Lowe’s Companies, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended February 3, 2012 (53 weeks), compared with fiscal 2010 ended January 28, 2011 (52 weeks). The request metadata says “2010 Q4,” but the supplied filing is the FY2011 annual report; its fourth quarter is included below where relevant. Dollar amounts are U.S. dollars.
Business context
Lowe’s operated 1,745 home-improvement stores across the U.S., Canada and Mexico, with approximately 197 million square feet of selling space. It opened 25 stores and closed 27 U.S. stores during FY2011. Management shifted emphasis from store expansion toward asset productivity, customer experience and multichannel growth. The Australian Masters joint venture opened its first seven stores.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $50.208 billion | $48.815 billion |
| Gross margin | $17.350 billion; 34.56% | $17.152 billion; 35.14% |
| Operating income (EBIT) | $3.277 billion; 6.53% of sales | $3.560 billion; 7.29% of sales |
| Net earnings | $1.839 billion | $2.010 billion |
| Diluted EPS | $1.43 | $1.42 |
| Net cash from operations | $4.349 billion | $3.852 billion |
| Net cash used in investing | $1.437 billion | $2.184 billion |
| Net cash used in financing | $2.549 billion | $1.651 billion |
- Comparable-store sales were flat for the year; customer transactions increased approximately 0.4% and average ticket declined 0.4%. The extra fiscal week contributed 1.6% to reported sales growth.
- Cash and cash equivalents were $1.014 billion and short-term investments were $286 million at year-end. Total assets were $33.559 billion.
- Total debt, including current maturities and capitalized leases, was $7.627 billion; long-term debt excluding current maturities was $7.035 billion. Debt-to-capital was 31.6%, up from 26.6%.
- The $1.75 billion revolving credit facility had no outstanding borrowings or letters of credit. Management reported $9.6 billion of available debt capacity versus $7.6 billion of debt outstanding and said liquidity was expected to be adequate for the next 12 months.
- Operating cash flow funded the primary liquidity needs. Property acquisitions were $1.829 billion; share repurchases were $2.937 billion, and cash dividend payments were $647 million. Dividends declared totaled $672 million.
Material changes versus FY2010
- Sales rose 2.9%, but net earnings fell 8.5%; the 53rd week contributed materially to sales growth. Comparable sales improved through the year, from negative 3.3% in Q1 to positive 3.4% in Q4.
- Gross margin declined 58 basis points. Management cited the 5% credit-card offer, targeted promotions and everyday-low-price changes, higher fuel-related distribution costs, and inventory adjustments tied mainly to store closures. Product mix partly offset these pressures.
- SG&A increased to 25.08% of sales from 24.60%, including charges for store closures, discontinued projects and asset impairments, as well as customer-experience investments. Depreciation expense declined, while net interest expense increased to $371 million from $332 million following debt issuance.
- Net earnings per share edged up to $1.43 from $1.42 despite lower earnings, alongside substantial repurchases: 119.8 million shares for $2.939 billion during FY2011.
Outlook, commentary, risks and unusual items
- FY2012 guidance, as of the February 27, 2012 earnings release: total sales growth of 1%–2%, comparable sales growth of 1%–3%, operating margin expansion of approximately 100 basis points, and diluted EPS of $1.75–$1.85. The company planned approximately 10 store openings and approximately $4.5 billion in share repurchases. FY2012 has 52 weeks, so reported growth comparisons are affected by FY2011’s extra week.
- Management highlighted investments in IT and store systems of $841 million, online sales growth of 70%, and more than 275,000 orders fulfilled through flexible fulfillment. The company also announced the acquisition of online retailer ATG Stores in December 2011.
- FY2011 long-lived asset impairment losses totaled $388 million, compared with $71 million in FY2010. The company closed 27 underperforming stores; it also recorded $76 million of store-closing lease-obligation expense and $15 million of severance accrual additions.
- Key risks include continued weakness in housing and consumer demand, intense price and service competition, execution of business-model and technology changes, cyber and data-security incidents, supply-chain disruption, and international expansion. Management said ordinary-course legal proceedings were not material. Non-cancelable purchase obligations totaled $1.297 billion; total contractual obligations were $21.001 billion.
- Debt ratings disclosed as of April 2, 2012 were S&P A- (negative outlook) and Moody’s A3 (stable outlook) for senior debt. The filing says the company was in compliance with credit covenants. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: this is the fiscal year ended February 3, 2012, not a standalone 2010 Q4 filing.
- Assess whether margin recovery and the guided operating-margin improvement materialized after the 58-basis-point FY2011 gross-margin decline.
- Separate underlying sales trends from the 53rd-week benefit and track comparable sales, traffic and average ticket.
- Review the sustainability of large share repurchases and planned borrowing alongside debt growth, capital spending and the 31.6% debt-to-capital ratio.
- Track outcomes from store closures, impairment charges, the ATG Stores acquisition and the Australian joint venture, including their effect on returns and cash generation.