10-QPeriod: Q3 FY2019

LOWES COMPANIES INC Quarterly Report for Q3 Ended Aug 3, 2018

Filed September 4, 2018For Securities:LOW

Summary

Lowe's Companies, Inc. reported strong financial performance for the second quarter and first half of fiscal year 2018, demonstrating significant year-over-year growth. Net sales increased by 7.1% in the second quarter and 5.2% for the first six months, driven by a combination of comparable sales growth, particularly in key categories like Lawn & Garden and Lumber & Building Materials, and the adoption of new revenue recognition standards. Diluted earnings per share also saw a healthy increase, rising by 10.8% in the quarter. A significant strategic development during this period was the decision to exit Orchard Supply Hardware operations, which resulted in impairment charges and is expected to incur further costs in the second half of the year. Despite these charges, the company is focused on streamlining operations, enhancing its omni-channel presence, and reallocating resources to its core home improvement business, aiming for improved efficiency and profitability. The company also continued its commitment to returning capital to shareholders through substantial share repurchases and dividend payments.

Financial Highlights

51 data points
Beta

Revenue

$20.89B

33.0% Gross Margin

Net Income

$1.52B

7.3% Net Margin

EPS (Diluted)

$1.86

Total Assets

$37.10B

Cash & Equivalents

$2.25B

Free Cash Flow

$2.04B

Financial Statements
Beta
Revenue$20.89B
Cost of Revenue$14.00B
Gross Profit$6.88B
SG&A Expenses$4.39B
Operating Income$2.16B
Net Income$1.52B
EPS (Basic)$1.86
EPS (Diluted)$1.86
Shares Outstanding (Basic)813.00M
Shares Outstanding (Diluted)814.00M

Key Highlights

  • 1Net sales increased by 7.1% to $20.9 billion in Q2 2018 and by 5.2% to $38.2 billion for the first six months compared to the prior year.
  • 2Diluted earnings per common share rose by 10.8% to $1.86 in Q2 2018. Adjusted diluted EPS increased significantly to $2.07, excluding one-time charges.
  • 3Comparable sales showed strength, increasing by 5.2% in Q2 2018, with particular strength in Lawn & Garden, Lumber & Building Materials, and Appliances.
  • 4The company adopted new revenue recognition standards (ASU 2014-09), which positively impacted net sales and gross margin but led to SG&A deleverage due to reclassifications.
  • 5Lowe's announced its strategic decision to exit Orchard Supply Hardware operations, incurring $230 million in non-cash pre-tax charges in Q2 2018 and anticipating further costs in H2 2018.
  • 6Significant capital returns to shareholders included $1.1 billion in share repurchases and $338 million in dividends during Q2 2018.
  • 7The effective income tax rate decreased substantially from 36.2% in Q2 2017 to 24.4% in Q2 2018, primarily due to the Tax Cuts and Jobs Act.

Frequently Asked Questions

The adoption of ASU 2014-09, effective February 3, 2018, resulted in an increase in net sales and gross margin primarily due to the reclassification of profit sharing income from the proprietary credit program from Selling, General & Administrative (SG&A) expenses to sales. This change impacted comparability with prior periods as comparative results were not restated. While boosting gross margin, it contributed to SG&A deleverage on a percentage of sales basis.

Lowe's has committed to exiting its Orchard Supply Hardware operations by the end of fiscal 2018, closing all 99 stores. This strategic move is intended to refocus resources on the core home improvement business. The exit resulted in $230 million of non-cash pre-tax impairment charges and discontinued project costs in Q2 2018. Additional pre-tax costs of $390 to $475 million are expected in the second half of fiscal 2018, related to lease obligations, accelerated depreciation, and severance.

Lowe's continues to prioritize returning capital to shareholders. In the second quarter of 2018, the company paid $338 million in dividends and repurchased $1.1 billion of common stock. For the first six months of 2018, total share repurchases amounted to $1.86 billion. The company had $5.1 billion remaining under its share repurchase program as of August 3, 2018, and expects to repurchase approximately $3.0 billion in 2018.

The effective income tax rate significantly decreased from 36.2% in the second quarter of 2017 to 24.4% in the second quarter of 2018. This reduction is primarily attributable to the enactment of the Tax Cuts and Jobs Act in fiscal 2017, which lowered the U.S. corporate federal income tax rate from 35% to 21%.