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

DBRS Limited (DBRS) 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 2, 2018, and relatively stable credit metrics, despite an increase in balance sheet debt. The ratings continue to be supported by Lowe’s strong brand and market position, large scale and geographic diversification and free cash flow–generating capacity. The ratings also consider the intense competitive environment, the economic cyclicality of the home improvement sector and the potential for more aggressive financial management.

DBRS believes that Lowe’s earnings should continue to benefit from the tailwinds in the U.S. housing market and the acceleration of strategic investments despite near term cost pressure from wages and transportation. DBRS believes Lowe's earnings profile should remain well-placed for the A (low) rating over the medium term. Net sales should increase in the low- to mid-single-digit range in the near to medium term, rising over $70 billion, driven primarily by comparable sales growth and approximately 10 net-new store openings in F2018. EBITDA margins are expected to weaken modestly in the near term due to higher selling, general and administrative expenses as a percentage of sales resulting from the acceleration of strategic investments, as well as rising wages and transportation costs. DBRS believes gross margins may be modestly pressured in the near term as Lowe’s adjusts pricing to be more competitive supported by implementation of pricing analytical tools. As a result, DBRS expects that EBITDA will increase toward the $8.4 billion level over the medium term.

DBRS expects Lowe’s financial profile to remain appropriate for the current A (low) ratings over the medium term, benefiting from its free cash flow–generating capacity and stable leverage target (lease-adjusted debt-to-EBITDAR of 2.25 times (x) using a 6.00x operating lease multiple and adjusting for share-based payments and extraordinary, non-recurring and unusual non-cash charges or losses). Cash flow from operations, before changes in working capital, is expected to continue to track operating income and should benefit from changes to U.S. tax laws, rising toward $6.3 billion over the medium term. Capital expenditures is expected to be elevated at around $1.7 billion in F2018 as Lowe’s accelerates strategic investments in information technology and supply chain and updates equipment and technology in existing stores. The Company’s target dividend payout ratio of approximately 35% is expected to remain unchanged over the medium term. DBRS believes that Lowe’s will continue to use free cash flow and incremental debt to increase shareholder returns such that credit metrics should remain in line with the Company’s stated leverage target of approximately 2.25x, which should remain acceptable for the current A (low) ratings.

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

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

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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