UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 30, 2015
or
o | 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'S COMPANIES, 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 Lowe's Blvd., Mooresville, NC | 28117 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code | 704-758-1000 | |
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.50 Par Value | New York Stock Exchange (NYSE) | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. o Yes x No
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. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of August 1, 2014, the last business day of the Company's most recent second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $47.1 billion based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
CLASS | OUTSTANDING AT March 27, 2015 | |
Common Stock, $0.50 par value | 951,704,640 | |
DOCUMENTS INCORPORATED BY REFERENCE
Document | Parts Into Which Incorporated | |
Portions of the Proxy Statement for Lowe’s 2015 Annual Meeting of Shareholders | Part III | |
LOWE’S COMPANIES, INC.
- TABLE OF CONTENTS -
Page No. | |||
PART I | |||
Item 1. | |||
Item 1A. | |||
Item 1B. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II | |||
Item 5. | |||
Item 6. | |||
Item 7. | |||
Item 7A. | |||
Item 8. | |||
Item 9. | |||
Item 9A. | |||
Item 9B. | |||
PART III | |||
Item 10. | |||
Item 11. | |||
Item 12. | |||
Item 13. | |||
Item 14. | |||
PART IV | |||
Item 15. | |||
Part I
Item 1 - Business
General Information
Lowe’s Companies, Inc. and subsidiaries (the Company or Lowe’s) is a Fortune® 100 company and the world’s second largest home improvement retailer. As of January 30, 2015, Lowe's operated 1,840 home improvement and hardware stores, representing approximately 201 million square feet of retail selling space. Lowe's is comprised of 1,793 stores located across 50 U.S. states, including 74 Orchard Supply Hardware (Orchard) stores in California and Oregon, as well as 37 stores in Canada, and 10 stores in Mexico.
Lowe’s was incorporated in North Carolina in 1952 and has been publicly held since 1961. The Company’s common stock is listed on the New York Stock Exchange - ticker symbol “LOW”.
See Item 6, “Selected Financial Data”, of this Annual Report on Form 10-K, for historical revenues, profits and identifiable assets. For additional information about the Company’s performance and financial condition, see also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this Annual Report on Form 10-K.
Customers, Market and Competition
Our Customers
We serve homeowners, renters, and professional customers (Pro customers). Retail customers, comprised of individual homeowners and renters, complete a wide array of projects and vary along the spectrum of do-it-yourself (DIY) and do-it-for-me (DIFM). The Pro customer consists of two broad categories: construction trades; and maintenance, repair & operations.
Our Market
We are among the many businesses, including home centers, paint stores, hardware stores, lumber yards and garden centers, whose revenues are included in the Building Material and Garden Equipment and Supplies Dealers Subsector (444) of the Retail Trade Sector of the North American Industry Classification System (NAICS), the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. The total annual revenue reported for businesses included in NAICS 444 in 2014 was $328 billion, which represented an increase of 5.1% over the amount reported for the same category in 2013. The total annual revenue reported for businesses included in NAICS 444 in 2013 was $312 billion, which represented an increase of 6.0% over the amount reported for the same category in 2012.
NAICS 444 represents less than half of what we consider the total market for our products and services. The broader market in which Lowe’s operates includes home-related sales through a variety of companies beyond those in NAICS 444. These consist of other companies in the retail sector, including mass retailers, home furnishings stores, and online retailers, as well as wholesalers that provide home-related products and services to homeowners, businesses, and the government. Based on our analysis of the most recent comprehensive data available, we estimate the size of the U.S. home improvement market at $690 billion in 2014, comprised of $520 billion of product sales and $170 billion of installed labor sales. That compares with $640 billion total market sales in 2013, comprised of $480 billion of product sales and $160 billion of installed labor sales.
There are many variables that affect consumer demand for the home improvement products and services Lowe’s offers. Key indicators we monitor include real disposable personal income, employment, home prices, and housing turnover. We also monitor demographic and societal trends that shape home improvement industry growth.
• | Real disposable personal income is projected to grow at a stronger pace in 2015 than in 2014. Real disposable personal income is forecasted to increase 3.5% in calendar 2015, up from the 2.5% gain recorded in 2014, based on the March 2015 Blue Chip Economic Indicators®. * |
*Blue Chip Economic Indicators® (ISSN: 0193-4600) is published monthly by Aspen Publishers, 76 Ninth Avenue, New York, NY 10011, a division of Wolters Kluwer Law and Business. Printed in the U.S.A.
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• | The average unemployment rate for 2015 is forecasted to decline to 5.4%, according to the March 2015 Blue Chip Economic Indicators, which would be an improvement from the 6.2% average in 2014. The unemployment rate should continue to trend lower as the job market continues to expand at a moderate pace. |
• | Recent evidence suggests that home prices will continue to increase. In 2014, home price appreciation improved to an estimated 5.7%, according to the Federal Housing Finance Agency index. Economists generally expect the rate of home price growth to moderate in 2015 but to remain positive. |
• | Housing turnover decreased 2.8% in 2014 after a 9.0% increase in 2013, according to The National Association of Realtors and U.S. Census Bureau. Growth in 2014 was restrained by an increase in mortgage rates and harsh winter weather. Turnover is generally expected to increase in 2015, supported by a strengthening jobs market, rising incomes and historically low mortgage rates. |
These indicators are important to our business because they signal a customer's willingness to engage in home maintenance, repair, and upgrade projects and favorably impact income available to purchase our products and services. Currently, these indicators suggest moderately improving consumer demand for the home improvement products and services we sell.
Our Competition
The home improvement retailing business includes a broad competitive landscape. We compete with other home improvement warehouse chains and lumberyards in most of our trade areas. We also compete with traditional hardware, plumbing, electrical and home supply retailers. In addition, we compete with general merchandise retailers, warehouse clubs, and online and other specialty retailers. Location of stores continues to be a key competitive factor in our industry; however, the increasing use of technology and the simplicity of online shopping also underscore the importance of omni-channel capabilities as a competitive factor. We differentiate ourselves from our competitors by providing better customer experiences that make us the project authority while delivering value to our customers. See further discussion of competition in Item 1A, “Risk Factors”, of this Annual Report on Form 10-K.
Products and Services
Our Products
Product Selection
To meet customers’ varying home improvement needs, we offer a complete line of products for maintenance, repair, remodeling, and decorating. We offer home improvement products in the following categories: Kitchens & Appliances; Lumber & Building Materials; Tools & Hardware; Fashion Fixtures; Rough Plumbing & Electrical; Lawn & Garden; Seasonal Living; Paint; Home Fashions, Storage & Cleaning; Flooring; Millwork; and Outdoor Power Equipment. A typical Lowe's home improvement store stocks approximately 36,000 items, with hundreds of thousands of additional items available through our Special Order Sales system, Lowes.com, Lowes.ca, and ATGstores.com. See Note 16 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K for historical revenues by product category for each of the last three fiscal years.
We are committed to offering a wide selection of national brand-name merchandise complemented by our selection of private brands. In addition, we are dedicated to ensuring the products we sell are sourced in a socially responsible, efficient, and cost effective manner.
National Brand-Name Merchandise
In many product categories, customers look for a familiar and trusted national brand to instill confidence in their purchase. Each Lowe’s home improvement store carries a wide selection of national brand-name merchandise such as Whirlpool® appliances and water heaters, GE®, LG®, and Samsung® appliances, Stainmaster® carpets, Valspar® paints and stains, Pella® windows and doors, Sylvania® light bulbs, Dewalt® power tools, Owens Corning® roofing, Johns Manville® insulation, James Hardie® fiber cement siding, Husqvarna® outdoor power equipment, Werner® ladders, and many more. In 2014, we added brand name merchandise such as Henry® coatings, Hubbell® wiring devices, GRK Fasteners™, and Progress® Lighting to our portfolio. Our merchandise selection provides the retail and Pro customer a one-stop shop for a wide variety of national brand-name merchandise needed to complete home improvement, repair, maintenance, or construction projects.
Private Brands
Private brands are an important element of our overall portfolio, helping to provide significant value and coordinated style across core categories. We sell private brands in several product categories including Tools & Hardware, Seasonal Living,
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Home Fashions, Storage & Cleaning, Paint, Fashion Fixtures, Flooring, Millwork, Rough Plumbing & Electrical, and Lumber & Building Materials. Some of Lowe’s most important private brands include Kobalt® tools, allen+roth® home décor products, Blue Hawk® home improvement products, Project Source® basic value products, Portfolio® lighting products, Garden Treasures® lawn and patio products, Utilitech® electrical and utility products, Reliabilt® doors and windows, Aquasource® faucets, sinks and toilets, Harbor Breeze® ceiling fans, Top Choice® lumber products and Iris® home automation and management products.
Supply Chain
We source our products from over 7,000 vendors worldwide with no single vendor accounting for more than 6% of total purchases. We believe that alternative and competitive suppliers are available for virtually all of our products. Whenever possible, we purchase directly from manufacturers to provide savings for customers and improve our gross margin.
To efficiently move product from our vendors to our stores and maintain in-stock levels, we own and operate 15 highly-automated Regional Distribution Centers (RDC) in the United States. Through our RDCs, products are received from vendors, stored and picked, or cross-docked, and then shipped to our retail locations or directly to customers. On average, each domestic RDC serves approximately 115 stores. We also lease and operate a distribution facility to serve our Canadian stores. Additionally, we have a service agreement with a third party logistics provider to manage a distribution facility to serve our stores in Mexico.
In addition to the RDCs, we also operate coastal holding facilities, transload facilities, and flatbed distribution centers. The flatbed distribution centers distribute merchandise that requires special handling due to size or type of packaging such as lumber, boards, panel products, pipe, siding, ladders, and building materials. Collectively, our facilities enable our import and e-commerce, as well as parcel post eligible products, to get to their destination as efficiently as possible. Most parcel post items can be ordered by a customer and delivered within two business days at standard shipping rates.
On average, in fiscal 2014, approximately 80% of the total dollar amount of stock merchandise we purchased was shipped through our distribution network, while the remaining portion was shipped directly to our stores from vendors.
Our Services
Installed Sales
We offer installation services through independent contractors in many of our product categories, with Flooring, Millwork and Kitchens & Appliances accounting for the majority of installed sales. Our Installed Sales model, which separates selling and project administration tasks, allows our sales associates to focus on project selling, while project managers ensure that the details related to installing the products are efficiently executed. Installed Sales, which includes both product and labor, accounted for approximately 8% of total sales in fiscal 2014.
Extended Protection Plans and Repair Services
We offer extended protection plans in Kitchens & Appliances, Tools & Hardware, Outdoor Power Equipment, Seasonal Living, and Rough Plumbing. Lowe’s Protection Plans provide customers with product protection that enhances or extends coverage previously offered by the manufacturer’s warranty. We provide in-warranty and out-of-warranty repair services for major appliances, outdoor power equipment, tools, grills, fireplaces, and water heaters through our stores or in the home through our Lowe’s Authorized Service Repair Network. We offer replacement plans in products in these categories priced below $200. Our contact center takes customers' calls, assesses the problems, and facilitates a resolution, making after-sales service easier for our customers because we manage the entire process.
Selling Channels
We are continuing our progress towards becoming an omni-channel retail company, which allows our customers to move from channel to channel with simple and seamless transitions even within the same transaction. For example, for many projects, more than half of our customers conduct research online before making an in-store purchase. For purchases made on Lowes.com, approximately 60% are picked up in-store, 10% are delivered from a store, and 30% are parcel shipped. Regardless of the channels through which customers choose to engage with us, we strive to provide them with a seamless experience across channels and an endless aisle of products, enabled by our flexible fulfillment capabilities. Our ability to sell products in-store, online, on-site, or through our contact centers speaks to our ability to leverage our existing infrastructure with the omni-channel capabilities we are introducing.
