QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 1-7898
LOWE’SCOMPANIES, INC.
(Exact name of registrant as specified in its charter)
North Carolina
56-0578072
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1000 Lowes Blvd., Mooresville, North Carolina
28117
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:
(704) 758-1000
Former name, former address and former fiscal year, if changed since last report: Not Applicable
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.50 per share
LOW
New York Stock Exchange
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.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
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.
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.
Preferred stock, $5 par value: Authorized – 5.0 million shares; Issued and outstanding – none
—
—
—
Common stock, $0.50 par value: Authorized – 5.6 billion shares; Issued and outstanding – 631 million, 699 million, and 670 million shares, respectively
316
350
335
Capital in excess of par value
—
—
—
Accumulated deficit
(8,895)
(460)
(5,115)
Accumulated other comprehensive income/(loss)
137
(65)
(36)
Total shareholders' deficit
(8,442)
(175)
(4,816)
Total liabilities and shareholders' deficit
$
46,725
$
49,404
$
44,640
See accompanying notes to the consolidated financial statements (unaudited).
Notes to Consolidated Financial Statements (Unaudited)
Note 1:Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements (unaudited) and notes to the condensed consolidated financial statements (unaudited) are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The condensed consolidated financial statements (unaudited), in the opinion of management, contain all normal recurring adjustments necessary to present fairly the consolidated balance sheets as of July 29, 2022, and July 30, 2021, and the statements of earnings, comprehensive income, and shareholders’ deficit for the three and six months ended July 29, 2022, and July 30, 2021, and cash flows for the six months ended July 29, 2022, and July 30, 2021. The January 28, 2022 consolidated balance sheet was derived from the audited financial statements.
These interim condensed consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Lowe’s Companies, Inc. (the Company) Annual Report on Form 10-K for the fiscal year ended January 28, 2022 (the Annual Report). The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.
Accounting Pronouncements Not Yet Adopted
Recent accounting pronouncements pending adoption not discussed in this Form 10-Q or in the 2021 Form 10-K are either not applicable to the Company or are not expected to have a material impact on the Company.
Note 2: Revenue
Net sales consists primarily of revenue, net of sales tax, associated with contracts with customers for the sale of goods and services in amounts that reflect consideration the Company is entitled to in exchange for those goods and services.
The following table presents the Company’s sources of revenue:
(In millions)
Three Months Ended
Six Months Ended
July 29, 2022
July 30, 2021
July 29, 2022
July 30, 2021
Products
$
26,477
$
26,365
$
49,360
$
49,887
Services
588
629
1,125
1,209
Other
411
576
650
897
Net sales
$
27,476
$
27,570
$
51,135
$
51,993
A provision for anticipated merchandise returns is provided through a reduction of sales and cost of sales in the period that the related sales are recorded. The merchandise return reserve is presented on a gross basis, with a separate asset and liability included in the consolidated balance sheets. The balances and classification within the consolidated balance sheets for anticipated sales returns and the associated right of return assets are as follows:
(In millions)
Classification
July 29, 2022
July 30, 2021
January 28, 2022
Anticipated sales returns
Other current liabilities
$
302
$
303
$
245
Right of return assets
Other current assets
183
194
151
Deferred revenue - retail and stored-value cards
Retail deferred revenue consists of amounts received for which customers have not yet taken possession of the merchandise or for which installation has not yet been completed. The majority of revenue for goods and services is recognized in the quarter following revenue deferral. Stored-value cards deferred revenue includes outstanding stored-value cards such as gift cards and
returned merchandise credits that have not yet been redeemed. Deferred revenue for retail and stored-value cards are as follows:
(In millions)
July 29, 2022
July 30, 2021
January 28, 2022
Retail deferred revenue
$
1,397
$
1,538
$
1,285
Stored-value cards deferred revenue
571
503
629
Deferred revenue
$
1,968
$
2,041
$
1,914
Deferred revenue - Lowe’s protection plans
The Company defers revenues for its separately-priced long-term extended protection plan contracts (Lowe’s protection plans) and recognizes revenue on a straight-line basis over the respective contract term. Expenses for claims are recognized in cost of sales when incurred.
