01—Abstract
Summary
Summary of the 10-K filed March 30, 2010. Cited figures are marked; the original filing is the authoritative source.
Lowe's (LOW) closed fiscal 2009 (ended January 29, 2010) with net sales down 2.1% to $47.2 billiona and net earnings down 18.8% to $1.78 billion, or $1.21 diluted EPS versus $1.49 in fiscal 2008.
Comparable store sales fell 6.7%b, though the decline narrowed to 1.6% in the fourth quarter, the company's best performance in over three years. Management attributes the weakness to high unemployment, falling home prices, and reduced consumer willingness to take on big-ticket discretionary projects. Average ticket fell 5.7% on a comparable basis while customer transactions held up better, reflecting a shift toward smaller DIY repair and maintenance projects.
Profitability was squeezed as SG&A rose to 24.75%c of sales from 22.96%, driven mainly by store payroll de-leverage as stores met fixed staffing thresholds on lower sales. Gross margin actually improved 65 basis points to 34.86%, helped by a more rational promotional environment and lower markdowns. Operating (EBIT) margin contracted to 6.59% from 7.85%.
Management guided to 4% to 6% sales growth and comparable store sales growth of 1% to 3% for 2010, with operating margin expanding 40 to 50 basis points and diluted EPS of $1.30 to $1.42d. Balance sheet and capital allocation remain conservative. Cash rose to $632 million, short-term borrowings were fully repaid, and long-term debt fell to $4.5 billion, lowering the debt-to-capital ratio to 21.0% from 25.1%.
Capital spending was cut to $1.8 billion from $3.3 billion as store expansion slowed, with 40 to 45 new stores planned for 2010 versus 62 in 2009. The board authorized a new $5 billion share repurchase program with no expiration, to be executed over roughly three years. Dividends rose to $0.355 per share, and the company holds debt ratings of A+/A1/A+ with a Fitch outlook revised to stable in March 2010.
02—Key points
Key Highlights
- Net sales declined 2.1% to $47.22 billion; comparable store sales fell 6.7%, improving to -1.6% in Q4 2009, the best quarter in over three years
- Net earnings fell 18.8% to $1.78 billion; diluted EPS was $1.21 versus $1.49 in 2008
- Gross margin expanded 65 basis points to 34.86% on fewer markdowns and a more rational promotional environment, but SG&A deleveraged 179 basis points to 24.75% of sales, pushing EBIT margin down to 6.59% from 7.85%
- Cash flow from operations was $4.05 billion; capital expenditures fell 45% to $1.8 billion as store expansion slowed (62 stores opened in 2009 versus 115 in 2008)
- Balance sheet strengthened: short-term borrowings were repaid to zero, long-term debt declined to $4.5 billion, and the debt-to-capital ratio improved to 21.0% from 25.1%
- Board approved a new $5 billion share repurchase authorization with no expiration; the company repurchased $504 million of stock in 2009
- 2010 guidance calls for 4% to 6% sales growth, 1% to 3% comparable store sales growth, 40 to 45 new stores, and diluted EPS of $1.30 to $1.42
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 30, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $47.22B$48.23B | −2.1% |
| Cost of Revenue | $30.76B$31.73B | −3.1% |
| Gross Profit | $16.46B$16.50B | −0.2% |
| SG&A Expenses | $11.74B$11.18B | +5.0% |
| Operating Expenses | $13.64B$12.99B | +4.9% |
| Interest Expense | $287.00M$280.00M | +2.5% |
| Net Income | $1.78B$2.19B | −18.8% |
| EPS (Basic) | $1.21$1.50 | −19.3% |
| EPS (Diluted) | $1.21$1.49 | −18.8% |
| Shares Outstanding (Basic) | 1.46B1.46B | +0.3% |
| Shares Outstanding (Diluted) | 1.46B1.47B | −0.3% |
05—Questions
Frequently Asked Questions
Why did Lowe's earnings decline in fiscal 2009 despite improving gross margins?
Gross margin rose 65 basis points to 34.86%, but SG&A grew to 24.75% of sales from 22.96%. Most of that increase came from store payroll deleverage, because lower sales per store meant more stores reached their base staffing thresholds. Bonus expense, employee insurance costs, and asset impairment charges also added pressure, and depreciation rose as a percentage of sales as well. Together these pushed EBIT margin down 126 basis points to 6.59%.
Is the home improvement recovery underway, according to management?
Management described cautious optimism. Comparable store sales declined only 1.6% in Q4 2009, larger-ticket projects and Installed and Special Order Sales showed sequential improvement, and 26 states posted positive comparable results in the fourth quarter. However, the 10-K also flags unemployment forecast at 10.0% for 2010, slow real income growth, and the expiration of housing stimulus programs in the second half of 2010 as headwinds. Management says consumer confidence remains relatively low and expects weakness to persist through much of fiscal 2010.
How is Lowe's capital allocation changing?
The company is shifting capital from store growth toward shareholder returns and balance sheet strength. Capital spending dropped to $1.8 billion in 2009 from $3.3 billion in 2008, and 2010 store openings are planned at 40 to 45, down from 62 in 2009 and 115 in 2008. Lowe's repaid its short-term borrowings, and the new $5 billion buyback program is expected to be executed over three years. Dividends increased to $0.355 per share from $0.335. Management also has a $100 million per year commitment over four years to a one-third stake in a Woolworths joint venture in Australia.
What are the main risks flagged in the 10-K?
The principal risks include a weak economy and slow recovery in housing and employment, unseasonable weather, the company's ability to open and staff new stores profitably, competition and promotional pricing, product liability and warranty exposure (Lowe's is self-insured for these), information systems disruption, data security and privacy compliance, and supply chain disruption affecting its roughly 7,000 vendors. The filing also notes that some vendors face financial stress from the recession and credit crisis, which could force Lowe's to replace smaller suppliers.
How strong is Lowe's financial position?
Lowe's remains financially sound. It ended the year with $632 million in cash, $425 million in short-term investments, and $33.0 billion in total assets, and shareholders' equity grew to $19.1 billion. Long-term debt fell to $4.5 billion, and the company has a $1.75 billion undrawn senior credit facility, which it was in compliance with at year end. Its senior debt is rated A+ by S&P and Fitch and A1 by Moody's. Fitch changed its outlook to stable in March 2010, while S&P and Moody's outlooks were negative and stable, respectively. Management stated that operating and financing cash flows will be adequate for the next 12 months.
06—Continue