UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-7898
LOWE'S COMPANIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0578072
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
P.O. BOX 1111, NORTH WILKESBORO, N.C. 28656
(Address of principal executive offices)
(Zip Code)
(336) 658-4000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 28, 1998
Common Stock, $.50 par value 352,519,932
65
TOTAL PAGES
LOWE'S COMPANIES, INC.
- INDEX -
Page No.
PART I - Financial Information:
Consolidated Balance Sheets - July 31, 1998,
August 1, 1997 and January 30, 1998 3
Consolidated Statements of Current and
Retained Earnings - quarter and six months
ended July 31, 1998 and August 1, 1997 4
Consolidated Statements of Cash Flows - six
months ended July 31, 1998 and August 1, 1997 5
Notes to Consolidated Financial Statements. 6-7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 8-10
Independent Accountants' Report 11
PART II - Other Information 12-13
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 (a) - Exhibits
Item 6 (b) - Reports on Form 8-K
EXHIBIT INDEX 14
Lowe's Companies, Inc.
Consolidated Balance Sheets
In thousands
Lowe's Companies, Inc.
Consolidated Statements of Current and Retained Earnings
In Thousands, Except Per Share Data
Lowe's Companies, Inc.
Consolidated Statements of Cash Flows
In Thousands
Lowe's Companies, Inc.
Notes to Consolidated Financial Statements
Note 1: The accompanying Consolidated Financial Statements (unaudited) have
been reviewed by an independent certified public accountant, and in
the opinion of management, they contain all adjustments necessary to
present fairly the financial position as of July 31, 1998, and the
results of operations for the quarters and six months ended July 31,
1998 and August 1, 1997, and the cash flows for the six months ended
July 31, 1998 and August 1, 1997.
These interim financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 30, 1998.
On May 29, 1998, the Board of Directors declared a two-for-one stock
split on the Company's common stock. As a result, one additional
share was issued on June 26, 1998 for each share held by shareholders
of record on June 12, 1998. Par value remained unchanged at $.50 and
$88.0 million was transferred to common stock from capital in excess
of par as of the record date. The accompanying Consolidated Financial
Statements, including per share data, have been adjusted to reflect
the effect of the stock split.
Diluted earnings per share are calculated on the weighted average
shares of common stock as adjusted for the dilutive effects of stock
options outstanding during the period. The dilutive effects of stock
options were incremental shares of 1,746,000 and 136,000 for the
quarters and 1,591,000 and 135,000 for the six months ended July 31,
1998 and August 1, 1997, respectively. Weighted average shares
outstanding, as adjusted for dilution, were 353,740,000 and
348,243,000 for the quarters ended July 31, 1998 and August 1, 1997,
respectively, and 353,104,000 and 347,642,000 for the six months ended
July 31, 1998 and August 1, 1997, respectively.
Note 2: The Company has a cash management program which provides for the
investment of excess cash balances in financial instruments which have
maturities of up to five years. Investments with original maturities
of three months or less when purchased are classified as cash
equivalents. Investments with a maturity of between three months and
one year from the balance sheet date are classified as short-term
investments. Investments with maturities greater than one year are
classified as long-term.
At July 31, 1998 and August 1, 1997, the Company had no derivative
financial instruments.
Note 3: Net interest expense is composed of the following (in thousands):
Note 4: Inventory is stated at the lower of cost or market using the last-
in, first-out inventory accounting method. If the first-in, first out
method of inventory accounting had been used, inventories would have
been $64.6 million higher at July 31, 1998, $80.2 million higher at
August 1, 1997 and $67.6 million higher at January 30, 1998.
Note 5: Property is shown net of accumulated depreciation of $901.4 million
at July 31, 1998, $708.3 million at August 1, 1997 and $789.8 million
at January 30, 1998.
