Business context and reporting period
This is Lowe’s Companies, Inc.’s unaudited Form 10-Q for the fiscal quarter ended November 3, 2017, comparing the three- and nine-month periods with the periods ended October 28, 2016. The request metadata labels the period “2016 Q3,” but the filing itself reports fiscal 2017 Q3.
All dollar amounts below are in millions unless otherwise noted. The interim statements were reviewed by Deloitte & Touche, not audited.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $16,770 | $15,739 | $53,125 | $49,233 |
| Gross margin | 34.07% | 34.35% | 34.23% | 34.59% |
| Operating income | $1,547 | $939 | $5,488 | $4,577 |
| Net earnings | $872 | $379 | $2,893 | $2,430 |
| Diluted EPS | $1.05 | $0.43 | $3.42 | $2.73 |
- Q3 sales rose 6.5%; comparable sales increased 5.7%, comprising a 4.8% increase in comparable average ticket and a 0.9% increase in customer transactions. Online sales contributed approximately 95 basis points to Q3 comparable sales.
- Q3 operating margin was 9.23%, up from 5.97%; net margin was 5.20%, up from 2.41%. Q3 diluted EPS was $1.05 versus prior-year adjusted EPS of $0.88, a more informative comparison given prior-year charges.
- Q3 gross margin declined 28 basis points, primarily due to competitive actions and product mix. For the first nine months, gross margin declined 36 basis points.
- Cash from operations for the first nine months was $5,372, versus $5,269. Capital expenditures were $787; net cash used in investing was $1,072 and net cash used in financing was $4,130. Cash increased $185 to $743.
- At November 3, 2017, total assets were $36,783 and total liabilities were $31,041. Current assets of $14,009 exceeded current liabilities of $13,738. Inventory was $12,393.
- Debt comprised $171 of short-term borrowings, $297 of current maturities and $15,570 of long-term debt, or approximately $16.0 billion in total. Total equity was $5,742.
Material changes versus the prior comparable period
- Q3 net earnings increased 130.3%, but the comparison was affected by $462 million of prior-year non-cash pre-tax charges: an Australian joint-venture impairment, canceled project write-offs, and Orchard Supply Hardware impairments. Those items added $0.45 per share to prior-year adjusted Q3 EPS of $0.88.
- Nine-month net earnings increased 19.1%. Results included a $464 million loss on extinguishment of debt in 2017, following the tender and retirement of $1.6 billion of notes.
- Hurricanes Harvey and Irma contributed approximately 140 basis points to Q3 comparable sales. All U.S. regions and product categories recorded comparable-sales increases; Lumber & Building Materials, Appliances, and Rough Plumbing & Electrical were particularly strong.
- First-nine-month sales growth included contributions from acquisitions and new stores; the filing attributes 2.6% of growth to RONA. Maintenance Supply Headquarters was acquired for an aggregate purchase price of $513 million in June 2017.
- Share repurchases reduced weighted-average shares. The company repurchased $3,041 of stock during the first nine months and had $2.1 billion remaining under its $5.0 billion authorization.
Outlook, commentary, and risks
- Management expects operating and financing cash flows to cover operating needs, investment, acquisitions if any, dividends, and repurchases over the next 12 months. Fiscal 2017 capital spending was forecast at approximately $1.2 billion; fiscal-year share repurchases were assumed at approximately $3.5 billion.
- The filing does not provide a clear full-year sales or earnings forecast in the supplied text. Management highlighted continued focus on Pro customers, omni-channel capabilities, customer experience, operating discipline, and the planned introduction of Craftsman products beginning in the second half of 2018.
- The company issued $3.0 billion of fixed-rate notes in May 2017, including $1.5 billion due in 2027 at 3.100% and $1.5 billion due in 2047 at 4.050%. It used proceeds in part to fund a tender offer that cost approximately $2.0 billion to retire $1.6 billion of higher-coupon debt.
- Lowe’s reported compliance with its credit-facility covenants. Its $1.75 billion revolving facility expires in November 2021; $171 million of commercial paper was outstanding, with no facility borrowings or letters of credit. Management reported stable outlooks from S&P and Moody’s.
- Principal risks cited include economic and housing-market conditions, competition, commodity and product availability, execution of technology and omni-channel initiatives, cybersecurity, staffing, regulation, reputation and service quality, supplier and installer relationships, and integration of acquisitions. The filing reported no material change in risk factors and no material adverse effect expected from ordinary-course legal proceedings.
- Management said the forthcoming lease accounting standard is expected to materially affect the balance sheet. Revenue recognition adoption was planned for fiscal 2018; management did not expect a material overall financial-statement impact, but anticipated changes to the timing of stored-value-card breakage and installation revenue and to sales-return presentation.
Important facts for investors to verify
- Confirm the reporting period: the filing is for fiscal Q3 2017, despite the request metadata’s “2016 Q3” label.
- Assess earnings quality by separating the prior-year impairment and project charges from current operating performance, and account for the 2017 debt-extinguishment loss in year-to-date comparisons.
- Evaluate comparable-sales durability after the approximately 140-basis-point hurricane benefit and the contribution from online sales.
- Track gross-margin pressure from competition and product mix against management’s pricing and promotional initiatives.
- Review debt, planned capital spending and shareholder returns alongside working-capital movements, particularly the increase in inventory and accounts payable.
- Monitor integration and expected benefits of Maintenance Supply Headquarters and other acquisitions, as well as the balance-sheet impact of lease-standard adoption.