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In-Store
Our 1,766 home improvement stores are generally open seven days per week and average approximately 112,000 square feet of retail selling space, plus approximately 32,000 square feet of outdoor garden center selling space. In addition, we operate 74 Orchard stores located throughout California and Oregon that also serve home improvement customers. Our home improvement stores offer similar products and services, with certain variations based on local market factors; however, Orchard stores are primarily focused on paint, repair, and backyard products. We continue to develop and implement tools to make our sales associates more efficient and to integrate our order management and fulfillment processes. Our home improvement stores have Wi-Fi capabilities that provide customers with internet access, making information available quickly to further simplify the shopping experience.
Online
Through Lowes.com, Lowes.ca, ATGstores.com and mobile applications, we seek to empower consumers by providing a 24/7 shopping experience, online product information, customer ratings and reviews, online buying guides and how-to videos and other information. These tools help consumers make more informed purchasing decisions and give them increased confidence to undertake home improvement projects. In 2014, sales through our online selling channels, which include Lowes.com, Lowes.ca and ATGstores.com, accounted for approximately 2.5% of our total sales. We enable customers to choose from a variety of fulfillment options, including buying online and picking up in-store as well as delivery or parcel shipment to their homes.
On-Site
We have on-site specialists available to retail and Pro customers to assist them in selecting products and services for their projects. Our Account Executives ProServices meet with Pro customers at their place of business or on a job site and leverage stores within the area to ensure we meet customer needs for products and resources. Our Project Specialist Exteriors (PSE) program is available in all Lowe’s stores to discuss exterior projects such as roofing, siding, fencing, and windows, whose characteristics lend themselves to an in-home consultative sales approach. In addition, our Project Specialist Interiors (PSI) program is available in seven of our 14 regions to provide similar consultative services on interior projects such as kitchens and bathrooms.
Contact Centers
Lowe’s operates two contact centers which are located in Wilkesboro, NC and Albuquerque, NM. In addition, we are opening an additional facility in Indianapolis, IN. These contact centers help enable an omni-channel experience by providing the ability to tender sales, coordinate deliveries, manage after-sale installations, facilitate repair services for Appliances and Outdoor Power Equipment, and answer general customer questions via phone, e-mail, letters, or social media.
Employees
As of January 30, 2015, we employed approximately 175,000 full-time and 91,000 part-time employees. Our employees in Mexico are subject to collective bargaining agreements. No other employees are subject to collective bargaining agreements. Management considers its relations with employees to be good.
Seasonality and Working Capital
The retail business in general is subject to seasonal influences, and our business is, to some extent, seasonal. Historically, we have realized the highest volume of sales during our second fiscal quarter (May, June and July) and the lowest volume of sales during our fourth fiscal quarter (November, December and January). Accordingly, our working capital requirements have historically been greater during our fourth fiscal quarter as we build inventory in anticipation of the spring selling season and as we experience lower fourth fiscal quarter sales volumes. We fund our working capital requirements primarily through cash flows generated from operations, but also with short-term borrowings, as needed. For more detailed information, see the Financial Condition, Liquidity and Capital Resources section in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this Annual Report on Form 10-K.
Intellectual Property
The name “Lowe’s” is a registered service mark of one of our wholly-owned subsidiaries. We consider this mark and the accompanying name recognition to be valuable to our business. This subsidiary has various additional trademarks, trade names and service marks, many of which are used in our private brand program. The subsidiary also maintains various Internet domain names that are important to our business, and we also own registered and unregistered copyrights. In addition, we maintain patent portfolios related to some of our products and services and seek to patent or otherwise protect certain innovations that we incorporate into our products, services, or business operations.
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Environmental Stewardship
Lowe’s recognizes how efficient operations can help protect the environment and our bottom line. We examine our operations regularly to deliver energy efficiency, reduce fuel consumption, and minimize waste generation through increased recycling. We also install technology that will help us operate our facilities more efficiently and environmentally responsibly. For example, our RDC in Rome, GA was designed to use high-efficiency, light-emitting diode (LED) fixtures, and our Pittston RDC was retrofitted with interior and exterior LED fixtures, significantly reducing this facility's total energy use.
We strive to deliver products to our stores in a fuel-efficient and an environmentally responsible manner through participation in the SmartWay® Transport Partnership, an innovative program launched by the U.S. Environmental Protection Agency (EPA) in 2004 that promotes cleaner, more fuel-efficient transportation options. Lowe’s received a 2014 SmartWay Excellence Award from the EPA, our sixth consecutive SmartWay honor, for our commitment to environmental excellence in freight management operations and reduction of carbon dioxide emissions and other harmful pollutants. We have also increased shipping of products by rail and increased the efficiency of truckload shipments to and from our RDCs.
We continue to take steps to improve our recycling programs and reduce the amount of waste we generate. Through these efforts, we are able to reduce our disposal costs and minimize the impact on the environment of the operation of our stores and other facilities. We also offer convenient recycling for our customers at many of our stores for items such as rechargeable batteries, plastic bags and compact fluorescent light bulbs.
We annually track our carbon footprint and participate in the Carbon Disclosure Project, an independent nonprofit organization hosting the largest database of primary corporate climate change information in the world. To further reduce our carbon footprint, we incorporate energy-efficient technologies and architectural systems into new stores and retrofits of existing stores, such as energy-efficient lighting, white membrane cool roofs, and HVAC units that meet or exceed ENERGY STAR qualifications. We also participate in demand response programs by voluntarily reducing our lighting and HVAC loads during peak demand periods to support electric grid reliability.
Additionally, we continue to focus on helping consumers reduce their energy and water use and their environmental footprint while saving money when they purchase our products and services. We offer a wide selection of environmentally responsible and energy-efficient products for the home, including ENERGY STAR® appliances, WaterSense® labeled toilets, paint with no volatile organic compounds (VOC), and indoor and outdoor LED lighting. Through our in-home sales specialists, we offer customers installation of insulation and energy efficient windows.
For more information on Lowe’s environmental efforts, please visit Lowes.com/SocialResponsibility.
Compliance with Environmental Matters
Our operations are subject to numerous federal, state and local laws and regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. These laws and regulations may increase our costs of doing business in a variety of ways, including indirectly through increased energy costs, as utilities, refineries, and other major emitters of greenhouse gases are subjected to additional regulation or legislation that seeks to better control greenhouse gas emissions. We do not anticipate any material capital expenditures during fiscal 2015 for environmental control facilities or other costs of compliance with such laws or regulations.
Reaching Out / Our Community
Lowe’s has a long and proud history of supporting local communities through public education and community improvement projects, beginning with the creation of the Lowe’s Charitable and Educational Foundation in 1957. In 2014, Lowe’s and the Lowe’s Charitable and Educational Foundation contributed $28 million to schools and community organizations in the United States, Canada, and Mexico.
Our commitment to improving educational opportunities is best exemplified by our signature education grant program, Lowe’s Toolbox for Education®. The program has benefited more than five million schoolchildren since 2006, funding improvements at 1,103 schools across the United States in 2014.
For more than a decade, we’ve been working with national nonprofit partners to strengthen and stabilize neighborhoods in the communities we serve. In 2014, Lowe’s contributed more than $6 million and teamed with Habitat for Humanity and Rebuilding Together to bring housing solutions and hope to families across the country. We also continued to build on our
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longstanding partnerships with SkillsUSA, the Boys & Girls Clubs of America, and Keep America Beautiful to improve communities and build tomorrow’s leaders.
Lowe’s is also committed to helping residents of the communities we serve by being there when we’re needed most - when a natural disaster threatens and in the recovery that follows. In 2014, Lowe’s committed more than $2 million and mobilized hundreds of Lowe’s Heroes employee volunteers to help families recover from disasters in 12 states from the Pacific Northwest to New York, while helping others prepare for the threat of hurricanes in Alabama, Florida, Louisiana, New Jersey, and Texas.
For more information on Lowe’s partnerships and latest community improvement projects, visit Lowes.com/SocialResponsibility and LowesInTheCommunity.tumblr.com.
Available Information
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge through our internet website at www.Lowes.com/investor, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). The public may also read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Item 1A - Risk Factors
We have developed a risk management process using periodic surveys, external research, planning processes, risk mapping, analytics and other tools to identify and evaluate the operational, financial, environmental, reputational, strategic and other risks that could adversely affect our business. For more information about our risk management process, which is administered by our Chief Risk Officer and includes developing risk mitigation controls and procedures for the material risks we identify, see the description included in the proxy statement for our annual meeting of shareholders (as defined in Item 10 of Part III of this Annual Report on Form 10-K) under “Board’s Role in the Risk Management Process”.
We describe below certain risks that could adversely affect our results of operations, financial condition, business reputation or business prospects. These risk factors may change from time to time and may be amended, supplemented or superseded by updates to the risk factors contained in our future periodic reports on Form 10-K, Form 10-Q and reports on other forms we file with the Securities and Exchange Commission. All forward-looking statements about our future results of operations or other matters made by us in this Annual Report on Form 10-K, in our Annual Report to Lowe’s Shareholders and in our subsequently filed reports to the Securities and Exchange Commission, as well as in our press releases and other public communications, are qualified by the risks described below.
You should read these Risk Factors in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and our Consolidated Financial Statements and related notes in Item 8. There also may be other factors that we cannot anticipate or that are not described in this report generally because we do not currently perceive them to be material. Those factors could cause results to differ materially from our expectations.
We may be unable to adapt our business concept in a rapidly changing retailing environment to address the changing shopping habits and demands and demographics of our customers.
The home improvement retailing environment, like the retailing environment generally, is rapidly evolving, and adapting our business concept to respond to our customers’ changing shopping habits and demands and their changing demographics is critical to our future success. In addition to our traditional large format brick and mortar retail stores, many of which are located in or near suburban communities, we are also increasing our urban market presence with smaller format stores and investing extensively in on-line sales, content marketing and information searching technology capabilities. Failure to adapt our business concept successfully could negatively affect our relationship with our customers, the demand for the home improvement products and services we sell, the rate of growth of our business and our market share.
We may not be able to realize the benefits of our strategic initiatives focused on omni-channel sales and marketing presence if we fail to deliver the capabilities required to execute on them.
The success of our strategic initiatives to adapt our business concept to our customers’ changing shopping habits and demands and changing demographics will require us to deliver large, complex programs requiring different skill sets and capabilities than were required by our management, employees and contractors in the past to achieve our objectives. They will also require
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more integrated planning, initiative prioritization and program sequencing. Our leadership development program for our managers at all levels is focused on aligning processes for corporate strategy, business unit strategy and integrated planning to drive alignment, execution and delivery of solutions, including timely delivery and functionality of new technology solutions. Our strategic initiatives will require new competencies in many positions, and our management, employees and contractors will have to adapt and learn new skills and capabilities. To the extent they are unable or unwilling to make these transformational changes, we may be unable to realize the full benefits of our strategic initiatives and expand our relevant market access. Our results of operations, financial condition, or business prospects could also be adversely affected if we are unable to attract and retain additional personnel at various levels of the Company who have the skills and capabilities we need to implement our strategic initiatives and drive the changes that are essential to successfully adapting our business concept in the rapidly changing retailing environment.
As customer-facing technology systems become an increasingly important part of our omni-channel sales and marketing strategy, the failure of those systems to perform effectively and reliably could keep us from delivering positive customer experiences.
Access to the internet from computers, tablets, smart phones and other mobile communication devices has empowered our customers and changed the way they shop and how we interact with them. Our website, Lowes.com, is a sales channel for our products, and is also a method of making product, project and other relevant information available to them that impacts our in-store sales. In addition to Lowes.com, we have multiple affiliated websites and mobile apps through which we seek to inspire, inform, cross-sell, establish online communities among and otherwise interact with our customers. Performance issues with these customer-facing technology systems, including temporary outages caused by distributed denial of service or other cyber-attacks, or a complete failure of one or more of them without a disaster recovery plan that can be quickly implemented could quickly destroy the positive benefits they provide to our home improvement business and negatively affect our customers’ perceptions of Lowe’s as a reliable online vendor and source of information about home improvement products and services.
Our financial performance could suffer if we fail to properly maintain our critical information systems or if those systems are seriously disrupted.