Note 6: Supplemental disclosures of cash flow information (in thousands):
Note 7: In January 1998, the Board of Directors authorized the funding of the
Fiscal 1997 ESOP contribution primarily with the issuance of new
shares of the Company's common stock. During the first half of Fiscal
1998, the Company issued the post-split equivalent of 1,232,485
shares, with a market value of $44.9 million.
Note 8: In February 1998, the Company issued $300 million of 6.875% Debentures
due February 2028. The debentures were issued at an original price of
$987.20 per $1,000 principal amount, which represented an original
issue discount of .405% payable at maturity and an underwriters'
discount of .875%. The debentures may not be redeemed prior to
maturity.
Note 9: Total comprehensive income, comprised of net earnings and unrealized
holding gains (losses) on available-for-sale securities, was $165.5
and $126.7 million for the quarters ended July 31, 1998 and August 1,
1997, respectively, and $259.8 and $197.3 million for the six months
ended July 31, 1998 and August 1, 1997, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements
and notes thereto included in the Company's most recent Form 10-K.
For the second quarter of fiscal 1998, sales increased 22% to $3.4 billion,
comparable store sales had a 6% gain and net earnings increased 31% to $165.4
million compared to last year's second quarter results. For the large store
group (more than 80,000 square feet), comparable store sales increased 7.5%
compared to last year's second quarter. Diluted earnings per share were $.47
compared to $.36 for the comparable quarter of last year. For the six months
ended July 31, 1998, sales increased 21% to $6.3 billion, net earnings
increased 32% to $259.8 million and diluted earnings per share were $.74
compared to $.57 in the first six months of fiscal 1997. Comparable store
sales increased 5.5% year-to-date, while comparable sales for the large store
group increased 7.5%.
The sales increase in the second quarter was partially attributable to the
addition of 6.9 million square feet of retail selling space at new and
existing locations since last year's second quarter. Additionally, sales
performances in our basic businesses were strong for the quarter. The Company
experienced strong sales increases in tools, outdoor hardlines, appliances,
kitchen cabinets and home decor categories.
Gross margin was 26.36% of sales for the quarter ended July 31, 1998
compared to 26.04% for last year's comparable quarter. Of the 32 basis point
increase in gross margin rate, 12 basis points were due to favorable changes
in product mix and ongoing store pricing disciplines. The other 20 basis
points were due to deflation in inventory costs resulting in a LIFO credit of
$3.0 million in this year's second quarter compared to a charge of $3.1
million in last year's second quarter. Gross margin for the six months ended
July 31, 1998 was 26.29% versus 26.01% last year. The 28 basis point increase
in gross margin rate consisted of 12 basis points related to favorable changes
in product mix and continuing store pricing disciplines and 16 basis points
resulting from a LIFO credit of $3.0 million for the first six months of
fiscal 1998 compared to a LIFO charge of $5.6 million for the comparable
period last year.
Selling, general and administrative expenses (SG&A) were 15.91% of sales
versus 15.93% in last year's second quarter. SG&A and sales both increased
22% for the quarter. Although the control of store payroll and general office
expenses provided positive leverage in SG&A for the second quarter, these
decreases were offset by increases in rent expense due to the higher
percentage of new store leases being operating leases rather than capital
leases. These increases in rent expense have a corresponding reduction in
depreciation and interest expense. For the six months ended July 31, 1998,
SG&A was 16.78% of sales versus 16.87% for the first six months of fiscal
Expense controlsspecifically relating to store payroll and general office
expenses contributed to the positive leverage in SG&A for the first six
months of 1998.
Store opening costs were $15.0 million for the quarter ended July 31, 1998
compared to $12.3 million last year, representing costs associated with the
opening of 15 stores during the current year's second quarter (8 new and 7
relocated) compared to 9 stores for the comparable period last year (4 new
and 5 relocated). Charges in this quarter for future and prior openings were
$5.4 million compared to $5.5 million in last year's second quarter. Charges
totaling $3.6 and $1.7 million related to stores opening in the
second quarter 1998 and 1997, respectively, were expensed prior
to the respective quarter. For the six months ended July 31, 1998, store
opening costs were $26.3 million versus $20.5 million last year, representing
costs associated with the opening of 24 stores this year (15 new and 9
relocated) compared to 17 stores in the comparable period last year (10 new
and 7 relocated). The Company's 1998 expansion plans are discussed under
"Liquidity and Capital Resources" below.
