How did Lowe's perform financially in fiscal 1995?

Sales reached a record $7.08 billion, up 16%. Net earnings were $226.0 million, nearly flat with the prior year's $223.6 million. Gross margin improved slightly to 24.9%, but higher SG&A, depreciation, and store opening costs held net margin to 3.2%, down from 3.7%.

Why did earnings growth stall despite strong sales growth?

Management cited higher interest rates and a weaker environment in the second half of 1995, which slowed housing-related demand and reduced inventory turns to 4.3x from 4.7x. Costs also rose faster than sales: SG&A grew to 15.9% of sales from 15.4%, driven by store payroll and credit card expenses, and depreciation increased 36.8% as the store base expanded.

What is Lowe's growth strategy?

Since 1989 Lowe's has shifted from small contractor-oriented stores to large home improvement superstores of about 100,000 to 114,000 square feet of sales floor, plus lawn and garden centers. The large-store group now generates most of the company's sales and operating profit. Planned 1996 expansion is about 60 new stores, 75% in new markets.

How is Lowe's financing its expansion, and how leveraged is it?

Capital spending was $637 million in 1995, including capital leases, and the 1996 budget is about $1 billion. Funding comes from operating cash flow, operating leases, about $40 million of ESOP stock issuance, and external debt. Long-term debt reached $866 million, and the long-term debt-to-capitalization ratio rose to 34.3%, though fixed charge coverage remained healthy at 5.8x. A $100 million 6.375% senior note due 2005 was issued in December 1995.

Are there material legal or contingent risks investors should know about?

Management says ordinary litigation and three potentially responsible party landfill matters are not expected to be material. The main open item is a March 1996 state agency warning that imported plastic mini-blinds sold for about ten years may pose a lead poisoning hazard to young children. Lowe's is working with the Consumer Products Safety Commission and has not recorded a provision because the potential liability cannot yet be estimated.

LOW 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 29, 1996. Cited figures are marked; the original filing is the authoritative source.

Lowe's Companies, Inc. (NYSE: LOW) reported fiscal 1995 (year ended January 31, 1996) as a record year, with net sales of $7.08 billion^a, up 16% from $6.11 billion in fiscal 1994, and net earnings of $226.0 million, roughly flat versus $223.6 million a year earlier.

Net margin fell to 3.2% from 3.7%, and EPS was $1.41^b (fully diluted $1.36) versus $1.44 ($1.39). Management attributes the slowdown in the second half to higher interest rates and weaker housing activity, which pushed inventory turns down to 4.3x from 4.7x. The company is in the middle of a transformation from small stores to large "big box" home improvement superstores: store count rose to 365 from 336, and selling space reached 24 million square feet, up 29% year over year.

The large-store group produced 79% of sales and 80% of operating profit in fiscal 1995. Balance sheet growth was driven by capital spending. Net property rose 33% to $1.86 billion^c, and long-term debt (excluding current maturities) climbed 27% to $866 million, including a $100 million 6.375% senior note issued in December 1995.

Shareholders' equity grew to $1.66 billion^d, and the equity-to-assets ratio improved to 46.6%. Management plans a capital budget of about $1 billion for fiscal 1996, with roughly 60 new stores and about 6.7 million square feet of added space, and says it will fund this mainly from operations, operating leases, and external financing, including about $40 million of stock issued to the ESOP.

Investors should weigh the margin compression and flat earnings against the strong top-line growth and store expansion. Key watch items include the fiscal 1996 capital intensity, the rising proportion of leased and capital-leased real estate, and the disclosed but unquantified potential liability from a state agency's probe into imported plastic mini-blinds.

02—Key points

Key Highlights

Record net sales of $7.08 billion in fiscal 1995, up 16% year over year, driven by large-format store growth.
Net earnings were essentially flat at $226.0 million, while net margin declined to 3.2% from 3.7% as SG&A and depreciation rose faster than sales.
EPS was $1.41 (fully diluted $1.36), compared with $1.44 ($1.39) in fiscal 1994.
Store count grew to 365 with 24 million square feet of selling space, a 29% increase in square footage over fiscal 1994.
Large stores (67% of units) generated 79% of sales and 80% of operating profit, supporting the big-box strategy.
Long-term debt rose 27% to $866 million, and shareholders' equity reached $1.66 billion (46.6% of total assets).
Fiscal 1996 capital budget is targeted at about $1 billion, including roughly 60 new stores and 6.7 million square feet of additional space.

03—Questions

Frequently Asked Questions

How did Lowe's perform financially in fiscal 1995?
Sales reached a record $7.08 billion, up 16%. Net earnings were $226.0 million, nearly flat with the prior year's $223.6 million. Gross margin improved slightly to 24.9%, but higher SG&A, depreciation, and store opening costs held net margin to 3.2%, down from 3.7%.
Why did earnings growth stall despite strong sales growth?
Management cited higher interest rates and a weaker environment in the second half of 1995, which slowed housing-related demand and reduced inventory turns to 4.3x from 4.7x. Costs also rose faster than sales: SG&A grew to 15.9% of sales from 15.4%, driven by store payroll and credit card expenses, and depreciation increased 36.8% as the store base expanded.
What is Lowe's growth strategy?
Since 1989 Lowe's has shifted from small contractor-oriented stores to large home improvement superstores of about 100,000 to 114,000 square feet of sales floor, plus lawn and garden centers. The large-store group now generates most of the company's sales and operating profit. Planned 1996 expansion is about 60 new stores, 75% in new markets.
How is Lowe's financing its expansion, and how leveraged is it?
Capital spending was $637 million in 1995, including capital leases, and the 1996 budget is about $1 billion. Funding comes from operating cash flow, operating leases, about $40 million of ESOP stock issuance, and external debt. Long-term debt reached $866 million, and the long-term debt-to-capitalization ratio rose to 34.3%, though fixed charge coverage remained healthy at 5.8x. A $100 million 6.375% senior note due 2005 was issued in December 1995.
Are there material legal or contingent risks investors should know about?
Management says ordinary litigation and three potentially responsible party landfill matters are not expected to be material. The main open item is a March 1996 state agency warning that imported plastic mini-blinds sold for about ten years may pose a lead poisoning hazard to young children. Lowe's is working with the Consumer Products Safety Commission and has not recorded a provision because the potential liability cannot yet be estimated.

04—Continue

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