01—Abstract
Summary
Summary of the 10-K filed March 29, 2011. Cited figures are marked; the original filing is the authoritative source.
Lowe's Companies (LOW) closed fiscal 2010 (year ended January 28, 2011) with net sales up 3.4% to $48.8 billiona, its first comparable store sales increase (+1.3%) since 2005, following a 6.7% decline in 2009.
Gross margin expanded 28 basis points to 35.14%, driven by better seasonal sell-through, more competitive pricing zones (from under 90 to over 210), and Base Price Optimization. Operating margin (EBIT) rose 70 basis points to 7.29%, and net earnings grew 12.7% to $2.01 billionb, or $1.42 diluted EPS versus $1.21 in 2009. Management characterized the home improvement market as moderately improving but still constrained by high unemployment, weak home prices, and low housing turnover, and guided to roughly 5% total sales growth and 1% to 2% comparable store sales growth for 2011, with EPS of $1.60 to $1.72 for fiscal 2011.
Balance sheet and capital allocation shifted meaningfully during the year. Lowe's repurchased $2.6 billionc of stock (about 111.7 million shares) and issued $2.0 billion of new unsecured notes, pushing long-term debt to $6.5 billion from $4.5 billion and the debt-to-capital ratio to 26.6% from 21.0%. Operating cash flow of $3.85 billion was down from $4.05 billion, mainly on working capital and tax payments, and the company retained a $2.4 billion repurchase authorization that it expects to use by the end of fiscal 2011.
Credit ratings were stable (S&P A, Moody's A1), and the company stated it does not expect a downgrade. Key risks remain in the 10-K's risk factors, including sensitivity to the broader economy and housing market, competitive pricing pressure, execution risk on its Installed Sales, PSE, and technology initiatives, and expansion in Canada, Mexico, and the Australian joint venture with Woolworths. The company reported no material legal proceedings and an effective internal control framework, audited by Deloitte & Touche LLP with unqualified opinions.
02—Key points
Key Highlights
- Net sales rose 3.4% to $48.8 billion; comparable store sales grew 1.3%, the first annual comp increase since 2005.
- Gross margin improved 28 bps to 35.14%, aided by seasonal sell-through, expanded pricing zones, and Base Price Optimization.
- Net earnings increased 12.7% to $2.01 billion; diluted EPS was $1.42 versus $1.21 in fiscal 2009.
- Lowe's returned $2.6 billion via share repurchases (111.7 million shares) and paid $571 million in dividends, with $2.4 billion of authorization remaining.
- Long-term debt nearly doubled-to-$6.5 billion from $4.5 billion after $2.0 billion of new notes, lifting the debt-to-capital ratio to 26.6% from 21.0%.
- Fiscal 2011 guidance calls for roughly 5% sales growth (including a 53rd week), 1% to 2% comparable store sales growth, 25 to 30 new stores, and EPS of $1.60 to $1.72.
- Scale remains large: 1,749 stores (about 197 million sq. ft.), 161,000 full-time employees, and over 7,000 merchandise vendors, with no vendor above 8% of purchases.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed March 29, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $48.81B$47.22B | +3.4% |
| Cost of Revenue | $31.66B$30.76B | +2.9% |
| Gross Profit | $17.15B$16.46B | +4.2% |
| SG&A Expenses | $12.01B$11.74B | +2.3% |
| Operating Expenses | $13.92B$13.64B | +2.1% |
| Interest Expense | $332.00M$287.00M | +15.7% |
| Net Income | $2.01B$1.78B | +12.7% |
| EPS (Basic) | $1.42$1.21 | +17.4% |
| EPS (Diluted) | $1.42$1.21 | +17.4% |
| Shares Outstanding (Basic) | 1.40B1.46B | −4.2% |
| Shares Outstanding (Diluted) | 1.40B1.46B | −4.2% |
05—Questions
Frequently Asked Questions
Is Lowe's demand recovering, and what is driving the improvement?
Comparable store sales turned positive in 2010 (+1.3%) after a 6.7% decline in 2009, and management reported improvement across all four quarters. Growth came mainly from smaller projects in categories such as tools and lawn & landscape, along with the Project Specialist Exteriors program, which lifted comparable installed sales by over 10%. Larger discretionary projects (fashion plumbing, cabinets, home fashion) remained weak, and management described the environment as slow growth, not a strong rebound.
Did profitability improve, and what were the main drivers?
Yes. EBIT margin expanded 70 bps to 7.29% and net margin rose 34 bps to 4.12%. Gross margin gains came from better seasonal inventory sell-through, more granular pricing zones, and Base Price Optimization. SG&A leveraged 25 bps, mainly from lower bonus expense, partly offset by higher store payroll, fleet, and bank card costs. Interest expense rose 16% due to new debt issuance.
How is Lowe's using its cash, and does the higher debt create concern?
Lowe's spent heavily on buybacks ($2.6 billion) and dividends, funded partly by $2.0 billion of new unsecured notes. Debt rose to $6.5 billion, and the debt-to-capital ratio increased to 26.6%. Management said cash from operations and financing should cover the next 12 months, the $1.75 billion credit facility was undrawn, and it does not expect a rating downgrade. Operating cash flow fell to $3.85 billion from $4.05 billion, mainly on working capital and higher tax payments.
What are the main risks investors should monitor?
The 10-K highlights dependence on the broader economy and housing turnover, slow recovery in home prices (with economists expecting a further 5% to 8% decline in 2011), intense competition with promotional pricing, execution risk on new service models and IT systems, reliance on a limited number of key vendors, and expansion risk in Canada, Mexico, and Australia through the Woolworths joint venture. Lowe's also notes it has no material pending legal proceedings.
What does the 2011 outlook imply for investors?
Management expects total sales growth of about 5% (including roughly 1.6 points from a 53rd week), comparable store sales growth of 1% to 2%, operating margin expansion of about 30 bps, and diluted EPS of $1.60 to $1.72, assuming roughly $2.4 billion of share repurchases. Capital spending is budgeted at about $1.8 billion, with about 45% for new stores and 30% for existing stores.
06—Continue