Lowe’s Companies, Inc. — Form 10-Q Summary
Reporting-period note: The supplied filing is for the quarter ended November 1, 2013, with comparisons to November 2, 2012. This differs from the request metadata stating “2012 Q3.” Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and reporting period
Lowe’s operates home-improvement stores. The filing reports results for the three and nine months ended November 1, 2013. The interim financial statements are unaudited; Deloitte & Touche conducted a review, not an audit. Lowe’s had 1,831 stores at quarter-end, including 72 Orchard stores acquired in August.
Financial performance and liquidity
- Third quarter: Net sales were $12,957, up 7.3%; comparable sales increased 6.2%. Net earnings were $499, up 26.1%, and diluted EPS was $0.47, versus $0.35. Gross margin was 34.58%, up 26 basis points; operating margin was 7.14%, up 93 basis points.
- First nine months: Net sales were $41,757, up 5.8%; comparable sales increased 5.1%. Net earnings were $1,980, up 18.6%, and diluted EPS was $1.84, versus $1.42. Gross margin was 34.57%, up 27 basis points; operating margin was 8.43%, up 85 basis points.
- Cash flow, nine months: Operating cash flow was $3,859, compared with $3,508. Investing used $1,023, including $610 of capital expenditures and $203 for the business acquisition. Financing used $2,273, including $2,797 of common-stock repurchases and $543 of dividend payments. Cash and cash equivalents ended at $1,101.
- Balance sheet at November 1: Current assets were $11,365 and current liabilities $9,403. Long-term debt was $10,090, plus $51 of current maturities. Total liabilities were $21,426 and shareholders’ equity $12,651.
- Capital and liquidity: September debt issuance added $1.0 billion in unsecured notes: $500 million at 3.875% due 2023 and $500 million at 5.0% due 2043. The $1.75 billion credit facility had no borrowings or letters of credit outstanding; the company reported covenant compliance. Restricted investments included $88 million short term and $244 million long term.
Material changes and management commentary
- Quarterly comparable sales growth reflected a 3.6% increase in comparable transactions and a 2.5% increase in comparable average ticket. Eleven of 12 product categories had positive comparable sales. Management cited strength in project categories and regions, improved planning and execution, and continued Pro Services performance.
- Quarterly gross margin benefited 52 basis points from the Value Improvement initiative, partly offset by 14 basis points from greater proprietary-credit sales penetration and 10 basis points from promotions. SG&A leverage reflected, among other factors, lower prior-year impairment and project costs; higher incentive compensation, added store labor, and reset/remerchandising costs partly offset the leverage.
- Management said inflation added about 25 basis points to quarterly comparable sales, while difficult comparisons with prior-year hurricane-related sales reduced them by about 45 basis points.
- In August, Lowe’s acquired most of Orchard Supply Hardware’s assets for approximately $207 million in cash and assumed liabilities, adding a smaller-store format and 72 stores. Lowe’s also assumed leases with $477 million of future payment obligations.
- Repurchases totaled $2,797 in the first nine months, compared with $3,643 in the prior-year period. The company had $2.2 billion remaining under its $5.0 billion authorization at quarter-end; an August $500 million accelerated repurchase was finalized after quarter-end, with 1.5 million additional shares delivered November 21.
Outlook, risks, and contingencies
- Fiscal 2013 guidance, as of November 20, 2013, was approximately 6% total-sales growth, 5% comparable-sales growth, 75 basis points of operating-margin expansion, an effective tax rate of about 37.8%, and diluted EPS of $2.15. Guidance assumed approximately $3.7 billion of repurchases for the year and nine store openings.
- Management expected home-improvement industry growth in the fourth quarter and further acceleration the following year, while noting the government shutdown and lower home affordability. It expected operating and financing cash flows to cover operations, investment, acquisitions if any, and shareholder returns over the next 12 months.
- Risks identified include economic and housing-market weakness, consumer spending and credit conditions, competition, labor and technology execution, product and input-cost availability, regulatory changes, adverse weather, and possible additional store-asset impairment if actual results fall short of assumptions.
- Ten operating locations were evaluated for impairment and were not impaired. Management estimated that a 10% reduction in projected sales would have caused five of those locations to be impaired, increasing impairment losses by $55 million. The company recorded $14 million of excess-property impairment charges during the nine months.
- The company reported $62 million of unrecognized tax benefits and ongoing tax examinations. It considered provisions adequate; it expected it was reasonably possible that $5 million of state audit matters could be resolved within 12 months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material change in risk factors or market risk from its latest annual report.
Important facts for investors to verify
- Confirm the intended reporting year: the source filing covers 2013 Q3, not 2012 Q3.
- Assess whether comparable-sales momentum, margin gains, and the benefit from the Value Improvement initiative persisted beyond this quarter.
- Monitor debt growth, interest expense, liquidity, and the scale of repurchases relative to operating cash flow and investment needs.
- Review Orchard’s integration, assumed lease commitments, and contribution to sales and earnings; the filing says the acquisition was not material and provides no pro forma results.
- Track store-level performance and the sensitivity of impairment estimates to sales assumptions, along with tax-audit developments and the stated fiscal-year guidance.