Lowe S Companies Inc

November 21, 2017

Lowe’s Companies Inc. (LOW-NYSE) $80.59

Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 3Q17 Earnings Release

Prev. Ed.: Nov 15, 2017; 2Q17 Earnings Update

Flash Update [Earnings update in progress; to follow]

On November 21, 2017, Lowe’s Companies, Inc. posted better-than-expected third-quarter fiscal 2017 results, after reporting negative surprises in both the top and bottom lines during the preceding two quarters.

The home improvement retailer posted quarterly earnings of $1.05 per share that beat the Zacks Consensus Estimate of $1.02. Bottom line improved 19.3% from 88 cents delivered in the year-ago quarter – following an increase of 14.6% and 18.4% registered in the second and first quarter, respectively. Higher net sales and lower SG&A expenses aided the bottom line.

Net sales of $16,770 million also came ahead of the Zacks Consensus Estimate of $16,568 million. Top line jumped 6.5% year over year after increasing 6.8% and 10.7% in the second and first quarter, respectively. Hurricane-related sales stood at approximately $200 million.

The company’s sales increase can be attributed to its efforts to provide a better omni-channel customer experience and an improvement in the housing market. Rise in demand for building materials post hurricanes also supported the top line.

Comparable sales (comps) rose 5.7% during the quarter under review, following an increase of 4.5% and 1.9% recorded in the second and first quarter, respectively. Comps for the U.S. business climbed 5.1%, after increasing 4.6% and 2% in the respective quarters.

Gross profit increased 5.7% year over year to $5,713 million, however, gross profit margin contracted roughly 28 basis points to 34.1%.

Other Financial Aspects

Lowe’s ended the quarter with cash and cash equivalents of $743 million, long-term debt (excluding current maturities) of $15,570 million and shareholders’ equity of $5,742 million.

During the quarter, the company kept its promise of returning surplus cash to stockholders as it repurchased shares worth $500 million and distributed $344 million as dividends.

Outlook

Management continues to project total sales growth of approximately 5% with comps increase of about 3.5% during fiscal 2017. Lowe’s envisions operating margin to increase approximately 80 to 100 basis

Moreover, the company intends to open 25 home improvement and hardware stores during fiscal 2017. As of Nov 3, 2017, the company operated 2,144 stores in the United States, Canada and Mexico.

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON LOW.

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

Lowe's Companies Inc. (LOW) serves more than 17 million customers a week at around 2,141 stores in the United States, Mexico and Canada. The company offers a wide range of products and services for home decoration, maintenance, repair, remodeling and property maintenance. Lowe's offers its products through retail locations as well as online.

Of the 18 firms covering the stock, nine provided positive ratings, eight assigned neutral ratings and one firm rendered a negative rating.

The outlook of the firms toward Lowe’s is dealt with in the following paragraphs:

Positive or equivalent ratings (50.0%, 9/18 firms): These firms remain bullish on Lowe’s prospects due to the easing of credit availability, a strong labor market and improving wages, which are likely to give home improvement sales a boost, going ahead. Moreover, homeowners are currently investing more than they did in the past. Lowe’s extensive merchandising initiatives will help it to make the most of the opportunity. Also, the company is extensively building its business for professionals by upgrading its website and adding more national and private brands to enrich customers’ shopping experience. The firms think that improved collaboration with key vendor partners and across internal functions is allowing the company to offer a more effective omni-channel experience to customers.

Further, the firms believe that Lowe’s has several opportunities to boost its revenues and subsequently increase its profit margins, as the company is focusing on enhancing its product availability and customers’ shopping experience. Moreover, these firms expect that Lowe’s earnings may improve at a double-digit rate, backed by cost control initiatives and sales growth. Further, its pro-focused strategy will result in increased pro-penetration, followed by an increase in sales volume. Additionally, Lowe’s efforts to increase its store base will likely improve its revenues.

