Lowe’s Companies, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended May 3, 2019, compared with the three months ended May 4, 2018. The request metadata says “2018 Q1,” but the filing itself covers 2019 Q1. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Lowe’s operates home-improvement retail stores and online sales channels. Management cited stronger seasonal demand, improved in-stock execution, and sales growth across most U.S. regions. The company had 2,002 stores at quarter-end, down from 2,154 a year earlier.
- Net sales were $17.741 billion, up 2.2%; comparable sales rose 3.5%, driven by comparable transactions up 2.2% and average ticket up 1.3%.
- Net earnings were $1.046 billion, up 5.9%. Diluted EPS was $1.31, up 9.7%; adjusted diluted EPS, excluding Mexico exit-related items, was $1.22 versus $1.19.
- Gross margin was 31.46%, down 165 basis points. Operating income was $1.417 billion, down 3.3%, and operating margin was 7.99%, down 45 basis points.
- SG&A was 21.77% of sales, improving 89 basis points; depreciation and amortization was 1.70% of sales, improving 31 basis points. Net margin was 5.90%, versus 5.69%.
- Return on invested capital, a non-GAAP measure, was 11.5%, down from 17.0%.
Cash flow, debt, and liquidity
- Operating cash flow was $2.137 billion, down from $3.429 billion, primarily due to working-capital changes. Capital expenditures were $205 million; investing cash outflow was $131 million.
- Cash and cash equivalents were $2.973 billion, versus $1.565 billion a year earlier. Current assets were $19.335 billion and current liabilities were $17.781 billion.
- Long-term debt, including current maturities, totaled $17.550 billion on the balance sheet. Lowe’s issued $3.0 billion of unsecured notes in April, with maturities in 2029 and 2049, and repaid $616 million of long-term debt during the quarter.
- Operating and finance lease liabilities totaled $4.985 billion following adoption of the new lease accounting standard. The company reported no quarter-end short-term borrowings and said it was in compliance with credit-facility covenants.
- Financing activities provided $446 million, including $2.972 billion of net long-term debt proceeds, offset in part by $826 million of share repurchases and $385 million of dividend payments.
Material changes and unusual items
- Gross margin pressure reflected cost increases and merchandising/pricing execution challenges (about 90 basis points), higher distribution and delivery costs (40 basis points), and product mix (30 basis points).
- Management attributed part of pricing difficulty to extensive merchandising leadership turnover and ineffective legacy pricing tools. It said it was improving pricing processes and investing in analytics.
- The decision to liquidate, rather than sell as an operating business, the Mexico retail operations generated an $82 million tax benefit, partly offset by $12 million of pretax operating costs. Management reported a net favorable earnings effect of $70 million, or $0.09 per diluted share.
- Adoption of lease accounting (ASC 842) added lease assets and liabilities to the balance sheet and reduced opening retained earnings by $263 million; the company said adoption did not materially affect earnings or cash flows.
- Shipping and handling cost presentation was changed retrospectively. The reclassification affected gross margin presentation but not operating income, net earnings, or diluted EPS.
Outlook, risks, and contingencies
- The filing does not provide a clear full-year sales or earnings guidance figure. Management forecast approximately $1.6 billion of 2019 capital expenditures and expected $4.0 billion of share repurchases in 2019, including first-quarter repurchases.
- Management said liquidity should be adequate over the next 12 months for operations, investment, debt repayment, dividends, and repurchases. It described gross-margin improvement as a priority for the balance of 2019.
- Risks highlighted include economic and housing-market conditions, consumer spending, tariffs and product costs, management and personnel changes, execution of strategic initiatives, competition, supply-chain and delivery costs, technology and cybersecurity, and regulatory changes.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors or market risks and no material off-balance-sheet financing arrangements.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing is for the quarter ended May 3, 2019, not 2018 Q1.
- Track whether pricing actions and merchandising changes reverse the 165-basis-point gross-margin decline.
- Assess recurring earnings excluding the Mexico-related tax benefit and associated wind-down costs.
- Monitor working-capital cash flow, debt maturities and costs, lease obligations, and the pace of buybacks relative to cash generation.
- Review the effect of store closures and the continuing transformation on comparable sales, store count, and return on invested capital.