01—Abstract
Summary
Summary of the 10-K filed March 31, 2009. Cited figures are marked; the original filing is the authoritative source.
Lowe's Companies (LOW) reported a difficult fiscal 2008 (year ended January 30, 2009) as the housing downturn and deep recession weighed heavily on demand for big-ticket home improvement projects.
Net sales were essentially flat at $48.2 billiona (down 0.1%), but comparable store sales fell 7.2%, and the fourth quarter was notably weaker with comparable sales down 9.9%. Gross margin contracted 43 basis points to 34.21%, while SG&A deleveraged 118 basis points to 22.96% of sales, driving pre-tax earnings down 22.3% to $3.5 billion and net earnings down 21.8% to $2.2 billion. Diluted EPS fell to $1.49 from $1.86.
02—Key points
Key Highlights
- Net sales were $48.2 billion, down 0.1% year over year, with comparable store sales declining 7.2% (Q4 down 9.9%) and average ticket falling 2.8% to $65.15.
- Net earnings fell 21.8% to $2.195 billion; diluted EPS was $1.49 versus $1.86 in 2007, and return on average shareholders' equity dropped to 12.7% from 17.7%.
- Gross margin declined 43 bps to 34.21%, and SG&A rose to 22.96% of sales (up 118 bps), with store payroll deleverage of 70 bps as sales per store declined.
- Management cut the 2009 capital budget to about $2.5 billion (down $1.1 billion) and plans only 60 to 70 new stores, versus 115 opened in 2008, to conserve capital and liquidity.
- Balance sheet remains solid: total debt-to-equity-plus-debt improved to 25.1% from 29.3%, cash flow from operations was $4.1 billion, and the company has $2.2 billion remaining on its buyback authorization, though no repurchases were made in 2008.
- Fiscal 2009 outlook (as of February 2009) called for total sales between a 2% decline and a 2% increase, comparable store sales down 4% to 8%, operating margin down about 170 bps, and diluted EPS of $1.04 to $1.20.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed March 31, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $48.23B$48.28B | −0.1% |
| Cost of Revenue | $31.73B$31.56B | +0.5% |
| Gross Profit | $16.50B$16.73B | −1.4% |
| SG&A Expenses | $11.18B$10.52B | +6.3% |
| Operating Expenses | $12.99B$12.22B | +6.4% |
| Interest Expense | $280.00M$194.00M | +44.3% |
| Net Income | $2.19B$2.81B | −21.9% |
| EPS (Basic) | $1.50$1.89 | −20.6% |
| EPS (Diluted) | $1.49$1.86 | −19.9% |
| Shares Outstanding (Basic) | 1.46B— | — |
| Shares Outstanding (Diluted) | 1.47B— | — |
05—Questions
Frequently Asked Questions
Why did Lowe's earnings decline so sharply in fiscal 2008 despite flat sales?
Sales held roughly flat only because of new store growth, which masked a 7.2% decline in comparable store sales. Shoppers pulled back on large discretionary projects such as cabinets, countertops, and millwork, which carry higher margins, and the company had to rely more on promotions and markdowns. Fixed costs such as store payroll, depreciation from new stores, and interest expense then deleveraged against lower sales, pushing net earnings down 21.8%.
How is Lowe's managing its finances during the downturn?
The company is prioritizing capital conservation and liquidity. It cut its 2009 capital plan by $1.1 billion, reduced planned store openings, slowed store remerchandising, and kept corporate hiring largely frozen. Operating cash flow of $4.1 billion covered its capital spending and $491 million in dividends. Debt-to-capital improved to 25.1%, and the company carries a $1.75 billion senior credit facility, though Fitch's outlook on its senior debt was revised to negative.
What is Lowe's outlook for fiscal 2009?
As of February 20, 2009, Lowe's expected total sales to range from a 2% decline to a 2% increase, with comparable store sales falling 4% to 8%. Operating margin was expected to decline roughly 170 basis points, and diluted EPS was guided to $1.04 to $1.20. The outlook assumed no share repurchases. Management noted that a demand recovery depends largely on factors beyond its control, particularly stabilization in employment.
What are the main risks investors should watch?
Key risks include prolonged weakness in consumer spending tied to unemployment, falling home prices, and tight credit; further pressure on discretionary big-ticket categories; unseasonable weather; competitive promotions and competitor liquidations during the recession; and supply-chain stress as financially weakened vendors may fail to meet obligations. Self-insurance and inventory shrink reserves also carry estimation risk, and about 40% of the company's long-term debt matures after 2037, so refinancing remains a long-term consideration.
Is Lowe's still generating shareholder returns despite the earnings decline?
Yes, though with less cushion. The quarterly dividend was raised 6% in 2008 to $0.085 per share, and total dividends paid were $491 million, with dividends per share of $0.335 for the year. The company did not repurchase shares in 2008, reversing the $2.3 billion of buybacks made in 2007, and it has $2.2 billion of authorization remaining through fiscal 2009.
06—Continue