Lowe’s Companies, Inc. — Form 10-Q Summary
Period: Fiscal third quarter ended November 1, 2019, and nine months ended November 1, 2019; comparisons are to the periods ended November 2, 2018. The request metadata says “2018 Q3,” but the filing itself reports 2019 Q3.
Business context and results
Lowe’s operated 2,004 stores at quarter-end. Third-quarter comparable sales rose 2.2%, although reported net sales edged down 0.2% to $17.388 billion, reflecting prior store closures and the Orchard Supply Hardware exit. For the first nine months, net sales increased 0.8% to $56.121 billion and comparable sales rose 2.7%.
- Management cited stronger store traffic and execution, improved in-stock levels and customer service, and better Pro-customer performance. All 15 U.S. regions posted positive comparable sales for the second consecutive quarter.
- Online growth was low single-digit; higher-than-expected lumber deflation also weighed on reported sales.
Financial performance and liquidity
- Third quarter: Gross margin was 32.44% of sales, up 156 basis points. Operating income was $1.558 billion (8.96% margin), net earnings were $1.049 billion, and diluted EPS was $1.36 versus $0.78 a year earlier. Adjusted diluted EPS, a non-GAAP measure, was $1.41 versus $1.04.
- Nine months: Gross margin was 32.01%, down 35 basis points. Operating income was $5.356 billion, net earnings were $3.771 billion, and diluted EPS was $4.80 versus $3.83.
- Quarterly margin improvement reflected prior-year inventory rationalization and product mix; tariffs, supply-chain costs, and inventory shrink were offsets. Prior-year restructuring and impairment charges also contributed to lower comparative SG&A and depreciation.
- Cash flow: Nine-month operating cash flow was $4.111 billion versus $6.798 billion, primarily because prior-year working-capital movements had provided substantially more cash. Capital expenditures were $927 million.
- Cash and debt: Cash and cash equivalents were $794 million at November 1, 2019. Balance-sheet long-term debt was $16.635 billion, with $574 million of current maturities and $637 million of short-term borrowings. Operating lease liabilities totaled $4.441 billion; lease accounting adoption makes balance-sheet comparisons with 2018 less direct.
- Nine-month shareholder returns included $3.649 billion of share repurchases and $1.195 billion of dividend payments. Cash dividends declared were $1.58 per share for the nine-month period.
Material changes and unusual items
- Lowe’s adopted the new lease accounting standard in February 2019, recording additional lease assets and liabilities and a $263 million reduction to opening retained earnings. Comparative 2018 balance-sheet figures were not restated.
- Third-quarter results included $53 million of non-cash Canadian long-lived-asset impairment charges, reducing diluted EPS by $0.05. The prior-year quarter included $280 million of specified restructuring and impairment charges. Adjusted EPS excludes these items and is not a GAAP measure.
- The company issued $3.0 billion of unsecured notes in April 2019, with maturities in 2029 and 2049, and repaid $1.092 billion of long-term debt during the first nine months.
- Shipping and handling cost presentation was changed retrospectively: delivery costs moved from SG&A and depreciation to cost of sales. The reclassification did not affect operating income, net earnings, or diluted EPS.
Outlook, commentary and risks
- After quarter-end, Lowe’s decided to close 34 underperforming Canadian stores. It expected $175 million to $225 million of fourth-quarter pre-tax charges and operating costs related to inventory liquidation, accelerated depreciation and amortization, severance, and other actions.
- Management forecast approximately $1.6 billion of 2019 capital expenditures and expected $4.0 billion of share repurchases for 2019, including repurchases already made. No full-year sales or earnings guidance is stated in the provided filing text.
- Lowe’s said liquidity sources should be adequate for operations, investment, debt repayment, dividends, and repurchases over the next 12 months. Its commercial paper program had $637 million outstanding at a weighted-average 1.97% rate; the company reported compliance with credit-facility covenants.
- Management was modernizing the Lowes.com platform, targeting a cloud transition in the first quarter of 2020, and planned Pro point-of-sale terminals in the fourth quarter of 2019 and a national Pro loyalty program in the first half of 2020.
- Risks discussed include housing and consumer-spending conditions, tariffs and commodity-price changes, competition, execution of technology and strategic initiatives, cybersecurity, supply availability, and store-asset impairment. The company reported no material change to previously disclosed risk factors. It did not expect the pending SCAQMD matter concerning denatured-alcohol sales to have a material adverse effect.
Key facts for investors to verify
- Confirm the reporting period: this is a 2019 third-quarter filing, not 2018 Q3.
- Assess whether comparable-sales momentum and underlying operating improvement offset flat reported quarterly sales and ongoing store exits.
- Evaluate the quality and sustainability of earnings growth, including prior-year charges, current Canadian impairment, and the non-GAAP adjustments.
- Monitor working-capital cash-flow trends, debt and lease obligations, and the pace of buybacks relative to operating cash generation.
- Track the Canadian closures, expected fourth-quarter charges, and execution of the e-commerce and Pro initiatives.