Lowe’s Companies, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2009 Q2, but the supplied filing is for the quarter ended July 30, 2010 (fiscal 2010 Q2), with comparisons to the quarter ended July 31, 2009. Filed August 31, 2010. Financial statements are unaudited and were reviewed by Deloitte & Touche.
Business context and results
Lowe’s operates home-improvement stores. Management described a sluggish economic recovery, with continued weakness and uncertainty in labor and housing markets. Customers showed some return to discretionary projects, but quarterly sales were below management’s expectations.
- Quarterly net sales were $14.361 billion, up 3.7%; comparable-store sales rose 1.6%. Total customer transactions increased 1.4% and average ticket increased 2.3%.
- Net earnings were $832 million, up 9.6%; diluted EPS was $0.58, versus $0.51. Gross margin was 34.86%, up 2 basis points; EBIT margin was 9.88%, up 54 basis points.
- For the six months, sales were $26.749 billion, up 4.2%; comparable-store sales increased 2.0%. Net earnings were $1.321 billion, up 7.0%, and diluted EPS was $0.92 versus $0.84. Gross margin was 35.01%, down 11 basis points; EBIT margin was 8.55%, up 25 basis points.
Cash flow, liquidity and capital
- Six-month operating cash flow was $2.782 billion, down from $3.716 billion, principally reflecting inventory growth and other working-capital changes. Investing cash outflow was $1.468 billion; financing cash outflow was $756 million. Cash and equivalents ended at $1.191 billion.
- At July 30, 2010, current assets were $11.121 billion and current liabilities $7.993 billion. Long-term debt was $5.533 billion, with $37 million of current maturities; total liabilities were $15.420 billion.
- Lowe’s issued $1.0 billion of senior notes in April: $500 million at 4.625% due 2020 and $500 million at 5.800% due 2040. A portion of proceeds repaid $500 million of 8.25% notes due June 2010. The $1.75 billion credit facility had no borrowings or letters of credit outstanding, and the company reported compliance with its covenants.
- First-half share repurchases totaled $1.0 billion; $4.0 billion remained authorized. Cash dividends paid were $261 million. The company forecast 2010 capital expenditures of approximately $2.15 billion, including lease commitments.
Changes, outlook and management commentary
- Compared with 2009, sales and earnings improved, aided by positive comparable-store sales and expense leverage. Second-quarter gross margin was nearly flat year over year; the six-month rate declined, primarily due to product mix.
- Appliance sales benefited from the government-sponsored Cash for Appliances program, which management estimated added about 25 basis points to quarterly comparable-store sales. Extreme heat helped cooling-related categories but hurt nursery and lawn-and-landscape traffic.
- As of August 16, management expected fiscal Q3 sales growth of 3%–5%, comparable-store sales growth of 1%–3%, operating-margin improvement of about 120 basis points, and diluted EPS of $0.28–$0.32. For fiscal 2010, it expected sales growth of about 4%, comparable-store sales growth of about 2%, operating-margin improvement of about 70 basis points, and diluted EPS of $1.38–$1.45. These outlooks excluded future share repurchases.
- Management cited ongoing risks from weak employment and housing markets, consumer spending, weather, competition, credit availability, costs and regulation. It cautioned that forecasts are uncertain and interim results may not indicate full-year results.
Contingencies and unusual items
- One operating store was impaired, producing a $7 million charge in the quarter and first half; no operating-store impairment charge was recorded in the comparable 2009 periods. Nine stores were evaluated for impairment during the first half. Management noted that a 10% reduction in projected sales could materially increase estimated impairment losses for certain evaluated stores.
- The California South Coast Air Quality Management District was investigating whether a subsidiary’s stores sold certain products exceeding limits on volatile organic compounds. The company said it was cooperating and did not believe the legal proceedings, including this matter, posed a material financial-statement risk.
- Management reported effective disclosure controls as of July 30, 2010, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied 10-Q covers fiscal 2010 Q2, not 2009 Q2.
- Compare reported performance with the dated Q3 and full-year outlook, recognizing that it excluded future repurchases.
- Assess the sustainability of operating cash flow given the inventory and working-capital usage.
- Review debt maturities, interest costs, planned capital spending, and the pace and funding of share repurchases.
- Monitor housing and labor-market conditions, store impairment assumptions, and the outcome of the environmental-products investigation.