FINANCIAL STATEMENT ANALYSIS PROJECT

ON

LOWE’S

By

Kanishka Sarkar (KXS180028 – SYSM 6337.501)

Shruti Mathur (SXM180069 – ACCT 6305.002)

Industry: LOWE’S is a home improvement company

About Lowe’s:

Founded in 1921, Lowe’s business had focused primarily on selling materials to contractors and serve

the needs of DIY consumers. Lowe’s increased the customer base by the introduction of home

centers, paint stores, lumber yards, and garden centers, upscale product line, home appliances and

installation services. Lowes operations included 1,723 stores located across U.S. as well as 279 stores

in Canada. Lowes acquire a Canadian store RONA INC. in 2016.

LOWE’S has 3 broad categories:

o Product line and Home appliances

o Primary provider to contractors

o Installation services

Risk factors for LOWE’S:

1. Unable to adapt business concept in a rapidly evolving retail environment to address the changing

shopping habits, demands and demographics of the customers.

2. Business and reputation adversely affected by cybersecurity incidents that could lead to failure to

protect customer, employee, vendor and company information.

3. Fail to hire, train, manage and retain qualified sales associates and specialists with expanded skills

could lead to lose sales to the competitors.

4. Financial performance could be adversely affected if management of information systems

disrupts or fails to properly maintain, improve, upgrade and expand.

5. Sales dependent upon the health and stability of the general economy. Any adverse changes in

economic factors may negatively impact the rate of growth of total sales and comparable sales.

6. If the public image and reputation are damaged it could negatively impact the company’s

relationship with customers, vendors and store associates and specialists and results of operations.

Two most important the investors should consider while investing in Lowes would be:

1. The public image and reputation of Lowes with the customers, vendors and suppliers.
 2. Customer information is confidential to the company and any cybersecurity threat could damage

the information system. Therefore, it is necessary to comply with evolving regulations relating to

obligation to protect the systems, assets and other such information.

LOWE’S Key Financial Characteristics:

Value of Total assets for 2018 is $34,508 M

ROE: Net Income / Shareholder’s equity = $2314 M / $3644 M = 63.5 %

Debt-to-Equity: Total liabilities/Shareholder’s equity = $30864 M / $3644 M = 8.47

Net Income: $2,314 M

Company’s average growth over 2 years is calculated by averaging 3.9% for 2018 and 2.4% for 2017

which comes out to be 3.15%.

Cash Flow Volatility for 3 years is:

Standard deviation of operating cash flow / average sales i.e. $62691.69 M

Year Operating Expenses Net Sales Operating Efficiency

2017 $ 15848 M $ 68619 M 23.1%

2018 $ 18890 M $ 71309 M 26.5 %

Since the operating efficiency is increased from 2017 to 2018 therefore, we can say that the company is

not performing well in terms of store management, inventory and customer satisfaction.

Debt LOWE’S hold outside its balance sheet:

Lowes do not have any off-balance sheet financing that has, or is reasonably likely to have, a current

or future material effect on financial condition, cash flows, results of operations, liquidity, capital

expenditures or capital resources.

LOWE’S Inventory:

1. Net inventory reported in 2018 is $12,561 M.

2. With strategic reassessment which included realigning the portfolio to improve the focus and

eliminate the underperforming and non-core assets i.e. the assets that are no longer used in

company’s business operations.

3. Focused the supply chain transformation in improving the omni-channel customer experience by

optimizing the network of assets in the distribution system as well as the flow product between

those assets to drive the topline growth and cost efficiencies.

4. Optimizing order management, fulfillment and delivery to ensure efficient flow of inventory with

the required network and capacity to meet the needs of the customers.

5. By end of 2019, standing up systems and processes to have better visibility of product coming

into the network as well as product location as it moves through the network, to improve in-stock

position.

6. Simplify store operations to provide a better customer experience.

7. Invest in job lot quantities to ensure the right inventory depth at the store level to meet Pro

customer needs (account for half of the U.S. home improvement product market).

Customer (AR) Turnover

There are no Account Receivable (AR) for 2018.

How LOWE’S business model is sustainable:

1. Based on the data provided in this memo the company is commercially successful since the total

assets value is $34,508 M which is greater than total liabilities i.e. $30,864 M.

