10-QPeriod: Q3 FY2019

LOWES COMPANIES INC Quarterly Report for Q3 Ended Nov 2, 2018

Filed December 6, 2018For Securities:LOW

Summary

Lowe's Companies, Inc. (LOW) reported its third-quarter fiscal year 2018 results, characterized by a strategic reassessment aimed at strengthening the company's foundation for long-term success. During the quarter, Lowe's initiated several significant business exits, including Orchard Supply Hardware operations, 20 underperforming U.S. stores, 31 locations in Canada, and certain non-core U.S. activities. Additionally, a decision was made to pursue an exit from its Mexico retail operations. These strategic actions resulted in substantial pre-tax charges of $280 million in the third quarter, impacting net earnings and diluted earnings per share. Despite these charges, net sales increased by 3.8% to $17.4 billion, with comparable sales showing a modest increase of 1.5%. The company is focusing on improving store and online execution, addressing issues like out-of-stocks and reset execution. While facing some category-specific challenges, key growth areas included Seasonal & Outdoor Living, Appliances, and Lawn & Garden. The favorable retail environment, supported by strong consumer confidence and residential investment, presents an opportunity for Lowe's to gain market share as it addresses operational improvements. The company maintains a strong liquidity position and expects it to remain adequate for its operational needs, investments, debt repayment, dividends, and share repurchases.

Key Highlights

  • 1Net sales increased by 3.8% to $17.4 billion in the third quarter of fiscal 2018, compared to the prior year period.
  • 2Comparable sales increased by 1.5% in the third quarter, driven by a 2.3% increase in average ticket, partially offset by a 0.8% decrease in transactions.
  • 3The company recorded significant pre-tax charges totaling $280 million in the third quarter related to strategic business exits, including Orchard Supply Hardware, U.S. and Canadian store closures, and non-core activities.
  • 4Diluted earnings per share decreased by 25.7% to $0.78 in the third quarter, largely due to the impact of these restructuring charges ($0.26 per share).
  • 5Gross margin as a percentage of sales decreased by 157 basis points in the third quarter, impacted by inventory rationalization, reset-related clearance, and wind-down of Orchard operations, partially offset by the adoption of new revenue recognition standards.
  • 6Selling, General, and Administrative (SG&A) expenses deleveraged by 180 basis points as a percentage of sales in the third quarter, mainly due to the adoption of new revenue recognition standards and charges related to strategic reassessment.
  • 7Cash provided by operating activities increased significantly to $6.8 billion for the nine months ended November 2, 2018, compared to $5.4 billion in the prior year period, reflecting strong operational cash generation.

Frequently Asked Questions

The primary reason for the decline in net earnings was the recognition of significant pre-tax charges totaling $280 million. These charges were related to strategic decisions to exit certain business operations, including Orchard Supply Hardware, underperforming U.S. and Canadian stores, non-core activities, and a planned exit from Mexico retail operations.

The adoption of ASU 2014-09, using the modified retrospective method, impacted both sales and expenses. For the third quarter, it contributed 1.4% to sales growth primarily through reclassification of profit sharing income from SG&A to sales. It also impacted gross margin by approximately 107 basis points positively and SG&A by approximately 118 basis points negatively as a percentage of sales due to the same reclassification. Prior period results were not restated, affecting comparability.

Lowe's expects its sources of liquidity, including cash flows from operations, supplemented by borrowings, to remain adequate for the next 12 months. This includes funding operations, strategic investments, debt repayment, dividends, and share repurchases. The company also believes it will continue to have access to capital markets for liquidity needs.

The company is undertaking a strategic reassessment to build a sustainable foundation. Key initiatives include exiting underperforming businesses and locations, focusing on improving execution in retail stores and online, addressing issues like out-of-stocks and reset execution, and implementing new store operations and merchandising strategies. The goal is to drive sustainable long-term improvements and increase market share.