Lowe’s Companies, Inc. — Form 10-Q Summary
Period: Fiscal third quarter ended October 28, 2016, with year-to-date results for the nine months ended that date. The request metadata says “2015 Q3,” but the filing itself covers 2016 Q3.
Business context and performance
Lowe’s operates home improvement retail stores. The quarter included the May 2016 acquisition of RONA, a Canadian retailer and distributor; reported store count was 2,119, including 245 RONA locations. Management said the acquisition is intended to expand Lowe’s Canadian presence. All amounts below are in U.S. dollars.
- Third-quarter net sales rose 9.6% to $15.739 billion, driven by RONA, new stores and comparable-sales growth. Comparable sales increased 2.7%; average ticket rose 2.2% and transactions 0.5%.
- Nine-month sales increased 7.4% to $49.233 billion; comparable sales rose 3.9%.
- Management reported solid demand from Pro customers and strength in Outdoor Power Equipment, Lawn & Garden, Lumber & Building Materials, Tools & Hardware and Appliances. Traffic was slow in August and September, then improved in October.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $15.739B | $14.360B | $49.233B | $45.838B |
| Gross margin | 34.35% | 34.75% | 34.59% | 34.87% |
| Net earnings | $379M | $736M | $2.430B | $2.535B |
| Diluted EPS | $0.43 | $0.80 | $2.73 | $2.70 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $5.269B | $4.546B |
- Third-quarter gross margin fell 40 basis points. SG&A rose 24.4% and increased to 25.98% of sales from 22.89%, reflecting impairment and project write-off charges as well as other cost pressures. Reported Q3 EBIT margin was 5.97%, versus 9.25%.
- Q3 net earnings included $462 million of non-cash pre-tax charges: $290 million related to the Australian joint venture wind-down, $96 million for canceled projects and $76 million for Orchard Supply Hardware impairments. Excluding these charges and their stated tax impact, adjusted net earnings were $775 million and adjusted diluted EPS was $0.88; these are non-GAAP measures.
- Nine-month operating cash flow increased to $5.269 billion. Investing cash outflow was $3.052 billion, primarily reflecting the RONA acquisition; financing cash outflow was $1.656 billion. Cash and cash equivalents ended at $960 million.
- At October 28, 2016, total debt was approximately $15.2 billion, comprising $800 million current maturities and $14.395 billion long-term debt. Long-term debt excluding capitalized lease obligations had an estimated fair value of $15.958 billion. Cash plus short-term investments totaled $1.083 billion; the filing reports current liabilities of $12.633 billion.
- Operating cash flow and access to capital markets were identified as primary liquidity sources. No borrowings or letters of credit were outstanding under the $1.75 billion revolving facility at quarter-end; the company reported compliance with its covenants.
Material changes, outlook and risks
- RONA acquisition consideration and settlement of its revolving debt totaled C$3.1 billion (approximately $2.4 billion); the cash flow statement reports $2.284 billion net cash used for the acquisition. RONA added $922 million of preliminary goodwill. In November, Lowe’s acquired RONA’s remaining preferred shares for C$166 million ($122 million).
- Long-term debt increased from $11.530 billion at October 30, 2015 to $14.395 billion at October 28, 2016. Lowe’s issued $3.3 billion of unsecured notes in April 2016. Interest expense increased year over year.
- Management described the home improvement industry outlook as solid but moderating, citing consumer conditions, existing-home sales and rising home prices. The filing does not provide a clear numerical full-year sales or earnings forecast. Fiscal 2016 capital expenditures were forecast at approximately $1.5 billion; share-repurchase assumptions were approximately $3.5 billion for the year.
- Lowe’s had $627 million remaining under its $5.0 billion repurchase authorization and paid $306 million in dividends declared during Q3. It expected operating and financing cash flows to cover operations, investment and shareholder returns over the next 12 months.
- The Australian joint-venture value remains in arbitration. Lowe’s recognizes the wind-down investment value and treats any additional recovery under its claim as a contingent asset until realized. The filing also notes potential integration, execution and benefit-realization risks from RONA, alongside economic, competitive, cybersecurity, labor, regulatory and impairment risks.
- Management said disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter. The company said there were no material changes to its previously disclosed risk factors. A subsidiary faced a proposed $167,213 environmental penalty, which management did not expect to materially affect the financial statements.
Important facts for investors to verify
- Confirm the applicable reporting period: the supplied metadata identifies 2015 Q3, while this filing reports 2016 Q3.
- Assess the composition, tax treatment and recurrence potential of the $462 million Q3 charges and the non-GAAP adjusted results.
- Track RONA integration, purchase-accounting effects on gross margin, and performance against expected Canadian growth and profitability benefits.
- Monitor the Australian joint-venture arbitration and potential recovery beyond the recorded wind-down value.
- Review debt maturities, interest costs, liquidity and the capacity to fund capital spending, dividends and repurchases while leverage has increased.