Lowe’s Companies, Inc. — Form 10-Q summary
Reporting-period clarification: The supplied filing is for the quarter ended July 30, 2021 (fiscal 2021 second quarter), not 2020 Q2 as stated in the request metadata. Comparisons below are with the quarter ended July 31, 2020; six-month figures compare the corresponding year-to-date periods.
Business context and reporting period
Lowe’s is a home-improvement retailer. The filing covers the three and six months ended July 30, 2021. Management attributed softer comparable sales to customers returning to pre-pandemic patterns and increased mobility, while highlighting Pro demand and its Total Home strategy. Deloitte reviewed the interim financial information; this was a review, not an audit.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $27.570bn | $27.302bn | $51.993bn | $46.977bn |
| Gross margin | $9.312bn; 33.78% | $9.304bn; 34.08% | $17.442bn; 33.55% | $15.816bn; 33.67% |
| Operating income | $4.210bn; 15.27% | $3.957bn; 14.49% | $7.455bn; 14.34% | $5.948bn; 12.66% |
| Net earnings | $3.018bn | $2.828bn | $5.340bn | $4.165bn |
| Diluted EPS | $4.25 | $3.74 | $7.46 | $5.50 |
- Q2 sales rose 1.0%; comparable sales declined 1.6%. Comparable transactions fell 12.9%, partly offset by an 11.3% increase in comparable average ticket. Management reported 21% growth in Pro customer sales.
- For the first six months, sales rose 10.7% and comparable sales increased 9.8%.
- Q2 gross margin contracted 30 basis points. Operating margin expanded 78 basis points, with SG&A expense down 137 basis points as a share of sales. Six-month operating margin expanded 168 basis points.
- Six-month operating cash flow was $6.913bn, versus $11.752bn; management cited working-capital timing, especially lower growth in accounts payable than in the prior-year period. Capital expenditures were $846m, versus $710m.
- At July 30, cash and cash equivalents were $4.835bn, short-term investments $1.420bn, and total current assets $25.083bn. Current liabilities were $21.664bn.
- Balance-sheet debt comprised $1.000bn of short-term borrowings, $1.344bn of current long-term debt maturities, and $21.967bn of long-term debt, or $24.311bn combined. The company also reported $3.0bn of undrawn revolving credit capacity. Shareholders’ equity was a deficit of $175m, following substantial share repurchases.
Material changes and capital allocation
- Q2 net earnings increased 6.7% and diluted EPS increased 13.8% year over year; the reduced share count contributed to per-share growth. Six-month net earnings increased 28.2%.
- Cash from operations declined $4.839bn year over year for the six-month period. Prior-year operating cash flow included much larger working-capital inflows, including a $5.259bn increase in accounts payable, compared with $1.115bn in the current period.
- The company repurchased $6.206bn of stock in the first half and declared dividends of $1.40 per share. It had $13.6bn remaining under its repurchase authorization at July 30.
- In March, Lowe’s issued $2.0bn of unsecured notes: $1.5bn due 2031 at 2.625% and $500m due 2051 at 3.500%. A $1.0bn unsecured term loan, bearing 0.79%, matures April 21, 2022.
Outlook, commentary and risks
- Fiscal 2021 capital expenditure outlook was approximately $2.0bn. The filing provides no clear full-year sales or earnings guidance.
- Management cited supply-chain cost pressure, product-mix shifts, inventory shrink and weather-related damage as Q2 gross-margin headwinds, partly offset by product-cost management, pricing and higher credit revenue.
- The company reported $27m in additional COVID-related expenses in Q2 and reinstated mask requirements for associates amid the Delta variant surge. Management emphasized supply-chain modernization, omnichannel improvements, Pro customers and operating efficiency.
- Risks identified include economic and consumer-spending changes, housing activity, inflation and commodity prices, tariffs and trade policy, supplier availability and cost, interest and currency movements, and public-health developments. Management said risk factors had not materially changed from its latest annual report.
- Management reported covenant compliance and effective disclosure controls. It said ordinary-course legal proceedings were not expected to have a material adverse effect and reported no material off-balance-sheet financing arrangements.
Important facts for investors to verify
- Confirm the intended filing period: this is fiscal 2021 Q2, despite the request’s 2020 Q2 metadata.
- Assess whether the Q2 comparable-sales decline and lower customer transactions persist, and whether Pro sales and higher average tickets can offset them.
- Track gross-margin pressures, supply-chain costs, inventory levels and working-capital movements; first-half operating cash flow was materially below the prior year.
- Review the effects of debt issuance, the April 2022 term-loan maturity, ongoing buybacks and dividends on leverage, liquidity and the reported shareholders’ deficit.
- Compare actual capital expenditures with the approximately $2.0bn fiscal-year outlook and monitor COVID-19, supplier, economic and housing-related risks.