An important part of our efforts to achieve efficiencies, cost reductions, and sales and cash flow growth is the maintenance and ongoing improvements of our existing management information systems that support operations such as inventory replenishment, merchandise ordering, transportation, receipt processing and product delivery. Our financial performance could be adversely affected if our management information systems are seriously disrupted or we are unable to maintain, improve, upgrade, and expand our systems.
Our business and our reputation could be adversely affected by the failure to protect sensitive customer, employee, vendor or Company information or to comply with evolving regulations relating to our obligation to protect our systems and assets and such information from the threat of cyber-attacks.
Cyber-attacks designed to gain access to sensitive information by breaching mission critical systems of large organizations are constantly evolving, and high profile electronic security breaches leading to unauthorized release of sensitive customer information have occurred in recent years with increasing frequency at a number of major U.S. companies, including several large retailers, despite widespread recognition of the cyber-attack threat and improved data protection methods. Despite our continued vigilance and investment in information security, we may be unable to adequately anticipate or prevent a breach in our systems that results in the unauthorized release of sensitive data. Should this occur, it may have a material adverse effect on our reputation, drive customers away and lead to financial losses from remedial actions, or potential liability, including possible punitive damages. A security breach resulting in the unauthorized release of sensitive data from our information systems could also materially increase the costs we already incur to protect against such risks. In addition, as the regulatory environment relating to retailers and other companies' obligation to protect such sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions and potentially to lawsuits.
We are subject to payments-related risks that could increase our operating costs, expose us to fraud, subject us to potential liability and potentially disrupt our business.
We accept payments using a variety of methods, including credit card, debit card, credit accounts, gift cards, direct debit from a customer’s bank account, consumer invoicing, and physical bank check. These payment options subject us to many compliance requirements, including, but not limited to, compliance with the Payment Card Industry Data Security Standards, which represents a common set of industry tools and measurements to help ensure the safe handling of sensitive information. They also subject us to potential fraud by criminal elements seeking to discover and take advantage of security vulnerabilities that may exist in some of these payment systems. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, electronic checks, gift cards, and promotional financing, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, including data security rules, certification
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requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected. We also offer co-branded credit card programs, which could adversely affect our operating results if terminated.
Our sales are dependent upon the health and stability of the general economy.
Many U.S. and global economic factors may adversely affect our financial performance. These include, but are not limited to, periods of slow economic growth or recession, 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, high rates of unemployment, consumer debt levels, fluctuations in fuel and energy costs, inflation or deflation of commodity prices, natural disasters, and acts of both domestic and international terrorism.
Adverse changes in economic factors specific to the home improvement industry may negatively impact the rate of growth of our total sales and comparable sales.
Sales of many of our product categories and services are driven by the activity level of home improvement projects. Although the housing market has been strengthened by favorable interest rates and increasing home prices, the large number of households that continue to have little available equity, mortgage delinquency and foreclosure rates that remain high, tight restrictions on the availability of mortgage financing, slow household formation growth rates, and decreases in housing turnover through existing home sales, have limited, and may continue to limit, consumers’ discretionary spending, particularly on larger home improvement projects that are important to the growth of our business. Another risk to the continued recovery of the home improvement industry is that consumer interest rates will rise when the Federal Reserve System begins withdrawing the extraordinary economic stimulus it has provided in recent years.
If we fail to hire, train, manage and retain qualified sales associates and specialists with expanded skill sets who can work effectively and collaboratively in an increasingly culturally diverse environment, we could lose sales to our competitors.
Our customers, whether they are homeowners or commercial businesses, expect our sales associates and specialists to be well trained and knowledgeable about the products we sell and the home improvement services we provide. Increasingly, our sales associates and specialists must have expanded skill sets, including, in some instances, the ability to do in-home or telephone sales. In addition, in many of our stores our employees must be able to serve customers whose primary language and cultural traditions are different from their own. A critical challenge we face is attracting and retaining a sufficiently diverse workforce that can deliver a relevant, culturally competent and differentiated experience for a wide variety of culturally diverse customers. Also, as our employees become increasingly culturally diverse, our managers and sales associates must be able to manage and work collaboratively with employees whose primary language and cultural traditions are different from their own.
We have many competitors who could take sales and market share from us if we fail to execute our merchandising, marketing and distribution strategies effectively, or if they develop a substantially more effective or lower cost means of meeting customer needs.
We operate in a highly competitive market for home improvement products and services and have numerous large and small, direct and indirect competitors. The principal competitive factors in our industry include convenience, customer service, quality and price of merchandise and services, in-stock levels, and merchandise assortment and presentation. Our failure to respond effectively to competitive pressures and changes in the markets for home improvement products and services could affect our financial performance. Moreover, changes in the promotional pricing and other practices of our competitors, including the effects of competitor liquidation activities, may impact our results.
Our inability to effectively manage our relationships with selected suppliers of brand name products could negatively impact our business plan and financial results.
We form strategic relationships with selected suppliers to market and develop products under a variety of recognized and respected national brand names. The inability to effectively and efficiently manage and maintain the relationships with these suppliers could negatively impact our business plan and financial results.
Failure of a key vendor or service provider that we cannot quickly replace could disrupt our operations and negatively impact our business.
No single vendor of the products we sell accounts for more than 6% of our total purchases, but we rely upon a number of vendors as the sole or primary source of some of the products we sell. We also rely upon many independent service providers for technology solutions and other services that are important to many aspects of our business. If these vendors or service
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providers fail or are unable to perform as expected and we are unable to replace them quickly, our business could be adversely affected, at least temporarily, until we are able to do so and potentially, in some cases, permanently.
If the domestic or international supply chain for our products is disrupted for any reason, our sales and gross margin would be adversely impacted.
We source, stock, and sell products from over 7,000 domestic and international vendors and their ability to reliably and efficiently fulfill our orders is critical to our business success. We source a large number of those products from foreign manufacturers with China continuing to be the dominant import source. Financial instability among key vendors, political instability and labor unrest in source countries or elsewhere in our supply chain, port labor disputes, retaliatory trade restrictions imposed by either the United States or a major source country, tariffs, currency exchange rates and transport availability, capacity and costs are beyond our control and could negatively impact our business if they seriously disrupted the movement of products through our supply chain or increased their costs.
Failure to effectively manage our third party installers could result in increased operational and legal risks.
We use third party installers to provide installation services to our customers, and as the general contractor, are subject to regulatory requirements and risks, applicable to general contractors, including the management of the permitting, licensing and quality of our third party installers. Our failure to effectively manage such requirements and risks could result in lost sales, fines and lawsuits, as well as damage to our reputation, which could negatively affect our business.
Failure to achieve and maintain a high level of product and service quality could damage our image with customers and negatively impact our sales, profitability, cash flows and financial condition.
Product and service quality issues could result in a negative impact on customer confidence in Lowe’s and the Company’s brand image. As a result, Lowe’s reputation as a retailer of high quality products and services, including both national and Lowe’s private brands, could suffer and impact customer loyalty. Additionally, a decline in product and service quality could result in product recalls, product liability and warranty claims.
Operating internationally presents unique challenges that have required us to adapt our store operations, merchandising, marketing and distribution functions to serve customers in Canada and Mexico and to work effectively with our joint venture partner in Australia.
A significant portion of our anticipated store growth over the next five years will be in Canada and Mexico. We are also in a joint venture with Australia’s largest retailer, Woolworths Limited, to develop a network of home improvement stores for consumers in Australia. Expanding internationally presents unique challenges that may increase the anticipated costs and risks, and slow the anticipated rate, of such expansion.
We must comply with multiple laws and regulations that differ substantially in each country where we operate.
If we fail to comply with these laws, rules and regulations, or the manner in which they are interpreted or applied, we may be subject to government enforcement action, litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance. These laws, rules and regulations include import and export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Although we have implemented policies and procedures to help ensure compliance with these laws, there can be no assurance that our employees and third parties with whom we do business will not take actions in violation of our policies or laws. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice.
Changes in existing or new laws and regulations or regulatory enforcement priorities could adversely affect our business.
Laws and regulations at the local, regional, state, federal and international levels change frequently, and the changes can impose significant costs and other burdens of compliance on our business and our vendors. Any changes in regulations, the imposition of additional regulations, or the enactment of any new legislation that affect employment/labor, trade, product safety, transportation/logistics, energy costs, health care, cyber-security, tax or environmental issues, could have an adverse impact, directly or indirectly, on our financial condition and results of operations. Changes in enforcement priorities by governmental agencies charged with enforcing existing laws and regulations can increase our cost of doing business. In addition, our contracts with U.S., as well as state and local government entities, are subject to various procurement regulations and other requirements, including audits and investigations, relating to their formation, administration, and performance, and we may be adversely affected by changes in the regulations or negative findings from audits or investigations.
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Future litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements.
We are, and in the future will become, involved in lawsuits, regulatory inquiries, and governmental and other legal proceedings arising out of the ordinary course of our business. Some of these proceedings may raise difficult and complicated factual and legal issues and can be subject to uncertainties and complexities. The timing of the final resolutions to lawsuits, regulatory inquiries, and governmental and other legal proceedings is typically uncertain. Additionally, the possible outcomes of, or resolutions to, these proceedings could include adverse judgments or settlements, either of which could require substantial payments. None of the legal proceedings in which we are currently involved, individually or collectively, is considered material.
Item 1B - Unresolved Staff Comments
None.
Item 2 - Properties
At January 30, 2015, our properties consisted of 1,840 stores in the U.S., Canada, and Mexico with a total of approximately 201 million square feet of selling space. Of the total stores operating at January 30, 2015, approximately 86% are owned, which includes stores on leased land, with the remainder being leased from third parties. We also operate regional distribution centers and other facilities to support distribution and fulfillment, as well as data centers and various support offices. Our executive offices are located in Mooresville, North Carolina.
Item 3 - Legal Proceedings
We are a defendant in legal proceedings considered to be in the normal course of business, none of which, individually or collectively, is considered material.
Item 4 - Mine Safety Disclosures
Not applicable.
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EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF THE REGISTRANT
Set forth below is a list of names and ages of the executive officers and certain significant employees of the registrant indicating all positions and offices with the registrant held by each such person and each person's principal occupations or employment during the past five years. Each executive officer of the registrant is elected by the board of directors at its first meeting after the annual meeting of shareholders and thereafter as appropriate. Each executive officer of the registrant holds office from the date of election until the first meeting of the directors held after the next annual meeting of shareholders or until a successor is elected.
Name | Age | Title | ||
Robert A. Niblock | 52 | Chairman of the Board, President and Chief Executive Officer since 2011; Chairman of the Board and Chief Executive Officer, 2006 – 2011. | ||
Maureen K. Ausura | 59 | Chief Human Resources Officer since 2012; Executive Vice President, Human Resources, 2011 – 2012; Senior Vice President, Human Resources, 2005 – 2011. | ||
Marshall A. Croom | 54 | Chief Risk Officer since 2012; Senior Vice President and Chief Risk Officer, 2009 – 2012. | ||
Rick D. Damron | 52 | Chief Operating Officer since 2012; Executive Vice President, Store Operations, 2011 – 2012; Senior Vice President, Logistics, 2009 – 2011. | ||
Matthew V. Hollifield | 48 | Senior Vice President and Chief Accounting Officer since 2005. | ||
Robert F. Hull, Jr. | 50 | Chief Financial Officer since 2012; Executive Vice President and Chief Financial Officer since 2004. | ||
Michael A. Jones | 52 | Chief Customer Officer since 2014; Chief Merchandising Officer 2013 – 2014; President, North and Latin America, The Husqvarna Group, 2009 – 2013. | ||
Richard D. Maltsbarger | 39 | Chief Development Officer and President of International since 2015; Chief Development Officer, 2014 – 2015; Business Development Executive, 2012 – 2014; Senior Vice President, Strategy, 2011 – 2012; Vice President, Strategic Planning 2010 – 2011; Vice President, Research, 2006 – 2010. | ||
Ross W. McCanless | 57 | General Counsel, Secretary and Chief Compliance Officer since 2015; Chief Legal Officer, Extended Stay America, Inc. and ESH Hospitality, Inc., 2013 – 2014; Chief Legal Officer, HVM, L.L.C.; Private Investor, 2006 – 2012. | ||
N. Brian Peace | 49 | Corporate Administration Executive since 2012; Senior Vice President, Corporate Affairs, 2006 – 2012. | ||
Paul D. Ramsay | 50 | Chief Information Officer since 2014; Senior Vice President, Information Technology, 2011 – 2014; Vice President, Information Technology, Exploration and Production, Hess Corporation, 2010 – 2011 | ||
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Part II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Lowe's common stock is traded on the New York Stock Exchange (NYSE). The ticker symbol for Lowe's is “LOW”. As of March 27, 2015, there were 25,065 holders of record of Lowe's common stock. The following table sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported by the NYSE Composite Tape and the dividends per share declared on the common stock during such periods.
