Lowe’s Companies, Inc. — Form 10-Q Summary
Period: Fiscal first quarter ended May 2, 2014; comparisons are with the three months ended May 3, 2013. The filing identifies this as fiscal 2014 Q1, despite the request metadata specifying 2013 Q1. Financial statements are unaudited and were reviewed by the independent accountant.
Business context and key financial metrics
Lowe’s operates home-improvement stores. At quarter-end, it reported 1,836 stores, including 73 Orchard Supply Hardware stores.
| Metric | Q1 2014 | Prior-year comparable |
|---|---|---|
| Net sales | $13.403 billion | $13.088 billion; up 2.4% |
| Comparable sales | Up 0.9% | Down 0.7% |
| Gross margin | 35.50% | 34.80%; up 70 basis points |
| Operating margin (EBIT margin) | 7.96% | 7.49%; up 47 basis points |
| Net earnings | $624 million | $540 million; up 15.5% as reported in the results table |
| Diluted EPS | $0.61 | $0.49; up 24.5% |
| Operating cash flow | $1.994 billion | $1.992 billion |
| Capital expenditures | $194 million | $196 million |
| Cash and cash equivalents | $658 million | $1.081 billion |
| Long-term debt, including current maturities | $10.127 billion | $9.073 billion |
Gross-margin improvement reflected a 40-basis-point benefit from the Value Improvement program and a 20-basis-point benefit from product mix. SG&A rose 3.0% and deleveraged 14 basis points; management cited higher employee-insurance costs and asset impairments, partly offset by leverage in the proprietary credit program. Net interest expense increased to $124 million from $113 million.
Operating cash flow was largely unchanged year over year. Inventory uses of cash were $1.384 billion, partly offset by a $2.041 billion increase in accounts payable. Investing activities used $280 million and financing activities used $1.447 billion, including $910 million for share repurchases and $186 million in dividends. Cash increased $267 million from fiscal year-end.
Total liabilities were $22.747 billion and shareholders’ equity was $11.482 billion at May 2, 2014. The company reported no short-term borrowings at quarter-end and no outstanding borrowings or letters of credit under its $1.75 billion senior credit facility; it was in compliance with facility covenants.
Material changes and operating trends
- Comparable sales improved from a 0.7% decline to 0.9% growth, driven by a 0.8% increase in comparable average ticket and a 0.1% increase in comparable transactions.
- Weather was uneven: southern and western markets had mid-single-digit comparable-sales growth, while the Northeast was negative. Outdoor categories declined approximately 1.5%; indoor categories grew approximately 2%.
- Net earnings increased faster than sales, with a lower effective tax rate of 33.8%, versus 37.8%, following favorable resolution of federal tax matters.
- Return on invested capital, a company-defined non-GAAP measure, rose to 12.0% from 9.5%.
- The company repurchased 17.9 million shares for $850 million under its program and paid $186 million in dividends. A May 30, 2014 dividend declaration raised the quarterly dividend from $0.18 to $0.23 per share.
Guidance, commentary, risks and unusual items
As of May 21, 2014, management expected fiscal 2014 total sales growth of approximately 5%, comparable-sales growth of approximately 4%, operating-margin expansion of approximately 65 basis points, an effective tax rate of approximately 37.2%, and diluted EPS of approximately $2.63. The outlook assumed $3.4 billion of fiscal-year share repurchases. Planned fiscal-year capital expenditures were approximately $1.2 billion, and management expected about 10 new home-improvement stores and five new Orchard stores.
Management cited seasonal planning, improving Pro-customer offerings, and customer-experience initiatives as priorities. It viewed the home-improvement outlook as favorable, while noting mixed housing-market signals and the slow start to spring. Forward-looking results are subject to economic, housing, consumer-spending, credit, competition, technology, labor, regulatory, supply-cost, and weather risks. Management also warned that store impairments could recur if actual results differ from cash-flow assumptions.
- Two of four stores evaluated for impairment were written down, resulting in a $23 million impairment loss; a 10% reduction in projected sales at the other two locations would have produced a further $28 million impairment.
- The company paid approximately $14.9 million to resolve a California hazardous-waste matter and agreed to spend approximately $3.2 million on remedial measures over five years. A separate EPA lead-renovation consent decree required a $500,000 payment and future compliance requirements.
- Federal tax audit resolutions reduced unrecognized tax benefits by $57 million; $5 million remained at quarter-end. Canadian and U.S. state tax audits were ongoing.
- The interim financial statements may not indicate full-year results. The accountant performed a review, not an audit, and reported no material modifications needed.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing covers fiscal Q1 2014, not 2013 Q1.
- Track comparable-sales performance against the approximately 4% fiscal-year target, especially recovery in weather-affected regions and outdoor categories.
- Assess whether margin gains persist after the Value Improvement benefit and whether SG&A and interest costs remain elevated.
- Monitor the $10.127 billion reported debt balance, cash generation, planned $1.2 billion capital spending, and $3.4 billion repurchase assumption.
- Review impairment assumptions and the status of tax audits and legal-matter compliance obligations.