Lowe’s Companies, Inc. — Form 10-Q Summary
Period: Fiscal first quarter ended April 29, 2016, compared with the three months ended May 1, 2015. The request metadata says “2015 Q1,” but the filing itself reports first-quarter 2016 results. Financial statements are unaudited and were reviewed by the independent auditor.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $15.234 billion | $14.129 billion | +7.8% |
| Comparable sales | +7.3% | +5.2% | +2.1 percentage points |
| Gross margin | 35.04% | 35.47% | -43 basis points |
| SG&A as % of sales | 22.28% | 24.16% | -188 basis points |
| Operating margin (EBIT, non-GAAP) | 10.42% | 8.72% | +170 basis points |
| Net earnings | $884 million | $673 million | +31.4% |
| Diluted EPS | $0.98 | $0.70 | +40.0% |
| Operating cash flow | $3.220 billion | $2.478 billion | +$742 million |
| Capital expenditures | $208 million | $232 million | -$24 million |
Comparable transactions rose 5.1% and comparable average ticket rose 2.2%. All 14 regions and all 13 product categories had comparable-sales growth. Gross margin contracted amid promotional activity, reset-related markdowns, and product mix; sales growth, expense management, and a foreign-exchange option gain contributed to improved reported profitability. The filing reports a 38.2% effective tax rate for the quarter, versus 38.7% a year earlier.
Liquidity, debt, and capital returns
- Cash and cash equivalents were $4.561 billion at April 29, 2016, versus $1.434 billion at May 1, 2015 and $405 million at January 29, 2016. The quarter-end cash increase included substantial new debt proceeds.
- Total current assets were $16.473 billion and current liabilities were $14.121 billion. Long-term debt, excluding current maturities, was $14.322 billion; current maturities were $1.083 billion. Total liabilities were $29.965 billion.
- On April 20, the company issued $3.3 billion of unsecured notes, with maturities from 2019 to 2046. Net proceeds from long-term debt issuance were $3.267 billion; the company also repaid $484 million of long-term debt in the quarter.
- Operating cash flow was supported by earnings and working-capital movements, including a $3.169 billion increase in accounts payable, partly offset by a $1.556 billion inventory build.
- The company paid $255 million in dividends and repurchased approximately $1.2 billion of stock during the quarter. It had $2.4 billion remaining under its $5.0 billion repurchase authorization. Fiscal-year guidance assumed about $3.5 billion of repurchases.
- A $1.75 billion revolving credit facility, expiring in August 2019, had no borrowings or letters of credit outstanding at quarter-end. The company stated it was in compliance with its facility covenants and expected liquidity to be adequate for the next 12 months.
Material changes, outlook, and notable items
- Net earnings included a $160 million pretax unrealized gain on a Canadian-dollar option entered into to manage currency exposure related to the planned RONA acquisition. Management said this increased diluted EPS by $0.11. The option was settled in May for $179 million, $84 million below its quarter-end fair value; the second-quarter loss was expected to offset part of the first-quarter gain, leaving a total fiscal-2016 realized gain of $76 million.
- On May 20, 2016, after quarter-end, Lowe’s acquired RONA for C$24 per share in cash, at a total transaction price of approximately C$3.2 billion, net of cash received and including debt assumed. The company said the deal was financed through debt capital markets and expected it to expand its Canadian presence. Initial purchase accounting was not complete at filing.
- As of the May 18 earnings release, fiscal-2016 guidance called for sales growth of approximately 6% (including the 53rd week, expected to add about 1.5%), comparable-sales growth of approximately 4%, operating-margin growth of 80–90 basis points, an effective tax rate of about 38.1%, and diluted EPS of approximately $4.11. This outlook excluded the RONA acquisition and excluded the current-year option gain from the operating-margin comparison.
- Management cited favorable employment, income, housing turnover, and construction trends, while noting that favorable weather effects could normalize. It highlighted stronger Pro business, omni-channel initiatives, and productivity efforts. Stated risks include economic and housing-market changes, competition, execution of technology and operating initiatives, cybersecurity, labor and supply constraints, and RONA integration and realization of expected benefits.
- Fiscal-2016 capital expenditures were forecast at approximately $1.5 billion. The company also disclosed $550 million of unsecured debt due in October 2016 and $500 million due in April 2017.
- No material changes to the company’s previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported earnings and margin improvement reflects underlying operations versus the $160 million currency-option gain, and how the settlement affects subsequent-period results.
- RONA’s final purchase accounting, assumed debt and other liabilities, integration costs, financing effects, and contribution to results relative to the pre-acquisition guidance.
- Whether strong comparable sales and transaction growth persist as weather benefits normalize, and whether gross-margin pressure from promotions and mix continues.
- Cash-flow sustainability, including the impact of seasonal inventory and accounts-payable movements, capital spending, scheduled debt maturities, dividends, and share repurchases.
- Changes in leverage, liquidity, and financing costs following the $3.3 billion note issuance and RONA acquisition.