Lowe’s Companies, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2019 Q1,” but this filing reports the fiscal quarter ended May 1, 2020, compared with the quarter ended May 3, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted otherwise.
Business context and results
Lowe’s is a home-improvement retailer. First-quarter 2020 sales and earnings rose substantially year over year amid strong customer demand during the COVID-19 pandemic. Comparable sales increased 11.2%, versus 3.2% in the prior-year quarter; all 15 U.S. regions and 14 of 15 product categories were positive.
- Net sales: $19.675 billion, up 10.9%; comparable average ticket rose 9.6% and comparable transactions rose 1.6%.
- Gross margin: $6.513 billion, or 33.10% of sales, up 164 basis points from 31.46%.
- Operating income: $1.991 billion, up 40.5%; operating margin was 10.12%, versus 7.99%.
- Net earnings: $1.337 billion, up 27.8%; diluted EPS was $1.76, versus $1.31. Adjusted diluted EPS, a non-GAAP measure, was $1.77 versus $1.22.
- Net cash from operations: $4.450 billion, versus $2.137 billion. Capital expenditures were $328 million, versus $205 million.
- Cash and cash equivalents: $5.955 billion at May 1, 2020, versus $2.973 billion a year earlier and $716 million at January 31, 2020.
Margins, liquidity and debt
- Gross-margin improvement reflected approximately 110 basis points of rate improvement, including mitigation strategies partly offset by tariff pressure, and 55 basis points from favorable product mix.
- SG&A was 21.32% of sales, improving 45 basis points year over year. COVID-related associate support costs partly offset leverage from higher sales and other factors.
- Total debt-related balances included $1.0 billion of short-term borrowings and $20.804 billion of long-term debt and current maturities. Long-term debt excluding current maturities was $20.200 billion, compared with $17.550 billion a year earlier. Interest expense, net, rose to $205 million from $162 million.
- In March, Lowe’s issued $4.0 billion of fixed-rate notes, with maturities from 2025 to 2050 and coupons from 4.000% to 5.125%. It also had a $1.0 billion term loan outstanding, maturing in December 2020. Revolving credit availability was $3.0 billion; the company reported covenant compliance.
- Management said liquidity sources were adequate for operations, investment, debt repayment and dividends over the next 12 months. Fiscal 2020 capital expenditures were forecast at approximately $1.6 billion.
Material changes and capital returns
- Operating cash flow benefited from higher earnings and working-capital movements. Inventory increased by $1.2 billion during the quarter, versus $2.5 billion in the prior-year quarter; accounts payable and other operating liabilities also supported cash flow.
- Lowe’s repurchased $947 million of shares and paid $420 million in dividends during the quarter. It suspended share repurchases and did not anticipate further repurchases in fiscal 2020 beyond first-quarter activity; the quarterly dividend was $0.55 per share.
- The effective tax rate increased to 25.1% from 16.6%, primarily because the prior-year period included an $82 million tax benefit related to the planned exit of Mexico retail operations.
Outlook, risks and unusual items
- Management provided no specific financial forecast in this filing and said visibility into future trends was limited because the duration, spread and economic effects of COVID-19 were uncertain.
- The company incurred $342 million of COVID-19-related costs for associate, vendor and community support, including special payments, temporary wage increases, and paid leave. It also adopted safety measures and adjusted store operations.
- Demand was particularly strong in essential cleaning products, home necessities, DIY repair, spring categories, paint and lumber; installation-heavy Kitchens & Bath was weaker as customers were reluctant to allow installers into their homes.
- Management cited continued investment in the business and near-term prioritization of omni-channel capabilities, including a planned second-quarter Google Cloud migration.
- Key risks include pandemic-related changes in demand and costs, supplier or fulfillment disruption, tariffs and trade policy, competition, cybersecurity and execution of strategic initiatives. The filing states that legal proceedings in the ordinary course are not expected to have a material adverse effect.
- Other notable items: $9 million of pre-tax Canada restructuring costs; the prior-year quarter included $12 million of Mexico exit operating losses in addition to the tax benefit.
Important facts for investors to verify
- Confirm the reporting period: this is the quarter ended May 1, 2020, not 2019 Q1.
- Assess whether pandemic-driven comparable-sales growth and favorable product mix persist, and how COVID-related costs affect margins.
- Review cash-flow quality, particularly the contribution from working capital, and the company’s elevated debt following the $4.0 billion note issuance.
- Monitor the December 2020 term-loan maturity, available revolving credit and management’s liquidity assumptions.
- Track capital spending, dividends and the suspension of share repurchases, alongside the uncertain outlook and supply-chain risks.
- Note that adjusted EPS and ROIC are non-GAAP measures; compare them with the company’s GAAP results and stated calculation methods.