Lowe's to Exit Mexico Operations

Lowe's Companies, Inc. (NYSE: LOW) today (20th November) reported net earnings of $629 million and diluted earnings per share of $0.78 for the quarter ended Nov. 2, 2018, which included pre-tax charges of $280 million further described below, compared to net earnings of $872 million and diluted earnings per share of $1.05 in the third quarter of 2017. Excluding the impact of the charges, adjusted diluted earnings per share¹ decreased 1.0 percent to $1.04 compared to the prior year.

Management has substantially completed its strategic reassessment of the business and identified actions to drive focus on its core home improvement business and improve profitability. The company intends to exit its Mexico retail operations and is exploring strategic alternatives. The company has also identified certain non-core activities within its U.S. home improvement business to exit, including Alacrity Renovation Services and Iris Smart Home. These actions are in addition to the previously announced decisions to exit its Orchard Supply Hardware operations, and close 20 underperforming stores in the U.S. and 31 stores and other locations in Canada.      

"Our top priority in the third quarter was positioning Lowe's for long-term success by identifying underperforming or non-core businesses and stores for divestiture," commented Marvin R. Ellison, Lowe's president and CEO.  "With our strategic reassessment substantially completed, we can now intensify our focus on the core retail business.

The $280 million in pre-tax charges recognized in the third quarter and referenced above related to this strategic reassessment, and included the following:

• $123 million of accelerated depreciation and amortization, lease and severance obligations, and other costs related to the decision to close all Orchard Supply Hardware locations;
• $121 million of long-lived asset impairment and severance obligations related to the decision to close certain underperforming stores in the U.S. and Canada and other locations in Canada;
• $22 million of long-lived asset impairment related to the decision to exit retail operations in Mexico, and;  
• $14 million of long-lived asset impairment and inventory write-down related to the decision to exit certain non-core activities, including Alacrity Renovation Services and Iris Smart Home.

Additional pre-tax charges of $460 to $580 million related to these decisions and consisting of lease obligations, accelerated depreciation and amortization, severance and other costs are expected to be incurred in the fourth quarter of fiscal 2018, and have been reflected in the company's updated business outlook.  The amounts, nature and timing of any additional charges associated with the intended exit of its

Mexico retail operations will depend on the plan executed, therefore those amounts are not reflected in the company's updated business outlook. 

Sales for the third quarter increased 3.8 percent to $17.4 billion over the third quarter of 2017, and comparable sales increased 1.5 percent. Comparable sales for the U.S. home improvement business increased 2.0 percent for the third 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 $240 million in the third 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.

"During the quarter, the favorable macroeconomic environment, combined with great values, drove traffic to our stores and website," said Ellison.  "However, continued challenges with inventory out of stocks, poor reset execution, and assortment concerns in certain categories pressured our ability to turn those visits into transactions," Ellison added.  "Rather than chase short-term solutions to these problems, we are redesigning processes and systems to deliver sustainable improvement, and expect to see positive trends as we enter 2019.

"Our transformation will take time, but we have assembled an experienced team and developed a comprehensive plan to make steady progress," Ellison concluded.  "I would like to thank our associates for their hard work and dedication to serving customers."

Delivering on its commitment to return excess cash to shareholders, the company repurchased $620 million of stock under its share repurchase program and paid $390 million in dividends in the third quarter.

As of Nov. 2, 2018, Lowe's operated 2,133 home improvement and hardware stores in the United States, Canada and Mexico representing 214.7 million square feet of retail selling space.

Lowe's Business Outlook

The company has updated its business outlook to reflect charges associated with its strategic reassessment, as well as its expectations for fourth quarter operating results. 

The amounts, nature and timing of any additional charges associated with the intended exit of its Mexico retail operations will depend on the plan executed, therefore those amounts are not reflected in the company's updated business outlook. 

Fiscal Year 2018 (comparisons to fiscal year 2017) 

• Total sales are expected to increase approximately 4 percent.
• Comparable sales are expected to increase approximately 2.5 percent.
• The company expects to add approximately 8 home improvement stores.
• Operating income as a percentage of sales (operating margin) is expected to decrease 240 to 255 basis points², including 135 to 150 basis points from charges associated with its strategic reassessment.
• The effective income tax rate is expected to be approximately 24 percent.
• Diluted earnings per share of $4.08 to $4.24 are expected for the fiscal year ending Feb. 1, 2019.
• Adjusted diluted earnings per share¹ are expected to be $5.08 to $5.13.

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 

For all the very latest news and intelligence on the UK's largest home improvement and garden retailers, sign up for the Insight DIY weekly newsletter.