(In millions)
July 29, 2022
July 30, 2021
January 28, 2022
Deferred revenue - Lowe’s protection plans
$
1,169
$
1,097
$
1,127
Three Months Ended
Six Months Ended
(In millions)
July 29, 2022
July 30, 2021
July 29, 2022
July 30, 2021
Lowe’s protection plans deferred revenue recognized into sales
$
129
$
120
$
256
$
237
Lowe’s protection plans claim expenses
48
44
93
97
Disaggregation of Revenues
The following table presents the Company’s net sales disaggregated by merchandise division:
Three Months Ended
Six Months Ended
July 29, 2022
July 30, 2021
July 29, 2022
July 30, 2021
(In millions)
Net Sales
%
Net Sales
%
Net Sales
%
Net Sales
%
Home Décor 1
$
9,073
33.0
%
$
9,159
33.2
%
$
17,372
34.0
%
$
17,466
33.6
%
Building Products 2
8,890
32.4
9,040
32.8
15,585
30.5
16,790
32.3
Hardlines 3
8,810
32.1
8,690
31.5
16,981
33.2
16,632
32.0
Other
703
2.5
681
2.5
1,197
2.3
1,105
2.1
Total
$
27,476
100.0
%
$
27,570
100.0
%
$
51,135
100.0
%
$
51,993
100.0
%
Note: Merchandise division net sales for the prior period have been reclassified to conform to the current period presentation.
1 Home Décor includes the following product categories: Appliances, Décor, Flooring, Kitchens & Bath, and Paint
2 Building Products includes the following product categories: Building Materials, Electrical, Lighting, Lumber, Millwork, and Rough Plumbing
3 Hardlines includes the following product categories: Hardware, Lawn & Garden, Seasonal & Outdoor Living, and Tools
The following table presents the Company’s net sales disaggregated by geographical area:
Short-term and long-term investments include restricted balances pledged as collateral primarily for the Lowe’s protection plans program and are as follows:
(In millions)
July 29, 2022
July 30, 2021
January 28, 2022
Short-term restricted investments
$
450
$
520
$
271
Long-term restricted investments
56
225
199
Total restricted investments
$
506
$
745
$
470
Note 4: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
•Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities
•Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly
•Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of July 29, 2022, July 30, 2021, and January 28, 2022:
Fair Value Measurements at
(In millions)
Classification
Measurement Level
July 29, 2022
July 30, 2021
January 28, 2022
Available-for-sale debt securities:
U.S. Treasury securities
Short-term investments
Level 1
$
214
$
139
$
75
Money market funds
Short-term investments
Level 1
119
131
120
Corporate debt securities
Short-term investments
Level 2
54
50
8
Commercial paper
Short-term investments
Level 2
35
117
30
Foreign government debt securities
Short-term investments
Level 2
14
10
14
Municipal obligations
Short-term investments
Level 2
10
—
10
Certificates of deposit
Short-term investments
Level 1
4
959
14
Agency securities
Short-term investments
Level 2
—
14
—
U.S. Treasury securities
Long-term investments
Level 1
31
148
132
Corporate debt securities
Long-term investments
Level 2
23
49
50
Municipal obligations
Long-term investments
Level 2
2
13
3
Foreign government debt securities
Long-term investments
Level 2
—
15
14
Derivative instruments:
Forward interest rate swaps
Other current assets
Level 2
$
216
$
—
$
66
Fixed-to-floating interest rate swaps
Other assets
Level 2
—
3
—
Forward interest rate swaps
Other assets
Level 2
—
2
48
Forward interest rate swaps
Other current liabilities
Level 2
—
3
—
Fixed-to-floating interest rate swaps
Other liabilities
Level 2
56
—
21
There were no transfers between Levels 1, 2, or 3 during any of the periods presented.
When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads, and benchmark securities, among others.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
During the three and six months ended July 29, 2022, and July 30, 2021, the Company had no material measurements of assets and liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.