Fiscal 2014 | Fiscal 2013 | ||||||||||||||||||||||
High | Low | Dividend | High | Low | Dividend | ||||||||||||||||||
1st Quarter | $ | 51.28 | $ | 44.45 | $ | 0.18 | $ | 39.98 | $ | 35.86 | $ | 0.16 | |||||||||||
2nd Quarter | 48.54 | 44.13 | 0.23 | 45.30 | 38.87 | 0.18 | |||||||||||||||||
3rd Quarter | 57.41 | 47.52 | 0.23 | 50.74 | 43.52 | 0.18 | |||||||||||||||||
4th Quarter | 71.11 | 56.76 | 0.23 | 52.08 | 45.62 | 0.18 | |||||||||||||||||
Total Return to Shareholders
The following information in Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
The following table and graph compare the total returns (assuming reinvestment of dividends) of the Company's common stock, the S&P 500 Index and the S&P Retailing Industry Group Index (S&P Retail Index). The graph assumes $100 invested on January 29, 2010 in the Company's common stock and each of the indices.
1/29/2010 | 1/28/2011 | 2/3/2012 | 2/1/2013 | 1/31/2014 | 1/30/2015 | ||||||||||||||||||
Lowe’s | $ | 100.00 | $ | 118.81 | $ | 130.87 | $ | 189.25 | $ | 230.81 | $ | 343.42 | |||||||||||
S&P 500 | 100.00 | 121.26 | 130.55 | 150.20 | 180.70 | 206.41 | |||||||||||||||||
S&P Retail Index | $ | 100.00 | $ | 127.17 | $ | 145.61 | $ | 183.31 | $ | 229.70 | $ | 275.85 | |||||||||||
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Issuer Purchases of Equity Securities
The following table sets forth information with respect to purchases of the Company’s common stock made during the fourth quarter of 2014:
(In millions, except average price paid per share) | 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 | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 2 | |||||||||
November 1, 2014 – November 28, 2014 | 1.4 | $ | 63.20 | 1.4 | $ | 3,300 | |||||||
November 29, 2014 – January 2, 2015 | 6.0 | 66.21 | 6.0 | 2,904 | |||||||||
January 3, 2015 – January 30, 2015 | 7.5 | 68.33 | 7.5 | 2,388 | |||||||||
As of January 30, 2015 | 14.9 | $ | 67.00 | 14.9 | $ | 2,388 | |||||||
1 | During the fourth quarter of fiscal 2014, the Company repurchased an aggregate of 14.9 million shares of its common stock. The total number of shares purchased also includes an insignificant number of shares withheld from employees to satisfy either the exercise price of stock options or the statutory withholding tax liability upon the vesting of restricted stock awards. |
2 | On February 1, 2013, the Company's Board of Directors authorized a $5.0 billion share repurchase program with no expiration. On January 31, 2014, the Company’s Board of Directors authorized an additional $5.0 billion under the repurchase program with no expiration, following which, the Company had an available share repurchase authorization of $6.3 billion. As of January 30, 2015, the Company had $2.4 billion remaining available under the program. On March 20, 2015, the Company's Board of Directors authorized an additional $5.0 billion under the repurchase program with no expiration. In fiscal 2015, the Company expects to repurchase shares totaling $3.8 billion through purchases made from time to time either in the open market or through private off market transactions in accordance with SEC regulations. |
Item 6 - Selected Financial Data
Selected Statement of Earnings Data (In millions, except per share data) | 2014 | 2013 | 2012 | 2011 | 1 | 2010 | |||||||||||||
Net sales | $ | 56,223 | $ | 53,417 | $ | 50,521 | $ | 50,208 | $ | 48,815 | |||||||||
Gross margin | 19,558 | 18,476 | 17,327 | 17,350 | 17,152 | ||||||||||||||
Net earnings | 2,698 | 2,286 | 1,959 | 1,839 | 2,010 | ||||||||||||||
Basic earnings per common share | 2.71 | 2.14 | 1.69 | 1.43 | 1.42 | ||||||||||||||
Diluted earnings per common share | 2.71 | 2.14 | 1.69 | 1.43 | 1.42 | ||||||||||||||
Dividends per share | $ | 0.87 | $ | 0.70 | $ | 0.62 | $ | 0.53 | $ | 0.42 | |||||||||
Selected Balance Sheet Data | |||||||||||||||||||
Total assets | $ | 31,827 | $ | 32,732 | $ | 32,666 | $ | 33,559 | $ | 33,699 | |||||||||
Long-term debt, excluding current maturities | $ | 10,815 | $ | 10,086 | $ | 9,030 | $ | 7,035 | $ | 6,537 | |||||||||
1 | Fiscal 2011 contained 53 weeks, while all other years contained 52 weeks. |
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Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended January 30, 2015 (our fiscal years 2014, 2013 and 2012). Unless otherwise noted, all references herein for the years 2014, 2013 and 2012 represent the fiscal years ended January 30, 2015, January 31, 2014 and February 1, 2013, respectively. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report on Form 10-K that have been prepared in accordance with accounting principles generally accepted in the United States of America. This discussion and analysis is presented in seven sections:
• | Executive Overview |
• | Operations |
• | Lowe’s Business Outlook |
• | Financial Condition, Liquidity and Capital Resources |
• | Off-Balance Sheet Arrangements |
• | Contractual Obligations and Commercial Commitments |
• | Critical Accounting Policies and Estimates |
EXECUTIVE OVERVIEW
Net earnings increased 18.0% to $2.7 billion during fiscal year 2014, and diluted earnings per share increased 26.6% to $2.71. Net sales for 2014 were $56.2 billion, a 5.3% increase over fiscal year 2013. Comparable sales increased 4.3%, driven by a comparable average ticket increase of 2.4% and a comparable transaction increase of 1.8%.
For 2014, cash flows from operating activities were approximately $4.9 billion, with $880 million used for capital expenditures. Our strong financial position and positive cash flows allowed us to deliver on our commitment to return excess cash to shareholders. During 2014, the company repurchased 74.7 million shares of stock for $3.9 billion and paid $822 million in dividends.
Throughout 2014, we continued to build momentum as we further optimized our business model. We were focused on three priorities to drive further top line growth including our enhanced Sales & Operations Planning process, building on our customer experience design capabilities, and improving our relevance with the Pro customer. In addition, in order to provide not just the products, but also the services, information, and advice to help our customers improve their homes, we are continuing to transform from a single-channel, home improvement retailer to an omni-channel home improvement company. This allows us to sell products from a store, online, on-site, or through one of our contact centers and fulfill orders in the most convenient manner for our customers.
Through our Sales & Operations Planning process, we have improved seasonal planning, including the cadence of product introductions, promotions and staffing. Our Sales & Operations process is anchored in the customer mindset for the season. The process ensures collaboration from all functions, including logistics, merchandising and marketing, to make certain we have relevant products available to customers at the right time and those products are effectively advertised and strategically promoted to drive customer traffic.
In addition, during 2014, we continued to build customer experience design capabilities. We now have a dedicated customer experience design team that coordinates the creation of customer experiences that encompass the entire project from inspiration, to purchase, to fulfillment. These experiences are rooted in research around customers' shopping preferences and mindset about specific home improvement projects. Any experience we design has to meet three critical criteria: it must be desirable to our target customer; feasible - fitting within the organization's competencies; and viable - or something we can deliver in a profitable and sustainable way. For example, during 2014, we rolled out an Outdoor Living Experience to two-thirds of our stores in advance of the spring selling season. To help customers envision and create their outdoor space, we displayed patio sets with coordinating rugs, umbrellas, and accessories, along with grills and other outdoor products just as they would have expected in their own backyard. This space was re-purposed for the Holiday Décor Experience in the second half of the year which inspired customers to decorate, raised awareness of the breadth of holiday décor and gift offerings, and provided project solutions relevant to the holiday micro seasons. By providing an integrative and cohesive assortment of products, inspiring and intuitive presentation and display, and optimal service components across all selling channels, we are able to provide better customer experiences that differentiate us in the marketplace.
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We continued to experience strength with our Pro customers, which have performed at or above the company average comparable sales increase for 14 consecutive quarters. We have a strong foundation for doing business with Pro customers with our dedicated service in the stores, inventory depth, job lot quantities and a strong value proposition. We are enhancing our product and service offering with this important customer, including ensuring we have the types of products and brands the Pros demand. For example, during 2014, we added brands such as Henry® coatings, Hubbell® wiring devices, GRK Fasteners™, and Progress® Lighting, all of which help make Lowe’s the destination for the Pro. In addition, we have been working to relaunch Lowesforpros.com, a dedicated platform which provides Pro customers with the ability to transact with us online and provides Pros the ability to develop requisition lists, access to purchase history, and customized product catalogs.
Looking Forward
Economic forecasts for 2015 suggest moderately stronger growth in the home improvement industry. Stronger job and income growth and improving household financial conditions are expected to build on the momentum gained in 2014. In addition, an increase in revolving credit usage should allow customers to be more willing and able to take on discretionary home improvement projects. Improvements in the housing market should also persist in 2015 with moderating home price growth and mortgage rates that remain historically low.
As we move into 2015, we will focus on capitalizing on market opportunities and driving profitability within an improving economy. We will continue to differentiate ourselves through better customer experiences and improving our product and service offering for the Pro customer. We have made progress over the past few years to meet customers on their terms whenever and wherever they choose to engage, and we will continue to invest in omni-channel capabilities to ensure that we are convenient and easy to do business with. We also remain committed to improving our productivity and profitability in areas including store payroll, marketing and efforts to leverage our scale to achieve cost savings on indirect spend.
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OPERATIONS
The following tables set forth the percentage relationship to net sales of each line item of the consolidated statements of earnings, as well as the percentage change in dollar amounts from the prior year. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements.
