DBRS Confirms Lowe’s Companies, Inc. at A (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Lowe’s Companies, Inc. (Lowe’s or the Company) at A (low) and its Short-Term Rating at R-1 (low), all with Stable trends. The ratings continue to reflect Lowe’s strong brand and its number two position in an intensely competitive and mature North American home improvement retail market. The ratings also consider the Company’s large size and scale as well as its prudent financial leverage guidelines.

Lowe’s achieved a 5.3% growth in total revenues ($56.2 billion in F2014 from $53.4 billion in F2013), primarily because of growth in comparable store sales, contribution from new stores, and the acquisition of Orchard Supply Hardware. Comparable sales growth was experienced in all product categories, and was driven by an increase in both the average ticket and the number of customer transactions. The EBITDA margin improved to 11.2% in F2014 compared with 10.5% in F2013 as a result of operating leverage and the Company’s cost-reduction initiatives. As such, EBITDA increased to $6.3 billion in F2014 from $5.6 billion in F2013.

Lowe’s cash flow from operations tracked growth in operating income and increased to $4.4 billion in F2014 from $3.9 billion in F2013. Dividend payout in F2014 grew with net income and the Company used excess cash and incremental debt to repurchase shares (its practice since the economic recovery began in 2010). The increase in debt was, however, moderate compared with earnings growth and, as such, the Company’s consolidated lease-adjusted debt-to-EBITDAR improved marginally to 2.09 times (x) in F2014 (compared with 2.16x in F2013).

Going forward, DBRS believes that Lowe’s earnings profile will remain stable, supported by the steady expansion of the U.S. economy and the Company’s continued efforts to refine its product offering and enhance customer experience. DBRS expects Lowe’s total sales in F2015 to grow at 4.5% to 5.0%, driven primarily by comparable sales growth with an emphasis on increasing sales in the Pro market segment. The Company’s sales will also benefit from the addition of about 15 to 20 new home improvement and hardware stores (approximately 1% of the current store count) and continuing investment in omni-channel capabilities. EBITDA margins in F2015 are expected to increase to around 12%, primarily because of operating leverage from increased sales. As such, DBRS forecasts that EBITDA will grow to approximately $6.8 billion to $7.0 billion in F2015.

DBRS forecasts that cash from operations will be approximately $4.50 billion to $4.75 billion in F2015. In this period, the Company is expected to incur about $1.2 billion on capital expenditures including new stores, existing store remodels and information technology investments. With dividend payout ratio likely to be 35%, DBRS estimates that, in F2015, the Company will generate free cash flow (before changes in working capital) of about $2.25 billion to $2.50 billion. In view of the Company’s ongoing share repurchase program, DBRS anticipates that the Company will repurchase shares totalling $3.8 billion in F2015, financed with a combination of free cash flow and incremental debt, while it maintains financial leverage at levels consistent with the current rating category.

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 (January 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.

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