This summary is based on the second quarter fiscal 2008 earnings call conducted by Lowe’s Companies Inc. (LOW) on August 18, 2008.
Management:
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Chairman of the Board, Chief Executive Officer: Robert A. Niblock
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President, Chief Operating Officer: Larry D. Stone
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Chief Financial Officer, Executive Vice President: Robert F. Hull Jr.
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Executive Vice President, Business Development: Gregory M. Bridgeford
Key Investors Issues
- Earnings were $938 million or 64 cents a share, decreasing 4.5% from $1 billion or 67 cents a share last year.
- Sales were $14.5 billion, which represents a 2.4% increase from 2007.
Half Year Highlights:
- Total sales increased 0.7% to $26.5 billion.
- Net income dropped 12% to $1.8 billion or $1.17 a share.
- Cash flow from operations was $3.9 billion, an increase of $790 million or 26% over the first half of 2007.
Second Quarter Highlights
Sales were $14.5 billion, which represents a 2.4% increase over last year’s second quarter as total customer count increased 4.6% but average ticket decreased 2.2% to $6.95.
- Comp sales were negative 5.3% and comp transactions decreased 2.7% and comp average ticket decreased 2.6%.
- The firm experienced nominal lumber and building material inflation in the quarter, which had minimal impact on second quarter comps.
- The categories that performed above average include building materials, rough plumbing, hardware, paint, flooring, nursery, outdoor power equipment, lawn and landscape products, appliances, and home environment.
- In addition, walls and windows and seasonal living performed at approximately the overall corporate average.
From a regional perspective, five of the 22 regions had positive comp sales in the quarter.
- The positive comping markets were in the middle of the country, from the upper Midwest down through Texas.
- However, six of the 22 regions had double-digit negative comps, including California, the Northeast, Florida, and Gulf Coast markets.
- Gross margin was 34.3% of sales and decreased 13 basis points as the whole house carpet promotion negatively impacted gross margin by 20 basis points.
- In addition, the firm has received vendor price increases in a number of product categories.
Higher fuel costs increased cost of goods sold and negatively impacted gross margin by approximately 5 basis points.
- Deleverage on distribution fixed costs caused approximately 5 basis points of negative impact on gross margin in the quarter.
- Lightly offsetting these items were positive impacts of 13 basis points from lower inventory shrink as a percentage of sales and 8 basis points from the margin mix of products sold.
- SG&A was 20.8% of sales, which deleveraged 74 basis points, driven by store payroll, fixed expenses, bonus, and credit.
- As sales per store decline, additional stores are hitting the minimum hours threshold, which increases the proportion of fixed to total payroll.
- Store opening costs of $21 million leveraged four basis points to last year as a percentage of sales as the firm opened 23 new stores with no relocations, compared to 26 new stores, including two relocations in 2007.
Depreciation at 2.6% of sales totaled $381 million and deleveraged 28 basis points compared with last year’s second quarter, primarily due to negative comp sales and the addition of 153 stores over the past 12 months.
- Earnings before interest and taxes or operating margin decreased 111 basis points to 10.8% of sales.
- Interest expense at $69 million deleveraged 12 basis points as a percentage of sales caused by the additional expense associated with last year’s bond deal.
- Total expenses were 24% of sales and deleveraged 110 basis points.
- Earnings were $938 million or 64 cents a share, decreasing 4.5% from $1 billion or 67 cents a share last year due to lower margins.
- Cash and cash equivalents balance at the end of the quarter was $477 million.
- The firm has retired $521 million of debt from the balance sheet and removed approximately 21 million shares from the diluted share count.
Macroeconomic Insights:
- The firm continues to experience weakness in spending for larger projects and more discretionary purchases, leading to the eighth consecutive quarter of negative comps.
- Nearly 90% of the firm’s stores are in markets experiencing year-over-year home price declines and generally the weakest comps continue to be in those markets that have experienced the greatest declines.
- While sales results will likely continue to vary widely by market, the firm is focused on capturing the unique opportunities presented in each of the stores and driving profitable market share gains.
Operational Issues:
- Reflective of the tough sales environment that has been pressuring the industry for the past eight quarters, only two of the product categories, rough plumbing and nursery achieved positive comps.
- Positive comps in rough plumbing were driven by solid sales in air filtration products, pumps and tanks, water treatment, and HVAC controls.
- The firm also experienced commodity price inflation in copper and resin products, which drove part of this increase.
Favorable weather, wide product selection, and great customer service helped drive solid nursery sales as consumers took on small projects to enhance the appearance of their outdoor space.
- Additionally, as homeowners repaired damage caused by last year’s drought and continue to do routine lawn maintenance, the firm drove better-than-average comps in lawn and landscape and outdoor power equipment.
- Despite this significant pressure on sales, it continues to gain market share, a good indication that the programs are working as it continues to offer value-added solutions for home improvement customers.
- According to third-party estimates, the firm gained unit market share in 17 of 20 product categories in the second calendar quarter versus the same time period last year, and gained 120 basis points of total store share.
