Lowe’s Companies, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata says 2019 Q3, but the filing covers the fiscal quarter ended October 30, 2020, and the nine months ended October 30, 2020. Comparisons below are against the corresponding 2019 periods.
Business context and reporting period
Lowe’s operates home-improvement retail stores and online channels. This unaudited Form 10-Q reports third-quarter and year-to-date fiscal 2020 results. Management attributed strong demand to customers investing in their homes during the COVID-19 pandemic; both DIY and Pro customers contributed.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $22.309bn | $17.388bn | $69.286bn | $56.121bn |
| Comparable sales growth | 30.1% | 2.1% | 25.6% | 2.4% |
| Gross margin | 32.72% | 32.44% | 33.36% | 32.01% |
| Operating income | $2.175bn | $1.558bn | $8.123bn | $5.356bn |
| Net earnings | $692m | $1.049bn | $4.857bn | $3.771bn |
| Diluted EPS | $0.91 | $1.36 | $6.41 | $4.80 |
- Q3 sales rose 28.3%; comparable sales increased 30.1%, driven by 16.4% growth in comparable transactions and 13.7% growth in average ticket. Online sales contributed approximately 485 basis points to Q3 comparable sales growth.
- Q3 GAAP earnings and EPS included a $1.06bn pretax loss on debt extinguishment. Excluding disclosed adjustments, adjusted diluted EPS was $1.98 versus $1.41, up 40.4%. This is a company-defined non-GAAP measure.
- Q3 gross margin improved 28 basis points. Pricing and promotional improvements and favorable product mix were partly offset by lower credit revenue, inventory shrink, and supply-chain costs.
- For the first nine months, operating cash flow was $11.485bn, versus $4.111bn; capital expenditures were $1.172bn. Cash and cash equivalents at October 30 were $8.249bn.
- At October 30, total debt, including current maturities, was approximately $21.8bn, compared with approximately $17.2bn at November 1, 2019. Shareholders’ equity was $4.073bn. No short-term borrowings or commercial paper were outstanding at quarter-end; revolving credit availability was $3.0bn.
Material changes, liquidity and capital allocation
- Q3 net earnings declined 34.1% year over year, primarily reflecting the debt-extinguishment loss; adjusted diluted EPS increased 40.4%. For the first nine months, net earnings increased 28.8%.
- Operating cash flow benefited from higher earnings and working-capital movements, notably a $5.1bn increase in accounts payable. Inventory purchases reduced operating cash flow by $2.5bn. The filing therefore shows a substantial working-capital contribution to cash generation.
- Lowe’s issued $8.0bn of unsecured notes in 2020, including $4.0bn in October, and used the October financing in part to tender for and retire $3.0bn of higher-coupon notes. The tender generated the $1.06bn pretax extinguishment loss; management said the refinancing was intended to reduce long-term interest expense.
- The company reinstated share repurchases in Q3 after suspending them in Q1. It repurchased $1.567bn of shares in the first nine months and had $8.1bn remaining under its authorization at October 30. Nine-month dividends declared were $1.70 per share.
- COVID-19-related associate support, safety and other measures contributed $1.0bn of SG&A expense in the first nine months, including $288m in Q3. The company also deferred $407m of qualifying employer payroll taxes under the CARES Act, payable over 2021 and 2022.
Outlook, commentary and risks
- Management expected fiscal 2020 capital expenditures of approximately $1.7bn. It expected the U.S. store reset to be complete in more than 90% of U.S. stores in Q4, with approximately $150m of related Q4 expense; Q3 reset expense was $100m.
- Management highlighted continued investment in supply-chain infrastructure, omnichannel capabilities and online shopping. It said visibility into longer-term demand and the duration of customer demand remained limited, as did visibility into potential supply-chain constraints.
- COVID-19 could continue to affect operations, customer demand and suppliers. Other identified risks include economic conditions, consumer spending, housing turnover, credit availability, interest rates, currency and commodity movements, tariffs, and availability and cost of goods.
- The filing reports no material long-lived asset impairment from the company’s quarterly assessment. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The company reported compliance with credit-agreement covenants and effective disclosure controls.
Important facts for investors to verify
- Confirm the reporting period: this filing is for Q3 fiscal 2020, not Q3 2019 as stated in the request metadata.
- Assess how much of the sharp sales and cash-flow growth is sustained, particularly given pandemic-driven demand and the sizable contribution from working-capital changes.
- Review the $1.06bn debt-extinguishment charge and compare GAAP results with management’s adjusted EPS, including the exclusions used in that non-GAAP measure.
- Monitor debt levels, refinancing benefits and future interest costs, alongside planned repurchases, dividends and capital spending.
- Track COVID-19-related costs, payroll-tax deferral repayments, store-reset spending and any changes to management’s demand or supply-chain outlook.