Morningstar DBRS Confirms Lowe’s Issuer Rating at BBB (high) With a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Lowe's Companies, Inc.(Lowe's or the Company) at BBB (high) with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmation and Stable trend reflect Morningstar DBRS' view that, while the operating results for the Company's fiscal year ending February, 2025 (F2024) are expected to continue to moderate from the elevated levels witnessed in recent years given the slowdown in housing-related spending (including DIY spending, particularly for bigger ticket purchases) amid the higher interest rate environment and overall decreased consumer purchasing power, Lowe's overall credit risk profile will remain commensurate with the current BBB (high) credit rating. This view is further supported by Morningstar DBRS' expectation that Lowe's will remain prudent with its financial policies and capital allocation priorities such that net leverage remains below its publicly stated target threshold of 2.75 times (x), which Morningstar DBRS views as appropriate for the current credit rating.

CREDIT RATING DRIVERS
A positive rating action could occur if Lowe's changed its financial policy in a commensurate fashion (i.e., debt-to-EBITDA leverage remained structurally below 2.5x) and the Company's business risk assessment remained relatively stable. Conversely, a negative rating action could occur if key credit metrics deteriorated as a result of weaker-than-expected operating performance and/or more aggressive financial management (i.e., debt-to-EBITDA leverage above 3.0x on a sustained basis).

EARNINGS OUTLOOK
Despite the expectation of near-term earnings moderation, Morningstar DBRS expects Lowe's earnings profile to remain relatively stable over the medium term and continue to support the current rating. Morningstar DBRS expects the Company's topline to continue to be negatively affected through F2024 given its higher exposure to the DIY segment (approximately 75% of total sales), cutbacks in big-ticket project spending, and moderating demand in other discretionary product categories (approximately 33% of total sales). Consequently, Morningstar DBRS forecasts the Company's revenues to decline in the low single-digits in F2024 to reach around $83.5 billion before improving toward $85.0 billion in F2025 compared with $86.4 billion and $97.0 billion in F2023 and F2022, respectively. Over the more medium term, Morningstar DBRS expects demand for repairs, remodeling, and small to midsize projects in the U.S. to stabilize and be sustained because of ageing housing stock and home owners' relatively robust balance-sheet positions. Morningstar DBRS anticipates EBITDA margins to follow a similar trend as the topline and gradually improve as inflationary pressure on operating costs moderates and interest rate cuts result in improved demand for home improvement projects. As such, Morningstar DBRS expects the Company's EBITDA to decline toward $12.5 billion in F2024 and grow modestly in F2025 versus $13.2 billion and $14.4 billion in F2023 and F2022, respectively.

FINANCIAL OUTLOOK
Morningstar DBRS believes Lowe's financial profile will remain appropriate for the current rating category, supported by its strong cash-generating capacity and the expectation that Lowe's will remain prudent with its capital allocation priorities. Morningstar DBRS expects cash flow from operations of approximately $9.5 billion in F2024 and F2025, versus $10.3 billion in F2023, to remain more than sufficient to fund the Company's capital expenditure target of $2.0 billion annually and its dividend payments of approximately $2.6 billion to $2.7 billion in F2024 and F2025, respectively. Morningstar DBRS anticipates Lowe's will continue to use any remaining free cash flows (after working capital changes) toward shareholder returns and/or debt reduction in the case of higher-than-expected earnings moderation, such that Lowe's key credit metric, i.e., net leverage, remains below 2.75x (or 3.00x based on Morningstar DBRS' calculation of gross debt-to-EBITDA).

CREDIT RATING RATIONALE
Lowe's credit ratings continue to be supported by the Company's strong brand and market position, large scale, and size and geographic diversification as well as its strong free cash flow-generating capacity. The credit ratings also consider the intense competitive environment, the economic cyclicality of the home improvement sector, and risks associated with future growth.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Lowe's, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Lowe's, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Lowe's, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Merchandising Industry (April 15, 2024), https://dbrs.morningstar.com/research/431175

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was not initiated at the request of the rated entity.

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

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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