Depreciation was $66.3 million for the quarter ended July 31, 1998 and
$131.0 million for the six months then ended. This is an increase of 13% and
14% over the respective comparable periods last year. The increase is due
primarily to additions of buildings, fixtures, displays and computer equipment
relating to the Company's expansion program.
Interest expense increased by $1.2 and $3.6 million to $17.2 and $36.9
million for the second quarter and six months ended July 31, 1998,
respectively. Interest has increased primarily due to interest expense on
medium-term notes and debentures issued since last year's second quarter.
The Company's effective income tax rate was 36.25% for the quarter ended
July 31, 1998 and 35.77% for last year's second quarter. The effective rate
was 36.25% compared to 35.85% for the six months ended July 31, 1998 and
August 1, 1997, respectively. The higher rate in 1998 is primarily related to
expansion into states with higher state tax rates.
The "Year 2000 Problem" arose because many existing computer programs use
only the last two digits to refer to a year. If not addressed, computer
programs that are date sensitive may not have the ability to properly
recognize dates in year 2000 and beyond. The result could be a temporary
disruption of operations and the processing of transactions. The Company has
completed an analysis of the impact and costs relating to the Year 2000
Problem and has developed an implementation plan to address the issue. The
implementation plan is scheduled to be substantially complete by the end of
1998, with continued testing of compliance throughout 1999. Additionally, the
Company will soon send year 2000 questionnaires to merchandise vendors and
other entities with which the Company conducts business in order to assess
whether they are year 2000 compliant or have adequately addressed their system
conversion requirements. The Company cannot predict how many, if any, of the
responses it receives may prove later to be inaccurate or overly optimistic.
As a result, the Company has begun developing contingency plans to address
unanticipated interruptions or down time in both the Company's and third
parties' systems and services. Costs to convert the Company's systems are not
estimated to be material and are being expensed as incurred. As of July 31,
1998 the Company is more than 50% complete with its implementation plan. The
Company is continuing to closely monitor adherence to the implementation plan
and is currently satisfied that it will be adequately completed in the
scheduled time frame. If the Company encounters unforeseen complications or
issues not previously addressed in the comprehensive plan, additional
resources from internal and external sources would be committed to complete
the necessary conversions in the required time frame. Since the use of these
additional resources is considered unlikely, no estimates as to the costs of
them have been made at this time.
LIQUIDITY AND CAPITAL RESOURCES
Primary sources of liquidity are cash flows from operating activities and
certain financing activities. Net cash provided by operating activities was
$451 million for the six months ended July 31, 1998 compared to $302 million
for the first six months of fiscal 1997. The $149 million increase in the
current year resulted primarily from increased earnings and a smaller use of
cash in 1998 for the
increase in inventory net of the larger increase in accounts payable. The
Company's working capital was $1.0 billion at July 31, 1998 compared to $673
million at August 1, 1997 and $660 million at January 30, 1998.
The primary component of net cash used in investing activities continues to
be new store facilities in connection with the Company's expansion plan. Cash
acquisitions of fixed assets were $372 million and $322 million for the six
months ended July 31, 1998 and August 1, 1997, respectively. At July 31, 1998,
the Company had 457 stores in 26 states and 38.8 million square feet of retail
selling space, a 22% increase over the selling space as of August 1, 1997.
