LOW

Business Context and Reporting Period

Company: Lowe's Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2008 (Third Quarter of Fiscal 2008)
Business Overview: Lowe's operates home improvement retail stores in the United States and Canada. The reporting period was characterized by a difficult operating environment due to rising unemployment, declining equity markets, falling home prices, and tight credit markets. Despite these headwinds, the company continued to gain market share and expand its store footprint.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales increased 1.4% for the quarter and 0.9% for the nine-month period compared to the prior year, driven primarily by the addition of 152 net new stores over the last four quarters.
• Comparable Store Sales: Declined 5.9% for the quarter and 6.5% for the nine-month period. This was driven by a 3.5% decrease in customer transactions and a 2.3% decrease in average ticket size.
• Profitability: Net earnings decreased 24.0% for the quarter and 15.3% for the nine-month period. Gross margin declined 29 basis points for the quarter due to product mix, higher fuel costs, and distribution fixed costs.
• Expenses: Selling, general, and administrative (SG&A) expenses increased as a percentage of sales (23.23% vs. 21.63% prior year) primarily due to de-leverage in store payroll and fixed expenses as sales per store declined.
• Capital Structure: The company redeemed all remaining convertible notes issued in 2001 (approx. $411 million principal) in June 2008. No share repurchases were made in the first nine months of fiscal 2008, compared to $2.0 billion in the prior year.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management anticipates continued pressure on home improvement consumers due to macro-economic factors. However, hurricane preparation and recovery spending provided a positive impact of approximately 100 basis points to comparable store sales in the third quarter.

Fourth Quarter 2008 Guidance (as of Nov 17, 2008):

• Store Openings: 33 to 38 new stores.
• Total Sales: Expected to range from a 3% decline to a 2% increase.
• Comparable Store Sales: Expected to decline 5% to 10%.
• Operating Margin: Expected to decline approximately 330 basis points.
• Diluted EPS: Expected to range from $0.08 to $0.16.

Fiscal 2008 Full Year Guidance:

• Total Sales: Flat to 1% increase.
• Comparable Store Sales: Decline of 6% to 7%.
• Diluted EPS: $1.46 to $1.54.

Risks and Contingencies

• Economic Conditions: Risks include rising unemployment, interest rate fluctuations, and reduced consumer spending power.
• Housing Market: Continued weakness in the housing market and reduced commercial building activity.
• Competition: Intense competition in the home improvement sector.
• Weather: Unanticipated weather conditions could adversely affect sales.
• Credit Ratings: A downgrade in debt ratings could adversely impact borrowing costs and access to capital markets, though no provisions exist for early debt settlement based on rating changes.

Investor Verification Checklist

• Comparable Store Sales Trend: Verify the sustainability of the 5.9% quarterly decline in comparable store sales and the impact of the housing market slowdown on future quarters.
• Margin Compression: Assess the ability to maintain gross margins amidst rising fuel costs and fixed cost de-leverage.
• Capital Allocation: Confirm the status of the $2.2 billion remaining share repurchase authorization and the company's decision to halt buybacks in 2008.
• Liquidity Position: Review the utilization of the $1.75 billion senior credit facility and commercial paper program given the tight credit markets.
• Store Expansion ROI: Evaluate the return on investment for the 115-120 planned store openings for fiscal 2008 given the current sales environment.