Moreover, management remains committed to improve its customers’ experience by making its stores and online channels more convenient to shop. Alongside, the firms think that the Orchard acquisition is likely to be a crucial move for Lowe’s, increasing square footage in the key California market.

Neutral or equivalent ratings (44.4%, 8/18 firms): Lowe’s faces stiff competition in the home improvement retailing business from The Home Depot and other home supply retailers. However, these firms believe that Lowe’s will boost its earnings and comparable store-sales (comps) faster than these retailers. Any deterioration in the housing business and restrictions in granting loans may dent the company’s financial performance. Lowe’s strategic endeavors and better merchandising initiatives place it well in the home improvement industry. Also, a strong recovery in the housing markets signals great opportunity for the home improvement sector.

Moreover, the neutral firms remain confident on the company’s long-term prospects, which focus on increasing profits, along with enhancing shareholders’ returns. Alongside, management remains committed toward pro customers, together with streamlining its store portfolio and merchandising transformation. These are likely to generate incremental sales, going ahead.

Zacks Investment Research Page 2 www.zackspro.com Nov 15, 2017

Overview [Note: only highlighted material has been changed]

The firms identified the following factors for evaluating the investment merits of Lowe’s:

Key Positive Arguments Key Negative Arguments  An improving job scenario, gradual recovery in  Aberrant weather patterns could affect Lowe’s the housing market and merchandising business, making it difficult to attain quarterly sales initiatives along with efforts to provide better and profit targets. omni-channel customer experience, will boost  Any deterioration in the housing and construction Lowe’s performance, moving ahead. market will likely affect the company’s results.  Lowe’s is streamlining its store portfolio, which  Economic factors, such as recession, inflation, along with the strategy of enhancing customer credit availability, fuel costs and irrational pricing shopping experience, is likely to generate could cause the company's results to be lower than incremental sales. anticipated.  Lowe’s continues to maximize shareholders’ wealth through share repurchases and dividend hikes.

Incorporated in 1952 and based in Mooresville, NC, Lowe’s Companies Inc. is a home improvement retailer, which operated approximately 2,141 stores in the United States, Mexico and Canada as of Aug 4, 2017. Also, the company caters to retail do-it-yourself (DIY) and do-it-for-me (DIFM) customers. In fact, a typical Lowe’s store stocks about 36,000 items, a number of which are available through the Special Order Sales system along with a varied collection of branded merchandise. Moreover, it also trades in brands that are exclusive to Lowe’s, including Aquasource, Garden Treasures, Harbor Breeze, Kobalt, Reliabilt, Top-Choice and Utilitech.

The company provides a line of home improvement products in diverse categories, such as appliances, lumber, paint, flooring, building materials, millwork, lawn and landscape products, fashion plumbing, hardware, lighting, tools, seasonal living, rough plumbing, outdoor power equipment, cabinets and countertops, nursery, rough electrical, home environment, home organization, and windows and walls.

The company’s fiscal year ends on Feb 3. Its website is www.lowes.com. Nov 15, 2017

Long-Term Growth [Note: only highlighted material has been changed]

Lowe’s commitment to provide superior customer experience will remain at the core of its competitive positioning, going forward. Strong omni-channel capacity and product differentiation are the two ways in which the company aims to enhance shopping experience for its customers, and these set it apart from its peers.

Lowe’s has continued with the execution of a proven strategy for success in the home improvement retail sector: invest in people, processes, systems and stores in order to maintain and boost customers’ shopping experience. The company has slowly metamorphosed from a single channel retailer to an omni-channel one. It has been upgrading its website to enrich customers’ shopping experience. The company is stressing on improved search capability, filtering, product content, presentation, and providing online delivery scheduling.

Zacks Investment Research Page 3 www.zackspro.com The company is now focusing on its Proservices business more than ever. Lowe’s has refurbished its pro-service business website, LowesForPros.com, in order to cater to the needs of its pro-customers. Further, the company has entered into an agreement with Sherwin-William, one of the leading paint brands in the country, to boost sales of its paint products.