Other Fair Value Disclosures
The Company’s financial assets and liabilities not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable, and long-term debt and are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. As further described in Note 6, certain long-term debt is associated with a fair value hedge and the changes in fair value of the hedged debt is included in the carrying value of long-term debt on the consolidated balance sheets. The fair values of the Company’s unsecured notes were estimated using quoted market prices. The fair values of the Company’s mortgage notes were estimated using discounted cash flow analyses, based on the future cash outflows associated with these arrangements and discounted using the applicable incremental borrowing rate.
Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding finance lease obligations, are as follows:
The Company’s commercial paper program is supported by the $2.0 billion five-year unsecured revolving credit agreement entered into in March 2020, and amended in December 2021, (2020 Credit Agreement) and the $2.0 billion five-year unsecured third amended and restated credit agreement (Third Amended and Restated Credit Agreement) entered into in December 2021. The amounts available to be drawn under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement are reduced by the amount of borrowings under the commercial paper program. As of July 29, 2022, July 30, 2021, and January 28, 2022, there were no outstanding borrowings under the Company’s commercial paper program, the 2020 Credit Agreement, or the Third Amended and Restated Credit Agreement. Total combined availability under the 2020 Credit Agreement and the Third Amended and Restated Credit Agreement was $4.0 billion as of July 29, 2022.
Other Short-Term Borrowings
In April 2021, the Company entered into a $1.0 billion unsecured 364-day term loan facility (2021 Term Loan), which was scheduled to mature in April 2022, but was repaid early in January 2022. There was $1.0 billion in outstanding borrowings under the 2021 Term Loan as of July 30, 2021, with an interest rate of 0.79%.
On March 24, 2022, the Company issued $5.0 billion of unsecured fixed rate notes (March 2022 Notes) as follows:
Principal Amount (in millions)
Maturity Date
Interest Rate
Discount (in millions)
$
750
April 2027
3.350%
$
3
$
1,500
April 2032
3.750%
$
7
$
1,500
April 2052
4.250%
$
14
$
1,250
April 2062
4.450%
$
12
Interest on the March 2022 Notes is payable semiannually in arrears in April and October of each year until maturity.
The indenture governing the March 2022 Notes contains a provision that allows the Company to redeem these notes at any time, in whole or in part, at specified redemption prices, plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption. The indenture also contains a provision that allows the holders of the notes to require the Company to repurchase all or any part of their notes if a change of control triggering event occurs. If elected under the change of control provisions, the repurchase of the notes will occur at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, on such notes up to, but excluding, the date of purchase. The indenture governing the March 2022 Notes does not limit the aggregate principal amount of debt securities that the Company may issue and does not require the Company to maintain specified financial ratios or levels of net worth or liquidity.
Note 6: Derivative Instruments
The Company utilizes forward interest rate swap agreements to hedge its exposure to changes in benchmark interest rates on forecasted debt issuances. The Company also utilizes fixed-to-floating interest rate swap agreements as fair value hedges on certain debt. The notional amounts for the Company’s material derivative instruments are as follows:
See Note 4 for the gross fair values of the Company’s outstanding derivative financial instruments and corresponding fair value classifications. The cash flows related to settlement of the Company’s hedging derivative financial instruments are classified in the consolidated statements of cash flows based on the nature of the underlying hedged items.
The Company accounts for the forward interest rate swap contracts as cash flow hedges, thus the effective portion of gains and losses resulting from changes in fair value are recognized in other comprehensive (loss)/income, net of tax effects, in the consolidated statements of comprehensive income and is amortized to interest expense over the term of the respective debt. In connection with the issuance of our March 2022 Notes, we settled forward interest rate swap contracts with a combined notional amount of $1.5 billion and received a payment of $143 million. The (loss)/gain from forward interest rate swap agreements, both settled and outstanding, designated as cash flow hedges recorded in other comprehensive (loss)/income and earnings for the three and six months ended July 29, 2022, and July 30, 2021, including its line item in the financial statements, is as follows:
(In millions)
Three Months Ended
Six Months Ended
July 29, 2022
July 30, 2021
July 29, 2022
July 30, 2021
Other comprehensive (loss)/income:
Cash flow hedges – net of tax benefit/(expense) of $12 million, $5 million, ($61) million, and ($4) million, respectively
The Company accounts for the fixed-to-floating interest rate swap agreements as fair value hedges using the shortcut method of accounting under which the hedges are assumed to be perfectly effective. Thus, the change in fair value of the derivative instruments offsets the change in fair value on the hedged debt, and there is no net impact in the consolidated statements of earnings from the fair value of the derivatives.
