Lowe’s Companies, Inc. — Form 10-Q Summary
Period: Fiscal second quarter ended July 29, 2016, with six-month results also presented. The request metadata says “2015 Q2,” but the filing itself reports 2016 Q2 and compares with the period ended July 31, 2015.
Business context and results
Lowe’s operates home-improvement retail stores. The quarter’s sales growth reflected comparable-sales gains, new stores, and the May 2016 acquisition of RONA, a Canadian retailer and distributor. RONA contributed 2.7 percentage points of quarterly sales growth; the acquisition added 242 stores.
| Metric | Three months ended July 29, 2016 | Change vs. 2015 |
|---|---|---|
| Net sales | $18.26 billion | +5.3% |
| Comparable sales | +2.0% | +2.3 percentage points lower |
| Gross margin | 34.44% | Down 3 basis points |
| Net earnings | $1.167 billion | +3.7% |
| Diluted EPS | $1.31 | +9.2% |
| EBIT margin | 11.24% | Down 13 basis points |
For the six months, sales were $33.49 billion, up 6.4%; net earnings were $2.051 billion, up 14.0%; and diluted EPS was $2.29 versus $1.90. Six-month gross margin was 34.71%, down 21 basis points, while EBIT margin was 10.86%, up 68 basis points.
Cash flow, liquidity, and capital
- Six-month operating cash flow was $4.628 billion, compared with $4.164 billion in 2015. Investing used $2.934 billion, including $2.284 billion for the RONA acquisition; financing used $110 million.
- Cash and cash equivalents were $1.988 billion at July 29, 2016. Current assets were $13.351 billion and current liabilities $13.183 billion.
- Total debt on the balance sheet was approximately $15.811 billion, including $1.193 billion of current maturities, compared with approximately $11.350 billion a year earlier. The company issued $3.3 billion of notes in April; net interest expense rose 25% for the quarter.
- The $1.75 billion revolving credit facility had no outstanding borrowings or letters of credit, and the company reported compliance with its covenants. Management stated cash flows and financing should cover operations, investment, and shareholder returns over the next 12 months.
- Six-month capital expenditures were $490 million; fiscal 2016 capital spending was forecast at approximately $1.5 billion. The company repurchased $2.452 billion of shares and paid $506 million in cash dividends in the first half.
Material changes and unusual items
- RONA was acquired for approximately $2.4 billion in cash, including settlement of its revolving-credit borrowings. Preliminary purchase accounting recorded $922 million of goodwill. The acquisition contributed to higher debt and investing outflows.
- A Canadian-dollar option related to the RONA purchase generated a $76 million gain for the first half, but its second-quarter fair-value movement reduced quarterly pretax earnings by $84 million and diluted EPS by $0.06.
- Quarterly gross margin was pressured by RONA purchase-accounting inventory adjustments and acquisition mix, partly offset by cost reductions. Quarterly SG&A deleveraged, in part because of the currency option and higher operating salaries.
- The Australian joint venture with Woolworths remained in dispute. After a prior-year $530 million impairment, the investment’s carrying value was $393 million at quarter-end. Following Woolworths’ August actions to wind down the venture, Lowe’s sought court appointment of an administrator and expected additional noncash losses, not exceeding the carrying value; any claims for additional value are treated as contingent.
Outlook, commentary, and risks
As of the August 17, 2016 earnings release, fiscal 2016 guidance called for total sales growth of approximately 10% (including the 53rd week, expected to add about 1.5%), comparable-sales growth of about 4%, operating-margin expansion of about 50 basis points, an effective tax rate near 38.1%, and diluted EPS of approximately $4.06. Guidance assumed about $3.5 billion of share repurchases and approximately 45 store openings. Operating-margin guidance excluded specified prior-year Australian impairment and current-year currency-option effects.
Management cited a favorable housing and consumer backdrop, but noted weaker northern-region demand due to unusual weather. Risks include economic and housing-market changes, competition, execution and integration of RONA, currency movements, cybersecurity, staffing, and potential further impairment losses. The filing reported no material changes to the previously disclosed risk factors. Interim financial statements were reviewed by Deloitte, not audited.
Important facts for investors to verify
- Confirm the reporting period: this filing is for the quarter ended July 29, 2016, not 2015 Q2.
- Track RONA integration, Canadian performance, acquisition-related margin effects, and the final purchase-price allocation.
- Assess debt maturities, interest costs, and the company’s capacity to fund planned repurchases and dividends.
- Monitor the Australian joint-venture wind-down, potential noncash losses, and the outcome of the legal dispute.
- Compare actual full-year sales, comparable sales, operating margin, and EPS with the guidance stated in the filing.