Lowe's 10-Q 2022-07-29

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended July 29, 2022

or

For the transition period from ______ to ______

Commission File Number 1-7898

LOWE’S COMPANIES, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

LOWE’S COMPANIES, INC.

- TABLE OF CONTENTS -

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FORWARD-LOOKING STATEMENTS

This Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements including words such as “believe”, “expect”, “anticipate”, “plan”, “desire”, “project”, “estimate”, “intend”, “will”, “should”, “could”, “would”, “may”, “strategy”, “potential”, “opportunity”, “outlook”, “scenario”, “guidance”, and similar expressions are forward-looking statements. Forward-looking statements involve, among other things, expectations, projections, and assumptions about future financial and operating results, objectives, business outlook, priorities, sales growth, shareholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for products and services, share repurchases, Lowe’s strategic initiatives, including those relating to acquisitions and dispositions and the impact of such transactions on our strategic and operational plans and financial results. Such statements involve risks and uncertainties and we can give no assurance that they will prove to be correct. Actual results may differ materially from those expressed or implied in such statements.

A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by these forward-looking statements including, but not limited to, changes in general economic conditions, such as volatility and/or lack of liquidity from time to time in U.S. and world financial markets and the consequent reduced availability and/or higher cost of borrowing to Lowe’s and its customers, slower rates of growth in real disposable personal income that could affect the rate of growth in consumer spending, inflation and its impacts on discretionary spending and on our costs, shortages, and other disruptions in the labor supply, interest rate and currency fluctuations, home price appreciation or decreasing housing turnover, the availability of consumer credit and of mortgage financing, trade policy changes or additional tariffs, outbreaks of pandemics, fluctuations in fuel and energy costs, inflation or deflation of commodity prices, natural disasters, armed conflicts, acts of both domestic and international terrorism, and other factors that can negatively affect our customers.

Investors and others should carefully consider the foregoing factors and other uncertainties, risks and potential events including, but not limited to, those described in “Item 1A - Risk Factors” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in our most recent Annual Report on Form 10-K and as may be updated from time to time in our quarterly reports on Form 10-Q or other subsequent filings with the SEC. All such forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update these statements other than as required by law.

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Part I - FINANCIAL INFORMATION

Lowe’s Companies, Inc.

Consolidated Statements of Earnings (Unaudited)

In Millions, Except Per Share and Percentage Data

See accompanying notes to the consolidated financial statements (unaudited).

Lowe’s Companies, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

In Millions, Except Percentage Data

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three and six months ended July 29, 2022, and July 30, 2021. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2022 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. Unless otherwise specified, all comparisons made are to the corresponding period of 2021. This discussion and analysis is presented in four sections:

• Executive Overview

• Operations

• Financial Condition, Liquidity and Capital Resources

• Critical Accounting Policies and Estimates

EXECUTIVE OVERVIEW

Net sales in the second quarter of 2022 decreased 0.3% to $27.5 billion compared to net sales of $27.6 billion in the second quarter of 2021. The decrease in total sales was driven by a decrease in comparable sales. Net earnings in the second quarter of 2022 was $3.0 billion, which was in line with prior year results. Diluted earnings per common share increased 9.9% to $4.67 in the second quarter of 2022 from $4.25 in the second quarter of 2021.

For the first six months of 2022, cash flows from operating activities were approximately $6.0 billion, while $687 million was used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, we repurchased $4.0 billion of common stock and paid $524 million in dividends during the three months ended July 29, 2022.

During the second quarter of 2022, comparable sales declined 0.3% with eight of 15 product categories generating positive comparable sales. In the quarter, we experienced broad-based demand from our Pro customers with positive comp sales in our core Pro categories, led by Rough Plumbing and Building Materials. We are pleased with the momentum with our Pro loyalty program, MVPs Pro Rewards and Partnership ProgramTM, which was launched in the first quarter of 2022. In addition to Pro customer demand, our positive comp sales also reflect unit price increases due to cost inflation. Despite our gains with the Pro customer, Do-It-Yourself (DIY) customer demand was adversely impacted by a short spring season due to unseasonable weather and cycling unprecedented demand in certain discretionary categories that occurred over the past two years.

During the quarter, we continued to execute on our Perpetual Productivity Improvement (PPI) initiatives driving operating margin improvement despite demand pressures. We expect these initiatives and our investments in the business to deliver operating margin productivity and drive meaningful long-term shareholder value going forward.

OPERATIONS

The following table sets forth the percentage relationship to net sales of each line item of the consolidated statements of earnings (unaudited), as well as the percentage change in dollar amounts from the prior period. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements (unaudited), including the related notes to the consolidated financial statements (unaudited).