Note 7: Shareholders’ Deficit
The Company has a share repurchase program that is executed through purchases made from time to time either in the open market, which may be made under pre-set trading plans meeting the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934, or through private off-market transactions. Shares purchased under the repurchase program are returned to authorized and unissued status. As of July 29, 2022, the Company had $11.7 billion remaining in its share repurchase program.
In February 2022, the Company entered into an Accelerated Share Repurchase (ASR) agreement with a third-party financial institution to repurchase $750 million of the Company’s common stock. In addition, in May 2022, the Company entered into an ASR agreement with a third-party financial institution to repurchase $1.8 billion of the Company’s common stock. The terms of the ASR agreements entered into during the six months ended July 29, 2022, are as follows (in millions):
Agreement Execution Date
Agreement Settlement Date
ASR Agreement Amount
Initial Shares Delivered at Inception
Additional Shares Delivered at Settlement
Total Shares Delivered
Q1 2022
Q1 2022
$
750
2.8
0.6
3.4
Q2 2022
Q2 2022
1,750
7.5
2.1
9.6
In addition, the Company repurchased shares of its common stock through the open market as follows:
Three Months Ended
Six Months Ended
July 29, 2022
July 29, 2022
(In millions)
Shares
Cost
Shares
Cost
Open market share repurchases
11.9
$
2,250
27.1
$
5,500
The Company also withholds shares from employees to satisfy either the exercise price of stock options exercised or the statutory withholding tax liability resulting from the vesting of share-based awards.
Total shares repurchased for the three and six months ended July 29, 2022, and July 30, 2021, were as follows:
Three Months Ended
July 29, 2022
July 30, 2021
(In millions)
Shares
Cost
Shares
Cost
Share repurchase program
21.5
$
4,000
16.4
$
3,132
Shares withheld from employees
0.1
2
—
7
Total share repurchases
21.6
$
4,002
16.4
$
3,139
Six Months Ended
July 29, 2022
July 30, 2021
(In millions)
Shares
Cost
Shares
Cost
Share repurchase program
40.1
$
8,000
32.8
$
6,132
Shares withheld from employees
0.6
119
0.4
74
Total share repurchases
40.7
$
8,119
33.2
$
6,206
Note 8: Earnings Per Share
The Company calculates basic and diluted earnings per common share using the two-class method. The following table reconciles earnings per common share for the three and six months ended July 29, 2022, and July 30, 2021:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Lowe’s Companies, Inc.
Results of Review of Interim Financial Information
We have reviewed the accompanying consolidated balance sheets of Lowe’s Companies, Inc. and subsidiaries (the “Company”) as of July 29, 2022, and July 30, 2021, the related consolidated statements of earnings, comprehensive income, and shareholders’ deficit for the fiscal three-month and six-month periods ended July 29, 2022, and July 30, 2021, and cash flows for the fiscal six-month periods ended July 29, 2022, and July 30, 2021, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of January 28, 2022, and the related consolidated statements of earnings, comprehensive income, shareholders’ deficit, and cash flows for the fiscal year then ended (not presented herein); and in our report dated March 21, 2022, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 28, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our review in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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:
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).
