DBRS Assigns Rating of A (low) to Lowe’s, Stable Trend

DBRS has today assigned an Issuer Rating and Senior Unsecured Debt rating of A (low) and a Short-Term Rating of R-1 (low) to Lowe’s Companies, Inc. (Lowe’s or the Company), all with Stable trends. The ratings reflect the Company’s strong brand and its number two position in an intensely competitive and cyclical U.S. home improvement retail market. The ratings also consider the mature and largely saturated nature of Lowe’s core market and incorporate the Company’s stated financial management guidelines.

Lowe’s earnings profile is fair for the current rating category on a through-the-cycle basis, based on progress related to implementation of recent strategic initiatives. Revenues increased by an average of 2.3% per year between 2009* and 2012 to reach $50.5 billion, driven primarily by comparable-store sales growth as the Company decelerated store openings. Lower-than-sector-average comparable-store sales growth during this period suggests that the Company may have been losing market share in its core U.S. market.

Operating margins were also pressured and EBITDA increased modestly to $5.1 billion in 2012 from $4.7 billion at the bottom of the cycle in 2009. Lowe’s reported more robust growth in 2013, with revenues growing by 5.7% to reach $53.4 billion and EBITDA increasing by 10% to $5.6 billion. This followed the implementation of initiatives to improve revenue and earnings growth, including an inventory reset program, a product differentiation program, greater investment in technology and a stronger focus on in-store service.

Lowe’s financial profile is also reasonable for the current rating category, based primarily on the Company’s relatively strong cash generating capacity and financial leverage target. Since 2009, the Company has generated an average of $1.9 billion per year of free cash flow before changes in working capital. During this period, the Company increased its focus on shareholder returns and used its free cash flow and incremental debt of $5.1 billion to repurchase, on a net basis, $12.9 billion of shares through 2013. As such, balance sheet debt more than doubled, contributing to lease-adjusted debt-to-EBITDAR increasing from 1.5 times (x) in 2009 to 2.2x in 2013, and lease-adjusted EBITDA interest coverage falling from 11.2x to 9.7x during the same period.

Lowe’s earnings profile should remain within the parameters of the current rating category on a through-the-cycle basis, supported by the Company’s size, scale and market position, with the potential to further benefit from recent investments in IT, investments in labour, product differentiation and inventory resets. DBRS forecasts revenues will grow to at least $62 billion by 2016, based on same-store sales of 4% to 5% per year and ten to 20 new store openings per year. DBRS’s comparable store sales forecast reflects further benefit from recent initiatives and increased focus on serving the “Pro” market, as well continued recovery of the U.S. economy. DBRS also expects some improvement in EBITDA margin over the next three years due to stronger gross margin from strategic initiatives and operating leverage from increased sales. As such, DBRS forecasts EBITDA to increase to at least $7.4 billion in 2016, versus $5.6 billion in 2013.

DBRS expects Lowe’s to maintain a financial profile consistent with the current rating category, based on the strength of its cash generating capacity and target financial leverage (i.e., lease-adjusted debt-to-EBITDAR of 2.25x using an 8.0x multiple to capitalize operating lease expense, or approximately 2.15x using a 6.0x multiple). DBRS estimates that Lowe’s free cash flow before changes in working capital will average at least $2.0 billion per year through 2016. Lowe’s has indicated that it will repurchase approximately $3.4 billion of shares in 2014, financed with free cash flow and additional balance sheet debt. DBRS anticipates the Company will continue to use free cash flow and incremental debt to repurchase shares through 2016, while remaining near its stated leverage target.

• In accordance with Lowe’s reporting practice and unless otherwise noted, references to 2009 represent the Company’s fiscal year ended January 29, 2010. References to 2012 represent the Company’s fiscal year ended February 1, 2013.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.