01—Abstract
Summary
Summary of the 10-K filed April 2, 2012. Cited figures are marked; the original filing is the authoritative source.
Lowe's Companies (LOW) reported fiscal 2011, a 53-week year ended February 3, 2012, with net sales of $50.2 billiona, up 2.9% from $48.8 billion, while comparable store sales were flat.
Net earnings fell 8.5% to $1.84 billionb from $2.01 billion, and diluted EPS was $1.43 versus $1.42 in 2010. The extra week contributed about 1.6 points to sales growth. Gross margin compressed 58 basis points to 34.56%, driven by the 5% credit-card discount, everyday low pricing, and higher fuel costs.
Operating (EBIT) margin fell 76 basis points to 6.53%, largely due to $388 millionc in long-lived asset impairments and store closing charges, which pressured SG&A. Management is shifting from store expansion toward maximizing asset productivity and a seamless multi-channel model. Online sales grew about 70% year over year, and Lowe's closed 27 underperforming stores and cut planned openings in half, to roughly 10 in 2012.
The balance sheet shows more leverage. Total debt rose to about $7.6 billiond, and the debt-to-equity-plus-debt ratio climbed to 31.6% from 26.6%, as the company issued $1.0 billion of notes in November 2011 while repurchasing $2.9 billion of stock. Shareholder equity declined to $16.5 billion from $18.1 billion because buybacks exceeded retained earnings.
Operating cash flow improved to $4.35 billion from $3.85 billion. Management guided fiscal 2012 total sales growth of 1% to 2%, comparable store sales growth of 1% to 3%, and diluted EPS of $1.75 to $1.85. Note that the 2012 guidance is based on a 52-week year compared with 53 weeks in 2011, and the S&P credit rating carries a negative outlook.
For investors, the central question is whether the strategic reset and multi-channel investments (IT spending of $841 million in 2011) can restore margins and comparable sales growth while the company continues large share repurchases funded partly by debt. The company has a $4.5 billion remaining buyback authorization that it expects to use by the end of fiscal 2012.
02—Key points
Key Highlights
- Net sales rose 2.9% to $50.2 billion, but comparable store sales were flat; the 53rd week added about 1.6 points of growth.
- Net earnings declined 8.5% to $1.84 billion, and diluted EPS was $1.43 versus $1.42 a year earlier, as margin pressure offset sales growth.
- Gross margin fell 58 basis points to 34.56%, driven by the 5% credit-card discount, everyday low pricing, and higher distribution fuel costs.
- Operating margin (EBIT) declined to 6.53% from 7.29%, including $388 million of long-lived asset impairments and store closing charges.
- Strategy pivot: 27 underperforming stores closed, new store openings cut to about 10 in 2012 (a 50% reduction), and focus shifted to asset productivity and multi-channel growth; online sales rose about 70%.
- Leverage increased: debt-to-capital rose to 31.6% from 26.6%, with $1.0 billion of notes issued while $2.9 billion of shares were repurchased; shareholder equity fell to $16.5 billion.
- 2012 guidance: total sales +1% to 2%, comparable store sales +1% to 3%, operating margin up about 100 basis points, and diluted EPS of $1.75 to $1.85; S&P senior debt outlook is negative.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed April 2, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $50.21B$48.81B | +2.9% |
| Cost of Revenue | $32.86B$31.66B | +3.8% |
| Gross Profit | $17.35B$17.15B | +1.2% |
| SG&A Expenses | $12.59B$12.01B | +4.9% |
| Operating Expenses | $14.44B$13.92B | +3.7% |
| Net Income | $1.84B$2.01B | −8.5% |
| EPS (Basic) | $1.43$1.42 | +0.7% |
| EPS (Diluted) | $1.43$1.42 | +0.7% |
| Shares Outstanding (Basic) | 1.27B1.40B | −9.3% |
| Shares Outstanding (Diluted) | 1.27B1.40B | −9.3% |
05—Questions
Frequently Asked Questions
Why did Lowe's earnings decline in fiscal 2011 even though sales grew?
Sales rose 2.9% to $50.2 billion, but comparable store sales were flat and gross margin fell 58 basis points to 34.56%. Margin was pressured by the 5% discount offered to Lowe's credit cardholders, everyday low pricing initiatives, and higher fuel costs. SG&A also rose as a share of sales, mainly due to $388 million in impairment and store closing charges, so net earnings fell 8.5% to $1.84 billion.
How much debt does Lowe's carry, and is its balance sheet getting riskier?
Total debt was about $7.6 billion at February 3, 2012, up from $6.6 billion a year earlier, after a $1.0 billion note issuance in November 2011. The debt-to-equity-plus-debt ratio rose to 31.6% from 26.6%, as buybacks reduced shareholder equity to $16.5 billion. The company reports $9.6 billion of available debt capacity and no outstanding commercial paper or revolver borrowings. Its S&P senior debt rating is A- with a negative outlook, while Moody's rates it A3 with a stable outlook.
What is management's outlook for fiscal 2012?
Management guided total sales growth of 1% to 2% and comparable store sales growth of 1% to 3%. It expects operating margin to rise about 100 basis points and diluted EPS of $1.75 to $1.85. Fiscal 2012 has 52 weeks versus 53 in 2011, which will weigh on reported growth rates. The company plans about $4.5 billion in share repurchases and a $1.4 billion capital budget, with roughly 10 new stores.
Is Lowe's still expanding its store base?
Not at the previous pace. Lowe's opened 25 stores in 2011 and closed 27 underperforming U.S. stores in the second half of the year. It plans roughly 10 openings in 2012 and about 15 per year afterward, a 50% reduction from its earlier plan. Management says its growth engine is now asset productivity and multi-channel sales rather than store count. The Masters joint venture in Australia is expected to open 15 to 20 stores in 2012.
How is Lowe's returning capital to shareholders?
In 2011, Lowe's repurchased $2.9 billion of stock and paid $647 million in cash dividends. The quarterly dividend rose to $0.14 per share from $0.11 a year earlier, and the full-year dividend was $0.53. A new $5.0 billion repurchase authorization was approved in August 2011, leaving $4.5 billion remaining at fiscal year-end, which the company expects to use by the end of fiscal 2012.
06—Continue