How much did Lowe's grow in fiscal 2004, and what drove it?

Net sales grew 18% to $36.5 billion. Growth came from 140 new stores (a 14% increase in selling space) and a 6.6% comparable store sales increase across every merchandising category. Specialty initiatives such as Installed Sales and Special Order Sales, each up about 27%, and Commercial Business Customer sales, which grew at about twice the company average, were key contributors. Lumber and building-material inflation added roughly 150 basis points to comparable sales.

Did the restatement change Lowe's reported earnings, and should investors be concerned?

The restatement corrected accounting for lease-related items: accelerated depreciation on lease assets to the lease term and revised straight-line rent for ground leases with free-rent construction periods. Prior-year figures were restated, and the company states the error was not material to any annual or interim period, though it would have been material to Q4 fiscal 2004 results. Cash flows were not affected, and the auditors issued an unqualified opinion with no change to internal control conclusions.

Why did inventory grow faster than sales, and when should that reverse?

Inventory rose 30% versus 18% sales growth as Lowe's added safety stock to its regional distribution centers before reducing store safety stock under its Rapid Response Replenishment (R3) initiative. Management expects the benefit to show up as inventory leverage and higher inventory turns in the second half of fiscal 2005, as store safety stock is reduced. Operating cash flow of $3.0 billion was still healthy, but the inventory build absorbed cash and reduced working capital to $1.3 billion from $2.3 billion.

How is Lowe's balance sheet and capital allocation positioned?

Long-term debt, excluding current maturities, fell to $3.06 billion from $3.68 billion, and the long-term debt-to-capitalization ratio dropped to 21.0%. The company repurchased $1 billion of stock in fiscal 2004 and authorized another $1 billion through 2006. It has a $1 billion senior credit facility and an $8 billion-equivalent investment in fixed assets, with fiscal 2005 capital spending budgeted at $3.7 billion. Debt ratings are A+ (S&P), A2 (Moody's), and A (Fitch), all with stable or positive outlooks.

What is the outlook for fiscal 2005?

Management expects to open 150 stores, increasing square footage by 13 to 14%, and to grow total sales about 17% with comparable store sales up about 5%. Operating margin, defined as gross margin less SG&A and depreciation, is expected to rise about 20 basis points, and diluted EPS is guided to $3.25 to $3.34. Fiscal 2005 will include a 53rd week in the fourth quarter. Risks cited include economic downturns, housing activity, commodity price swings, competition, and dependence on imports and vendor supply.

LOW 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 13, 2005. Cited figures are marked; the original filing is the authoritative source.

Lowe's Companies, Inc. (LOW) reported fiscal 2004 (year ended January 28, 2005) as another year of strong growth.

Net sales rose 18% to $36.5 billion^a, comparable store sales increased 6.6%, and net earnings grew 18% to $2.18 billion, or $2.71 diluted EPS (restated prior-period results, with a $0.16 EPS headwind from the EITF 02-16 vendor-funds accounting change, which reclassified about 258 basis points of gross margin benefit against SG&A). The company opened 140 stores, ending the year with 1,087 stores in 48 states and 123.7 million square feet of selling space, and it is the world's second-largest home improvement retailer. Management is positioning the business around specialty sales (Installed Sales up about 27%, Special Order Sales up about 27%), Commercial Business Customers, and imports.

The filing also discloses a restatement of prior periods to correct lease accounting: depreciation lives for lease assets were shortened to the lease term, and ground-lease rent expense was revised. Restated net earnings were reduced by $33 million^b in fiscal 2003 and increased by $20 million in fiscal 2002 before other adjustments. Deloitte & Touche issued an unqualified opinion on both the financial statements and internal control over financial reporting, and management concluded internal control is effective.

Balance-sheet and capital-allocation items stand out. Inventory grew 30% versus 18% sales growth as the company built distribution-center safety stock under its R3 initiative, which management expects to yield inventory leverage in the second half of 2005. Operating cash flow was $3.0 billion^c against $2.9 billion of fixed-asset spending, and the company repurchased $1 billion of stock.

