Lowe’s Companies, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended May 3, 2013; comparable quarter ended May 4, 2012. The filing’s interim financial statements are unaudited and were reviewed by the independent accountant, not audited. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $13.088 billion | $13.153 billion | Down 0.5% |
| Comparable sales | Down 0.7% | Up 2.6% | — |
| Gross margin | 34.80% | 34.70% | Up 10 bps |
| Operating margin (EBIT margin) | 7.49% | 7.24% | Up 25 bps |
| Net earnings | $540 million | $527 million | Up 2.5% |
| Diluted EPS | $0.49 | $0.43 | Up 14.0% |
| Operating cash flow | $1.992 billion | $2.467 billion | Down $475 million |
| Capital expenditures | $196 million | $337 million | Down $141 million |
Comparable transactions declined 3.7%, while comparable average ticket rose 3.1%. Customer transactions were 201 million versus 208 million; average ticket was $64.99 versus $63.09. Management attributed sales weakness chiefly to colder, wetter spring weather than in the prior year. Indoor-category comparable sales rose approximately 3%, while outdoor categories fell approximately 7%.
Cash, debt, and liquidity
- Cash and cash equivalents were $1.081 billion at May 3, 2013, compared with $3.072 billion a year earlier and $541 million at February 1, 2013. Current assets were $12.014 billion and current liabilities $10.439 billion.
- Total debt, including current maturities, was approximately $9.073 billion ($47 million current and $9.026 billion long-term), versus approximately $9.611 billion a year earlier. Long-term debt’s estimated fair value was $10.111 billion, above its carrying value of $8.646 billion, excluding capitalized lease obligations.
- Operating cash flow was lower primarily because inventory increased with the delayed spring season and accounts-payable cash flows reflected purchase timing. Cash used in investing was $263 million; financing used $1.190 billion, including $1.046 billion of share repurchases and $178 million of dividends.
- Lowe’s had a $1.75 billion senior credit facility expiring in October 2016, with no borrowings or letters of credit outstanding at quarter-end. The company reported compliance with its credit-facility covenants. Ratings disclosed were S&P A-2 commercial paper and A- senior debt, with a negative senior-debt outlook; Moody’s P-2 commercial paper and A3 senior debt, with a stable outlook.
Material changes and management commentary
- Net earnings increased modestly, while diluted EPS increased more substantially, supported in part by a lower weighted-average share count following repurchases. The company repurchased 23.5 million shares for $1.010 billion under its program and had $4.0 billion of authorization remaining at May 3.
- Gross margin improvement reflected a 25-basis-point benefit from the Value Improvement program, partly offset by the proprietary credit program. SG&A leveraged 3 basis points, helped by a favorable casualty-insurance adjustment and lower incentive compensation; added store labor, repairs, and resets weighed on expenses. Net interest expense rose to $113 million from $103 million.
- Management cited stronger performance in the upper Northwest, Texas Gulf Coast, and Florida, and continued benefit from Hurricane Sandy recovery in the Northeast. Pro Services outperformed the company average. Stores that had completed Value Improvement resets represented over half of the business; the remainder of the initial round was expected during 2013. Additional customer-facing staffing hours were added in nearly two-thirds of stores, with initial payroll deleverage.
Outlook, risks, and unusual items
- Fiscal 2013 guidance, as of the May 22 earnings release, called for total sales growth of approximately 4%, comparable-sales growth of approximately 3.5%, operating-margin expansion of approximately 60 basis points, an effective tax rate of approximately 38.1%, and diluted EPS of $2.05. The company expected to open approximately 10 stores.
- Guidance assumed approximately $3.8 billion in fiscal-year share repurchases, including $1.0 billion already repurchased in Q1. The fiscal-year capital budget was approximately $1.25 billion, including lease commitments.
- Management expected modest economic growth through mid-year, with housing-market improvement potentially supporting home-improvement demand later in the year. It identified weather, employment and consumer spending, housing and credit conditions, competition, input costs, technology, staffing, regulation, and information-system protection among the risks to forward-looking expectations. Management warned interim results may not indicate full-year results.
- After quarter-end, the accelerated share repurchase was finalized on May 23 with delivery of an additional 2.8 million shares. On May 31, the board declared a quarterly dividend of $0.18 per share, up 12.5% from $0.16.
- The EPA and the company reached an agreement in principle over lead-paint renovation compliance by independent contractors. A civil penalty and possible supplemental environmental projects were expected to total $500,000, subject to negotiation and a consent decree. The company said other ordinary-course legal proceedings were not believed to pose a material financial-statement risk.
Important facts for investors to verify
- Whether sales and comparable-sales growth recover as seasonal weather normalizes, particularly in outdoor categories.
- Whether the stated fiscal 2013 sales, margin, EPS, store-opening, and repurchase guidance is achieved.
- How inventory levels, working-capital movements, and operating cash flow develop through the spring selling season.
- The ultimate terms and financial treatment of the EPA settlement, and the effects of continued share repurchases and the higher declared dividend on liquidity.