LOWE'S COMPANIES, INC. This discussion and analysis summarizes the significant factors affecting our consolidated operating results, liquidity and capital resources during the three months endedApril 30, 2021 , andMay 1, 2020 . This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that are included in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2021 (the Annual Report), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. Unless otherwise specified, all comparisons made are to the corresponding period of 2020. This discussion and analysis is presented in six sections: • Executive Overview • Operations • Financial Condition, Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Contractual Obligations and Commercial Commitments • Critical Accounting Policies and Estimates
EXECUTIVE OVERVIEW
Performance Overview
Net sales in the first quarter of 2021 increased 24.1% to$24.4 billion compared to net sales of$19.7 billion in the first quarter of 2020. The increase in total sales was primarily driven by an increase in comparable sales. Net earnings in the first quarter of 2021 were$2.3 billion , which represents an increase of 73.6% compared to net earnings of$1.3 billion in the first quarter of 2020. Diluted earnings per common share increased 82.1% in the first quarter of 2021 to$3.21 from$1.76 in the first quarter of 2020. Excluding the impact of theCanada restructuring in the first quarter of 2020, diluted earnings per common share increased 81.4% to$3.21 in the first quarter of 2021 from adjusted diluted earnings per common share of$1.77 in the first quarter of 2020 (see the discussion of non-GAAP financial measures ). For the first three months of 2021, cash flows from operating activities were approximately$4.5 billion , while$461 million was used for capital expenditures. Continuing to deliver on our commitment to return excess cash to shareholders, we repurchased$3.0 billion shares of common stock and paid$440 million in dividends during the three months endedApril 30, 2021 . During the first quarter of 2021, comparable sales increased by 25.9% with allU.S. regions generating positive comparable sales of more than 18% and growth in our Canadian operations that outpaced theU.S. We experienced consistent broad-based demand from both Do-It-Yourself (DIY) and Pro customers throughout the quarter in-store and online with 13 of 15 product categories generating positive comparable sales of more than 15%. At the end of fiscal 2020, we launched our Total Home strategy aimed at accelerating market share gains with a focus on the Pro customer, expanding our online business, modernizing installation services, improving localization, and elevating our product assortment. During the first quarter of 2021, we continued to gain momentum with the Pro customer through our improved in-stock inventory levels, our enhanced service offering, and our new Pro Loyalty program. Our new Pro customer relationship management tool, as well as the redesigned store layout that aligns product adjacencies, has enabled us to more effectively serve their needs for their entire project, across all their jobs. We also introduced new convenience products at the checkout, and services such as dedicated Pro customer trailer parking to help add value to every trip the Pro customer makes away from their job site. We continued to enhance the online customer experience with improved search and navigation functionality that allows customers to easily shop for products across categories. In addition, we continued to see a strong download rate of our mobile application as we build customer loyalty through a great mobile experience. As a result of our merchandising excellence initiative, we delivered improvement in our product margins with disciplined vendor cost management, improved and enhanced pricing systems, and our transition to an Everyday Competitive Price strategy. Our operating margin also reflects the progress made on our Perpetual Productivity Improvement (PPI) initiative. PPI allows us to leverage store payroll by using technology to reduce tasking hours, improve customer service, and increase sales productivity. We are also leveraging an improved Freight Flow Application, creating a fully digital process that gives our associates better line of sight to when products will arrive at our stores. In addition, we launched secure mobile checkout, which we are using to improve the speed of service in high traffic areas inside the store and on the exterior of the store in areas 15 -------------------------------------------------------------------------------- Table o f Contents such as outside Lawn & Garden and under the Pro Canopy. In the first quarter, we also completed the rollout of our buy online pickup in store (BOPIS) lockers in theU.S. , which allows us to expand our omnichannel capabilities, further improve customer satisfaction, and limit congestion at our service desk.
COVID-19 Response
As we enter the second year of the COVID-19 pandemic, we remain focused on protecting the health and safety of our associates and communities. As part of our commitment, we incurred$59 million of additional COVID-related expense in the first quarter, which included contributions to nonprofit organizations inIndia that are working to respond to the aggressive resurgence of COVID-19.
Looking Forward
Our first quarter performance gives us confidence that we are making the right investments to accelerate our market share gains through our Total Home strategy by enhancing our investments in the Pro customer, online, installation services, localization, and elevated product assortment. These initiatives allow us to drive sustainable growth as we deliver a Total Home solution for our Pro and DIY customers. We are encouraged by our strong performance in the first quarter, and we remain confident in our ability to outpace market growth, driving both market share gains and operating efficiency. In addition, our enhanced technology infrastructure and improved operating capabilities make us more agile and able to respond quickly to potential changes in the business environment.