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year | Percentage Increase / (Decrease) in Dollar Amounts from Prior Year | ||||||||
2014 | 2013 | 2014 vs. 2013 | 2014 vs. 2013 | ||||||
Net sales | 100.00% | 100.00% | N/A | 5.3 | % | ||||
Gross margin | 34.79 | 34.59 | 20 | 5.9 | |||||
Expenses: | |||||||||
Selling, general and administrative | 23.62 | 24.08 | (46 | ) | 3.2 | ||||
Depreciation | 2.64 | 2.74 | (10 | ) | 1.6 | ||||
Interest - net | 0.92 | 0.89 | 3 | 8.3 | |||||
Total expenses | 27.18 | 27.71 | (53 | ) | 3.2 | ||||
Pre-tax earnings | 7.61 | 6.88 | 73 | 16.4 | |||||
Income tax provision | 2.81 | 2.60 | 21 | 13.8 | |||||
Net earnings | 4.80% | 4.28% | 52 | 18.0 | % | ||||
EBIT margin 1 | 8.53% | 7.77% | 76 | 15.5 | % | ||||
Basis Point Increase / (Decrease) in Percentage of Net Sales from Prior Year | Percentage Increase / (Decrease) in Dollar Amounts from Prior Year | ||||||||
2013 | 2012 | 2013 vs. 2012 | 2013 vs. 2012 | ||||||
Net sales | 100.00% | 100.00% | N/A | 5.7 | % | ||||
Gross margin | 34.59 | 34.30 | 29 | 6.6 | |||||
Expenses: | |||||||||
Selling, general and administrative | 24.08 | 24.24 | (16 | ) | 5.1 | ||||
Depreciation | 2.74 | 3.01 | (27 | ) | (4.0 | ) | |||
Interest - net | 0.89 | 0.84 | 5 | 12.7 | |||||
Total expenses | 27.71 | 28.09 | (38 | ) | 4.3 | ||||
Pre-tax earnings | 6.88 | 6.21 | 67 | 17.1 | |||||
Income tax provision | 2.60 | 2.33 | 27 | 17.7 | |||||
Net earnings | 4.28% | 3.88% | 40 | 16.7 | % | ||||
EBIT margin 1 | 7.77% | 7.05% | 72 | 16.6 | % | ||||
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Other Metrics | 2014 | 2013 | 2012 | ||||||||
Comparable sales increase 2 | 4.3 | % | 4.8 | % | 1.4 | % | |||||
Total customer transactions (in millions) | 857 | 828 | 804 | ||||||||
Average ticket 3 | $ | 65.61 | $ | 64.52 | $ | 62.82 | |||||
At end of year: | |||||||||||
Number of stores | 1,840 | 1,832 | 1,754 | ||||||||
Sales floor square feet (in millions) | 201 | 200 | 197 | ||||||||
Average store size selling square feet (in thousands) 4 | 109 | 109 | 113 | ||||||||
Return on average assets 5 | 8.1 | % | 6.8 | % | 5.7 | % | |||||
Return on average shareholders' equity 6 | 24.4 | % | 17.7 | % | 13.1 | % | |||||
Return on invested capital 7 | 13.9 | % | 11.5 | % | 9.3 | % | |||||
1 | EBIT margin, also referred to as operating margin, is defined as earnings before interest and taxes as a percentage of sales. |
2 | A comparable location is defined as a location that has been open longer than 13 months. A location that is identified for relocation is no longer considered comparable one month prior to its relocation. The relocated location must then remain open longer than 13 months to be considered comparable. A location we have decided to close is no longer considered comparable as of the beginning of the month in which we announce its closing. Acquired locations are included in the comparable sales calculation beginning in the first full month following the first anniversary of the date of the acquisition. Comparable sales include online sales, which did not have a meaningful impact for the periods presented. |
3 | Average ticket is defined as net sales divided by the total number of customer transactions. |
4 | 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 home improvement store has approximately 112,000 square feet of retail selling space, while the average Orchard store has approximately 36,000 square feet of retail selling space. |
5 | Return on average assets is defined as net earnings divided by average total assets for the last five quarters. |
6 | Return on average shareholders’ equity is defined as net earnings divided by average shareholders’ equity for the last five quarters. |
7 | Return on invested capital is a non-GAAP financial measure. See below for additional information and a reconciliation to the most comparable GAAP measure. |
Return on Invested Capital
Return on Invested Capital (ROIC) is considered a non-GAAP financial measure. We believe ROIC is a meaningful metric for investors because it measures how effectively the Company uses capital to generate profits.
We define ROIC as trailing four quarters’ net operating profit after tax divided by the average of ending debt and equity for the last five quarters. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by our management to calculate ROIC may differ from the methods other companies use to calculate their ROIC. We encourage you to understand the methods used by another company to calculate its ROIC before comparing its ROIC to ours.
We consider return on average debt and equity to be the financial measure computed in accordance with generally accepted accounting principles that is the most directly comparable GAAP financial measure to ROIC. The difference between these two measures is that ROIC adjusts net earnings to exclude tax adjusted interest expense.
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The calculation of ROIC, together with a reconciliation to the calculation of return on average debt and equity, the most comparable GAAP financial measure, is as follows:
(In millions, except percentage data) | |||||||||||
Calculation of Return on Invested Capital | 2014 | 2013 | 2012 | ||||||||
Numerator | |||||||||||
Net earnings | $ | 2,698 | $ | 2,286 | $ | 1,959 | |||||
Plus: | |||||||||||
Interest expense - net | 516 | 476 | 423 | ||||||||
Provision for income taxes | 1,578 | 1,387 | 1,178 | ||||||||
Earnings before interest and taxes | 4,792 | 4,149 | 3,560 | ||||||||
Less: | |||||||||||
Income tax adjustment 1 | 1,769 | 1,567 | 1,337 | ||||||||
Net operating profit after tax | $ | 3,023 | $ | 2,582 | $ | 2,223 | |||||
Effective tax rate | 36.9 | % | 37.8 | % | 37.6 | % | |||||
Denominator | |||||||||||
Average debt and equity 2 | $ | 21,752 | $ | 22,510 | $ | 23,921 | |||||
Return on invested capital | 13.9 | % | 11.5 | % | 9.3 | % | |||||
Calculation of Return on Average Debt and Equity | 2014 | 2013 | 2012 | ||||||||
Numerator | |||||||||||
Net earnings | $ | 2,698 | $ | 2,286 | $ | 1,959 | |||||
Denominator | |||||||||||
Average debt and equity 2 | $ | 21,752 | $ | 22,510 | $ | 23,921 | |||||
Return on average debt and equity | 12.4 | % | 10.2 | % | 8.2 | % | |||||
1 | Income tax adjustment is defined as earnings before interest and taxes multiplied by the effective tax rate. |
2 | Average debt and equity is defined as average debt, including current maturities and short-term borrowings, plus total equity for the last five quarters. |
Fiscal 2014 Compared to Fiscal 2013
Net sales – Net sales increased 5.3% to $56.2 billion in 2014. The increase in total sales was driven primarily by the comparable sales increase of 4.3%, the acquisition of Orchard, and new stores. The comparable sales increase of 4.3% in 2014 was driven by a 2.4% increase in comparable average ticket and a 1.8% increase in comparable customer transactions. Comparable sales increased during each quarter of the fiscal year as we reported 0.9% in the first quarter, 4.4% in the second quarter, 5.1% in the third quarter, and 7.3% in the fourth quarter.
All of our product categories experienced comparable sales increases for the year. During 2014, we experienced comparable sales above the company average in the following product categories: Millwork, Kitchens & Appliances, Tools & Hardware, and Fashion Fixtures. Targeted promotions coupled with the expansion of our Project Specialist programs drove comparable sales increases, especially within Millwork, Kitchens & Appliances, and Fashion Fixtures, as we continued to benefit from customers' increasing interest in refreshing both the interior and exterior of their homes. Within Tools & Hardware, our enhanced Sales & Operations Planning process helped us drive strong performance in power and pneumatic tools. In addition, Flooring and Outdoor Power Equipment performed at approximately the overall company average. Geographically, 13 of the 14 U.S. regions experienced increases in comparable store sales, as sales performance was well balanced across the country.
Gross margin – Gross margin of 34.79% for 2014 represented a 20 basis point increase from 2013 and was primarily driven by cost reductions associated with our Value Improvement initiative, which consisted of improved line review and product reset processes to better position us to meet customers' product needs and drive better inventory productivity.
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During the fourth quarter of 2014, gross margin decreased one basis point as a percentage of sales. Gross margin was negatively impacted by mix of products sold and price actions on specific categories, partially offset by our Value Improvement program and better seasonal sell-through.
SG&A – SG&A expense for 2014 leveraged 46 basis points as a percentage of sales compared to 2013. This was primarily driven by 21 basis points of leverage associated with operating salaries as we optimized payroll hours against customer traffic. We also experienced 16 basis points of leverage associated with incentive compensation due to lower attainment levels compared to the prior year and seven basis points of leverage in property taxes due to favorability in property valuations recognized in the current year. In addition, we experienced six basis points of leverage in advertising expense due to increased sales and five basis points of leverage in utilities due to decreased consumption due to favorable weather experienced in the current year. These were partially offset by 23 basis points of deleverage in employee insurance costs, due to increased claims as well as additional costs associated with the Affordable Care Act.
SG&A expense during the fourth quarter leveraged 88 basis points due primarily to long-lived asset impairments recorded in the prior year, as well as leverage in operating salaries, and property taxes.
Depreciation – Depreciation expense leveraged 10 basis points for 2014 compared to 2013 primarily due to the increase in sales. Property, less accumulated depreciation, decreased to $20.0 billion at January 30, 2015 compared to $20.8 billion at January 31, 2014. At January 30, 2015 and January 31, 2014, we owned 86% of our stores, which included stores on leased land.
Interest – Net – Net interest expense is comprised of the following:
(In millions) | 2014 | 2013 | |||||
Interest expense, net of amount capitalized | $ | 515 | $ | 474 | |||
Amortization of original issue discount and loan costs | 7 | 6 | |||||
Interest income | (6 | ) | (4 | ) | |||
Interest - net | $ | 516 | $ | 476 | |||
Net interest expense increased primarily as a result of the issuance of $1.25 billion and $1.0 billion of unsecured notes in September 2014 and 2013, respectively.
Income tax provision - Our effective income tax rate was 36.9% in 2014 compared to 37.8% in 2013. The lower effective tax rate in 2014 was the result of the favorable settlement of certain federal tax matters during the year.
Fiscal 2013 Compared to Fiscal 2012
Net sales – Net sales increased 5.7% to $53.4 billion in 2013. Comparable sales increased 4.8% in 2013, driven by a 3.2% increase in comparable average ticket and a 1.6% increase in comparable customer transactions. Performance for the year was strong across product categories as all of our product categories experienced comparable sales increases for the year. During 2013, we experienced comparable sales above the company average in the following product categories: Outdoor Power Equipment, Kitchens & Appliances, Flooring, and Fashion Fixtures. Sales to Pro customers also performed well during the year and experienced comparable sales above the company average.
Sales during the year benefited from growth in the home improvement industry where gains in housing turnover and job growth created increased demand. Through our Sales & Operations Planning process, we were able to better capitalize on market demand and drive sales in big ticket categories such as Outdoor Power Equipment, Kitchens & Appliances, and Flooring, which all performed above the company average. Furthermore, we were able to make improvements in our seasonal planning and the timing of product introductions and promotions, which also helped drive sales in these categories.
We continued to realize benefits from our strategic initiatives, with many product categories benefiting from improved line designs and deeper inventory in key items after having completed their Value Improvement resets. In addition, we also saw benefit from our proprietary credit value proposition, which offers customers the choice of 5% off every day or promotional financing.
Gross margin – Gross margin of 34.59% for 2013 represented a 29 basis point increase from 2012. Gross margin was positively impacted by 45 basis points resulting from our Value Improvement initiative. This was partially offset by a negative
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impact of 15 basis points as a result of higher penetration of our proprietary credit value proposition, which increased 145 basis points over the prior year and was approximately 25.5% of sales.
SG&A – SG&A expense for 2013 leveraged 16 basis points as a percentage of sales compared to 2012. This was driven by 17 basis points of leverage associated with casualty insurance as we cycled a reduction in the discount rate applied in the prior year. We also experienced nine basis points of leverage due to greater long-lived asset impairments and discontinued project expenses in the prior year and eight basis points of leverage in advertising expense due to higher sales. In addition, we experienced eight basis points of leverage in contract labor expense as a result of lower spending on information technology projects in the current year. These were partially offset by 14 basis points of deleverage associated with incentive compensation due to higher attainment levels and eight basis points of deleverage as a result of reset and remerchandising activity associated with efforts to improve customer experiences. We also experienced eight basis points of deleverage due to higher store repair and maintenance expense.
Depreciation – Depreciation expense leveraged 27 basis points for 2013 compared to 2012 primarily due to the increase in sales as well as assets becoming fully depreciated. Property, less accumulated depreciation, decreased to $20.8 billion at January 31, 2014 compared to $21.5 billion at February 1, 2013. At January 31, 2014 and February 1, 2013 we owned 86% and 89% of our stores, respectively, which included stores on leased land.
