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. The rating confirmations and Stable trends reflect DBRS Morningstar’s view that while Lowe’s operating results remained elevated in F2021, earnings will moderate in the near to medium term, as consumer spending shifts away from home, and inflationary pressure and rising interest rates curb home improvement activities. The Stable trends are further supported by the view that Lowe’s balanced this surge in earnings through growth investments and higher shareholder returns to maintain a steady level of leverage (i.e., lease-adjusted debt-to-EBITDAR ratio). 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.

During F2021, Lowe’s earnings continued to benefit from an elevated level of demand in the home improvement sector thanks to extended work-from-home mandates, relatively strong consumer balance sheets, and customers taking on larger projects as savings rose year over year (YOY). However, the Company’s sales have started to moderate in Q1 F2022 as comparable sales fell by 4% YOY, because of softness in the do-it-yourself segment that was further exaggerated by a delayed spring season in the U.S. For the last 12 months ended April 29, 2022 (LTM 2022), the Company’s revenue increased marginally by 1.6% to approximately $95.5 billion, compared with $94.0 billion for LTM 2021. EBITDA margins improved by 160 basis points during this period, on account of higher sales and greater operating productivity, partially offset by inflationary pressure and higher year-end bonus payouts. As a result, EBITDA increased materially to approximately $14.0 billion for LTM 2022, compared with $12.4 billion for LTM 2021.

Cash flow from operations (before working capital changes) increased to approximately $10.8 billion for LTM 2022, compared with $10.0 billion for LTM 2021, and was more than adequate to cover capital expenditures of approximately $1.8 billion and dividend payments of $2.1 billion. Lowe’s utilized the free cash flow from operations (before working capital changes) of $6.9 billion, existing cash in hand of $3.3 billion, and incremental debt of $5.6 billion to fund share repurchases of $13.8 billion in LTM 2022. As such, despite Lowe’s stronger-than-expected earnings performance, the Company's financial profile has remained relatively stable, as growth in operating income was partially offset by an increase in gross debt to fund shareholder returns, such that the leverage ratio increased to 2.4 times (x) at LTM 2022 from 2.24x at LTM 2021.

Looking ahead, DBRS Morningstar expects organic operating sales growth over the near to medium term to be moderately negative as consumer spending shifts to other discretionary sectors, away from home, and product price increases may not be sufficient to offset the decline in unit volumes. Further, the impact of escalating inflation on consumers’ wallets and increased cost of remodelling and renovation is likely to negatively affect demand for large home-related projects. On a longer term, the home improvement sector remains exposed to housing market shifts and a likely correction in home prices, especially in a rising interest rate environment. Lowe’s will also be challenged to maintain operating margins at current levels amid rising costs and operating deleverage, despite its continued effort to improve margins through productivity initiatives. That said, DBRS Morningstar expects earnings to still remain considerably higher than pre-pandemic levels, with EBITDA staying above $12 billion in F2022. DBRS Morningstar notes the earnings growth over the last two years has helped the Company build up ample cushion, and Lowe’s should be able to absorb certain volume moderation as well as inflationary pressures, within the context of the current rating category.

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 expects Lowe’s to manage shareholder returns in line its financial policy and leverage threshold of 2.75x. DBRS Morningstar expects cash flow from operations to be more than sufficient for the capital expenditure target of $2.0 billion and dividend payments of more than $2.2 billion in F2022. DBRS Morningstar believes the Company will rely on additional debt to fund its share repurchase target of $12 billion for F2022, such that the leverage ratio will remain within the 3.0x threshold considered appropriate for the current rating category. A positive rating action may occur if the Company’s earnings profile remains relatively elevated and if there is a change in its financial policy such that financial leverage stays structurally below 2.5x. Conversely, and highly unlikely in the near term, a negative rating action may occur if Lowe’s earnings profile fundamentally deteriorated and/or leverage is sustained above 3.0x because of aggressive financial management.

There were no environmental, social, and governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929.

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

The principal methodology is Rating Companies in the Merchandising Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382073), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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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