OPERATIONS
The following table sets forth the percentage relationship to net sales of each
line item of the consolidated statements of earnings (unaudited), as well as the
percentage change in dollar amounts from the prior period. This table should be
read in conjunction with the following discussion and analysis and the
consolidated financial statements (unaudited), including the related notes to
the consolidated financial statements (unaudited).
Basis Point Increase
/ (Decrease) in Percentage Increase /
Percentage of Net (Decrease) in Dollar
Sales from Prior Amounts from Prior
Three Months Ended Period Period
April 30, 2021 May 1, 2020 2021 vs. 2020 2021 vs. 2020
Net sales 100.00 % 100.00 % N/A 24.1 %
Gross margin 33.29 33.10 19 24.8
Expenses:
Selling, general and administrative 18.40 21.32 (292) 7.1
Depreciation and amortization 1.60 1.66 (6) 19.9
Operating income 13.29 10.12 317 63.0
Interest - net 0.87 1.04 (17) 3.2
Pre-tax earnings 12.42 9.08 334 69.8
Income tax provision 2.92 2.28 64 58.7
Net earnings 9.50 % 6.80 % 270 73.6 %
The following table sets forth key metrics utilized by management in assessing business performance. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements (unaudited), including the related notes to the consolidated financial statements (unaudited).
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Three Months Ended
Other Metrics April 30, 2021 May 1, 2020
Comparable sales increase 1 25.9 % 11.2 %
Total customer transactions (in millions) 261 233
Average ticket 2 $ 93.74 $ 84.38
At end of period:
Number of stores 1,972 1,970
Sales floor square feet (in millions) 208 208
Average store size selling square feet (in thousands) 3 105 106
Net earnings to average debt and equity 4 24.3 % 17.2 %
Return on invested capital 4 29.9 % 19.7 %
1 A comparable location is defined as a retail location that has been open
longer than 13 months. A location that is identified for relocation is no longer
considered comparable in the month of its relocation. The relocated location
must then remain open longer than 13 months to be considered comparable. A
location we have decided to close is no longer considered comparable as of the
beginning of the month in which we announce its closing. Comparable sales are
presented on a transacted basis when tender is accepted from a customer.
Comparable sales include online sales, which positively impacted first quarter
fiscal 2021 and first quarter fiscal 2020 comparable sales by approximately 310
basis points and 430 basis points, respectively. The comparable store sales
calculation included in the preceding table was calculated using comparable
13-week periods.
2 Average ticket is defined as net sales divided by the total number of
customer transactions.
3 Average store size selling square feet is defined as sales floor square feet
divided by the number of stores open at the end of the period. The average
Lowe's -branded home improvement store has approximately 112,000 square feet of
retail selling space.
4 Return on invested capital is calculated using a non-GAAP financial measure.
Net earnings to average debt and equity is the most comparable GAAP ratio. See
below for additional information and reconciliations of non-GAAP measures.
Non-GAAP Financial Measures
Adjusted Diluted Earnings Per Share
Adjusted diluted earnings per share is considered a non-GAAP financial measure. The Company believes this non-GAAP financial measure provides useful insight for analysts and investors in evaluating what management considers the Company's core financial performance. Adjusted diluted earnings per share excludes the impact of a discrete item, further described below, not contemplated in the Company's business outlook for the first quarter of fiscal 2020. Unless otherwise noted, the income tax effect of these adjustments is calculated using the marginal rates for the respective periods. Fiscal 2020 Impacts •Beginning in the third quarter of fiscal 2019, the Company began a strategic review of its Canadian operations, and in the fourth quarter of fiscal 2019, the Company announced additional actions to improve future performance and profitability of its Canadian operations. As a result of this review and related actions, during the first quarter of 2020, the Company recognized$9 million of pre-tax operating costs related to severance and other costs (Canada restructuring). Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company's diluted earnings per common share as prepared in accordance with GAAP. The Company's methods of determining non-GAAP financial measures may differ from the method used by other companies and may not be comparable. 17
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Three Months Ended
May 1, 2020
Pre-Tax
Earnings Tax Net Earnings
Diluted earnings per share, as reported $ 1.76 Non-GAAP adjustments - per share impacts
Canada restructuring 0.01 - 0.01 Adjusted diluted earnings per share$ 1.77 Return onInvested Capital Return onInvested Capital (ROIC) is calculated using a non-GAAP financial measure. Management believes ROIC is a meaningful metric for analysts and investors as a measure of how effectively the Company is using capital to generate profits. Although ROIC is a common financial metric, numerous methods exist for calculating ROIC. Accordingly, the method used by our management may differ from the methods used by other companies. We encourage you to understand the methods used by another company to calculate ROIC before comparing its ROIC to ours. We define ROIC as the rolling 12 months' lease adjusted net operating profit after tax (Lease adjusted NOPAT) divided by the average of current year and prior year ending debt and equity. Lease adjusted NOPAT is a non-GAAP financial measure, and net earnings is considered to be the most comparable GAAP financial measure. The calculation of ROIC, together with a reconciliation of net earnings to Lease adjusted NOPAT, is as follows: For the Periods