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The following table sets forth key metrics utilized by management in assessing business performance. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements (unaudited), including the related notes to the consolidated financial statements (unaudited).

During the three months ended July 29, 2022, the Company adjusted its comparable sales metric to exclude days affected by national outages with its third-party credit and debit processor. Excluding these days, and the corresponding prior period days, increased comparable sales by approximately 30 basis points and 10 basis points for the three and six months ended July 29, 2022, respectively. The comparable sales metric for the three and six months ended July 30, 2021 was not impacted by similar outages and was not adjusted.

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1 A comparable location is defined as a retail location that has been open longer than 13 months. A location that is identified for relocation is no longer considered comparable in the month of its relocation. The relocated location must then remain open longer than 13 months to be considered comparable. A location we decide to close is no longer considered comparable as of the beginning of the month in which we announce its closing. Comparable sales are presented on a transacted basis when tender is accepted from a customer. Comparable sales include online sales, which impacted second quarter fiscal 2022 and fiscal 2021 comparable sales by approximately 55 basis points and 70 basis points, respectively, and year-to-date fiscal 2022 and fiscal 2021 comparable sales by approximately 25 basis points and 170 basis points, respectively. The comparable store sales calculation included in the preceding table was calculated using comparable 13-week and 26-week periods.

2 Average ticket is defined as net sales divided by the total number of customer transactions.

3 Average store size selling square feet is defined as sales floor square feet divided by the number of stores open at the end of the period. The average Lowe’s-branded home improvement store has approximately 112,000 square feet of retail selling space.

4 Return on invested capital is calculated using a non-GAAP financial measure. Net earnings to average debt and shareholders’ (deficit)/equity is the most comparable GAAP ratio. See below for additional information and reconciliations of non-GAAP measures.

Non-GAAP Financial Measures

Return on Invested Capital

Return on Invested Capital (ROIC) is calculated using a non-GAAP financial measure. Management believes ROIC is a meaningful metric for analysts and investors as a measure of how effectively the Company is using capital to generate profits. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by our management may differ from the methods used by other companies. We encourage you to understand the methods used by another company to calculate ROIC before comparing its ROIC to ours.

We define ROIC as the rolling 12 months’ lease adjusted net operating profit after tax (Lease adjusted NOPAT) divided by the average of current year and prior year ending debt and shareholders’ (deficit)/equity. Lease adjusted NOPAT is a non-GAAP financial measure, and net earnings is considered to be the most comparable GAAP financial measure. The calculation of ROIC, together with a reconciliation of net earnings to Lease adjusted NOPAT, is as follows:

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1 Income tax adjustment is defined as lease adjusted net operating profit multiplied by the effective tax rate, which was 24.8% and 24.2% for the periods ended July 29, 2022, and July 30, 2021, respectively.

2 Average debt and shareholders’ (deficit)/equity is defined as average current year and prior year ending debt, including current maturities, short-term borrowings, and operating lease liabilities, plus the average current year and prior year ending total shareholders’ (deficit)/equity.

Results of Operations

Net Sales – Net sales in the second quarter of 2022 decreased 0.3% to $27.5 billion. The decrease in total sales was primarily driven by comparable sales decline. Comparable sales declined 0.3% over the same period, driven by a 6.4% decrease in comparable customer transactions, partially offset by a 6.1% increase in comparable average ticket.

During the second quarter of 2022, we experienced comparable sales increases in eight of 15 product categories, led by Rough Plumbing, Building Materials, and Paint. Strength in these categories reflects robust Pro customer demand, as well as unit price increases due to cost inflation. We experienced the lowest comparable sales in Lighting, Tools, and Lumber in the quarter. DIY customer spending in certain discretionary categories decreased due to cycling unprecedented demand over the past two years when certain consumers received three rounds of government stimulus payments. Lumber decline was primarily due to cycling high commodity prices in the prior year. Geographically, eight of 15 U.S. regions experienced positive comparable sales, while our Canadian operations lagged the U.S. primarily due to lower Lumber sales as the Canadian business is more heavily weighted towards Lumber.

Net sales decreased 1.6% to $51.1 billion for the first six months of 2022 compared to 2021. Comparable sales declined 2.1% over the same period, driven by a 9.2% decrease in comparable customer transactions, partially offset by a 7.1% increase in comparable average ticket.

