Lowe’s Companies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended August 3, 2012, not 2011 Q2. Comparisons are with the corresponding 2011 periods. Financial amounts below are in millions of dollars unless stated otherwise. The interim statements were reviewed, not audited.
Business context and reporting period
Lowe’s operates home-improvement retail stores. The filing covers the three and six months ended August 3, 2012. Fiscal 2012 comparisons are affected by a one-week shift from fiscal 2011’s 53rd week.
Financial results and position
- Quarterly sales and earnings: Net sales were $14,249, down 2.0% year over year; comparable-store sales declined 0.4%. Net earnings were $747, down 10.0%, and diluted EPS was $0.64 versus $0.64. Gross margin was 33.93%, down 56 basis points; net margin was 5.25%, down 46 basis points.
- Six-month results: Net sales were $27,402, up 2.5%, while comparable-store sales rose 1.0%. Net earnings were $1,275, down 1.3%; diluted EPS increased to $1.07 from $0.98, alongside a reduction in weighted-average diluted shares to 1,183 million from 1,303 million. Gross margin was 34.30%, down 63 basis points, and net margin was 4.65%, down 18 basis points.
- Cash flow: Six-month operating cash flow was $2,796, down from $3,293. Investing used $1,032; financing used $1,066. Cash and cash equivalents increased to $1,710 from $1,014 at the fiscal-year start.
- Liquidity and debt: Current assets were $11,599 and current liabilities $9,022 at August 3, 2012. Current and long-term debt totaled $9,602, versus $6,620 at July 29, 2011. The company issued $2.0 billion of unsecured notes in April. It had no borrowings under its $1.75 billion credit facility or commercial-paper program at quarter-end and was in compliance with facility covenants.
- Capital returns: The company repurchased $2,793 of stock and paid $340 in dividends during the first half. Remaining repurchase authorization was $1.75 billion. Six-month dividends per share were $0.30, compared with $0.25.
Material changes and management commentary
- Quarterly sales were affected by the fiscal-calendar shift, which management estimated reduced comparisons by $259 million, and by a 0.8% decline in comparable transactions. Average ticket rose 0.4%.
- Management attributed gross-margin pressure to promotions, price reductions, Lawn & Garden write-offs in drought markets, and the company’s proprietary credit value proposition. The quarter’s margin decline was less severe than the 74-basis-point decline in Q1.
- Management said results fell short of expectations, citing inconsistent execution, promotional-strategy changes, and slower-than-expected benefits from initiatives. Comparable sales improved during the quarter, from down 2.1% in May to up 0.4% in June and 0.7% in July. The company expected disruption from its transformation initiatives over coming quarters and said this phase might not be complete until mid-2013.
- Commercial sales, about 25% of sales, remained strong; nine of 14 product categories had comparable-sales increases. Lawn & Garden was affected by seasonal sales pulled forward and extreme heat and drought; Building Materials faced difficult comparisons with prior-year storm-repair activity.
Guidance, risks, contingencies, and unusual items
- Fiscal 2012 guidance, as of August 20, 2012: Total sales expected to be flat versus fiscal 2011’s 53-week year; on a 52-week-comparable basis, sales were expected to rise about 1% and comparable-store sales about 0.5%. Management expected operating margin to increase about 45 basis points, depreciation of approximately $1.5 billion, an effective tax rate of approximately 37.8%, and diluted EPS of $1.64. It planned about 10 store openings and approximately $4.25 billion of share repurchases for the year.
- RONA proposal: Lowe’s made a non-binding $1.8 billion proposal to acquire Canadian retailer RONA; RONA’s board rejected it. Any transaction remained subject to due diligence. If completed, Lowe’s said it would use operating cash flow and financing and temporarily suspend repurchases.
- Debt maturity and ratings: $550 million of unsecured debt was scheduled to mature in September 2012, with repayment expected from operating or investing cash flows. At September 4, S&P’s senior-debt outlook was “Watch Negative”; Moody’s outlook was “Stable.” Management cautioned that a ratings downgrade or deterioration in financial ratios could adversely affect funding availability and costs.
- Impairments: First-half long-lived-asset impairment charges were $22 million, including $6 million for one impaired operating location and $16 million for excess properties. Management noted that a 10% reduction in projected sales for certain evaluated stores would have caused one additional store impairment and $6 million more in losses.
- Tax and legal matters: Settlements of IRS and state tax matters reduced unrecognized tax benefits by $84 million and interest expense by $22 million in the quarter. Lowe’s reported $4 million of unrecognized tax benefits at quarter-end and ongoing state audits. A subsidiary received a California subpoena concerning hazardous-waste handling, storage, and disposal and said it was cooperating.
- Other risks: The filing highlights economic and housing conditions, consumer spending and credit, competition, execution of technology and business-model initiatives, product and operating costs, weather, and potential further asset impairments. Management reported no material changes to previously disclosed risk factors or market-risk exposure.
Important facts for investors to verify
- Confirm the period: this filing reports Q2 and first-half fiscal 2012 results, not 2011 Q2.
- Track comparable sales, customer transactions, and gross-margin recovery against management’s fiscal-year guidance.
- Assess the effects of share repurchases and the reduced share count on EPS, alongside higher debt and interest costs.
- Check whether the RONA proposal advanced and how any acquisition would affect liquidity, financing, and repurchases.
- Monitor the September 2012 debt repayment, credit ratings, and available liquidity.
- Follow impairment assumptions and outcomes, tax audits, and the California hazardous-waste inquiry.