Lowe’s Companies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended August 1, 2014, and the six months then ended, compared primarily with the periods ended August 2, 2013. This differs from the request metadata’s “2013 Q2.” Dollar figures below are in millions unless otherwise noted.
Business context and results
Lowe’s operates home improvement stores. Management attributed quarterly growth to stronger weather-driven outdoor sales, improvements across product categories, and continued strength in its Pro Services business. The company had 1,837 stores at quarter-end, including 73 Orchard Supply Hardware stores.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $16,599 | $15,711 | $30,001 | $28,800 |
| Comparable sales growth | 4.4% | 9.6% | 2.8% | 4.6% |
| Gross margin | 34.55% | 34.35% | 34.98% | 34.56% |
| Operating margin (EBIT) | 10.96% | 10.29% | 9.62% | 9.02% |
| Net earnings | $1,039 | $941 | $1,663 | $1,482 |
| Diluted EPS | $1.04 | $0.88 | $1.64 | $1.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3,923 | $3,356 |
Financial position, cash flow, and capital allocation
- At August 1, 2014, cash and cash equivalents were $1,039; current assets were $11,075 and current liabilities were $10,013.
- Total debt was approximately $10,117, comprising $54 of current maturities and $10,063 of long-term debt. Long-term debt, excluding current maturities, had a reported fair value of $10,841.
- Six-month investing cash outflow was $525, including $384 of capital expenditures. Financing cash outflow was $2,751, including $2,051 of share repurchases and $369 of dividend payments. Cash increased by $648 from the fiscal-year start.
- The company repurchased $2.0 billion of shares under its program during the first six months and paid $750 million under an accelerated repurchase agreement. A further 2.3 million shares under that agreement were delivered after quarter-end. Remaining repurchase authorization was $4.3 billion.
- Operating cash flow increased year over year, primarily due to working-capital changes and higher earnings. The company said operating and financing cash flows should be adequate for anticipated needs over the next 12 months.
Changes versus the prior comparable periods
- Q2 sales increased 5.7%, net earnings rose 10.4%, and diluted EPS increased 18.2%. Comparable sales growth was lower than the prior-year quarter’s 9.6%.
- For the first six months, sales rose 4.2%, net earnings increased 12.2%, and diluted EPS increased to $1.64 from $1.36. Comparable sales growth eased to 2.8% from 4.6%.
- Gross margin improved 20 basis points in Q2 and 42 basis points for the six-month period, primarily due to the Value Improvement program. SG&A as a share of sales improved, while net interest expense increased, primarily reflecting $1 billion of unsecured notes issued in September 2013.
- Long-term debt excluding current maturities increased to $10,063 from $9,015 a year earlier. Shareholders’ equity declined to $11,240 from $13,062, alongside significant share repurchases and dividends.
Outlook, commentary, and risks
- Fiscal 2014 guidance, as of August 20, 2014: total sales growth of approximately 4.5%; comparable sales growth of approximately 3.5%; operating-margin expansion of approximately 65 basis points; effective tax rate of approximately 37.2%; and diluted EPS of approximately $2.63.
- Management expected approximately $3.4 billion of fiscal-year share repurchases, approximately $1.2 billion of capital expenditures, and the opening of about 10 home improvement stores and five Orchard stores.
- Management cited improving employment, income, and consumer spending, but described housing indicators as mixed. It noted that existing home sales had declined overall while sales excluding distressed transactions showed a slight increase.
- Risks include economic and housing-market changes, consumer spending and credit conditions, competition, weather, costs and availability of products and services, regulation, technology and execution challenges, and possible additional store impairments. Three of eight locations tested for impairment were impaired, resulting in a $26 million six-month charge; a 10% reduction in projected sales for the five recoverable locations would have produced an additional $62 million impairment.
- The company reported no material change in risk factors or market risk from its latest Form 10-K. Its interim financial statements were reviewed by Deloitte & Touche, not audited.
Important facts for investors to verify
- Confirm the correct intended period: this filing is for Q2 2014, not Q2 2013.
- Track comparable-sales trends against the prior-year comparison and assess whether the stated fiscal 2014 guidance was subsequently achieved or revised.
- Review debt levels, interest costs, credit-facility covenants, and the capacity to fund planned investment, dividends, and buybacks.
- Assess the sustainability of margin gains and operating cash flow, including the contribution from working-capital movements.
- Monitor impairment assumptions and store performance, as well as the impact of weather, housing conditions, and consumer demand.