Long-term debt fell to $3.06 billion^d, and the company maintains strong investment-grade ratings (S&P A+, Moody's A2, Fitch A). For fiscal 2005, management guides to roughly 17% sales growth, about 5% comparable store sales growth, 150 new stores, and diluted EPS of $3.25 to $3.34, with a 53-week year.

02—Key points

Key Highlights

Net sales up 18% to $36.46 billion; comparable store sales up 6.6%, with average ticket rising 7.1% to $63.43.
Net earnings up 18% to $2.18 billion; diluted EPS $2.71 versus $2.28 in fiscal 2003 (restated).
Gross margin expanded 258 basis points to 33.73%, mostly from the EITF 02-16 vendor-funds reclassification, which shifted costs from SG&A (SG&A rose to 20.74% of sales).
Restatement of prior periods for lease accounting; Deloitte issued unqualified audit opinions and management assessed internal control as effective.
Inventory grew 30% versus 18% sales growth due to R3 distribution safety stock, with inventory leverage expected in the second half of fiscal 2005.
$1 billion share repurchase (18.4 million shares) in fiscal 2004; new $1 billion authorization through 2006; quarterly dividend raised to $0.04.
Fiscal 2005 guidance: about 17% sales growth, about 5% comparable store sales growth, 150 new stores, and diluted EPS of $3.25 to $3.34.

03—Questions

Frequently Asked Questions

How much did Lowe's grow in fiscal 2004, and what drove it?
Net sales grew 18% to $36.5 billion. Growth came from 140 new stores (a 14% increase in selling space) and a 6.6% comparable store sales increase across every merchandising category. Specialty initiatives such as Installed Sales and Special Order Sales, each up about 27%, and Commercial Business Customer sales, which grew at about twice the company average, were key contributors. Lumber and building-material inflation added roughly 150 basis points to comparable sales.
Did the restatement change Lowe's reported earnings, and should investors be concerned?
The restatement corrected accounting for lease-related items: accelerated depreciation on lease assets to the lease term and revised straight-line rent for ground leases with free-rent construction periods. Prior-year figures were restated, and the company states the error was not material to any annual or interim period, though it would have been material to Q4 fiscal 2004 results. Cash flows were not affected, and the auditors issued an unqualified opinion with no change to internal control conclusions.
Why did inventory grow faster than sales, and when should that reverse?
Inventory rose 30% versus 18% sales growth as Lowe's added safety stock to its regional distribution centers before reducing store safety stock under its Rapid Response Replenishment (R3) initiative. Management expects the benefit to show up as inventory leverage and higher inventory turns in the second half of fiscal 2005, as store safety stock is reduced. Operating cash flow of $3.0 billion was still healthy, but the inventory build absorbed cash and reduced working capital to $1.3 billion from $2.3 billion.
How is Lowe's balance sheet and capital allocation positioned?
Long-term debt, excluding current maturities, fell to $3.06 billion from $3.68 billion, and the long-term debt-to-capitalization ratio dropped to 21.0%. The company repurchased $1 billion of stock in fiscal 2004 and authorized another $1 billion through 2006. It has a $1 billion senior credit facility and an $8 billion-equivalent investment in fixed assets, with fiscal 2005 capital spending budgeted at $3.7 billion. Debt ratings are A+ (S&P), A2 (Moody's), and A (Fitch), all with stable or positive outlooks.
What is the outlook for fiscal 2005?
Management expects to open 150 stores, increasing square footage by 13 to 14%, and to grow total sales about 17% with comparable store sales up about 5%. Operating margin, defined as gross margin less SG&A and depreciation, is expected to rise about 20 basis points, and diluted EPS is guided to $3.25 to $3.34. Fiscal 2005 will include a 53rd week in the fourth quarter. Risks cited include economic downturns, housing activity, commodity price swings, competition, and dependence on imports and vendor supply.

04—Continue

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