DBRS Confirms Lowe’s Companies, Inc. at A (low) and R-1 (low), Stable Trends

DBRS Limited (DBRS) has 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 Issuer Rating at R-1 (low), all with Stable trends. The confirmation of the ratings reflects the Company’s solid operating performance in the fiscal year ended February 3, 2017 (F2016), balanced by its use of free cash flow and incremental debt to fund increasing shareholder returns. The ratings continue to be supported by Lowe’s strong brand and market position, its large scale geographic diversification and free-cash generating capacity. The ratings also reflect the intense competition and cyclicality of the home improvement retail industry as well as the potential for increasing financial leverage and risks related to possible future growth strategies.

DBRS believes that the Company’s earnings profile will remain relatively stable over the medium-term as Lowe’s is expected to continue to enhance its in-store and omni channel experience while remaining focused on improving efficiency with the implementation of end-to-end optimization. Net sales should continue to increase in the low- to mid-single-digit range, based primarily on comparable sales growth and a modest percentage increase in selling square footage. EBITDA margins should improve modestly over the near to medium term as the Company focuses on improving productivity and efficiency while reinvesting proceeds from Value Improvement efforts into price to protect and/or grow market share. As a result, EBITDA is expected to increase toward and above the $8 billion level over the medium term.

DBRS expects the Company’s financial profile to remain relatively stable or weaken modestly in the near term but improve over the medium term based on the Company’s stated leverage target of 2.25 times (x) lease-adjusted debt-to-EBITDA (capitalizing operating leases at 6.0x). Cash flow from operations should continue to track operating income while capital expenditures is expected to remain relatively stable per year over the medium term as Lowe’s continues to invest into its store base (i.e., maintenance and new store openings), enhance its customer experience and improve its distribution network. The Company’s target dividend payout ratio of approximately 35% of net income is expected to remain unchanged over the medium term. DBRS expects that Lowe’s will continue to use the majority of its free cash flow as well as incremental debt to repurchase shares. Combined with the expected growth in earnings, credit metrics should therefore remain relatively stable or weaken modestly in the near term. Should credit metrics not display improvement toward a level considered more appropriate for the current A (low) rating (i.e., lease-adjusted debt-to-EBITDAR toward 2.0x, consistent with the Company’s stated lease-adjusted debt-to-EBITDAR target of 2.25x) within a reasonable timeframe as a result of weaker than-expected operating performance and/or higher debt financed returns to shareholders then expected, a negative rating action could result.

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.

The principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.