Gross Margin – For the second quarter of 2022, gross margin as a percentage of sales decreased 54 basis points. The gross margin decrease for the quarter is driven by approximately 35 basis points of deleverage in product margin rate, 35 basis points of deleverage from distribution costs, 10 basis points of deleverage from inventory shrink, primarily due to live-goods damaged by unseasonable weather, partially offset by 30 basis points of favorable product mix. Product margin rate was pressured early in the quarter by a reduction in Lumber prices. These pressures were largely mitigated by data-driven pricing and product cost management strategies across other product categories.

Gross margin as a percentage of sales increased five basis points in the first six months of 2022 compared to 2021. Gross margin was positively impacted by approximately 25 basis points of favorable product mix and 15 basis points of total rate improvement due to continued improvements in managing product costs and disciplined pricing strategies. These favorable

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impacts are partially offset by approximately 25 basis points of distribution costs and 10 basis points of deleverage from inventory damages.

SG&A – For the second quarter of 2022, SG&A expense leveraged 80 basis points as a percentage of sales compared to the second quarter of 2021. This was primarily driven by improved labor productivity, partially offset by wage pressure and an incremental bonus to our hourly front-line associates.

SG&A expense as a percentage of sales leveraged 55 basis points in the first six months of 2022 compared to 2021 primarily due to the same factors that impacted SG&A for the second quarter.

Depreciation and Amortization – Depreciation and amortization deleveraged 14 basis points as a percentage of sales for the second quarter of 2022 compared to 2021 due to ongoing capital investments in technology, store environment, and store equipment.

Depreciation and amortization deleveraged 21 basis points as a percentage of sales for the first six months of 2022 compared to 2021 primarily due to the same factors that impacted depreciation and amortization for the second quarter.

Interest – Net – Interest expense for the second quarter of 2022 deleveraged 18 basis points primarily due to interest expense related to the issuance of unsecured notes in September 2021 and March 2022, partially offset by scheduled payoff of notes at maturity.

Interest expense for the first six months of 2022 deleveraged 17 basis points primarily due to the same factors that impacted interest expense for the second quarter.

Income Tax Provision – Our effective income tax rates were 24.5% and 24.4% for the three months ended July 29, 2022 and July 30, 2021, respectively, and 24.2% and 24.0% for the six months ended July 29, 2022 and July 30, 2021, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Cash flows from operations, combined with our continued access to capital markets on both a short-term and long-term basis, as needed, remain adequate to fund our operations, make strategic investments to support long-term growth, and return excess cash to shareholders in the form of dividends and share repurchases. We believe these sources of liquidity will continue to support our business for the next twelve months. As of July 29, 2022, we held $1.5 billion of cash and cash equivalents, as well as $4.0 billion in undrawn capacity on our revolving credit facilities.

Cash Flows Provided by Operating Activities

Cash flows from operating activities continued to provide the primary source of our liquidity. The decrease in net cash provided by operating activities for the six months ended July 29, 2022, compared to the six months ended July 30, 2021, was driven primarily by changes in working capital. Inventory decreased operating cash flows for the first six months of 2022 by approximately $1.7 billion compared to a decrease of approximately $1.1 billion for the first six months of 2021. The increase in inventory is primarily due to product cost and freight inflation compared to the prior year, as well as slightly lower inventory turns year-over-year. Deferred revenue increased operating cash flows by $97 million for the first six months of 2022, compared to an increase of $511 million for the first six months of 2021. The decline in operating cash flow due to deferred revenue compared to the prior year is primarily due to lower sales volume, as well as an operational focus on customer fulfillment.

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Cash Flows Used in Investing Activities

Net cash used in investing activities primarily consists of transactions related to capital expenditures.

Capital expenditures

Our capital expenditures generally consist of investments in our strategic initiatives to enhance our ability to serve customers, improve existing stores, and support expansion plans. The following table provides our capital expenditures for the six months ended July 29, 2022, and July 30, 2021:

1**Includes merchandising resets, facility repairs, replacements of IT and store equipment, among other specific efforts.

2**Represents investments related to our strategic focus areas aimed at improving customers’ experience and driving improved performance in the near and long term (excluding acquisitions).

3**Represents expenditures primarily related to land purchases, buildings, and personal property for new store projects and new corporate facilities projects, as well as expenditures related to our international operations.

Our fiscal year 2022 outlook for capital expenditures is up to $2.0 billion.

Cash Flows Used in Financing Activities

Net cash used in financing activities primarily consists of transactions related to our share repurchases, long-term debt, and cash dividend payments.

Total Debt

During the six months ended July 29, 2022, we issued $5.0 billion of unsecured notes, the proceeds of which were designated for general corporate purposes. During the six months ended July 29, 2022, we also paid $750 million due to the scheduled payoff of notes at maturity.

