Lowe’s Companies, Inc. — Form 10-Q Summary
Period: Fiscal second quarter and first six months ended August 2, 2019, compared with periods ended August 3, 2018. The request metadata says “2018 Q2,” but the filing itself reports fiscal 2019 Q2.
Business context and results
Lowe’s is a home-improvement retailer. Second-quarter sales rose modestly, while reported earnings increased more quickly, partly reflecting prior-year Orchard Supply Hardware charges and lower share count from repurchases. Store closures, including Orchard, weighed on total sales.
| Metric | Q2 2019 | Q2 2018 | First six months 2019 | First six months 2018 |
|---|---|---|---|---|
| Net sales | $20.992 billion | $20.888 billion | $38.733 billion | $38.247 billion |
| Gross margin | 32.11% | 32.96% | 31.81% | 33.03% |
| Operating income | $2.381 billion | $2.163 billion | $3.798 billion | $3.628 billion |
| Net earnings | $1.676 billion | $1.520 billion | $2.722 billion | $2.509 billion |
| Diluted EPS | $2.14 | $1.86 | $3.44 | $3.05 |
| Comparable sales growth | 2.3% | 5.2% | 2.9% | 3.0% |
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $3.583 billion, down from $5.787 billion, primarily because prior-year working-capital movements—especially accounts payable relative to inventory—provided a much larger cash benefit.
- Capital expenditures were $526 million; investing cash outflow was $458 million. Cash and cash equivalents at August 2 were $1.796 billion.
- Reported current assets were $16.796 billion and current liabilities $15.835 billion. Inventory was $13.730 billion, up from $11.885 billion a year earlier.
- Long-term debt excluding current maturities was $16.538 billion, with $1.009 billion of current maturities. The company issued $3.0 billion of unsecured notes in April, at fixed rates of 3.65% due 2029 and 4.55% due 2049.
- There were no borrowings outstanding under the cited revolving or 364-day credit facilities at quarter-end; the company reported compliance with facility covenants. Management said liquidity sources should be adequate for operations, investment, debt repayment, dividends and repurchases over the next 12 months.
- Operating lease right-of-use assets and liabilities were recognized following adoption of the new lease standard: $3.967 billion of operating lease assets and $4.547 billion of operating lease liabilities at quarter-end.
Changes, outlook and management commentary
- Q2 sales increased 0.5%; comparable sales rose 2.3%, with average ticket up 2.0% and transactions up 0.3%. Orchard and other closed locations reduced total sales by 1.6%. The company cited broad-based U.S. regional growth, partly offset by early-quarter weather challenges and lumber deflation.
- Gross margin declined 85 basis points in Q2. Management cited rate pressure, higher distribution and delivery costs, product mix and inventory shrink. For the six-month period, gross margin fell 122 basis points.
- Q2 SG&A as a share of sales improved 170 basis points, mainly reflecting lower retail operating salaries and the absence of prior-year Orchard impairment and project charges. Prior-year Orchard charges were $230 million pre-tax. Management’s adjusted Q2 diluted EPS was $2.15 versus $2.07, an increase of 3.9%; reported EPS was $2.14 versus $1.86.
- Management cited strength in Paint, Tools, Appliances, Décor, Hardware, Millwork, and Seasonal & Outdoor Living. It described continued investment in Pro service, online capabilities, technology, pricing tools and retail analytics.
- Management planned to focus on reducing inventory in selected areas during the second half through improved delivery and demand planning. It forecast approximately $1.6 billion of capital expenditures for fiscal 2019 and expected $4.0 billion of share repurchases for the year, including first-half repurchases. The filing provides no specific full-year sales or EPS guidance.
- During the first six months, the company repurchased $2.770 billion of shares and paid $767 million in dividends. It had $11.2 billion remaining under its repurchase authorization at August 2.
- The company was winding down its Mexico retail operations and recorded a Q2 net loss of $12 million, or a net $0.01 per-share impact, associated with the wind-down. The decision to liquidate assets rather than sell the operating business also contributed to a favorable first-quarter tax benefit.
Risks, contingencies and unusual items
- Management identified risks including economic and housing-market conditions, consumer spending and credit, commodity-price deflation, tariffs, competition, execution of technology and strategic initiatives, labor retention, supply costs, cybersecurity, and regulatory changes. Market exposures include foreign exchange, interest rates and commodity prices.
- In May 2019, the company received a California air-quality regulator letter alleging noncompliant sales of denatured alcohol since 2015. Lowe’s was in discussions with the regulator and did not expect a material adverse effect, but could not predict the outcome.
- The company said ordinary-course legal matters were not expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors and no material off-balance-sheet financing arrangements.
- Adoption of lease accounting added lease assets and liabilities to the balance sheet and reduced opening retained earnings by $263 million; management said it did not materially affect earnings or cash flows. Comparative balance-sheet periods were not restated.
- The independent accountant performed a review of interim financial information, not a full audit, and reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether comparable-sales momentum can persist as closures, lumber deflation and changing transaction trends affect reported sales.
- Whether gross-margin pressures—particularly pricing, delivery and distribution costs, shrink and product mix—moderate as planned.
- Whether inventory reduction efforts improve working capital without harming in-stock levels or sales.
- How the $3.0 billion debt issuance, lease obligations, buybacks and dividends affect leverage, interest expense and liquidity.
- Progress and final costs of the Mexico wind-down, and the outcome of the SCAQMD matter.
- Whether fiscal 2019 capital-expenditure and share-repurchase plans are achieved; these are management expectations, not guarantees.