Interest – Net – Net interest expense is comprised of the following:
(In millions) | 2013 | 2012 | |||||
Interest expense, net of amount capitalized | $ | 474 | $ | 427 | |||
Amortization of original issue discount and loan costs | 6 | 5 | |||||
Interest income | (4 | ) | (9 | ) | |||
Interest - net | $ | 476 | $ | 423 | |||
Net interest expense increased primarily as a result of a favorable tax settlement that resulted in a reduced interest accrual in 2012, in addition to increased expense as a result of the net increase in long-term debt.
LOWE’S BUSINESS OUTLOOK
As of February 25, 2015, the date of our fourth quarter 2014 earnings release, we expected total sales in 2015 to increase 4.5% to 5% and comparable sales to increase 4% to 4.5%. We expected to open 15 to 20 home improvement and hardware stores during 2015. In addition, earnings before interest and taxes as a percentage of sales (operating margin) were expected to increase 80 to 100 basis points, and the effective tax rate was expected to be approximately 38.1%. Diluted earnings per share of approximately $3.29 were expected for the fiscal year ending January 29, 2016. Our guidance assumed approximately $3.8 billion in share repurchases during 2015.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows from operating activities continued to provide the primary source of our liquidity. The increase in net cash provided by operating activities for 2014 versus 2013 was primarily driven by changes in working capital and an increase in net earnings. The decrease in net cash used in investing activities for 2014 versus 2013 was primarily driven by the acquisition of Orchard in the prior year and a reduction in capital expenditures, partially offset by an increase in net contributions to equity method investments in the current year. The increase in net cash used in financing activities for 2014 versus 2013 was driven primarily by repayments of short-term borrowings.
Sources of Liquidity
In addition to our cash flows from operations, liquidity is provided by our short-term borrowing facilities. On August 29, 2014, we entered into a new five year unsecured revolving credit agreement (the 2014 Credit Facility) to replace the 2011 Second Amended and Restated Credit Agreement dated October 2011. The 2014 Credit Facility provides for borrowings up to $1.75 billion and expires in August 2019. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2014 Credit Facility, we may increase the aggregate availability under the facility by an additional $500 million. The 2014 Credit Facility supports our commercial paper program and has a $500 million letter of credit sublimit. Letters of credit issued pursuant to the 2014 Credit Facility reduce the amount available for borrowing under its terms.
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Borrowings made are unsecured and are priced at fixed rates based upon market conditions at the time of funding in accordance with the terms of the 2014 Credit Facility. Thirteen banking institutions are participating in the 2014 Credit Facility. The 2014 Credit Facility contains certain restrictive covenants, which include maintenance of an adjusted debt leverage ratio as defined by the credit agreement. We were in compliance with those covenants at January 30, 2015. In addition, there were no outstanding borrowings or letters of credit under the 2014 Credit Facility and no outstanding borrowings under the commercial paper program at January 30, 2015. For additional information about the 2014 Credit Facility, see the summary of certain terms thereof that is included in the Current Report on Form 8-K we filed on September 2, 2014 with the Securities and Exchange Commission.
We expect to continue to have access to the capital markets on both short-term and long-term bases 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 March 31, 2015, which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds. Although we currently do not expect a downgrade in our debt ratings, 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 | A- | A3 | |
Outlook | Stable | Stable | |
We believe that net cash provided by operating and financing activities will be adequate not only for our operating requirements, but also for investments in information technology, investments in our existing stores, expansion plans and acquisitions, if any, and to return cash to shareholders through both dividends and share repurchases over the next 12 months. 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 have a significant amount of cash held in foreign affiliates that is unavailable to fund domestic operations.
Cash Requirements
Capital expenditures
Our fiscal 2015 capital forecast is approximately $1.4 billion, inclusive of approximately $200 million of lease commitments, resulting in a planned net cash outflow of $1.2 billion. Investments in our existing stores are expected to account for approximately 40% of net cash outflow, including investments in store equipment, resets, and remerchandising. Approximately 30% of the planned net cash outflow is for corporate programs, including investments to enhance the customer experience, as well as enhancements to the corporate infrastructure. In addition, approximately 30% of the planned net cash outflow is for store expansion. Our expansion plans for 2015 consist of 15 to 20 new home improvement and hardware stores, approximately half of which will be leased.
Debt and capital
In September 2014, the Company issued $1.25 billion of unsecured notes in three tranches: $450 million of floating rate notes maturing in September 2019, $450 million of 3.125% notes maturing in September 2024, and $350 million of 4.25% notes maturing in September 2044. The 2019, 2024, and 2044 Notes were issued at discounts of approximately $2 million, $6 million, and $4 million, respectively. The 2019 Notes will bear interest at a floating rate, reset quarterly, equal to the three-month LIBOR plus 0.420% (0.658% as of January 30, 2015). Interest on the 2019 Notes is payable quarterly in arrears in March, June, September, and December of each year until maturity, beginning in December 2014. Interest on the 2024 and 2044 Notes is payable semiannually in arrears in March and September of each year until maturity, beginning in March 2015.
The discounts associated with these issuances, which include the underwriting and issuance discounts, are recorded in long-term debt and are being amortized over the respective terms of the notes.
Dividends declared during fiscal 2014 totaled $858 million. Our dividend payment dates are established such that dividends are paid in the quarter immediately following the quarter in which they are declared. The dividend declared in the fourth quarter of 2014 was paid in fiscal 2015 and totaled $222 million.
We have an ongoing share repurchase program that is executed through purchases made from time to time either in the open market or through private off-market transactions. Shares purchased under the repurchase program are retired and returned to
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authorized and unissued status. On January 31, 2014, the Company's Board of Directors authorized a $5.0 billion share repurchase program with no expiration. As of January 30, 2015, the Company had $2.4 billion remaining available under this authorization with no expiration date. On March 20, 2015, the Company's Board of Directors authorized an additional $5.0 billion share repurchase program with no expiration. In fiscal 2015, the Company expects to repurchase shares totaling $3.8 billion through purchases made from time to time either in the open market or through private off market transactions in accordance with SEC regulations.
Our ratio of debt to equity plus debt was 53.3% and 47.0% as of January 30, 2015, and January 31, 2014, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our significant contractual obligations at January 30, 2015:
Payments Due by Period | |||||||||||||||||||
Contractual Obligations (In millions) | Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | ||||||||||||||
Long-term debt (principal amounts, excluding discount) | $ | 10,949 | $ | 508 | $ | 1,779 | $ | 451 | $ | 8,211 | |||||||||
Long-term debt (interest payments) | 7,477 | 491 | 881 | 802 | 5,303 | ||||||||||||||
Capitalized lease obligations 1 | 795 | 85 | 133 | 110 | 467 | ||||||||||||||
Operating leases 1 | 5,479 | 464 | 931 | 850 | 3,234 | ||||||||||||||
Purchase obligations 2 | 847 | 745 | 100 | 2 | — | ||||||||||||||
Total contractual obligations | $ | 25,547 | $ | 2,293 | $ | 3,824 | $ | 2,215 | $ | 17,215 | |||||||||
Amount of Commitment Expiration by Period | |||||||||||||||||||
Commercial Commitments (in millions) | Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | ||||||||||||||
Letters of Credit 3 | $ | 66 | $ | 63 | $ | 3 | $ | — | $ | — | |||||||||
1 | Amounts do not include taxes, common area maintenance, insurance or contingent rent because these amounts have historically been insignificant. |
2 | Represents commitments related to certain marketing and information technology programs, and purchases of merchandise inventory. |
3 | Letters of credit are issued primarily for insurance and construction contracts. |
At January 30, 2015, our reserve for uncertain tax positions (including penalties and interest) was $9 million, all of which was classified as a current liability. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of the effective settlement of tax positions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements and notes to consolidated financial statements presented in this Form 10-K requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
Our significant accounting policies are described in Note 1 to the consolidated financial statements. We believe that the following accounting policies affect the most significant estimates and management judgments used in preparing the consolidated financial statements.
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Merchandise Inventory
Description
We record an obsolete inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience. During 2014, our reserve decreased approximately $16 million to $52 million as of January 30, 2015, primarily due to a reduction in obsolete inventory.
We also record an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrinkage results from previous physical inventories. During 2014, the inventory shrinkage reserve increased approximately $4 million to $162 million as of January 30, 2015.
In addition, we receive funds from vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments or promotions of vendors’ products. Generally, these vendor funds do not represent the reimbursement of specific, incremental and identifiable costs that we incurred to sell the vendor’s product. Therefore, we treat these funds as a reduction in the cost of inventory as the amounts are accrued, and recognize these funds as a reduction of cost of sales when the inventory is sold. Funds that are determined to be reimbursements of specific, incremental and identifiable costs incurred to sell vendors’ products are recorded as an offset to the related expense.
Judgments and uncertainties involved in the estimate
We do not believe that our merchandise inventories are subject to significant risk of obsolescence in the near term, and we have the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns or a deterioration in product quality could result in the need for additional reserves. Likewise, changes in the estimated shrink reserve may be necessary, based on the timing and results of physical inventories. We also apply judgment in the determination of levels of obsolete inventory and assumptions about net realizable value.
For vendor funds, we develop accrual rates based on the provisions of the agreements in place. Due to the complexity and diversity of the individual vendor agreements, we perform analyses and review historical purchase trends and volumes throughout the year, adjust accrual rates as appropriate and confirm actual amounts with select vendors to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our inventory valuation or the related reserves for obsolete inventory or inventory shrinkage during the past three fiscal years. We believe that we have sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves. However, it is possible that actual results could differ from recorded reserves. A 10% change in either the amount of products considered obsolete or the weighted average estimated loss rate used in the calculation of our obsolete inventory reserve would have affected net earnings by approximately $3 million for 2014. A 10% change in the estimated shrinkage rate included in the calculation of our inventory shrinkage reserve would have affected net earnings by approximately $10 million for 2014.
We have not made any material changes in the methodology used to recognize vendor funds during the past three fiscal years. If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional adjustments that could positively or negatively impact gross margin and inventory. However, substantially all receivables associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year. Adjustments to gross margin and inventory in the following fiscal year have historically not been material.
Long-Lived Asset Impairment
Description
We review the carrying amounts of locations whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. When evaluating locations for impairment, our asset group is at an individual location level, as that is the lowest level for which cash flows are identifiable. Cash flows for individual locations do not include an allocation of corporate overhead.
We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a location’s asset carrying values may not be recoverable. For operating locations, our primary indicator that asset carrying values may not be recoverable is consistently negative cash flow for a 12-month period for those locations that have been open
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in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results. Management also monitors other factors when evaluating operating locations for impairment, including individual locations’ execution of their operating plans and local market conditions, including incursion, which is the opening of either other Lowe’s locations or those of a direct competitor within the same market. We also consider there to be a triggering event when there is a current expectation that it is more likely than not that a given location will be closed significantly before the end of its previously estimated useful life.
A potential impairment has occurred if projected future undiscounted cash flows expected to result from the use and eventual disposition of the location’s assets are less than the carrying amount of the assets. When determining the stream of projected future cash flows associated with an individual operating location, management makes assumptions, incorporating local market conditions, about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll and occupancy expense, as well as asset residual values or lease rates. An impairment loss is recognized when the carrying amount of the operating location is not recoverable and exceeds its fair value.
We use an income approach to determine the fair value of our individual operating locations, which requires discounting projected future cash flows. This involves making assumptions regarding both a location’s future cash flows, as described above, and an appropriate discount rate to determine the present value of those future cash flows. We discount our cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. The selected market participants represent a group of other retailers with a market footprint similar in size to ours.
Judgments and uncertainties involved in the estimate
Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more likely than not that a location will be closed significantly before the end of its previously estimated useful life. Our impairment loss calculations require us to apply judgment in estimating expected future cash flows, including estimated sales, margin and controllable expenses, and assumptions about market performance for operating locations and estimated selling prices or lease rates for locations identified for closure. We also apply judgment in estimating asset fair values, including the selection of an appropriate discount rate for fair values determined using an income approach.
