Lowe’s Companies, Inc. — Form 10-Q Summary
Period: The filing covers the quarter ended July 29, 2011, and the six months then ended. The request metadata says “2010 Q2,” which conflicts with the filing; this summary follows the filing’s stated 2011 period. Financial statement amounts are in millions except per-share data.
Business context and results
Lowe’s operates home-improvement stores. Management cited weak consumer sentiment, a focus on smaller repair and maintenance projects, unfavorable weather in some regions, and difficult comparisons with prior-year government stimulus programs.
| Metric | Three months ended July 29, 2011 | Comparable 2010 period | Six months ended July 29, 2011 | Comparable 2010 period |
|---|---|---|---|---|
| Net sales | $14,543 | $14,361 | $26,728 | $26,749 |
| Comparable-store sales | (0.3%) | 1.6% | (1.7%) | 2.0% |
| Gross margin | 34.49% | 34.86% | 34.93% | 35.01% |
| Net earnings | $830 | $832 | $1,292 | $1,321 |
| Diluted EPS | $0.64 | $0.58 | $0.98 | $0.92 |
| Operating margin (EBIT margin) | 9.76% | 9.88% | 8.41% | 8.55% |
Financial condition, cash flow and capital
- For the six months, operating cash flow was $3,293, up from $2,782, with the increase primarily reflecting working-capital timing, particularly accounts payable. Investing cash outflow was $694, compared with $1,468; financing cash outflow was $2,687, compared with $756.
- Capital expenditures/property acquired were $780 for the six months. Cash and cash equivalents were $568 at July 29, 2011; short-term investments were $340. Total current assets were $10,168 against current liabilities of $8,677.
- Long-term debt, excluding current maturities, was $6,581, versus $5,533 a year earlier; current maturities were $39. Total liabilities were $17,266, compared with $15,420. The $1.75 billion senior credit facility had no outstanding borrowings or letters of credit, and the company reported compliance with its covenants.
- Share repurchases totaled $2,433 for the six months, compared with $1,015 in 2010. The company used the prior authorization and announced a new $5.0 billion authorization on August 19, 2011. Six-month dividends paid were $294.
Material changes and management commentary
- Second-quarter sales rose 1.3%, but comparable-store sales declined 0.3%. Higher customer transactions were offset by a lower average ticket; management attributed the comparable-sales decline partly to weakness in big-ticket categories.
- Quarterly gross margin fell 37 basis points. Management cited promotions, the new 5% credit-cardholder discount, clearance activity, and higher distribution costs, partly offset by product mix. Six-month gross margin declined 8 basis points.
- Second-quarter net earnings were nearly flat year over year; six-month net earnings decreased 2.2%. Diluted EPS increased year over year in both periods, supported in part by lower weighted-average share counts following repurchases.
- The six-month period included $89 of long-lived asset impairment losses, versus $11 in the prior-year period. The second quarter included $60 related to locations identified for closure. Seven stores closed after quarter-end on August 14, 2011; management included related costs in its outlook.
Outlook, risks and contingencies
- As of August 15, 2011, management expected third-quarter total sales growth of about 2%, comparable-store sales approximately flat, operating margin down 10–20 basis points, and diluted EPS of $0.30–$0.33. The estimates included costs associated with the seven store closures.
- For fiscal 2011, management expected total sales growth of about 2% (including the 53rd week), comparable-store sales down about 1%, operating margin down about 30 basis points, and diluted EPS of $1.48–$1.54. Planned capital expenditures were approximately $2.1 billion, including lease commitments.
- Management said operating cash flows and financing sources should meet expansion and operating needs over the next 12 months. It expected to renew the senior credit facility before its June 2012 expiration. Moody’s outlook was negative; S&P’s was stable.
- Risks discussed include weak economic and housing conditions, consumer spending and credit availability, fuel and commodity costs, competition, regulation, weather, and execution of technology and store-development plans. Further impairment losses could arise if store results or asset-value assumptions differ from estimates.
- At July 29, 2011, unrecognized tax benefits were $151. The company said certain IRS and state tax matters could be settled within 12 months, potentially reducing unrecognized tax benefits by $133; it stated that provisions had been made for outstanding tax matters.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for the quarter ended July 29, 2011, not 2010 Q2.
- Track comparable-store sales, average ticket, and the effect of customer promotions on sales and gross margin.
- Assess whether the store-closure and impairment charges are complete and whether additional impairment losses emerge.
- Monitor debt, liquidity, credit-facility renewal, and the scale and pace of the newly authorized share repurchases.
- Compare actual results with management’s dated fiscal 2011 and third-quarter outlook, noting that the filing says interim results may not indicate full-year results.
The interim financial statements were reviewed by Deloitte & Touche, not audited; the auditor reported no material modifications that should be made to them.