Ended
(In millions, except percentage data) April 30, 2021 May 1, 2020 Calculation of Return onInvested Capital Numerator Net Earnings$ 6,819 $ 4,572 Plus: Interest expense - net 855 733 Loss on extinguishment of debt 1,060 - Operating lease interest 168 189 Provision for income taxes 2,167 1,583 Lease adjusted net operating profit 11,069
7,077
Less:
Income tax adjustment 1 2,670
1,820
Lease adjusted net operating profit after tax$ 8,399 $ 5,257 Denominator Average debt and equity 2$ 28,053 $ 26,645 Net earnings to average debt and equity 24.3 % 17.2 % Return on invested capital 29.9 % 19.7 % 1 Income tax adjustment is defined as lease adjusted net operating profit multiplied by the effective tax rate, which was 24.1% and 25.7% for the periods endedApril 30, 2021 , andMay 1, 2020 , respectively. 2 Average debt and equity is defined as average current year and prior year ending debt, including current maturities, short-term borrowings, and operating lease liabilities, plus the average current year and prior year ending total equity. Results of OperationsNet Sales - Net sales in the first quarter of 2021 increased 24.1% to$24.4 billion . The increase in total sales was primarily driven by comparable sales growth. Comparable sales increased 25.9% over the same period, driven by a 14.1% increase in comparable average ticket and a 11.8% increase in comparable customer transactions. 18 -------------------------------------------------------------------------------- Table o f Contents During the first quarter of 2021, we experienced comparable sales increases in 14 of 15 product categories with broad-based strength in performance across both DIY and Pro customers. Comparable sales were above the Company average in Lumber, Electrical, Seasonal & Outdoor Living, Kitchens & Bath, Décor, and Millwork. Lumber experienced strong unit demand from Pro customers along with inflation. Growth in Electrical was also driven by inflation as well as demand from the repair and remodel market. Seasonal & Outdoor Living benefited from demand in patio and grills as homeowners prepared for the arrival of spring. In support of our Total Home strategy, we drove engagement with customers in Kitchens & Bath as homeowners continue to enhance their living spaces. Within Décor, we saw strong performance as a result of elevated product assortments we launched this quarter that spanned a broad array of product categories. We experienced low single-digit negative comparable sales in Paint due to cycling prior year demand at the onset of the COVID-19 pandemic. Geographically, all 15U.S. regions experienced positive comparable sales in excess of 18%, and sales for our Canadian operations outpaced ourU.S. regions. Gross Margin - For the first quarter of 2021, gross margin as a percentage of sales increased 19 basis points. The gross margin increase for the quarter is driven by approximately 165 basis points of total rate improvement, driven by continued improvements in managing product costs and disciplined pricing strategies. This favorable impact was partially offset by 90 basis points of pressure from product mix shifts, 20 basis points of deleverage from supply chain costs, 20 basis points of deleverage from lower credit revenue, and 15 basis points of deleverage from inventory shrink. SG&A - For the first quarter of 2021, SG&A expense leveraged 292 basis points as a percentage of sales compared to the first quarter of 2020. This is primarily driven by approximately 140 basis points of leverage due to lower COVID-19 related expenses, 100 basis points of leverage in retail operating salaries due to increased sales and improved operating efficiencies, and 35 basis points of occupancy leverage due to higher sales volume compared to fixed occupancy costs. Depreciation and Amortization - Depreciation and amortization leveraged six basis points as a percentage of sales for the first quarter of 2021 compared to the prior year primarily due to an increase in sales during the period. Property, less accumulated depreciation, increased to$19.1 billion atApril 30, 2021 , compared to$18.6 billion atMay 1, 2020 . Interest - Net - Interest expense for the first quarter of 2021 leveraged 17 basis points primarily as a result of increased sales during the period, partially offset by interest expense related to the issuance of$4.0 billion unsecured notes inMarch 2020 and$4.0 billion unsecured notes inOctober 2020 . Income Tax Provision - Our effective income tax rates were 23.5% and 25.1% for the three months endedApril 30, 2021 , andMay 1, 2020 , respectively. The decrease in the effective tax rate for the quarter was impacted by excess tax benefits associated with vesting and exercises of share-based compensation.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Continued customer demand and operating performance during the quarter drove consistent cash flows from operations compared to the prior year. These strong cash flows from operations, supplemented with our short-term and long-term borrowings, have been sufficient to fund our operations while allowing us to make strategic investments in our omnichannel capabilities to support long-term growth and return excess cash to shareholders in the form of dividends and share repurchases. As ofApril 30, 2021 , we held$6.7 billion of cash and cash equivalents, as well as$3.0 billion in undrawn capacity on our revolving credit facilities and a$1.0 billion term loan that has not been drawn as of the end of the quarter.
