Lowe’s Companies, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2010 Q1, but the filing is for the three months ended April 29, 2011, compared with the three months ended April 30, 2010. Financial amounts below are in millions of dollars unless noted.
Business context and reporting period
Lowe’s operates home-improvement stores. Management cited cautious consumer spending, weak housing conditions, difficult comparisons with 2010 stimulus programs, and unfavorable weather as factors weighing on the quarter. Comparable-store sales fell 3.3%; the filing reports 1,751 stores at quarter-end.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $12,185 | $12,388 | Down 1.6% |
| Gross margin | $4,319; 35.44% | $4,358; 35.18% | Rate up 26 bps |
| Operating margin (EBIT) | 6.79% | 7.00% | Down 21 bps |
| Net earnings | $461 | $489 | Down 5.7% |
| Diluted EPS | $0.34 | $0.34 | Flat |
| Net cash from operations | $2,423 | $2,736 | Down $313 |
| Property acquired | $313 | $283 | Up $30 |
- SG&A was $3,120, up 0.8%, and increased to 25.60% of sales from 24.98%. Net interest expense rose to $88 from $82.
- At April 29, 2011, cash was $1,496; short- and long-term investments totaled $1,554. Some investment balances were restricted: $120 short-term and $261 long-term.
- Total liabilities were $18,425. Current maturities of debt were $38 and long-term debt excluding current maturities was $6,538. The comparable April 2010 balances were $536 and $5,531, respectively.
- Operating cash flow declined primarily due to working-capital changes and timing of income-tax payments. Financing cash flow was a $1,171 outflow, mainly reflecting $1,031 of share repurchases and $149 of dividends. Cash increased by $844 to $1,496.
- The $1.75 billion senior credit facility, which supports commercial paper, had no borrowings or letters of credit outstanding; the company reported compliance with its covenants. Management said liquidity should be adequate for the next 12 months.
Material changes versus the prior comparable period
- Sales and net earnings declined despite a 26-basis-point improvement in gross margin; lower sales and higher SG&A as a share of sales contributed to lower EBIT margin.
- Comparable-store sales fell 3.3%, versus growth of 2.4% a year earlier. Customer transactions declined 2.1%; average ticket increased 0.5% to $62.51.
- Management attributed pressure to cold, wet northern weather and storms and flooding, particularly affecting outdoor categories, as well as difficult comparisons with prior-year government programs. Indoor categories generally performed better.
- Share repurchases totaled about $1.0 billion, versus $450 million under the program in the prior-year quarter. The company repurchased 37.9 million shares under the program and had $1.4 billion of authorization remaining.
- Cash dividends per share were $0.11 versus $0.09. On May 27, the board declared a quarterly dividend of $0.14 per share, a 27% increase.
Outlook, commentary, and risks
- As of May 16, 2011, Q2 guidance called for total sales growth of about 4%, comparable-store sales growth of about 2%, operating-margin expansion of 20–30 basis points, and diluted EPS of $0.65–$0.69.
- Fiscal 2011 guidance called for total sales growth of about 4% (including an estimated 1.4% contribution from a 53rd week), comparable-store sales growth of 0%–1%, operating-margin expansion of about 10 basis points, and diluted EPS of $1.56–$1.64. The company expected about 25 new stores and $1.8 billion in capital expenditures.
- Management expected approximately $2.4 billion in fiscal 2011 repurchases, with the remaining $1.4 billion after Q1 planned across the next three quarters. It also expected to use delayed seasonal selling opportunities to clear inventory without significant markdowns.
- Initiatives included weekend staffing, shifting media spending toward online channels, a third-party gift-card distribution program, and a 5% everyday discount for Lowe’s consumer-card holders, with a financing alternative on qualifying purchases.
- Key risks cited include economic and housing-market weakness, consumer spending and credit conditions, fuel and other cost inflation, competition, execution of technology and store-development plans, labor and regulatory matters, and adverse weather. Management stated that interim results may not indicate full-year results.
- The company reported $148 of unrecognized tax benefits. It said IRS and state tax matters could be settled within 12 months, potentially reducing that balance by $131; management believed appropriate provisions had been made.
- The interim financial statements received an independent accountant’s review, not an audit; the reviewer reported no material modifications needed. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter.
Investor facts to verify
- Confirm the intended reporting period: this filing covers Q1 2011, not Q1 2010.
- Track whether comparable-store sales and customer traffic recover from Q1 declines, and assess the effect of weather and housing-market conditions.
- Compare subsequent results with the Q2 and fiscal 2011 sales, margin, and EPS guidance, including the 53rd-week contribution.
- Monitor gross-margin gains against SG&A deleverage, fuel and insurance costs, and inventory levels.
- Assess the pace and funding of planned repurchases, dividends, capital expenditures, and debt obligations, including the restricted portion of investments.
- Follow the resolution of tax examinations and the potential change in unrecognized tax benefits.