How strong was Lowe's growth in fiscal 1996?

Growth was strong. Sales rose 22% to $8.6 billion, comparable store sales increased 7%, and the store base expanded from 365 to 402. Earnings grew faster than sales, with EPS up 26% to $1.71 on a fully diluted basis. Management also noted compound sales growth of about 20% and compound EPS growth of about 24% through the 1990s to date.

Did the convertible note conversion affect shareholders?

Yes. Conversion of $284.7 million of 3% convertible subordinated notes into common stock increased equity by roughly $257 million in shares and added to capital in excess of par, which is why total shareholders' equity rose $560.8 million. The conversion also reduced debt, lowering long-term debt by 11% to $767.3 million, and it dilutes existing shareholders by adding about 10.9 million shares to the outstanding count.

What are the main risks to Lowe's business?

The filing cites sensitivity to the economy, housing starts, and repair and remodeling activity, since much of inventory is discretionary and can be deferred in a downturn. Commodity price swings, especially in lumber and plywood, can affect margins. Weather can hurt seasonal categories such as lawn and garden and building materials. Expansion into larger markets may bring new competition and zoning or environmental hurdles, and the business depends on suppliers providing reliable inventory at competitive prices.

How is Lowe's funding its expansion, and how much debt is it taking on?

Lowe's plans to fund 1997 expansion from operating cash flow, leases, and external financing. Roughly half of new 1997 stores are expected to be leased. Capital lease obligations rose $182.7 million in 1996, which increases long-term debt on the balance sheet. The company had $349 million available under its shelf registrations, and the long-term debt-to-capitalization ratio fell to 25.7% after the note conversion.

What changed in the company's leadership during the year?

Robert L. Tillman became President and CEO in August 1996, succeeding Leonard Herring, who retired after leading the company since 1978. Thomas E. Whiddon joined as Executive Vice President and CFO in July 1996. Robert L. Strickland remains Chairman of the Board. Several directors, including Gordon Cadwgan, Pete Kulynych, and Senator Russell Long, are leaving or have left the board, and Jim Halpin and Paul Fulton joined in 1996.

LOW 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 25, 1997. Cited figures are marked; the original filing is the authoritative source.

Lowe's Companies, Inc. closed fiscal 1996 (year ended January 31, 1997) with record results.

Net sales rose 22% to $8.6 billion^a from $7.1 billion, driven by 66 new large stores and a 7% comparable store sales increase. Net earnings were $292.2 million, up 29% from $226.0 million, and fully diluted EPS was $1.71, up 26% from $1.36. Net margin improved to 3.4% from 3.2%, and return on beginning shareholders' equity rose to 17.6% from 15.9%.

Gross margin expanded to 25.9% from 24.9%, supported by the shift toward large-format stores, higher-margin categories, and reduced exposure to lower-margin consumer electronics. The balance sheet strengthened materially. Conversion of $284.7 million^b of 3% convertible subordinated notes into common stock lifted shareholders' equity by $560.8 million, to 50% of total assets, and cut the long-term debt-to-capitalization ratio to 25.7% from 34.3%.

Long-term debt fell 11% to $767.3 million^c, although capital lease obligations rose $182.7 million as the company continued leasing new stores. Operating cash flow more than doubled to $543.0 million, and inventory turns held at 4.3 times. Management guided to a 1997 capital budget of $1.2 billion, with more than 80% dedicated to expansion.

Lowe's plans 60 to 65 new store projects, including 40 to 45 in new markets, and expects to fund growth through operations, leases, and external financing. Key risks disclosed include sensitivity to housing starts, home repair and remodeling activity, economic cycles, commodity price volatility in lumber and plywood, weather, and competitive pressure as the company moves into larger markets. Lowe's described itself as the world's second-largest home improvement retailer, trailing The Home Depot.

02—Key points

Key Highlights

Record net sales of $8.6 billion, up 22% year over year, with comparable store sales up 7%
Net earnings of $292.2 million (up 29%); fully diluted EPS of $1.71, up 26% from $1.36
Gross margin improved to 25.9% from 24.9%; net margin rose to 3.4% from 3.2%
$284.7 million of convertible notes converted to equity, lifting shareholders' equity 50% of total assets and reducing the long-term debt-to-capitalization ratio to 25.7% from 34.3%
Operating cash flow of $543.0 million, up from $303.3 million in fiscal 1995
1997 capital budget of $1.2 billion, with over 80% for store expansion; plans for 60 to 65 new stores, 40 to 45 in new markets
Store count reached 402 with 30.4 million sq. ft. of selling space; large stores (80,000+ sq. ft.) account for 61% of sales

03—Questions

Frequently Asked Questions

How strong was Lowe's growth in fiscal 1996?
Growth was strong. Sales rose 22% to $8.6 billion, comparable store sales increased 7%, and the store base expanded from 365 to 402. Earnings grew faster than sales, with EPS up 26% to $1.71 on a fully diluted basis. Management also noted compound sales growth of about 20% and compound EPS growth of about 24% through the 1990s to date.
Did the convertible note conversion affect shareholders?
Yes. Conversion of $284.7 million of 3% convertible subordinated notes into common stock increased equity by roughly $257 million in shares and added to capital in excess of par, which is why total shareholders' equity rose $560.8 million. The conversion also reduced debt, lowering long-term debt by 11% to $767.3 million, and it dilutes existing shareholders by adding about 10.9 million shares to the outstanding count.
What are the main risks to Lowe's business?
The filing cites sensitivity to the economy, housing starts, and repair and remodeling activity, since much of inventory is discretionary and can be deferred in a downturn. Commodity price swings, especially in lumber and plywood, can affect margins. Weather can hurt seasonal categories such as lawn and garden and building materials. Expansion into larger markets may bring new competition and zoning or environmental hurdles, and the business depends on suppliers providing reliable inventory at competitive prices.
How is Lowe's funding its expansion, and how much debt is it taking on?
Lowe's plans to fund 1997 expansion from operating cash flow, leases, and external financing. Roughly half of new 1997 stores are expected to be leased. Capital lease obligations rose $182.7 million in 1996, which increases long-term debt on the balance sheet. The company had $349 million available under its shelf registrations, and the long-term debt-to-capitalization ratio fell to 25.7% after the note conversion.
What changed in the company's leadership during the year?
Robert L. Tillman became President and CEO in August 1996, succeeding Leonard Herring, who retired after leading the company since 1978. Thomas E. Whiddon joined as Executive Vice President and CFO in July 1996. Robert L. Strickland remains Chairman of the Board. Several directors, including Gordon Cadwgan, Pete Kulynych, and Senator Russell Long, are leaving or have left the board, and Jim Halpin and Paul Fulton joined in 1996.

04—Continue

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