Lowe’s Companies, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the unaudited three months ended May 5, 2017, not 2016 Q1 as stated in the request metadata. Comparisons are with the three months ended April 29, 2016; the fiscal-calendar shift affects comparability.
Business context and results
Lowe’s operates home-improvement stores. First-quarter sales growth reflected the RONA acquisition, the fiscal-calendar shift, comparable sales growth and new stores. The company reported 2,137 stores at quarter-end, including 246 RONA stores.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $16.860 billion | $15.234 billion |
| Comparable sales | +1.9% | +7.3% |
| Gross margin | 34.40% | 35.04% |
| Operating income / margin | $1.559 billion / 9.25% | $1.586 billion / 10.42% |
| Net earnings | $602 million | $884 million |
| Diluted EPS | $0.70 | $0.98 |
| Adjusted diluted EPS (non-GAAP) | $1.03 | $0.87 |
| Operating cash flow | $3.295 billion | $3.220 billion |
| Capital expenditures | $202 million | $208 million |
Financial position, liquidity and capital allocation
- At May 5, 2017, cash and cash equivalents were $1.963 billion; current assets were $15.276 billion and current liabilities $14.686 billion.
- Total debt shown on the balance sheet was $16.065 billion: $295 million current maturities and $15.770 billion long-term debt. Total liabilities were $32.082 billion and equity $5.531 billion.
- Cash from operations increased modestly, while working-capital movements included a $1.808 billion inventory outflow and a $3.291 billion accounts-payable inflow.
- Financing cash outflow was $1.605 billion, including $1.237 billion of share repurchases and $304 million of dividend payments. The company had $3.8 billion remaining under its $5.0 billion repurchase authorization.
- The company issued $3.0 billion of fixed-rate notes at 3.10% due 2027 and 4.05% due 2047, and tendered for $1.6 billion principal amount of existing notes. It recorded a $464 million pretax extinguishment loss. A $250 million debt maturity was scheduled for September 2017.
- A $1.75 billion revolving credit facility was available through November 2021; there were no facility or commercial-paper borrowings at quarter-end, and the company reported covenant compliance.
Changes, outlook and notable items
- Sales rose 10.7%, but comparable sales growth slowed to 1.9%. Comparable average ticket rose 3.5%, while transactions declined 1.5%. Management attributed softness in some outdoor categories to unfavorable weather.
- Gross margin fell 64 basis points, citing RONA mix, calendar-related product mix, promotions and pricing investments, and lumber inflation. SG&A rose 73 basis points as a percentage of sales; prior-year foreign-exchange gains were a significant comparison factor. Operating income declined 1.7%.
- Reported EPS included the debt-extinguishment loss; prior-year EPS included a $160 million unrealized foreign-currency option gain. Excluding those items, management-reported adjusted EPS increased 18.4%. Adoption of share-based compensation accounting guidance also generated $23 million of excess tax benefits, or $0.03 per diluted share.
- Management expected solid home-improvement industry gains, supported by job and income growth, consumer spending and housing conditions, while emphasizing productivity, Pro-customer services and omnichannel investment. Fiscal 2017 capital spending was forecast at approximately $1.4 billion; full-year share repurchases were assumed at approximately $3.5 billion.
- On May 12, 2017, Lowe’s agreed to acquire Maintenance Supply Headquarters for approximately $512 million, subject to regulatory approval and customary conditions; closing was expected in Q2 and funding from operating cash.
- Management said operating cash flow and financing access should cover operations, investment, acquisitions and shareholder returns over the next 12 months. Risks discussed include economic and housing-market changes, competition, execution of technology and operating initiatives, cybersecurity, commodity and supply costs, and acquisition integration. The filing reported no material change in risk factors and no legal proceedings expected to materially affect the financial statements.
Most important facts to verify
- Confirm the requested “2016 Q1” label against the actual filing period: quarter ended May 5, 2017.
- Assess the $464 million debt-tender loss and distinguish GAAP EPS from management’s adjusted, non-GAAP EPS.
- Evaluate comparable-sales momentum, margin pressure, and the role of calendar timing, weather, and RONA in reported growth.
- Review working-capital effects on operating cash flow, planned repurchases, debt maturities, and the proposed $512 million acquisition’s completion and integration.
- Note that the interim financial statements were reviewed by the independent accountant, not presented as an audit opinion on the quarter.