Cash Flows Provided by Operating Activities
Three Months Ended
(In millions) April 30, 2021 May1, 2020
Net cash provided by operating activities $ 4,492 $ 4,450
Cash flows from operating activities continued to provide the primary source of
our liquidity. The increase in net cash provided by operating activities for the
three months ended April 30, 2021 , versus the three months ended May 1, 2020 ,
was driven primarily by higher net earnings, offset by changes in working
capital. Accounts payable increased for the first three months of 2021 by $3.1
billion , compared to an increase for the first three months of 2020 of $3.2
billion . The increase in accounts payable in the current year is driven by high
sustained inventory purchase volume. Deferred revenues increased operating cash
flow for the first three months of 2021 by $442 million compared to an increase
of $13 million for the first three months of
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2020. The increase in deferred revenue in the current year is driven by an
increase in sales volume and shifts in timing of fulfillment. Other operating
liabilities increased $421 million for the first three months of 2021 compared
to an increase of $703 million in the first three months of 2020. The increase
in other operating liabilities in the current year is driven by increased income
taxes payable related to higher sales in the current year. Inventory decreased
operating cash flow for the first three months of 2021 by approximately $2.1
billion , compared to a decrease of approximately $1.2 billion for the first
three months of 2020, primarily due to higher inventory purchases to meet
elevated customer demand in 2021.
Cash Flows Used in Investing Activities
Three Months Ended
(In millions) April 30, 2021 May1, 2020
Net cash used in investing activities $ (477) $ (288) Net cash used in investing activities primarily consists of transactions related to capital expenditures.
Capital expenditures
Our capital expenditures generally consist of investments in our strategic
initiatives to enhance our ability to serve customers, improve existing stores,
and support expansion plans. The following table provides our capital
expenditures for the three months ended
Three Months Ended
(In millions) April 30, 2021 May 1, 2020
Existing store investments 1 $ 365 $ 266
Strategic initiatives 2 58 40
New stores, new corporate facilities and international 3 38 22
Total capital expenditures $ 461 $ 328
1Includes merchandising resets, facility repairs, replacements of IT and store
equipment, among other specific efforts.
2Represents investments related to our strategic focus areas aimed at improving
customers' experience and driving improved performance in the near and long
term.
3Represents expenditures primarily related to land purchases, buildings, and
personal property for new store projects and new corporate facilities projects,
as well as expenditures related to our international operations.
Our 2021 outlook for capital expenditures is approximately
Cash Flows Used in Financing Activities
Three Months Ended
(In millions)April 30, 2021
Net cash (used in) provided by financing activities
Net cash used in or provided by financing activities primarily consists of transactions related to our long-term debt, short-term borrowings, share repurchases, and cash dividend payments.
