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 are Stable. While the Company’s operating performance was substantially stronger than expected in the last 12 months, benefitting from a surge in demand in the home-improvement sector that was sparked by the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar forecasts that operating results and credit metrics will moderate as the economy reopens and consumer spending shifts away to other discretionary sectors. The current ratings and the Stable trends also incorporate the Company’s financial policy and leverage target that commensurate with the BBB (high) Issuer Rating. The ratings continue to be supported by the Company’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.

For the last 12 months ended April 30, 2021 (LTM 2021), the Company’s revenues increased materially by more than 27% year over year (YOY) to approximately $94 billion as compared with $74 billion for LTM 2020, driven by broad-based growth across all product categories and customer segments. While the initial demand surge for Lowe’s products was driven by the DIY segment as customers sheltered-in-place and invested in improving their home livability, the PRO segment has picked up pace in the last two quarters, as home remodelling projects regained momentum and professionals looked to reduce their long order backlogs. The Company’s earnings further benefitted from margin expansion during this period and EBITDA margins improved by over 200 basis points YOY, on account of better product pricing, higher gross margins, and operating leverage, but partially offset by incremental coronavirus-related operating costs and financial support extended by Lowe’s to its front-line associates. As a result of substantial sales growth and margin expansion, EBITDA increased materially to $12.4 billion for LTM 2021 as compared with $8.2 billion for LTM 2020.

In terms of financial profile, credit metrics improved YOY as moderate increase in gross debt to fund shareholder returns was more than offset by substantial growth in operating income and leverage ratio improved to 2.24 times (x) at LTM 2021, as compared with approximately 3.00x levels during previous year. Cash flow from operations (before working capital changes) tracked the increase in operating income and increased to approximately $10 billion for LTM 2021 vis-à-vis approximately $7 billion for LTM 2020. After initially suspending share repurchases in Q1 2020, Lowe’s reinstated the program in H2 2020 and has allocated around $7 billion of capital for share repurchases during the last three quarters.

Looking ahead, DBRS Morningstar expects the impact of pandemic-related social behaviour, such as social distancing, and increased work-from-home mandates to continue to support elevated demand for home-improvement products from the pre-pandemic levels, at least in the near term. As the pandemic subsides and the economy gradually reopens later this year, consumer spending is expected to shift away from home and the demand surge experienced in the year to date is unlikely to persist throughout all of F2021. As a result, organic operating earnings growth over the near to medium term may be flat to moderately negative as the Company not only faces tough YOY growth comparables but also potential challenges around evolving consumer behaviour. That said, earnings are still expected to remain considerably higher than pre-coronavirus levels in the near term, and DBRS Morningstar expects EBITDA to continue to stay above $10 billion in F2021.

DBRS Morningstar expects the Company’s credit metrics to remain appropriate for the current rating category, supported by the Company's strong cash generating capacity and the expectation of relatively stable credit metrics, in line with Company’s financial policy and leverage threshold of 2.75x. DBRS Morningstar expects cash flow from operations to be more than adequate for the Company’s capital program and dividend payments and expects the Company to rely on existing cash in hand, internally generated cash, and moderate increase in debt to fund its share repurchase target of $9 billion for F2021, such that the leverage ratio remains well within the 3.0x threshold considered appropriate for the current rating category. Should the Company’s earnings profile remain relatively elevated even post-pandemic and if capital allocation is managed so that financial leverage is maintained structurally below 2.5x, a positive rating action may occur. Conversely, while it is highly unlikely in the near term given the current demand for home-improvement products, if Lowe’s were to experience a fundamental deterioration in earnings and/or a sustainable rise in leverage above 3.0x, due to aggressive financial management, a negative rating action may occur.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Merchandising Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364692), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

This is an unsolicited credit rating.

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].

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