Additionally, Lowe’s is benefiting from its strategic acquisitions. This is evident from the buyout of Orchard Supply Hardware Stores that is aiding comps growth. We believe the Orchard acquisition is a crucial move on Lowe’s part as increasing square footage in the key California market brings significant opportunities for the company to improve its top line and profitability. Orchard’s smaller-format stores located at prime locations of the region are also likely to bolster the company’s market position and capitalize on under-penetrated markets.

Again, Lowe’s acquisition of ATG Stores, one of the leading online retailers of home improvement and lifestyle products, highlights its dedication to expand product offering. Further, ATG Stores’ robust online retailing platform is expected to help Lowe's target new customers and provide them with better service, while expanding the range of items on Lowes.com. Lowe’s also acquired RONA, a key Canadian retailer and supplier of hardware, building materials as well as home renovation products for $2.4 billion. This will help further augment its position in the Canadian market.

Also, Lowe’s long-term strategic plans that focuses on improving profitability; developing abilities to cater the customers in a better way and enhance shareholders’ returns remain impressive. Further, the company expects Return on Invested Capital to go beyond 22% by 2019. This represents an increase of over 500 basis points (bps) in the next three years. Nov 15, 2017

Target Price/Valuation [Note: only highlighted material has been changed]

Rating Distribution Positive 50.0% Neutral 44.4% Negative 5.6% Avg. Target Price $85.60 Maximum Target $100.00 Minimum Target $66.00 No. of Analysts with Target Price/Total 15/18

The firms believe that risks in achieving the target price include inability to find appropriate real estate for future store expansion, disruption in the flow of goods resulting from a change in the distribution platform, rising interest rates, rising gasoline prices, decelerating growth in existing home sales, declining benefits from lumber inflation, and increasing dependence on the cyclical appliance business.

Recent Events [Note: only highlighted material has been changed]

On Aug 23, 2017, Lowe’s posted 2Q17 results wherein its adjusted earnings of $1.57 per share missed the Zacks Consensus Estimate of $1.62. However, bottom line improved 14.6% year over year (y/y). Net sales of $19,495 million lagged the Zacks Consensus Estimate of $19,524 million but improved 6.8% y/y.

Zacks Investment Research Page 4 www.zackspro.com Revenue [Note: only highlighted material has been changed]

Provided below is a summary of revenues as compiled by Zacks Digest:

Revenue ($M) 2Q16A 1Q17A 2Q17A 3Q17E 2016A 2017E 2018E 2019E Digest High $18,260.0 $16,860.0 $19,495.0 $16,569.0 $65,017.0 $68,409.7 $71,302.0 $73,937.0 Digest Low $18,260.0 $16,860.0 $19,495.0 $16,444.5 $65,017.0 $68,146.0 $70,404.0 $72,737.0 Total Revenue $18,260.0 $16,860.0 $19,495.0 $16,499.5 $65,017.0 $68,289.5 $70,927.2 $73,337.0 Y-o-Y Growth 5.3% 10.7% 6.8% 4.8% 10.1% 5.0% 3.9% 3.4% Q-o-Q Growth 19.9% 6.8% 15.6% -15.4%

The Zacks Digest average total revenues were $19,495 million in 2Q17, reflecting an increase of 6.8% from 2Q16 and 15.6% from 1Q17.

Comps increased 4.5% during the quarter under review, up from 1.9% in 1Q17, on the back of 0.9% improvement in transaction and a 3.6% increase in average ticket. Comps for the U.S. business rose 4.6%, following an increase of 2% in the preceding quarter. Comps were up 0.6% in May, 5.3% in June and 7.9% in the month of July. Meanwhile, management continues to enhance its omni-channel capabilities and registered 43% comp growth on lowes.com during the quarter. Notably, Lowe’s attained positive comps in 13 out of 14 regions as well as in all product categories.

Guidance

Management continues to project total sales growth of approximately 5% with comps increase of about 3.5% during FY17.

Please refer to the Zacks Research Digest spreadsheet of Lowe’s for specific revenue estimates.

