DBRS Morningstar Confirms Lowe’s Ratings at BBB (high), R-2 (high), with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Lowe’s Companies, Inc.’s (Lowe’s or the Company) Issuer Rating, Short-Term Issuer Rating, and Senior Unsecured Debt rating at BBB (high), R-2 (high), and BBB (high), respectively. All trends remain Stable. The confirmations reflect DBRS Morningstar’s view that, while uncertainty related to the intensity and duration of the Coronavirus Disease (COVID-19) pandemic persists, the Company’s earnings profile is well positioned to navigate the current climate and has shown resilience during the initial stages of the outbreak and resultant macroeconomic impact. 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. These rating actions and the outlook for the Company also incorporate the current uncertainty related to the coronavirus pandemic.

DBRS Morningstar believes that in the short term Lowe’s earnings are likely to benefit from a surge in demand driven in large part by do-it-yourself activity as customers shelter-in-place and look to complete home improvement projects. While stores have reduced operating hours, a number of measures have been put in place in order to continue to serve customers while conforming to local coronavirus regulations. In addition the Company reported an 80% increase in online shopping activity, pushing online sales penetration to 8% compared with an estimated 5% in the year-ago period.

While the surge in Q1 operating performance is unlikely to persist at the same pace through the balance of the year, social distancing requirements and reduced travel are expected to continue to influence consumer behaviour in a manner that is likely to be positive for the home improvement sector. Having said that, there remains significant uncertainty in the medium-to-longer term operating performance of the sector related to the economic impact of government actions taken to combat the coronavirus and the pace of recovery of home building activity, housing permits, and home values, which have historically underpinned long term growth within the industry. As a result, operating earnings growth beyond 2020 may be more muted as the Company faces both tough annual comparables and also the potential of economic challenges related to the housing sector if a return to “normal” societal behaviour is measured in years and not months.

In terms of the Company’s financial profile, credit metrics are expected to deteriorate modestly primarily related to an increase in debt, which has been used to fund near-term debt maturities and also provide a liquidity cushion. DBRS Morningstar expects Lowe’s to continue to generate stable cash flow to meet its capex and dividend commitments. Share repurchase activity was suspended post Q1 2020 and is not expected to occur through the balance of 2020 as compared with $4.2 billion spent last year. DBRS Morningstar notes that the recent $4.0 billion debt issuance effectively prefunds near-term debt maturities and improved the Company’s liquidity position. Lowe’s had $6.0 billion in cash and equivalents and $3.0 billion in undrawn credit facilities at the end of the Q1 period ended May 1, 2020.

While Lowe’s is well positioned to navigate the initial challenges of the coronavirus pandemic both in terms of operating performance and balance sheet stability and liquidity, a protracted economic downturn could pressure medium term operating results and cash flow contraction and possibly preclude the Company from being able to invest in high-return initiatives and maximize shareholder value concurrently. If Lowe’s were to experience a fundamental deterioration in profit and/or a sustainable rise in net leverage above 3.0x, a negative rating action may occur.

Conversely, while it is highly unlikely given the current coronavirus pandemic and economic challenges that are likely to intensify over the coming 12 months to 24 months, if the Company’s earnings profile accelerates meaningfully for a sustained period and gross leverage moves structurally to 2.0x to 2.5x, a positive rating action may occur.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Merchandising Industry and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577