Lowe’s Companies, Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says 2012 Q2, but the filing is for the quarter ended August 2, 2013, with comparisons to the quarter ended August 3, 2012. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and period
Lowe’s operates home-improvement retail stores. The filing covers the second quarter and first six months of fiscal 2013. At quarter-end the company had 1,758 stores. Management attributed stronger sales to home-improvement demand, housing turnover and job growth, recovery of weather-delayed sales, and execution of strategic initiatives.
Key financial metrics
| Metric | Three months ended Aug. 2, 2013 | Six months ended Aug. 2, 2013 |
|---|---|---|
| Net sales | $15.711 billion; up 10.3% | $28.800 billion; up 5.1% |
| Comparable sales | Up 9.6% | Up 4.6% |
| Gross margin | 34.35%, up 42 basis points | 34.56%, up 26 basis points |
| Net earnings | $941 million; up 25.9% | $1.482 billion; up 16.2% |
| Diluted EPS | $0.88; up 37.5% | $1.36, versus $1.07 |
| EBIT margin | 10.29%, up 121 basis points | 9.02%, up 82 basis points |
For the quarter, comparable transactions increased 5.0% and average ticket increased 4.4%. For the six-month period, comparable transactions rose 0.8% and average ticket rose 3.8%. Second-quarter SG&A was 21.73% of sales, improving 53 basis points; net interest expense was $110 million. The effective tax rate was 37.5% for the quarter and 37.6% for the half year.
Six-month operating cash flow was $3.356 billion, versus $2.796 billion a year earlier. Investing cash outflow was $518 million, including $376 million of capital expenditures; financing cash outflow was $2.293 billion, including $2.027 billion of share repurchases and $352 million of dividends. Cash and cash equivalents were $1.085 billion at August 2, 2013.
Total current assets were $10.913 billion and current liabilities were $9.340 billion. Long-term debt was $9.015 billion, with $47 million of current maturities. The $1.75 billion credit facility had no borrowings or letters of credit outstanding, and the company reported compliance with its covenants. Cash plus short- and long-term investments totaled $1.580 billion; some investments were restricted, primarily for the extended-protection-plan program.
Material changes versus prior comparable periods
- Second-quarter sales and comparable sales strengthened markedly from the prior-year quarter, when comparable sales declined 0.4%; six-month comparable sales increased 4.6%, versus 1.0% in the prior-year period.
- Gross-margin improvement reflected product-line cost reductions from the Value Improvement initiative and more targeted promotions. These benefits were partly offset by credit-program penetration, product mix, and Lumber inflation.
- Higher sales helped SG&A leverage, including operating salaries and insurance, partly offset by higher incentive compensation. Net earnings and EPS also benefited from fewer weighted-average shares after substantial repurchases.
- Six-month operating cash flow increased year over year. Capital expenditures fell to $376 million from $622 million; share repurchases were $2.027 billion, down from $2.793 billion.
- At August 2, 2013, total assets were $33.408 billion versus $35.032 billion a year earlier; shareholders’ equity was $13.062 billion versus $14.824 billion. The company reported $9.062 billion of current and long-term debt combined, compared with $9.602 billion a year earlier.
Outlook, risks, contingencies, and unusual items
- As of August 21, management’s fiscal-2013 outlook called for total sales growth of approximately 5%, comparable-sales growth of approximately 4.5%, operating-margin expansion of approximately 65 basis points, an effective tax rate of approximately 37.9%, and diluted EPS of $2.10. The company expected to open approximately 10 stores.
- The outlook assumed $3.6 billion of fiscal-year share repurchases, including approximately $1.6 billion in the second half. Remaining authorization at August 2 was $3.0 billion.
- Fiscal-2013 capital expenditures were forecast at approximately $1.0 billion. Management said operating and financing cash flows should cover operations, planned investments, acquisitions if any, dividends, and repurchases over the next 12 months.
- On August 30, 2013, after quarter-end, Lowe’s acquired most Orchard Supply Hardware assets for approximately $205 million cash and assumed approximately $70 million of supplier payables. The acquisition was not included in the fiscal-year outlook and was described as immaterial to the company’s financial statements as a whole; initial purchase accounting was incomplete.
- Management cited mortgage-rate increases as a potential influence on second-half industry performance. Other risks include economic and housing conditions, consumer spending and credit availability, competition, costs and supply, technology and execution, regulation, and weather.
- Impairment charges for excess properties totaled $5 million for the first six months. Nine operating locations were reviewed and found recoverable; management estimated that a 10% reduction in their projected sales would have triggered impairment at four locations and increased losses by $37 million.
- A California environmental investigation concerning hazardous-waste handling remained under negotiation after authorities made a confidential settlement demand in July 2013. The amount of any penalty and proposed injunctive relief were unresolved. The company said other pending legal matters were not expected to have a material adverse effect.
- The company reported $63 million of unrecognized tax benefits and ongoing federal, state, and Canadian tax examinations. Management believed appropriate provisions had been made.
Important facts for investors to verify
- Confirm the applicable reporting period: the filing is fiscal Q2 2013, not Q2 2012.
- Track whether sales momentum and the 4.5% full-year comparable-sales outlook were sustained, particularly given mortgage-rate and weather risks.
- Assess the durability of gross-margin and SG&A improvements and the contribution of share repurchases to EPS growth.
- Review cash generation against planned capital spending, dividends, repurchases, and Orchard acquisition costs and integration.
- Monitor operating-location and property impairment assumptions, the California environmental matter, tax audits, and access to capital markets.