Basis Point Increase/(Decrease) in Percentage of Net Sales from Prior Period
Percentage Increase/(Decrease) in Dollar Amounts from Prior Period
July 29, 2022
July 30, 2021
2022 vs. 2021
2022 vs. 2021
Net sales
100.00
%
100.00
%
N/A
(0.3)
%
Gross margin
33.24
33.78
(54)
(1.9)
Expenses:
Selling, general and administrative
16.22
17.02
(80)
(5.1)
Depreciation and amortization
1.63
1.49
14
9.6
Operating income
15.39
15.27
12
0.4
Interest – net
0.96
0.78
18
22.2
Pre-tax earnings
14.43
14.49
(6)
(0.7)
Income tax provision
3.54
3.54
—
(0.3)
Net earnings
10.89
%
10.95
%
(6)
(0.9)
%
Six Months Ended
Basis Point Increase/(Decrease) in Percentage of Net Sales from Prior Period
Percentage Increase/(Decrease) in Dollar Amounts from Prior Period
July 29, 2022
July 30, 2021
2022 vs. 2021
2022 vs. 2021
Net sales
100.00
%
100.00
%
N/A
(1.6)
%
Gross margin
33.60
33.55
5
(1.5)
Expenses:
Selling, general and administrative
17.12
17.67
(55)
(4.7)
Depreciation and amortization
1.75
1.54
21
11.7
Operating income
14.73
14.34
39
1.0
Interest – net
0.99
0.82
17
18.8
Pre-tax earnings
13.74
13.52
22
(0.1)
Income tax provision
3.33
3.25
8
0.6
Net earnings
10.41
%
10.27
%
14
(0.3)
%
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.
Average store size selling square feet (in thousands) 3
106
105
Net earnings to average debt and shareholders’
(deficit)/equity 4
31.4
%
23.7
%
Return on invested capital 4
34.5
%
29.1
%
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:
Net earnings to average debt and shareholders’ (deficit)/equity
31.4
%
23.7
%
Return on invested capital
34.5
%
29.1
%
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.
2Average 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
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
Six Months Ended
(In millions)
July 29, 2022
July 30, 2021
Net cash provided by operating activities
$
6,012
$
6,913
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.
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:
Six Months Ended
(In millions)
July 29, 2022
July 30, 2021
Core business investments 1
$
495
$
655
Strategic initiatives 2
103
114
New stores, new corporate facilities and international 3
89
77
Total capital expenditures
$
687
$
846
1Includes merchandising resets, facility repairs, replacements of IT and store equipment, among other specific efforts.
2Represents investments related to our strategic focus areas aimed at improving customers’ experience and driving improved performance in the near and long term (excluding acquisitions).
3Represents 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
Six Months Ended
(In millions)
July 29, 2022
July 30, 2021
Net cash used in financing activities
$
(4,954)
$
(4,927)
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.
The following table includes additional information related to our debt for the six months ended July 29, 2022, and July 30, 2021:
Six Months Ended
(In millions)
July 29, 2022
July 30, 2021
Net proceeds from issuance of debt
$
4,964
$
2,988
Repayment of debt
(799)
(568)
Maximum commercial paper outstanding at any period
1,361
400
Short-term borrowings outstanding at quarter-end
—
1,000
Weighted-average interest rate of short-term borrowings outstanding
—
%
0.79
%
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:
Six Months Ended
(In millions, except per share data)
July 29, 2022
July 30, 2021
Total amount paid for share repurchases
$
8,128
$
6,174
Total number of shares repurchased
40.7
33.1
Average price paid per share
$
199.61
$
186.73
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.
Debt Ratings
S&P
Moody’s
Commercial Paper
A-2
P-2
Senior Debt
BBB+
Baa1
Senior Debt Outlook
Stable
Stable
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.
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.
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
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.
Item 4. - Controls and Procedures
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.
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.
Item 1A. - Risk Factors
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:
Total Number of Shares Purchased 1
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 2
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 2
April 30, 2022 - May 27, 2022 3
13,391,751
$
186.95
13,391,328
$
12,828,171,013
May 28, 2022 - July 1, 2022
3,315,243
183.24
3,300,614
12,223,284,350
July 2, 2022 - July 29, 2022 3
4,843,883
184.01
4,843,262
11,727,396,196
As of July 29, 2022
21,550,877
$
185.72
21,535,204
$
11,727,396,196
1The 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.
2On 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.
3In 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.
Inline XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.‡
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.
LOWE’S COMPANIES, INC.
(Registrant)
August 25, 2022
By: /s/ Dan C. Griggs, Jr.
Date
Dan C. Griggs, Jr. Senior Vice President, Tax and Chief Accounting Officer