Margins [Note: only highlighted material has been changed]

The Zacks Digest average gross profit grew 6.1% y/y to $6,670 million in 2Q17 but the gross margin contracted 20 bps to 34.2%.

The Zacks Digest average adjusted operating profit grew 7.1% y/y to $2,286 million in 2Q17. However, the operating margin remained flat at 11.7%.

Provided below is a summary of margins as compiled by Zacks Digest:

Margins 2Q16A 1Q17A 2Q17A 3Q17E 2016A 2017E 2018E 2019E Gross Margin 34.4% 34.4% 34.2% 34.2% 34.6% 34.3% 34.2% 34.2% Operating Margin 11.7% 9.2% 11.7% 9.2% 9.7% 9.8% 10.2% 10.6% Pre Tax Margin 10.8% 8.3% 10.9% 8.2% 8.7% 8.8% 9.3% 9.7% Net Margin 6.7% 5.3% 6.8% 5.1% 5.4% 5.5% 5.8% 6.1%

Zacks Investment Research Page 5 www.zackspro.com Guidance

For FY17, Lowe’s envisions operating margin to increase approximately 80-100 bps.

Please refer to the Zacks Research Digest spreadsheet on Lowe’s for more details on margin estimates.

Earnings per Share [Note: only highlighted material has been changed]

Provided below is a summary of EPS as compiled by Zacks Digest:

EPS 2Q16A 1Q17A 2Q17A 3Q17E 2016A 2017E 2018E 2019E Digest High $1.38 $1.03 $1.57 $1.03 $4.01 $4.49 $5.15 $5.80 Digest Low $1.32 $1.03 $1.56 $1.00 $3.98 $4.47 $5.05 $5.80 Digest Avg. $1.37 $1.03 $1.57 $1.01 $3.99 $4.48 $5.09 $5.80 Y-o-Y Growth 13.9% 18.3% 14.6% 14.7% 21.1% 12.2% 13.6% 13.9% Q-o-Q Growth 57.2% 19.9% 52.3% -35.5%

The Zacks Digest average earnings per share for 2Q17 were $1.57, up 14.6% from 2Q16 and 52.3% from 1Q17.

The total number of diluted shares outstanding in 2Q17 was 842.3 million, down 4.8% from 885 million in 2Q16 and 1.8%, sequentially.

Guidance

The company now envisions earnings to be in the $4.20–$4.30 per share range compared with $4.30, projected earlier.

Please refer to the Zacks Research Digest spreadsheet on Lowe’s for more extensive EPS figures.

Capital Structure/Solvency/Cash Flow/Governance/Other [Note: only highlighted material has been changed]

Balance Sheet

Lowe’s ended 2Q17 with cash and cash equivalents of cash and cash equivalents of $1,696 million, long-term debt (excluding current maturities) of $15,788 million and shareholders’ equity of $5,536 million.

Share Repurchases and Dividend

During the quarter, the company kept its promise of returning surplus cash to stockholders as it repurchased shares worth $1.25 billion and distributed $299 million as dividends. The company still had approximately $2.6 billion remaining under share buyback program. In total, management expects to repurchase shares worth $3.5 billion in FY17.

Zacks Investment Research Page 6 www.zackspro.com On Aug 18, 2017, Lowe's board of directors declared a quarterly dividend of 41 cents per share, which will be payable on Nov 8, 2017 to shareholders of record, as of Oct 25.

Store Update

During the quarter, the company opened four new stores in the United States. As of August 4, 2017, the company operated 2,141 stores in the United States, Canada and Mexico.

During FY17, the company intends to open 25 home improvement and hardware stores. Nov 15, 2017

Research Analyst Rashmi Jaiswal Copy Editor Rajani Lohia Content Ed. Rajani Lohia QCA Sumit Singh Lead Analyst Sumit Singh No. of brokers reported/Total brokers Reason for Update Flash

Zacks Investment Research Page 7 www.zackspro.com