DBRS Downgrades Lowe’s Companies, Inc. to BBB (high) and R-2 (high), Stable Trends

DBRS Limited (DBRS) downgraded the Issuer Rating and the Senior Unsecured Debt rating of Lowe’s Companies, Inc. (Lowe’s or the Company) to BBB (high) from A (low) and the Company’s Short-Term Issuer Rating to R-2 (high) from R-1 (low). All trends remain Stable. The downgrade reflects the Company’s revised leverage target while also acknowledging a decline in reported operating profit resulting from charges taken as a result of a strategic reassessment that were concentrated the fiscal year ended February 1, 2019 (F2018); these charges should now help drive profit growth going forward. 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 and the economic cyclicality of the home-improvement sector.

DBRS believes that Lowe’s earnings should benefit from the positive impact of the Company’s investments to improve product mix and customer experience, the strategic rationalization of underperforming locations and non-core assets and tailwinds in the U.S. housing market. DBRS expects Lowe’s net sales to increase in the low-single-digit range in the near to medium term, driven primarily by low-to-mid single-digit growth in comparable average ticket value. DBRS expects EBITDA margins to improve in the near term, primarily reflecting the absence of underperforming locations, better in-stock performance and capacity utilization, improved customer service and product mix. As a result, DBRS expects that EBITDA will increase to about $9.0 billion over the medium term.

Despite a decrease in balance sheet debt, Lowe’s financial credit metrics weakened modestly in F2018 as the Company executed a comprehensive rationalization initiative of its store portfolio that negatively impacted its operating income and free cash flow generation while maintaining its shareholder-friendly dividend and share repurchase activity. Additionally, the Company revised its leverage target to 2.75 times (x) from 2.25x and will primarily use the excess debt capacity to fund share repurchase activity.

Lowe’s is expected to increase returns to shareholders beginning in F2019 amid a more aggressive capital structure that will enable the Company to continue to invest in high-return initiatives and maximize shareholder value concurrently. Despite the anticipated increase in balance sheet debt in F2019, the benefits of the strategic reassessment are expected to improve Lowe’s’ long-term profit growth outlook such that credit metrics are appropriate for the BBB (high) rating in the near to medium term.

Cash flow from operations is expected to continue to track operating income and should rise to roughly $6.5 billion over the medium term. DBRS expects capex to be elevated at around $1.6 billion in F2019 and for dividends to increase modestly year over year. As such, DBRS forecasts free cash flow after dividends and before changes in working capital to move toward the $3.7 billion range over the medium term. DBRS expects F2019 share repurchase activity to be at the high end of the Company’s guidance range of $6.0 billion to $7.5 billion and that the Company will continue to use free cash flow as well as incremental debt to support share repurchase activity in excess of its historical level over the F2019 to F2021 time frame. DBRS notes that the Company ended F2018 with $14.0 billion in share repurchase activity authorized by the Board. As a result, credit metrics are expected to move toward the Company’s stated leverage target of approximately 2.75x in F2019 and remain around this level over the medium term.

Should operating performance deteriorate and/or financial management become more aggressive than currently contemplated such that gross debt-to-EBITDA increases materially above 3.0x for a sustained period, a negative rating action may result. Conversely, DBRS believes a positive rating action is highly unlikely over the foreseeable future as a result of the Company’s decision to increase its leverage target and gain financial flexibility while it looks to execute on its strategic initiatives concurrently with an increase in shareholder returns over the next several years.

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 & Criteria.

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 not 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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada