Lowe's Companies, Inc. Lowe's Companies Inc.

Lowe's Companies, Inc.

Lowe's Companies, Inc.

This report discusses the home improvement retailer, Lowe's Companies, Inc. The report profiles Lowe's, providing information about its background, operations, size, and relative industry position, as well as lists key competitors. The report also includes a profile of the home improvement retail industry and discusses the current economic outlook and sales forecasts through 2015.

The report also analyzes Lowe's consolidated cash flow statements and discusses the company's sources and uses of cash. Lowe's cash inflows and outflows include the issuance of common stock, repurchase of common stock, repayment and issuance of long-term debt, and investments in property and store information technology.

In addition to reviewing Lowe's cash flow, financial analysis reviews Lowe's performance by comparing Lowe's key ratios to industry ratios. In general, ratio analysis shows Lowe's needs to improve its efficiency and generate more sales. Even though Lowe's is the second largest firm in the home improvement industry in terms of market capitalization, the company's performance lags behind its competitors in many areas.

Part I -- Company and Industry Profile

Lowe's is a $50.2 billion retailer of home improvement products and services. The company employs more than 248,000 and has 1,745 stores located throughout the U.S., Canada and Mexico. Founded in 1946, the company grew from a small hardware store to become the second largest home improvement retailer worldwide. Lowe's stores stock more than 40,000 products in categories that range from lumber and nursery products, to tools and paint. The company serves approximately 15 million do-it-yourself, do-it-for-me and commercial customers each week (Lowe's "Corporate Information" 2012). In addition to Lowe's, the other leaders of the home improvement industry, based on market capitalization, include Home Depot, KingFisher plc, Rona Inc., Lumber Liquidators Holdings, inc. And Builders FirstSource, Inc. (Yahoo! Finance 2012).

The home improvement industry is reporting a positive outlook through March 2012. The Home Improvement Research Institute (HIRI) reported 2011 sales of $269 billion, a 3.8% increase. Given modest increases in employment and weak wage gains, HIRI projects no significant increase in disposable income in 2012, resulting in real consumer spending growth in the 2% range. Nonetheless, housing starts are trending upward, and HIRI forecasts existing home sales to increase an average of 8% over the next three years. They forecast that growth of home improvement sales will increase 5% to $283 billion in 2012, but see no further acceleration without further disposable income gains. They project growth will slow to 4.6% in 2013, followed by a stronger cyclical rebound with home improvement product sales growth close to 6% in 2014-2015 (HIRI 2012).

Part II -- Cash Flows

Lowe's consolidated statements of cash flows reports the company's inflows and outflows of cash, showing how the company generated and used cash. Over the two-year reporting period, Lowe's primary source of new financing resulted from the proceeds from issuance of common stock amounting to $1.28 billion for 2009, $1.04 billion for 2010, and $1.0 for 2011. Lowe's also had net proceeds from the issuance of just under $2 billion of notes in April and November of 2010. Lowe's reported repayment of long-term debt amounting to $37 million for 2009, $552 million for 2010, and $37 million for 2011. Lowe's invested in property related to corporate systems and store information technology amounting to $1.8 billion in 2009, $1.3 billion in 2010, and $1.83 billion in 2011 (Lowe's 2012, 34).

In addition to these activities, the cash flow statements show other significant information. Cash and cash equivalents, which includes cash on hand, demand deposits, and short-term investments, increased over the two-year reporting period by $362 million. Net earnings increased as well by $560 million. Cash flows provided by operating activities were the primary source of Lowe's liquidity, with the increase in net cash being primarily driven by an increase in net earnings from $1.78 billion to $1.84 billion over the two-year period for 2010 and 2011 (Lowe's 2012, 34).

Lowe's cash flows from investment activities included inflows from the proceeds from the sale or maturity of investments of $1.78 billion, $1.82 billion, and $2.12 billion in fiscal years 2009, 2010, and 2011 respectively (Lowe's 2012, 34).

Other uses of cash included Lowe's repurchase of common stock which amounted to $504 million in 2009, $2.6 billion in 2010, and $2.9 billion in 2011. Lowe's also paid more than $41.6 billion in dividends over the two-year period (Lowe's 2012, 34).

Part III -- Financial Analysis

All calculations use information taken from Lowe's annual reports "2011 Form 10-K."

Current Ratio

2011

2010

The higher that the current ratio is, the better able the company is to pay its obligations. Lowe's current ratio is affected by its accounting treatment for shrinkage reserves and the recognition of funds received from vendors as a reduction in the cost of inventory when the inventory is sold. The current ratio has remained consistent from 2009 to 2011. Lowe's current ratio is below the industry average, suggesting that the company's competitors have a more efficient operating cycle and fewer liquidity challenges.
Total Liabilities / Net Worth

2011

2010

2009

Lowe's

86.0

73.1

Industry Median

37.1

40.2

39.3

This ratio measures the extent that Lowe's net worth can offset its liabilities. A ratio greater than 1.0, such as Lowe's 2011 ratio, is undesirable because it indicates that the company's creditors have a greater stake in their business than do the owners. Lowe's does not expect the adoption of recent FASB guidelines for fair value measurement to have a material impact on its accounting for assets and liabilities. The total liabilities to net worth ratio has been trending upward since at least 2009, and it places Lowe's in the lower industry quartile. Investors and creditors perceive this ratio as indicating that Lowe's is less financially sound than its competitors.

Sales / Inventory

2011

2010

2009

Lowe's

6.0

5.9

5.7

Industry Median

6

6.4

6.2

The inventory ratio shows how many times Lowe's inventory is sold and replaced over each reporting period; low turnover indicates poor sales and excess inventory. Lowe's use of an inventory shrinkage reserve results in more conservative inventory values. Lowe's inventory ratio has increased each year and is currently the same as the median, indicating that Lowe's is becoming more competitive.

Age of Inventory

2011

2010

2009

Lowe's

60.8

61.9

64.0

Industry Median

60.8

61.8

58.9

This ratio indicates how well Lowe's is managing its inventory, showing that it takes Lowe's an average of two months to sell inventory items. Lowe's has improved its inventory management since 2009 to the point that their average age inventory is equal to the industry median.

Age of Accounts Receivable

2011

2010

2009

Lowe's

NA1

NA1

NA1

Industry Median

35

30.3

29.9

1 Lowe's sells its accounts receivable to GE Money Bank and does not disclose accounts receivable turnover data. Sales generated through Lowe's proprietary credit cards and controlled by GE are not reflected in receivables.

Typically the average collection period provides an indication of the number of days required to convert receivables into cash. The fact that Lowe's outsources it credit and collection activities suggests that they believe GE performs these functions more efficiently and at lower cost than Lowe's would be able to achieve.

Assets / Sales

2011

2010

2009

Lowe's

66.8

69.0

69.9

Industry Median

48.5

44.4

44.1

The assets to sales ratio measures the total investment used to generate sales. Lowe's treatment of long-lived assets to determine whether impairment exists yields conservative valuations for their store locations and affects any calculation involving total assets. Lowe's asset to sales ratio has decreased over the last two years, but is still significantly higher than the rest of the industry. Either Lowe's sales efforts are not aggressive enough, or its assets are not being fully utilized.

Return on Sales

2011

2010

2009

Lowe's

.06

.06

.06

Industry Median

.3

.5

.4

The return on sales ratio provides insight into how much profit Lowe's is producing per dollar of sales. Deferred revenue associated with stored-value cards is recognized when cards are redeemed. Lowe's return on sales declined from 2009 to 2011, indicating that the company is becoming less efficient. Comparison with industry median ratios shows Lowe's to be significantly below…