01—Abstract
Summary
Summary of the 10-K filed April 26, 2002. Cited figures are marked; the original filing is the authoritative source.
Lowe's reported a strong fiscal 2001 (year ended February 1, 2002), with net sales up 18% to $22.1 billiona and net earnings up 26% to $1.02 billion, or 4.6% of sales.
Diluted EPS rose to $1.30b from $1.05 (both figures adjusted for the two-for-one stock split in mid-2001). Comparable store sales grew 2.4%, driven by stabilizing lumber and building material prices and improved sales across most merchandising categories. Gross margin expanded to 28.8% from 28.2%, and SG&A leveraged modestly to 17.7% of sales from 17.8%, reflecting expense controls in payroll and advertising.
Return on beginning shareholders' equity improved to 18.6% from 17.2%. The company remains in an aggressive expansion phase. It ended the year with 744 stores (up from 650) and 80.7 million square feet of selling space, and plans to open about 123 stores in 2002 on a $2.8 billionc capital budget, with roughly 96% devoted to store expansion and new distribution centers.
Expansion is weighted toward metro markets of 500,000+ population. Capital spending of $2.2 billiond in 2001 was funded largely by operating cash flow of $1.6 billion and about $2.1 billion of new debt, including $580.7 million of senior convertible notes and $1.005 billion of convertible notes. Long-term debt rose to 36.2% of total capitalization from 33.3%, and interest expense climbed to $173.5 million from $120.8 million.
The main investor considerations are the rising leverage and interest burden that come with the expansion program, the sensitivity of sales to housing activity and commodity prices such as lumber, and the reliance on continued store growth to drive the 18% top-line increases. Management states the company was in compliance with its debt covenants and believes internal cash flow and financing will cover 2002 plans, though a downgrade in debt ratings could restrict access to commercial paper and new debt.
02—Key points
Key Highlights
- Net sales rose 18% to $22.1 billion in 2001, with comparable store sales up 2.4%.
- Net earnings increased 26% to $1.02 billion (4.6% of sales); diluted EPS was $1.30 versus $1.05 in 2000, after the 2-for-1 split.
- Gross margin improved to 28.8% of sales from 28.2%, reflecting better buying, line reviews and product mix; SG&A leveraged to 17.7% of sales from 17.8%.
- Store count grew to 744 across 42 states (from 650), with 80.7 million sq. ft. of selling space; 2002 plan calls for about 123 new or relocated stores.
- Long-term debt rose to 36.2% of debt-plus-equity (from 33.3%) after issuing about $1.6 billion of convertible notes; net interest expense increased 44% to $173.5 million.
- Return on beginning shareholders' equity rose to 18.6% from 17.2%; total shareholders' equity reached $6.67 billion.
- Operating cash flow of $1.6 billion funded much of the $2.2 billion capital spending; 2002 capital budget is $2.8 billion, about 96% for expansion and distribution centers.
03—Questions
Frequently Asked Questions
How did Lowe's perform financially in fiscal 2001?
Lowe's posted net sales of $22.1 billion, up 18%, and net earnings of $1.02 billion, up 26%. Diluted EPS was $1.30 versus $1.05 in 2000, and net margin expanded to 4.6% from 4.3%. Gross margin improved and SG&A was controlled, which together drove the earnings growth.
How much of Lowe's growth came from new stores versus existing stores?
Most of the sales growth came from expansion. Comparable store sales rose only 2.4%, while the store base grew from 650 to 744 and selling space rose about 19%. Management attributes the sales increase primarily to its store expansion and relocation program.
What are the main risks to Lowe's future results?
The filing cites sensitivity to the economy, housing starts and existing home sales, and home improvement spending, which can be delayed in a downturn. It also notes commodity price volatility (especially lumber and plywood), growing competition in larger metro markets, dependence on vendor supply, weather, and expansion obstacles such as zoning and labor availability.
Is Lowe's taking on more debt, and is it a concern?
Yes. Long-term debt rose to $3.73 billion excluding current maturities, and long-term debt as a share of capitalization increased to 36.2% from 33.3%. Net interest costs rose to $173.5 million. Management says it is in covenant compliance and that cash flow and financing will fund 2002 plans, but a rating downgrade could make commercial paper and new debt harder to obtain.
What is the outlook for 2002?
Lowe's plans to open about 123 stores, including roughly 8 relocations, and expects its sales floor square footage to grow about 18%. It is building two additional regional distribution centers, in Cheyenne, Wyoming (expected operational in Q3 2002) and Northampton, North Carolina (expected late 2002). The company's 2002 capital budget is $2.8 billion.
04—Continue