Lowe’s Companies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 31, 2020, compared with the periods ended August 2, 2019. The request metadata says “2019 Q2,” but the filing is for 2020 Q2.
Business context and results
Lowe’s is a home-improvement retailer. Management attributed exceptional second-quarter demand to consumers focusing on their homes during the COVID-19 pandemic. Comparable sales rose broadly across product categories, channels and geographies.
- Quarter: Net sales increased 30.1% to $27.3 billion; comparable sales rose 34.2%. Customer transactions increased 22.6% and comparable average ticket increased 11.6%. Online sales contributed approximately 650 basis points to comparable sales growth.
- Six months: Net sales increased 21.3% to $47.0 billion; comparable sales rose 23.6%, driven by higher transactions and average ticket.
Financial metrics
| Metric | Three months ended July 31, 2020 | Three months ended August 2, 2019 | Six months ended July 31, 2020 | Six months ended August 2, 2019 |
|---|---|---|---|---|
| Net sales | $27.302 billion | $20.992 billion | $46.977 billion | $38.733 billion |
| Gross margin | $9.304 billion; 34.08% | $6.740 billion; 32.11% | $15.816 billion; 33.67% | $12.321 billion; 31.81% |
| Operating income | $3.957 billion; 14.49% of sales | $2.381 billion; 11.34% | $5.948 billion; 12.66% | $3.798 billion; 9.81% |
| Net earnings | $2.828 billion | $1.676 billion | $4.165 billion | $2.722 billion |
| Diluted EPS | $3.74 | $2.14 | $5.50 | $3.44 |
| Net interest expense | $219 million | $169 million | $423 million | $331 million |
- Quarterly gross margin expanded 197 basis points; management cited pricing and promotional improvements and favorable product mix. SG&A fell to 18.39% of sales from 19.29%, despite COVID-related costs. Quarterly net earnings rose 68.8% and diluted EPS rose 74.9% year over year.
- For the six months, operating cash flow was $11.752 billion versus $3.583 billion. Capital expenditures were $710 million versus $526 million. Cash dividends paid were $836 million; share repurchases were $966 million.
- At July 31, cash and cash equivalents were $11.641 billion and short-term investments were $1.085 billion, versus cash of $1.796 billion and short-term investments of $275 million a year earlier. Current assets were $27.717 billion and current liabilities $21.370 billion.
- Debt at July 31 included $1.0 billion in short-term borrowings, $609 million in current maturities of long-term debt and $20.197 billion of long-term debt. Cash-flow statement financing included $3.961 billion of net debt issuance proceeds. The company reported $3.0 billion of undrawn revolving-credit availability and compliance with credit-agreement covenants.
Material changes and unusual items
- COVID-19 associate support, safety measures and community contributions added $428 million of SG&A expense in the quarter and $740 million in the first half. Management separately reported $461 million of incremental second-quarter investment in associate, community and store-safety support.
- In March 2020, Lowe’s issued $4.0 billion of fixed-rate unsecured notes, with maturities from 2025 to 2050 and stated rates of 4.000% to 5.125%. Interest expense increased, in part, because of this issuance and the $1.0 billion term loan.
- Operating cash flow benefited materially from working capital: accounts payable increased $5.259 billion and other operating liabilities increased $1.825 billion in the first half. Management linked the payable increase largely to inventory purchases supporting high demand; it also cited deferred revenue, accrued compensation and deferred payroll taxes.
- The company suspended share repurchases during the first quarter because of pandemic uncertainty. It had $8.7 billion remaining under its authorization at July 31. Quarterly dividends declared were $0.55 per share.
- Adjusted diluted EPS, a non-GAAP measure, was $3.75 for the quarter versus $2.15 a year earlier; adjustments were small and related to Canada restructuring and prior-year Mexico exit costs.
Outlook, risks and contingencies
Management did not provide a specific sales or earnings forecast and said visibility into future trends was limited, with a wide range of potential outcomes. It forecast approximately $1.6 billion of capital expenditures for fiscal 2020. Planned investments included store merchandising resets and, over the following 18 months, 50 cross-dock delivery terminals, seven bulk distribution centers and four e-commerce fulfillment centers.
- Management warned that COVID-19 could affect customer demand, operations and suppliers; strong demand and pandemic-related production impacts had caused replenishment delays, particularly in Seasonal & Outdoor Living, Appliances and Lumber.
- Other disclosed risks include economic and consumer-spending changes, housing-market conditions, tariffs, commodity and energy costs, supplier availability, currency and interest-rate movements, and management or key-person changes.
- The company deferred $251 million of qualifying employer payroll taxes under the CARES Act, payable over 2021 and 2022. It reported no material long-lived-asset impairment from its quarterly assessment.
- Lowe’s said ordinary-course legal matters were not expected, individually or in aggregate, to materially adversely affect results, financial position or cash flows. The auditor’s interim review found no material modifications needed; it was a review, not an audit.
Important facts for investors to verify
- Confirm the intended period: the supplied filing covers Q2 2020, not Q2 2019.
- Assess whether unusually strong pandemic-era comparable sales and margins can persist, and how deferred sales affect comparisons under the changed comparable-sales presentation.
- Track replenishment constraints, inventory availability and the sustainability of gross-margin improvement and elevated demand.
- Evaluate the quality and durability of operating cash flow, particularly the substantial contribution from accounts payable and other operating liabilities.
- Review debt maturities, interest costs, liquidity, the December 2020 term-loan maturity and the timing of any resumption of share repurchases.
- Compare actual capital spending and infrastructure plans with management’s approximately $1.6 billion fiscal-year forecast.