Lowe’s Companies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended October 29, 2010. The request metadata says “2009 Q3,” but the filing itself is for 2010 Q3. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
- Third-quarter sales: $11.587 billion, up 1.9% year over year; comparable-store sales rose 0.2%. Net earnings were $404 million, up 17.5%, and diluted EPS was $0.29 versus $0.23.
- Nine-month results: Sales were $38.335 billion, up 3.5%; net earnings were $1.725 billion, up 9.3%; diluted EPS was $1.21 versus $1.07.
- Margins: Q3 gross margin was 35.05%, up 85 basis points, and operating margin was 6.31%, up 99 basis points. For nine months, gross margin was 35.02%, up 18 basis points, and operating margin was 7.87%, up 49 basis points.
- Cash flow: Nine-month operating cash flow was $3.833 billion, down from $4.367 billion. Investing used $1.868 billion; financing used $1.521 billion. Ending cash was $1.078 billion.
- Liquidity and debt: Current assets were $10.701 billion and current liabilities $8.008 billion. Long-term debt, including current maturities, was approximately $5.575 billion, versus $5.077 billion a year earlier. The company had no borrowings or letters of credit outstanding under its $1.75 billion senior facility and was in compliance with its covenants.
- Capital returns: The company repurchased $1.6 billion of shares in the first nine months and paid $418 million in cash dividends. Remaining repurchase authorization was $3.4 billion.
Changes versus prior comparable periods
- Sales and earnings improved year over year, while comparable-store sales remained nearly flat in Q3 following a 7.5% decline in the prior-year quarter.
- Management attributed the gross-margin improvement to seasonal sell-through, pricing initiatives, private-label mix, and commodity inflation. Q3 SG&A declined slightly as a percentage of sales, while net interest expense increased.
- Operating cash flow declined, primarily due to working-capital changes, especially accounts payable and inventory. Property acquisitions fell 28% as store expansion slowed.
- Property, net, decreased to $22.180 billion from $22.557 billion a year earlier. Total liabilities increased to $15.449 billion from $14.929 billion.
Outlook, risks, and notable items
- Management outlook, stated November 15, 2010: Q4 sales growth of 2%–4%, comparable-store sales growth of 0%–2%, operating-margin expansion of about 80 basis points, and diluted EPS of $0.16–$0.19. For fiscal 2010, expected sales growth was 3%–4%, comparable-store sales growth 1%–2%, operating-margin expansion 50–60 basis points, and diluted EPS $1.37–$1.40. These estimates excluded future share repurchases.
- Management cited weak employment and housing conditions, cautious customers, delayed discretionary projects, and unusually hot weather as sales headwinds. It said it did not expect consistent improvement in core demand until labor and housing fundamentals improved.
- Q3 included $30 million of operating-store impairment charges; nine-month charges were $36 million. Four of 15 stores tested for impairment were impaired. Management disclosed sensitivity to lower projected sales at certain stores.
- In April 2010, Lowe’s issued $1.0 billion of notes, partly using proceeds to repay $500 million of 8.25% notes due June 2010. On November 22, after quarter-end, it issued another $1.0 billion of notes for general corporate purposes, including capital needs and share repurchases.
- The company settled an air-quality matter with the South Coast Air Quality Management District for $2.45 million in civil penalties and $300,000 in investigation costs. Other legal proceedings were described as ordinary-course matters not believed to pose a material financial-statement risk.
- Key risks include economic and housing weakness, consumer spending and credit conditions, competition, commodity costs, weather, regulation, execution of store expansion, and possible additional impairment charges. Management reported no material change in risk factors or market risk and concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the intended reporting period: this filing reports Q3 2010, despite the request metadata stating 2009 Q3.
- Compare subsequent sales, comparable-store sales, margins, and EPS with the November 2010 guidance; the filing’s outlook is not a guarantee of results.
- Assess whether operating cash flow and working-capital trends support planned capital spending, debt service, and repurchases.
- Review the impact of the $2.0 billion of 2010 note issuances, debt maturities, and ongoing share repurchases on leverage and liquidity.
- Monitor store impairment assumptions and the disclosed sensitivity of impairment estimates to lower sales projections.