6%.
- Third-quarter sales growth was strongest in Seasonal & Outdoor Living, Appliances, Lawn & Garden, Kitchens, and Rough Plumbing & Electrical. Management cited out-of-stocks, reset execution, and assortment issues in certain categories.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Net sales | $17.415B | $16.770B | $55.662B | $53.125B |
| Gross margin | $5.660B; 32.50% | $5.713B; 34.07% | $18.871B; 33.90% | $18.183B; 34.23% |
| Operating income | $957M | $1.547B | $4.586B | $5.488B |
| Net earnings | $629M | $872M | $3.138B | $2.893B |
| Diluted EPS | $0.78 | $1.05 | $3.83 | $3.42 |
- Q3 net earnings fell 27.9% and diluted EPS fell 25.7%. Management said the quarter’s $280 million of pre-tax strategic-exit charges reduced diluted EPS by $0.26; adjusted diluted EPS was $1.04 versus $1.05 a year earlier. Adjusted EPS is a non-GAAP measure.
- Nine-month adjusted diluted EPS was $4.30 versus $3.64. Reported prior-year results included a $464 million debt-extinguishment loss and a $96 million gain on sale of the Australian joint-venture interest.
- Q3 gross margin declined 157 basis points. Management attributed pressure principally to inventory rationalization, clearance activity, Orchard’s wind-down, and product mix. The new revenue accounting standard partly offset the decline.
- The effective tax rate was 21.8% for Q3 and 23.8% for the first nine months, down from 37.1% and 36.3%, respectively, primarily reflecting the U.S. Tax Act rate reduction.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $6.798 billion, compared with $5.372 billion a year earlier. Capital expenditures were $846 million; simple operating cash flow less capital expenditures was approximately $5.952 billion.
- Investing cash outflow was $788 million and financing cash outflow was $4.921 billion. Financing included $2.498 billion of share repurchases and $1.068 billion of cash dividends.
- At November 2, 2018, cash and cash equivalents were $1.668 billion and short-term investments were $208 million. Current assets were $15.138 billion versus current liabilities of $15.069 billion.
- Short-term borrowings were zero. Long-term debt was $14.460 billion excluding $1.117 billion of current maturities; total debt including those maturities was approximately $15.577 billion.
- The company reported a $1.75 billion revolving credit facility maturing in September 2023 and a $250 million 364-day facility. Neither facility nor the commercial-paper program had outstanding borrowings at quarter-end; the company was in covenant compliance.
- Management said liquidity was adequate for operations, investment, debt repayment, dividends, and share repurchases over the next 12 months. The company expected approximately $1.2 billion of fiscal-2018 capital expenditures and $3.0 billion of fiscal-2018 share repurchases.
Material changes, outlook, and risks
- Strategic exits and closures: Lowe’s committed to close all 99 Orchard Supply Hardware stores and related facilities, 20 U.S. home-improvement stores, and 31 Canadian locations, including 27 stores. It also decided to exit certain non-core U.S. activities. The company recorded $280 million of pre-tax charges in Q3 and $510 million in the first nine months for the described exit activities.
- Management expected another $460 million to $580 million of pre-tax charges in Q4, primarily for lease obligations and accelerated depreciation. Separately, on November 9, after quarter-end, management and the board decided to pursue an exit of the 13 Mexico stores; future charges were not reasonably estimable. The filing reports a $22 million Q3 impairment related to Mexico.
- ASU 2014-09 was adopted in fiscal 2018. It increased reported sales by $239 million in Q3 and $512 million for the first nine months, primarily through presentation changes involving proprietary credit-program profit sharing. Its effect on operating income and net earnings was minimal, but prior periods were not restated, limiting comparability.
- Management described the home-improvement market backdrop as supportive, citing residential investment, home-price appreciation, and consumer confidence, while noting higher interest rates and pressured housing turnover. It planned to address store execution, out-of-stocks, merchandising resets, and assortments. The filing does not provide a clear full-year sales or earnings forecast.
- Key stated risks include leadership transitions, execution of strategic initiatives and store closures, housing and consumer-spending trends, competition, tariffs and supply costs, technology and cybersecurity, and potential additional asset impairments if actual results differ from assumptions.
- The independent accountant performed a review of interim information, not a full audit, and reported no material modifications necessary for GAAP conformity. Management said disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether store and business exits meet announced timelines, and whether total closure, lease, severance, and impairment costs remain within estimates—especially the Q4 charge range and unestimated Mexico exit costs.
- Whether comparable-sales momentum improves as management addresses out-of-stocks, merchandising resets, assortment gaps, and transaction declines.
- How much of reported sales growth reflects underlying demand versus the revenue-accounting presentation change, and the impact of that change on period-to-period comparisons.
- Whether cash generation can sustain planned capital spending, dividends, and repurchases while meeting debt maturities and other obligations.
- Whether operating results at affected locations or changes in closure plans lead to further material impairment charges.