Cash flows provided by financing activities were $263 million for the six
months ended July 31, 1998 compared to $110 million for the six months ended
August 1, 1997. Net proceeds from borrowings (long-term and short-term) were
$292 million for the first six months of fiscal 1998 versus $145 million for
the comparable period last year. In February 1998, the Company issued $300
million principal amount of 6.875% Debentures due February 15, 2028. The
debentures may not be redeemed prior to maturity.
Property has increased as a result of the Company's plan to continue
expansion of retail sales floor square footage by expanding into new markets
and relocating from older, smaller stores to larger stores. The Company's
1998 capital budget is approximately $1.4 billion, inclusive of approximately
$400 million in operating or capital leases. More than 80% of this planned
commitment is for store expansion. Expansion plans for 1998 consist of
approximately 75 to 80 new stores with about 60% in new markets and the
balance being relocations of existing stores, the combination of which will
increase retail selling space by approximately 20%. Approximately 30% of the
1998 projects will be leased and 70% will be owned. Expansion in the first
six months of fiscal 1998 included 15 new stores and 9 relocations
representing 2.3 million square feet of new incremental retail space.
The Company believes that funds from operations, funds from debt issuances,
leases and existing credit agreements will be adequate to finance the 1998
expansion plan and other operating needs.
As discussed in the annual report for the year ending January 30, 1998, the
Company's major market risk exposure is the potential loss arising from
changing interest rates and its impact on long-term investments and long-term
debt. The Company's policy is to manage interest rate risks by maintaining a
combination of fixed and variable rate financial instruments. The risks
associated with long-term investments at July 31, 1998 have not changed
materially since January 30, 1998. Long-term debt has increased primarily due
to the issuance of $300 million principal amount of 6.875% Debentures due
February 15, 2028. Disclosures of the Company's principal cash outflows for
long-term debt and related interest rates have changed since January 30, 1998
due to the new fixed rate debt.
FORWARD-LOOKING STATEMENTS
This Securities and Exchange Commission Form 10-Q may include "forward-
Looking statements" within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
Important factors that could cause actual results to differ from expectations
include, but are not limited to, general economic trends, availability and
development of real estate for expansion, commodity markets, and the nature of
competition and weather conditions, all which are described in detail in the
Company's 1997 Annual Report.
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Lowe's Companies, Inc.
North Wilkesboro, North Carolina:
We have reviewed the accompanying consolidated balance sheet of Lowe's
Companies, Inc. and subsidiary companies as of July 31, 1998, and the related
consolidated statements of current and retained earnings for the quarter and
six months ended July 31, 1998 and August 1, 1997, and of cash flows for the
six months ended July 31, 1998 and August 1, 1997. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Lowe's Companies, Inc. and
subsidiary companies as of January 30, 1998, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated February 19, 1998, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of January 30, 1998 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
August 11, 1998
Part II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.
(a)-The annual meeting of shareholders was held May 29, 1998.
(b)-Directors elected at the meeting: Richard K. Lochridge, Peter C.
Browning, Leonard L. Berry, Paul Fulton, James F. Halpin and Robert L.
Tillman
-Incumbent Directors whose terms expire in subsequent years are: William
Andres, John M. Belk, Carol A. Farmer, Leonard G. Herring, Claudine
B. Malone, Robert G. Schwartz and Robert L. Strickland
(c)-The matters voted upon at the meeting and the results of the voting
were as follows:
Item 6 (a) - Exhibits
(3.1) Restated and Amended Charter, June 3, 1998
(3.2) Bylaws, as Amended and Restated May 28, 1998
Refer to the Exhibit Index on page 14.
Item 6 (b) - Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended July
31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOWE'S COMPANIES, INC.
September 14, 1998 /s/ Kenneth W. Black, Jr.
Date ___________________ _________________________________________
Kenneth W. Black, Jr.
Vice President and Corporate Controller
EXHIBIT INDEX
Page No.
Exhibit 3.1 - Restated and Amended Charter, June 3, 1998 15 - 49
Exhibit 3.2 - Bylaws, as Amended and Restated May 28, 1998 50 - 65