Lowe's Q2 results: Orchard Supply Hardware chain to close

Lowe's Companies, Inc. (NYSE: LOW) today reported net earnings of $1.5 billion and diluted earnings per share of $1.86 for the quarter ended Aug. 3, 2018, which included non-cash pre-tax charges of $230 million further described below, compared to net earnings of $1.4 billion and diluted earnings per share of $1.68 in the second quarter of 2017. Excluding the impact of these charges, adjusted diluted earnings per share¹ increased 31.8 percent to $2.07 from adjusted diluted earnings per share¹ of $1.57 in the second quarter of 2017.

The $230 million non-cash pre-tax charges referenced above resulted from the company's strategic reassessment of Orchard Supply Hardware, which led to long-lived asset impairments and discontinued projects during the second quarter and a decision by the company on Aug. 17, 2018, to exit these operations in order to focus on its core home improvement business. The company expects to close all 99 Orchard Supply Hardware stores, which are located in California, Oregon and Florida, as well as the distribution facility that services those stores by the end of fiscal 2018. To facilitate an orderly wind-down, the company intends to conduct store closing sales and has partnered with Hilco Merchant Services to help manage the process and ensure a seamless experience for customers. Additional pre-tax costs of $390 to $475 million related to lease obligations, accelerated depreciation and amortization, and severance obligations are expected to be incurred in the second half of fiscal 2018, and have been reflected in the company's updated business outlook.

Sales for the second quarter increased 7.1 percent to $20.9 billion over the second quarter of 2017, and comparable sales increased 5.2 percent. Comparable sales for the U.S. home improvement business increased 5.3 percent for the second quarter.

As a result of the new revenue recognition accounting standard ASU No. 2014-09 adopted in the first quarter of 2018, the company reclassified certain items within operating income. This change resulted in an increase to sales of approximately $140 million in the second quarter, driven primarily by the reclassification of the profit sharing income from the company's proprietary credit program from selling, general and administrative expense. This accounting standard has no impact on comparable sales or diluted earnings per share.  It was adopted on a modified retrospective basis, therefore the prior year has not been adjusted.

"We posted solid results this quarter by capitalizing on delayed spring demand," commented Marvin R. Ellison, Lowe's president and CEO. "We are committed to driving even stronger performance in the future by sharpening our focus on retail fundamentals and by limiting any projects and initiatives that take us away from our core mission of being a great omni-channel home improvement retailer. I would like to thank our associates for their hard work and commitment to the company.

"While it was a necessary business decision to exit Orchard Supply Hardware, decisions that impact our people are never easy. We will be providing outplacement services for impacted associates, and they will be given priority status if they choose to apply for other Lowe's positions," Ellison added.

"In addition to the decision to exit Orchard Supply Hardware, we are developing plans to aggressively rationalize store inventory, reducing lower-performing inventory while investing in increased depth of high velocity items. Exiting Orchard Supply Hardware and rationalizing inventory are the driving force behind the changes to Lowe's Business Outlook." Ellison continued.  "Our strategic reassessment is ongoing as we evaluate the productivity of our real estate portfolio and non-retail business investments.  We will update you on the changes to our strategy at the upcoming analyst and investor conference in December."

Delivering on its commitment to return excess cash to shareholders, the company repurchased $1.1 billion of stock under its share repurchase program and paid $338 million in dividends in the second quarter.

As of Aug. 3, 2018, Lowe's operated 2,155 home improvement and hardware stores in the United States, Canada and Mexico representing 215.3 million square feet of retail selling space.

Lowe's Business Outlook

In addition to the decision to exit Orchard Supply Hardware, the company is developing plans to aggressively rationalize its store inventory, reducing lower-performing inventory while investing in increased depth of high velocity items. Potential impacts of these actions have been reflected in Lowe's business outlook.

Fiscal Year 2018 (comparisons to fiscal year 2017; based on U.S. GAAP) 

• Total sales are expected to increase approximately 4.5 percent.
• Comparable sales are expected to increase approximately 3 percent.
• The company expects to add approximately 9 home improvement stores.
• Operating income as a percentage of sales (operating margin) is expected to decrease approximately 180 basis points², including the $230 million non-cash charges recorded in the second quarter of fiscal 2018 and $390 to $475 million in additional costs expected to be incurred in the second half of fiscal 2018 as a result of the decision to exit Orchard Supply Hardware.
• The effective income tax rate is expected to be approximately 25%.
• Diluted earnings per share of $4.50 to $4.60 are expected for the fiscal year ending Feb. 1, 2019.

¹ Adjusted diluted earnings per share is a non-GAAP financial measure. Refer to the "Non-GAAP Financial Measures Reconciliation" section of this release for additional information as well as a reconciliation between the Company's GAAP and non-GAAP financial results.

² Includes 4 basis point net negative impact from the gain on the sale of the company's interest in its Australian joint venture (2Q 2017) and the one-time bonus paid to eligible hourly U.S. employees (4Q 2017).

Source : Lowe's

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