Effect if actual results differ from assumptions
During 2014, 10 operating locations experienced a triggering event and were evaluated for recoverability. Three of the 10 operating locations were determined to be impaired. We recorded impairment losses related to these three operating locations of $26 million during 2014, compared to impairment losses of $26 million related to one operating location impaired during 2013.
We have not made any material changes in the methodology used to estimate the future cash flows of operating locations or locations identified for closure during the past three fiscal years. If the actual results are not consistent with the assumptions and judgments we have made in determining whether it is more likely than not that a location will be closed significantly before the end of its useful life or in estimating future cash flows and determining asset fair values, our actual impairment losses could vary positively or negatively from our estimated impairment losses.
Seven of the 10 operating locations that experienced a triggering event during 2014 were determined to be recoverable and therefore were not impaired. For all of these seven locations, the expected undiscounted cash flows substantially exceeded the net book value of the location’s assets. For these seven locations, a 10% reduction in projected sales used to estimate future cash flows at the latest date these operating locations were evaluated for impairment would have resulted in the impairment of six of these locations and increased recognized impairment losses by $71 million.
We analyzed other assumptions made in estimating the future cash flows of the operating locations evaluated for impairment, but the sensitivity of those assumptions was not significant to the estimates.
Store Closing Lease Obligations
Description
When locations under operating leases are closed, we recognize a liability for the fair value of future contractual obligations associated with the leased location. The fair value of the store closing lease obligation is determined using an expected present value cash flow model incorporating future minimum lease payments, property taxes, utilities, common area maintenance and other ongoing expenses, net of estimated sublease income and other recoverable items, discounted at a credit-adjusted risk free rate. The expected present value cash flow model uses a probability weighted scenario approach that assigns varying cash flows to certain scenarios based on the expected likelihood of outcomes. Estimating the fair value involves making assumptions regarding estimated sublease income by obtaining information from property brokers or appraisers in the specific
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markets being evaluated. The information includes comparable lease rates of similar assets and assumptions about demand in the market for leasing these assets. Subsequent changes to the liability, including a change resulting from a revision to either the timing or the amount of estimated cash flows, are recognized in the period of the change.
Judgments and uncertainties involved in the estimate
Our store closing lease liability calculations require us to apply judgment in estimating expected future cash flows, primarily related to estimated sublease income, and the selection of an appropriate discount rate.
Effect if actual results differ from assumptions
During 2014, the Company did not close or relocate any stores subject to operating leases. During 2013, the Company relocated two stores subject to operating leases. Expenses for store closing lease obligations included $12 million and $6 million in 2014 and 2013, respectively, related to adjustments for previously closed or relocated locations.
We have not made any material changes in the methodology used to estimate the expected future cash flows of closed locations under operating leases during the past three fiscal years. If the actual results are not consistent with the assumptions and judgments we have made in estimating expected future cash flows, our store closing lease obligation losses could vary positively or negatively from our estimated losses. A 10% change in the store closing lease liability would have affected net earnings by approximately $3 million for 2014.
Self-Insurance
Description
We are self-insured for certain losses relating to workers’ compensation; automobile; general and product liability; extended protection plan; and certain medical and dental claims. Our self-insured retention or deductible, as applicable, is limited to $2 million per occurrence involving workers’ compensation, $5 million per occurrence involving general or product liability, and $10 million per occurrence involving automobile. We do not have any insurance coverage for self-insured extended protection plan or medical and dental claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. During 2014, our self-insurance liability increased approximately $1 million to $905 million as of January 30, 2015.
Judgments and uncertainties involved in the estimate
These estimates are subject to changes in the regulatory environment; utilized discount rate; projected exposures including payroll, sales and vehicle units; as well as the frequency, lag and severity of claims.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our self-insurance liability during the past three fiscal years. Although we believe that we have the ability to reasonably estimate losses related to claims, it is possible that actual results could differ from recorded self-insurance liabilities. A 10% change in our self-insurance liability would have affected net earnings by approximately $55 million for 2014. A 100 basis point change in our discount rate would have affected net earnings by approximately $19 million for 2014.
Revenue Recognition
Description
See Note 1 to the consolidated financial statements for a discussion of our revenue recognition policies. The following accounting estimates relating to revenue recognition require management to make assumptions and apply judgment regarding the effects of future events that cannot be determined with certainty.
We sell separately-priced extended protection plan contracts under a Lowe’s-branded program for which the Company is ultimately self-insured. The Company recognizes revenues from extended protection plan sales on a straight-line basis over the respective contract term. Extended protection plan contract terms primarily range from one to four years from the date of purchase or the end of the manufacturer’s warranty, as applicable. The Company consistently groups and evaluates extended protection plan contracts based on the characteristics of the underlying products and the coverage provided in order to monitor for expected losses. A loss on the overall contract would be recognized if the expected costs of performing services under the contracts exceeded the amount of unamortized acquisition costs and related deferred revenue associated with the contracts. Deferred revenues associated with the extended protection plan contracts were $730 million as of January 30, 2015 and January 31, 2014.
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We defer revenue and cost of sales associated with settled transactions for which customers have not yet taken possession of merchandise or for which installation has not yet been completed. Revenue is deferred based on the actual amounts received. We use historical gross margin rates to estimate the adjustment to cost of sales for these transactions. During 2014, deferred revenues associated with these transactions increased $84 million to $545 million as of January 30, 2015.
Judgments and uncertainties involved in the estimate
For extended protection plans, there is judgment inherent in our evaluation of expected losses as a result of our methodology for grouping and evaluating extended protection plan contracts and from the actuarial determination of the estimated cost of the contracts. There is also judgment inherent in our determination of the recognition pattern of costs of performing services under these contracts.
For the deferral of revenue and cost of sales associated with transactions for which customers have not yet taken possession of merchandise or for which installation has not yet been completed, there is judgment inherent in our estimates of gross margin rates.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to recognize revenue on our extended protection plan contracts during the past three fiscal years. We currently do not anticipate incurring any overall contract losses on our extended protection plan contracts. Although we believe that we have the ability to adequately monitor and estimate expected losses under the extended protection plan contracts, it is possible that actual results could differ from our estimates. In addition, if future evidence indicates that the costs of performing services under these contracts are incurred on other than a straight-line basis, the timing of revenue recognition under these contracts could change. A 10% change in the amount of revenue recognized in 2014 under these contracts would have affected net earnings by approximately $19 million.
We have not made any material changes in the methodology used to reverse net sales and cost of sales related to amounts received for which customers have not yet taken possession of merchandise or for which installation has not yet been completed. We believe we have sufficient current and historical knowledge to record reasonable estimates related to the impact to cost of sales for these transactions. However, if actual results are not consistent with our estimates or assumptions, we may incur additional income or expense. A 10% change in the estimate of the gross margin rates applied to these transactions would have affected net earnings by approximately $9 million in 2014.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We speak throughout this Annual Report on Form 10-K in forward-looking statements about our future, but particularly in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The words “believe,” “expect,” “will,” “should,” "suggest", and other similar expressions are intended to identify those forward-looking statements. While we believe our expectations are reasonable, they are not guarantees of future performance. Our actual results could differ substantially from our expectations.
For a detailed description of the risks and uncertainties that we are exposed to, you should read the “Risk Factors” included elsewhere in this Annual Report on Form 10-K to the United States Securities and Exchange Commission. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section and in the “Risk Factors” included elsewhere in this Annual Report on Form 10-K. We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
In addition to the risks inherent in our operations, we are exposed to certain market risks, including changes in interest rates, commodity prices and foreign currency exchange rates.
Interest Rate Risk
Fluctuations in interest rates do not have a material impact on our financial condition and results of operations because our long-term debt is carried at amortized cost and consists primarily of fixed-rate instruments. Therefore, providing quantitative information about interest rate risk is not meaningful for our financial instruments.
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Commodity Price Risk
We purchase certain commodity products that are subject to price volatility caused by factors beyond our control. We believe that the price volatility of these products is partially mitigated by our ability to adjust selling prices. The selling prices of these commodity products are influenced, in part, by the market price we pay, which is determined by industry supply and demand.
Foreign Currency Exchange Rate Risk
Although we have international operating entities, our exposure to foreign currency exchange rate fluctuations is not material to our financial condition and results of operations.
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Item 8 - Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Lowe’s Companies, Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (Internal Control) as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our Internal Control was designed to provide reasonable assurance to our management and the Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness may vary over time.
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our Internal Control as of January 30, 2015. In evaluating our Internal Control, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on our management’s assessment, we have concluded that, as of January 30, 2015, our Internal Control is effective.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the financial statements contained in this report, was engaged to audit our Internal Control. Their report appears on page 33.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lowe's Companies, Inc.
Mooresville, North Carolina
We have audited the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of January 30, 2015 and January 31, 2014, and the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows for each of the three fiscal years in the period ended January 30, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 30, 2015 and January 31, 2014, and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 30, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 30, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 31, 2015
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lowe’s Companies, Inc.
Mooresville, North Carolina
We have audited the internal control over financial reporting of Lowe’s Companies, Inc. and subsidiaries (the "Company") as of January 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 30, 2015 of the Company and our report dated March 31, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 31, 2015
33
Lowe's Companies, Inc.
Consolidated Statements of Earnings
(In millions, except per share and percentage data)
Fiscal years ended on | January 30, 2015 | % Sales | January 31, 2014 | % Sales | February 1, 2013 | % Sales | ||||||||||||||
Net sales | $ | 56,223 | 100.00 | % | $ | 53,417 | 100.00 | % | $ | 50,521 | 100.00 | % | ||||||||
Cost of sales | 36,665 | 65.21 | 34,941 | 65.41 | 33,194 | 65.70 | ||||||||||||||
Gross margin | 19,558 | 34.79 | 18,476 | 34.59 | 17,327 | 34.30 | ||||||||||||||
Expenses: | ||||||||||||||||||||
Selling, general and administrative | 13,281 | 23.62 | 12,865 | 24.08 | 12,244 | 24.24 | ||||||||||||||
Depreciation | 1,485 | 2.64 | 1,462 | 2.74 | 1,523 | 3.01 | ||||||||||||||
Interest - net | 516 | 0.92 | 476 | 0.89 | 423 | 0.84 | ||||||||||||||
Total expenses | 15,282 | 27.18 | 14,803 | 27.71 | 14,190 | 28.09 | ||||||||||||||
Pre-tax earnings | 4,276 | 7.61 | 3,673 | 6.88 | 3,137 | 6.21 | ||||||||||||||
Income tax provision | 1,578 | 2.81 | 1,387 | 2.60 | 1,178 | 2.33 | ||||||||||||||
Net earnings | $ | 2,698 | 4.80 | % | $ | 2,286 | 4.28 | % | $ | 1,959 | 3.88 | % | ||||||||
Basic earnings per common share | $ | 2.71 | $ | 2.14 | $ | 1.69 | ||||||||||||||
Diluted earnings per common share | $ | 2.71 | $ | 2.14 | $ | 1.69 | ||||||||||||||
Cash dividends per share | $ | 0.87 | $ | 0.70 | $ | 0.62 | ||||||||||||||
Lowe's Companies, Inc.
Consolidated Statements of Comprehensive Income
(In millions, except percentage data)
January 30, 2015 | % Sales | January 31, 2014 | % Sales | February 1, 2013 | % Sales | |||||||||||||||
Fiscal years ended on | ||||||||||||||||||||
Net earnings | $ | 2,698 | 4.80 | % | $ | 2,286 | 4.28 | % | $ | 1,959 | 3.88 | % | ||||||||
Foreign currency translation adjustments - net of tax | (86 | ) | (0.15 | ) | (68 | ) | (0.13 | ) | 6 | 0.01 | ||||||||||
Net unrealized investment losses - net of tax | — | — | (1 | ) | — | — | — | |||||||||||||
Other comprehensive income/(loss) | (86 | ) | (0.15 | ) | (69 | ) | (0.13 | ) | 6 | 0.01 | ||||||||||
Comprehensive income | $ | 2,612 | 4.65 | % | $ | 2,217 | 4.15 | % | $ | 1,965 | 3.89 | % | ||||||||
See accompanying notes to consolidated financial statements.