Short-term Borrowing Facilities
In
The 2020 Credit Agreement and the Second Amended and Restated Credit Agreement support our commercial paper program. The amount available to be drawn under the 2020 Credit Agreement and the Second Amended and Restated Credit Agreement is reduced by the amount of borrowings under our commercial paper program. There were no outstanding borrowings under the Company's commercial paper program, the 2020 Credit Agreement, or the Second Amended and Restated Credit Agreement as ofApril 30, 2021 , andMay 1, 2020 . Total combined availability under the 2020 Credit Agreement and the Second Amended and Restated Credit Agreement as ofApril 30, 2021 , was$3.0 billion . 20 -------------------------------------------------------------------------------- Table o f Contents The following table includes additional information related to our short-term borrowings for the three months endedApril 30, 2021 , andMay 1, 2020 : Three Months Ended (In millions, except for interest rate data) April 30, 2021 May 1, 2020 Net change in commercial paper $ -$ (941)
Maximum commercial paper outstanding at any month-end $ 400
$ 1,858 Short-term borrowings outstanding at quarter-end $ -$ 1,000 Weighted-average interest rate of short-term borrowings outstanding - % 1.86 %
The 2020 Credit Agreement and the Second Amended and Restated Credit Agreement
contain customary representations, warranties, and covenants. We were in
compliance with those covenants at
Long-Term Debt
The following table includes additional information related to the Company's
long-term debt for the three months ended
Three Months Ended
(In millions) April 30, 2021 May 1, 2020
Net proceeds from issuance of debt $ 1,988 $ 3,961
Repayment of debt $ (543) $ (543)
During the three months ended April 30, 2021 , we issued $2.0 billion of
unsecured notes, to be used for general corporate purposes. During the three
months ended April 30, 2021 , we also paid $525 million to retire scheduled debts
at maturity.
Share Repurchases
We have an ongoing share repurchase program, authorized by the Company's Board
of Directors, that is executed through purchases made from time to time either
in the open market or through private off-market transactions. We also withhold
shares from employees to satisfy tax withholding liabilities. Shares repurchased
are retired and returned to authorized and unissued status. The following table
provides, on a settlement date basis, the total number of shares repurchased,
average price paid per share, and the total amount paid for share repurchases
for the three months ended April 30, 2021 , and May 1, 2020 :
Three Months Ended
(In millions, except per share data)
Total amount paid for share repurchases $ 3,038 $
966
Total number of shares repurchased 16.7 9.8
Average price paid per share $ 182.20 $ 98.78
As of
Dividends
Dividends are paid in the quarter immediately following the quarter in which they are declared. Dividends paid per share increased from$0.55 per share for the three months endedMay 1, 2020 , to$0.60 per share for the three months endedApril 30, 2021 .
Capital Resources
We expect to continue to have access to the capital markets on both a short-term and long-term basis when needed for liquidity purposes by issuing commercial paper or new long-term debt. The availability and the borrowing costs of these funds could be adversely affected, however, by a downgrade of our debt ratings or a deterioration of certain financial ratios. The table below reflects our debt ratings byStandard & Poor's (S&P) and Moody's as ofMay 27, 2021 , which we are disclosing to enhance understanding of our sources of liquidity and the effect of our ratings on our cost of funds. Our debt ratings have enabled, and 21 -------------------------------------------------------------------------------- Table o f Contents should continue to enable, us to refinance our debt as it becomes due at favorable rates in capital markets. Our commercial paper and senior debt ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Debt Ratings S&P Moody's Commercial Paper A-2 P-2 Senior Debt BBB+ Baa1 Senior Debt Outlook Stable Stable There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in our debt rating or a decrease in our stock price. In addition, we do not believe it will be necessary to repatriate significant cash and cash equivalents and short-term investments held in foreign affiliates to fund domestic operations.
OFF-BALANCE SHEET ARRANGEMENTS
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
During the first quarter of 2021, we issued$2.0 billion of unsecured notes in the ordinary course of business to be used for general corporate purposes. The table below summarizes our contractual obligations relating to long-term debt, excluding operating and finance lease obligations, atApril 30, 2021 . The unsecured notes issued in the first quarter of fiscal year 2021 are further described in Note 7 to the consolidated financial statements included herein.
Payments Due by Period
Less Than 1-3 4-5 After 5
(In millions) Total 1 Year Years Years Years
Long-term debt (principal amounts,
excluding discounts and debt issuance
costs) $ 22,788 $ 1,250 $ 518 $ 3,301 $ 17,719
Long-term debt (interest payments) 11,994 770 1,549 1,455 8,220
Total $ 34,782 $ 2,020 $ 2,067 $ 4,756 $ 25,939
As of April 30, 2021 , there were no other material changes to our contractual
obligations and commercial commitments outside the ordinary course of business
since the end of fiscal year 2020. Refer to the Annual Report on Form 10-K for
additional information regarding our contractual obligations and commercial
commitments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 to the consolidated financial statements presented in the Annual Report. Our critical accounting policies and estimates are described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. Our significant and critical accounting policies have not changed significantly since the filing of the Annual Report.
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