2. The company is future ready with $12,561 M of inventory.

3. The company is socially responsible and sustainable as they have taken many steps towards being

socially responsible, some of them are stated below:

i. To ensure high quality products from suppliers they have established a management

system to monitor the suppliers who also support worker rights and protect environment.
 ii. Offer assorted rebates for a variety of environmentally efficient products.

iii. Published and updated wood sourcing policy to ensure that all wood products in the store

originate from well-managed, non-endangered forests.

iv. Implemented a safer chemical policy through a number of strategic actions and

commitment.

Market Capitalization for 2018:

Market Capitalization for Lowe’s has been calculated using the following formula:

Avg. Price paid per share * Total number of shares purchased + Dollar value of shares that yet to be

purchased under the plans or programs

91.19*5453765 = $ 1.444210606*10^10

Stock price volatility in over the three months is given below in the table:

Month Avg. Price Paid Per Share

November 3,2018 - November 30,2018 90.33

December 1,2019-January 4,2019 91.19

January 5,2019-February 1,2019 94.56

Since there isn’t much change in the avg price of share, the stock is less volatile to changes in the business.

Stockholder’s equity for 2018 is $ 3644 M

Market capitalization is different from stockholders’ equity for the following reasons:

1. We can see with the figures above that the market capitalization is higher than stockholder equity

reason being investors figure in factors such as company’s expected future earnings from growth

and expansion.

2. Market cap is total dollar value of all outstanding shares of a company and stockholder equity is

company’s assets minus its liabilities.

LOWE’S engagement in events:

On 23rd June of 2017, Lowe’s completed the acquisition of Maintenance Supply Headquarters, a

leading supplier of maintenance, repair and operations products serving the housing industry. The

Acquisition related costs were expensed as they incurred and is said to be not significant. The net

assets acquired is said to be $ 513 M.

Intangible assets acquired by Lowe’s came out to be $259 M which includes a trademark of $34 M

having a useful life of 15years. A customer list is also included which was priced at $225 M with a

useful life of 20 years. A goodwill of $160 M is attributed to the synergies associated with the

intangible acquisitions.

Financial Statement used:

The company did not engage in M&A. The company engaged in sales/purchase of tangible assets,

stock-by backs and goodwill impairment. This question is answered from cash flow statement.

Company Dividends:

Company paid the cash dividends with a rate per share to be $1.78. Total cash dividends payments

for 2018 is $ 1,455 M.

Depreciation Method followed by LOWE’S:

The company follows the straight-line method of depreciation. The advantage of using the straight-

line depreciation method is that the depreciation charged for the entire life of that asset is equal for

every year. According to the financial statement released by Lowe’s, Average age of the tangible

asset comes out to be 58.32% The company has not changed their method of depreciation in the last

three years.

Is LOWE’S innovating internally:

As per 2018 annual report, Lowes did not invest in R&D productivity. However, Lowes Innovation

Labs is responsible for innovating solutions towards the society.

LOWE’S Effective Tax Rate:

The effective tax rate for Lowe’s is 31.8%. In a progressive tax system, income is taxed at different

rate at different income thresholds, effective tax rate gives a accurate picture of the tax since it is an

average.

Social Responsibility and Sustainability Performance:

In annual report 2018 for Lowe’s, the company mentions about the responsibility towards social and

environmental factors. For fiscal 2018, the Board of Directors created a Sustainability Committee

that oversees the sustainability and environmental matters and monitors related trends and risks. The

major focus was sourcing, offering safe and eco-friendly products, maintain diverse, healthy,

engaged and skilled workforce, supporting local communities and operate ethically and responsibly.

1. Products undergo a rigorous selection process, beginning with sourcing decisions.

2. Offer assorted rebates for a variety of environmentally efficient products.

3. Published and updated wood sourcing policy to ensure that all wood products in the store

originate from well-managed, non-endangered forests.

4. Implemented a safer chemical policy through a number of strategic actions and commitments.

5. Upgraded to LED lighting for sustainable practices. Signed renewable energy agreement

comprised of 100 megawatts of renewable wind energy in 2018.

6. Provide in-store recycling centers for customers to bring in compact fluorescent lamp bulbs,

plastic bags and rechargeable batteries.

Recommendation

With the provided data about the company’s inventory, social responsibility, total assets, less stock

price volatility the investors should buy company’s stock at current market price.