Our commercial paper program is supported by the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement. The amount available to be drawn under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement is reduced by the amount of borrowings under our commercial paper program. There were no outstanding borrowings under the Company’s commercial paper program, the 2020 Credit Agreement, or the Third Amended and Restated Credit Agreement as of July 29, 2022, and July 30, 2021. Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement as of July 29, 2022 was $4.0 billion.

The 2020 Credit Agreement and the Third Amended and Restated Credit Agreement contain customary representations, warranties, and covenants. We were in compliance with those covenants at July 29, 2022.

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The following table includes additional information related to our debt for the six months ended July 29, 2022, and July 30, 2021:

Share Repurchases

We have an ongoing share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions. We also withhold shares from employees to satisfy tax withholding liabilities. Shares repurchased are retired and returned to authorized and unissued status. The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total cash used to repurchase shares for the six months ended July 29, 2022, and July 30, 2021:

As of July 29, 2022, we had $11.7 billion remaining available under our share repurchase program with no expiration date. We expect to repurchase shares totaling approximately $12.0 billion in 2022 (including the amount repurchased during the first six months of fiscal year 2022).

Dividends

Dividends are paid in the quarter immediately following the quarter in which they are declared. Dividends paid per share increased from $1.20 per share for the six months ended July 30, 2021, to $1.60 per share for the six months ended July 29, 2022.

Capital Resources

We expect to continue to have access to the capital markets on both a short-term and long-term basis when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios. The table below reflects our debt ratings by Standard & Poor’s (S&P) and Moody’s as of August 25, 2022, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds. Our debt ratings have enabled, and should continue to enable, us to refinance our debt as it becomes due at favorable rates in capital markets. Our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in our debt rating or a decrease in our stock price. In addition, we do not believe it will be necessary to repatriate significant cash and cash equivalents and short-term investments held in foreign affiliates to fund domestic operations.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are described in Note 1 to the consolidated financial statements presented in the Annual Report. Our critical accounting policies and estimates are described in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. Our significant and critical accounting policies and estimates have not changed significantly since the filing of the Annual Report.

The Company is exposed to certain market risks, including changes in foreign currency exchange rates related to our international operations, interest rates, and commodity prices. The Company’s market risks have not changed materially from those disclosed in the Annual Report for the fiscal year ended January 28, 2022.

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” (as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of July 29, 2022, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In addition, no change in the Company’s internal control over financial reporting occurred during the quarter ended July 29, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II – OTHER INFORMATION

Item 1. - Legal Proceedings

The Company is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to such lawsuits, claims and proceedings, the Company records reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on its results of operations, financial position, or cash flows. SEC rules establish a threshold of $300,000 for purposes of disclosing environmental proceedings involving a governmental authority. The Company maintains liability insurance for certain risks that are subject to certain self-insurance limits.

The U.S. Attorney’s Office for the Central District of California and the U.S. Environmental Protection Agency’s Region 9 Office are conducting an investigation with respect to whether the Company and independent contractors who performed installations under the Company’s third-party installer program complied with applicable recordkeeping requirements and lead-safe practices under the Toxic Substances Control Act, the Environmental Protection Agency’s Lead Renovation, Repair and Painting Rules, and with an Environmental Protection Agency civil consent decree that the Company entered into in 2014 in the context of projects in homes constructed before 1978.

There have been no material changes in the Company’s risk factors from those disclosed in “Item 1A. Risk Factors” in our Annual Report filed with the SEC on March 21, 2022.

Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table sets forth information with respect to purchases of the Company’s common stock on a trade date basis made during the three months ended July 29, 2022:

1**The total number of shares repurchased includes shares withheld from employees to satisfy either the exercise price of stock options or the statutory withholding tax liability upon the vesting of share-based awards.

2**On December 15, 2021, the Company announced that its Board of Directors authorized $13.0 billion of share repurchases under the program, in addition to the $15.0 billion of share repurchases authorized by the Board of Directors in December 2020, with no expiration.

3**In May 2022, the Company entered into an Accelerated Share Repurchase (ASR) agreement with a third-party financial institution to repurchase the Company’s common stock. At inception, pursuant to the agreement, the Company paid $1.8 billion to the financial institution and received an initial delivery of 7.5 million shares. In July, prior to the end of the second quarter, the Company finalized the transaction and received an additional 2.1 million shares. The average price paid per share in settlement of the ASR agreement included in the table above was determined with reference to the volume-weighted average price of the Company’s common stock over the term of the ASR agreement. See Note 7 to the consolidated financial statements included herein for additional information regarding share repurchases.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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