Lowe’s Companies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 31, 2014, not 2013 Q3 as stated in the request metadata. Dollar amounts are in millions unless otherwise noted.
Business context and reporting period
Lowe’s is a home-improvement retailer. This unaudited quarterly report covers the three and nine months ended October 31, 2014, compared with the corresponding 2013 periods. The interim financial statements were reviewed by Deloitte & Touche; the firm did not express an audit opinion.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $13,681 | $12,957 | $43,682 | $41,757 |
| Gross margin | 34.49% | 34.58% | 34.82% | 34.57% |
| Net earnings | $585 | $499 | $2,248 | $1,980 |
| Diluted EPS | $0.59 | $0.47 | $2.24 | $1.84 |
| EBIT margin | 7.95% | 7.14% | 9.10% | 8.43% |
- Q3 sales rose 5.6%; comparable sales increased 5.1%, comprising a 3.4% increase in comparable average ticket and a 1.7% increase in transactions. Nine-month sales rose 4.6%, with comparable sales up 3.5%.
- Q3 net earnings increased 17.3% and diluted EPS increased 25.5%. For the first nine months, net earnings increased 13.5%.
- Q3 gross margin declined 9 basis points: promotions reduced margin by about 25 basis points and product mix by about 20 basis points, partly offset by the Value Improvement program and better seasonal sell-through. Nine-month gross margin improved 25 basis points.
- SG&A leverage improved 76 basis points in Q3 and 37 basis points for nine months, mainly from payroll, incentive compensation and other expense leverage. Higher employee insurance costs, including costs associated with the Affordable Care Act, were offsets.
- Nine-month operating cash flow was $4,684, versus $3,859 in 2013. Investing cash outflow was $887, versus $1,023; financing cash outflow was $2,624, versus $2,273. Cash and cash equivalents ended the period at $1,562, up from $391 at fiscal year-end.
- At October 31, 2014, total assets were $34,032 and total liabilities were $23,302. Current assets were $12,130 and current liabilities $10,804. Cash plus short- and long-term investments totaled $2,168; some investments were restricted, primarily for the extended protection plan program.
- Balance-sheet debt comprised $551 of current maturities and $10,806 of long-term debt. The company issued $1.25 billion of unsecured notes in September. Its $1.75 billion revolving credit facility had no borrowings or letters of credit outstanding at quarter-end; the company reported compliance with its covenants.
- Share repurchases and dividends were significant uses of capital: the company repurchased $2.9 billion of shares under its program and paid $597 in dividends during the first nine months. The share repurchase authorization remaining at October 31 was $3.4 billion.
Material changes versus the prior comparable period
- Q3 comparable-sales growth moderated to 5.1% from 6.2%; nine-month comparable-sales growth was 3.5% versus 5.1%.
- Q3 operating performance improved despite slightly lower gross margin, as lower SG&A and depreciation as a percentage of sales lifted EBIT margin by 81 basis points. Nine-month EBIT margin improved 67 basis points.
- Interest expense rose, primarily reflecting the September 2013 and September 2014 unsecured note issuances. Long-term debt excluding current maturities increased to $10,806 from $10,090 a year earlier.
- Outstanding common shares declined to 974 million from 1,050 million a year earlier, reflecting repurchases. The company also reported a $750 million accelerated repurchase completed during the period and a $500 million accelerated repurchase completed in Q3.
Outlook, commentary, risks and unusual items
- Fiscal 2014 guidance, as of November 19, 2014, called for total-sales growth of 4.5%–5%, comparable-sales growth of 3.5%–4%, operating-margin expansion of 70–75 basis points, an effective tax rate of about 37.2%, and diluted EPS of approximately $2.68. The company expected to open six home-improvement stores and four Orchard stores and assumed $3.7 billion of share repurchases.
- Management described itself as cautiously optimistic, citing improving disposable income and revolving-credit use, modestly rising existing-home sales and home-price appreciation in small- to mid-sized markets. It reported positive Q3 comparable sales in every region and product category; Pro Services outperformed company comparable sales for the 13th consecutive quarter.
- Management identified economic and housing conditions, consumer spending and credit, competition, technology and cybersecurity, labor, product and supply costs, regulation, and unanticipated weather as risks to results. Store cash-flow assumptions are also relevant: additional impairment losses could arise if actual performance falls short.
- The company recorded $28 of long-lived-asset impairment losses for the first nine months, including $26 for three operating locations and $2 for excess properties. Management noted that a 10% reduction in projected sales at six other evaluated locations would have produced $71 of additional impairment losses.
- Tax audits and examinations were ongoing in the U.S. and Canada. Remaining unrecognized tax benefits were $7, which the company said it could resolve within 12 months; management believed appropriate provisions had been made.
- The company stated that market risk had not changed materially, no material risk-factor changes had occurred, and no material off-balance-sheet financing existed other than operating leases. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the filing itself is Q3 2014, notwithstanding the request’s 2013 Q3 label.
- Compare the fiscal-year guidance with subsequent reported results, especially sales, comparable sales, operating margin, EPS and repurchases.
- Assess the sustainability of comparable-sales growth and margin improvement, including promotional activity, product mix and higher employee-insurance costs.
- Review the company’s debt maturities, interest costs and liquidity needs alongside planned capital spending, dividends and share repurchases.
- Monitor impairment-sensitive store performance and the assumptions underlying future cash flows, as well as the outcome of tax examinations.