34
Lowe's Companies, Inc.
Consolidated Balance Sheets
(In millions, except par value and percentage data)
January 30, 2015 | % Total | January 31, 2014 | % Total | ||||||||||||
Assets | |||||||||||||||
Current assets: | |||||||||||||||
Cash and cash equivalents | $ | 466 | 1.5 | % | $ | 391 | 1.2 | % | |||||||
Short-term investments | 125 | 0.4 | 185 | 0.6 | |||||||||||
Merchandise inventory - net | 8,911 | 28.0 | 9,127 | 27.9 | |||||||||||
Deferred income taxes - net | 230 | 0.7 | 252 | 0.8 | |||||||||||
Other current assets | 348 | 1.1 | 341 | 1.0 | |||||||||||
Total current assets | 10,080 | 31.7 | 10,296 | 31.5 | |||||||||||
Property, less accumulated depreciation | 20,034 | 62.9 | 20,834 | 63.6 | |||||||||||
Long-term investments | 354 | 1.1 | 279 | 0.9 | |||||||||||
Other assets | 1,359 | 4.3 | 1,323 | 4.0 | |||||||||||
Total assets | $ | 31,827 | 100.0 | % | $ | 32,732 | 100.0 | % | |||||||
Liabilities and shareholders' equity | |||||||||||||||
Current liabilities: | |||||||||||||||
Short-term borrowings | $ | — | — | % | $ | 386 | 1.2 | % | |||||||
Current maturities of long-term debt | 552 | 1.7 | 49 | 0.1 | |||||||||||
Accounts payable | 5,124 | 16.1 | 5,008 | 15.3 | |||||||||||
Accrued compensation and employee benefits | 773 | 2.4 | 785 | 2.4 | |||||||||||
Deferred revenue | 979 | 3.1 | 892 | 2.7 | |||||||||||
Other current liabilities | 1,920 | 6.0 | 1,756 | 5.4 | |||||||||||
Total current liabilities | 9,348 | 29.3 | 8,876 | 27.1 | |||||||||||
Long-term debt, excluding current maturities | 10,815 | 34.0 | 10,086 | 30.8 | |||||||||||
Deferred income taxes - net | 97 | 0.3 | 291 | 0.9 | |||||||||||
Deferred revenue - extended protection plans | 730 | 2.3 | 730 | 2.2 | |||||||||||
Other liabilities | 869 | 2.8 | 896 | 2.8 | |||||||||||
Total liabilities | 21,859 | 68.7 | % | 20,879 | 63.8 | % | |||||||||
Commitments and contingencies | |||||||||||||||
Shareholders' equity: | |||||||||||||||
Preferred stock - $5 par value, none issued | — | — | — | — | |||||||||||
Common stock - $.50 par value; | |||||||||||||||
Shares issued and outstanding | |||||||||||||||
January 30, 2015 | 960 | ||||||||||||||
January 31, 2014 | 1,030 | 480 | 1.5 | 515 | 1.6 | ||||||||||
Capital in excess of par value | — | — | — | — | |||||||||||
Retained earnings | 9,591 | 30.3 | 11,355 | 34.7 | |||||||||||
Accumulated other comprehensive loss | (103 | ) | (0.5 | ) | (17 | ) | (0.1 | ) | |||||||
Total shareholders' equity | 9,968 | 31.3 | 11,853 | 36.2 | |||||||||||
Total liabilities and shareholders' equity | $ | 31,827 | 100.0 | % | $ | 32,732 | 100.0 | % | |||||||
See accompanying notes to consolidated financial statements.
35
Lowe's Companies, Inc.
Consolidated Statements of Shareholders' Equity
(In millions)
Common Stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Total Shareholders' Equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance February 3, 2012 | 1,241 | $ | 621 | $ | 14 | $ | 15,852 | $ | 46 | $ | 16,533 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||
Net earnings | 1,959 | |||||||||||||||||||||
Other comprehensive income | 6 | |||||||||||||||||||||
Total comprehensive income | 1,965 | |||||||||||||||||||||
Tax effect of non-qualified stock options exercised and restricted stock vested | 12 | 12 | ||||||||||||||||||||
Cash dividends declared, $0.62 per share | (708 | ) | (708 | ) | ||||||||||||||||||
Share-based payment expense | 97 | 97 | ||||||||||||||||||||
Repurchase of common stock | (147 | ) | (74 | ) | (440 | ) | (3,879 | ) | (4,393 | ) | ||||||||||||
Issuance of common stock under share-based payment plans | 16 | 8 | 343 | 351 | ||||||||||||||||||
Balance February 1, 2013 | 1,110 | $ | 555 | $ | 26 | $ | 13,224 | $ | 52 | $ | 13,857 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||
Net earnings | 2,286 | |||||||||||||||||||||
Other comprehensive loss | (69 | ) | ||||||||||||||||||||
Total comprehensive income | 2,217 | |||||||||||||||||||||
Tax effect of non-qualified stock options exercised and restricted stock vested | 25 | 25 | ||||||||||||||||||||
Cash dividends declared, $0.70 per share | (741 | ) | (741 | ) | ||||||||||||||||||
Share-based payment expense | 102 | 102 | ||||||||||||||||||||
Repurchase of common stock | (88 | ) | (44 | ) | (312 | ) | (3,414 | ) | (3,770 | ) | ||||||||||||
Issuance of common stock under share-based payment plans | 8 | 4 | 159 | 163 | ||||||||||||||||||
Balance January 31, 2014 | 1,030 | $ | 515 | $ | — | $ | 11,355 | $ | (17 | ) | $ | 11,853 | ||||||||||
Comprehensive income: | ||||||||||||||||||||||
Net earnings | 2,698 | |||||||||||||||||||||
Other comprehensive loss | (86 | ) | ||||||||||||||||||||
Total comprehensive income | 2,612 | |||||||||||||||||||||
Tax effect of non-qualified stock options exercised and restricted stock vested | 41 | 41 | ||||||||||||||||||||
Cash dividends declared, $0.87 per share | (858 | ) | (858 | ) | ||||||||||||||||||
Share-based payment expense | 111 | 111 | ||||||||||||||||||||
Repurchase of common stock | (75 | ) | (37 | ) | (286 | ) | (3,604 | ) | (3,927 | ) | ||||||||||||
Issuance of common stock under share-based payment plans | 5 | 2 | 134 | 136 | ||||||||||||||||||
Balance January 30, 2015 | 960 | $ | 480 | $ | — | $ | 9,591 | $ | (103 | ) | $ | 9,968 | ||||||||||
See accompanying notes to consolidated financial statements.
36
Lowe's Companies, Inc.
Consolidated Statements of Cash Flows
(In millions)
Fiscal years ended on | January 30, 2015 | January 31, 2014 | February 1, 2013 | ||||||||
Cash flows from operating activities: | |||||||||||
Net earnings | $ | 2,698 | $ | 2,286 | $ | 1,959 | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 1,586 | 1,562 | 1,623 | ||||||||
Deferred income taxes | (124 | ) | (162 | ) | (140 | ) | |||||
Loss on property and other assets – net | 25 | 64 | 83 | ||||||||
Loss on equity method investments | 57 | 52 | 48 | ||||||||
Share-based payment expense | 119 | 100 | 100 | ||||||||
Changes in operating assets and liabilities: | |||||||||||
Merchandise inventory – net | 170 | (396 | ) | (244 | ) | ||||||
Other operating assets | 83 | (5 | ) | (87 | ) | ||||||
Accounts payable | 127 | 291 | 303 | ||||||||
Other operating liabilities | 188 | 319 | 117 | ||||||||
Net cash provided by operating activities | 4,929 | 4,111 | 3,762 | ||||||||
Cash flows from investing activities: | |||||||||||
Purchases of investments | (820 | ) | (759 | ) | (1,444 | ) | |||||
Proceeds from sale/maturity of investments | 805 | 709 | 1,837 | ||||||||
Capital expenditures | (880 | ) | (940 | ) | (1,211 | ) | |||||
Contributions to equity method investments – net | (241 | ) | (173 | ) | (219 | ) | |||||
Proceeds from sale of property and other long-term assets | 52 | 75 | 130 | ||||||||
Acquisition of business - net | — | (203 | ) | — | |||||||
Other – net | (4 | ) | 5 | 4 | |||||||
Net cash used in investing activities | (1,088 | ) | (1,286 | ) | (903 | ) | |||||
Cash flows from financing activities: | |||||||||||
Net change in short-term borrowings | (386 | ) | 386 | — | |||||||
Net proceeds from issuance of long-term debt | 1,239 | 985 | 1,984 | ||||||||
Repayment of long-term debt | (48 | ) | (47 | ) | (591 | ) | |||||
Proceeds from issuance of common stock under share-based payment plans | 137 | 165 | 349 | ||||||||
Cash dividend payments | (822 | ) | (733 | ) | (704 | ) | |||||
Repurchase of common stock | (3,905 | ) | (3,710 | ) | (4,393 | ) | |||||
Other – net | 24 | (15 | ) | 22 | |||||||
Net cash used in financing activities | (3,761 | ) | (2,969 | ) | (3,333 | ) | |||||
Effect of exchange rate changes on cash | (5 | ) | (6 | ) | 1 | ||||||
Net increase/(decrease) in cash and cash equivalents | 75 | (150 | ) | (473 | ) | ||||||
Cash and cash equivalents, beginning of year | 391 | 541 | 1,014 | ||||||||
Cash and cash equivalents, end of year | $ | 466 | $ | 391 | $ | 541 | |||||
See accompanying notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 30, 2015, JANUARY 31, 2014 AND FEBRUARY 1, 2013
NOTE 1: Summary of Significant Accounting Policies
Lowe’s Companies, Inc. and subsidiaries (the Company) is the world's second-largest home improvement retailer and operated 1,840 stores in the United States, Canada and Mexico at January 30, 2015. Below are those accounting policies considered by the Company to be significant.
Fiscal Year - The Company’s fiscal year ends on the Friday nearest the end of January. Each of the fiscal years presented contained 52 weeks. All references herein for the years 2014, 2013 and 2012 represent the fiscal years ended January 30, 2015, January 31, 2014, and February 1, 2013, respectively.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All intercompany accounts and transactions have been eliminated.
Foreign Currency - The functional currencies of the Company’s international subsidiaries are generally the local currencies of the countries in which the subsidiaries are located. Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the consolidated balance sheet date. Results of operations and cash flows are translated using the average exchange rates throughout the period. The effect of exchange rate fluctuations on translation of assets and liabilities is included as a component of shareholders' equity in accumulated other comprehensive loss. Gains and losses from foreign currency transactions, which are included in selling, general and administrative (SG&A) expense, have not been significant.
Use of Estimates - The preparation of the Company’s financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at amortized cost on the consolidated balance sheets. The majority of payments due from financial institutions for the settlement of credit card and debit card transactions process within two business days and are, therefore, classified as cash and cash equivalents.
Investments - As of January 30, 2015, investments consisted primarily of money market funds, municipal obligations, certificates of deposit, and municipal floating rate obligations. The Company classifies as investments restricted balances primarily pledged as collateral for the Company's extended protection plan program. Investments, exclusive of cash equivalents, with a stated maturity date of one year or less from the balance sheet date or that are expected to be used in current operations, are classified as short-term investments. All other investments are classified as long-term.
Merchandise Inventory - Inventory is stated at the lower of cost or market using the first-in, first-out method of inventory accounting. The cost of inventory also includes certain costs associated with the preparation of inventory for resale, including distribution center costs, and is net of vendor funds.
The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on management’s current knowledge with respect to inventory levels, sales trends and historical experience. Management does not believe the Company’s merchandise inventories are subject to significant risk of obsolescence in the near term, and management has the ability to adjust purchasing practices based on anticipated sales trends