Q4 2016 Real-Time Call Brief

Highlights

I'm pleased that we delivered a strong quarter with comparable sales of growth of 5.1% exceeding our expectations.

Our comp growth was driven by 4% increase in comp average ticket and a 1.1% increase in comp transactions.

Our U.S. business achieved 5.1% comp for the quarter with positive comps in all 14 regions.

During the quarter, we delivered positive comps in 12 of 13 product categories.

We continue to see strength in our projects specialist interiors program with strong double-digit comp growth this quarter and we posted 25% comp growth on Lowes.com, driven by robust growth in both transactions and ticket.

We also drove continued strong performance in international markets, with double-digit comps in Mexico and mid-single-digit comps in Canada in local currency.

For the quarter, we delivered adjusted earnings per share of $0.86, a 46% increase compared to last year's fourth quarter adjusted earnings per share of $0.59.

Delivering our commitment to return excess cash to shareholders, in the quarter we repurchased $551 million of stock under our share repurchase program and paid $306 million of dividends.

Turning to full year fiscal 2016 results, we delivered comparable sales growth of 4.2% with all regions and product categories achieving positive comps.

Sales growth coupon with our short focus on improving profitablity led to a 21% increase in adjusted earnings per share.

The customer response to our winter wonderland experience was strong driving comps sales increase of 8%.

We drove high single-digit comps in appliances, leveraging our investments and customer expectation both in-store and online.

This quarter, we also delivered high single-digit comps in kitchens.

We achieved high single-digit comps in lawn and garden as customers in the South and West took advantage of warmer weather early in the quarter to complete lawn and garden projects.

We drove 25% comp growth on Lowes.com as well as above average comp growth from our in-home sales program.

Our 15% comp in pneumatics this quarter, driven by our home channel exclusives with Hitachi and Bostitch.

Sales for the fourth quarter were $15.8 billion, an increase of 19.2%.

Total customer transactions grew 15.1%, and total average ticket increased 3.6% to $69.58.

The extra week in the period added roughly $950 million in sales, contributing 7.1% to sales growth.

RONA's sales were approximately $825 million, or 6.2% of sales growth.

Comp sales were 5.1%, driven by an average ticket increase of 4% and transaction growth of 1.1%.

Looking at monthly trends, comps were 4.7% in November, 6.3% in December and 4.2% in January.

We estimate that weather positively impacted comp sales in the quarter by approximately 100 basis points.

New stores drove 80 basis points of growth.

For the year, total sales were $65 billion, an increase of 10.1% driven by comp sales of 4.2%, RONA contributing 3.8% to 53rd week adding 1.6% and new stores.

Gross margin for the fourth quarter was 34.1% of sales, which decreased 25 basis points from Q4 last year.

Gross margin was negatively impacted by RONA due to both purchase, accounting adjustments and the mix of business.

In the quarter, these negatively impacted gross margin by 25 basis points.

SG&A for the quarter was 23.99% of sales, which leveraged 455 basis points.

In last year's fourth quarter, we recorded a $530 million non-cash impairment charge associated with the decision to exit our Australian joint venture.

This year-over-year comparison drove 403 basis points of expense leverage.

In Q4 2016, we experience 59 basis points of benefits leveraged, primarily related to incentive comp as we had lower attainment levels relative to last year.

Somewhat offsetting these items for severance related costs for organizational changes there are part of our comprehensive effort to focus and prioritize resources.

The changes resulted in a charge of $84 million, which cost 53 basis points of deleverage.

Depreciation and amortization for the quarter was $374 million, which is 2.37% of sales and leveraged 44 basis points.

Earnings before interest and taxes or operating income increased 474 basis points to 8.05% of sales.

For Q4, we estimate that the 53rd week EBIT are roughly 30 basis points.

The severance related costs for EBIT by 53 basis points in the quarter.

The rolling impact associated with purchase accounting adjustments the mix of business and integration cost negatively impacted EBIT by 36 basis points in the quarter.

For the quarter, interest expense was a $159 million.

The effective tax rate for the quarter was 40.3%.

Earnings per share was $0.74 for the quarter, including approximately $0.08 from the 53-week.

The charge associated with severance-related cost to current EPS by approximately $0.06.

The impact of the new tax regulation noted a moment ago reduce earnings per share by $0.04.

There was a $0.02 negative impact associated with the Adjusted earnings per share was $0.86, which was 45.8% higher than Q4 2015's adjusted $0.59.

For 2016, adjusted earnings per share of $3.99 were up 21.3% versus 2015.

The extra week in 2016 aided EPS growth by 250 basis points.

Cash and cash equivalents at the end of the quarter was $558 million.

Inventory at nearly $10.5 billion increased $1 billion or 10.6% versus the end of last year.

Just over 60% of the increase related to the addition RONA with the balance to support strong sales growth.

Inventory turnover was 4.05, up 13 basis points to last year.

Asset turnover increased to 5 basis points to 1.85.

Moving on to the liabilities section of the balance sheet, accounts payable of $6.7 billion, represents $1 billion or 18.1% increase over Q4 last year.

At the end of the fourth quarter, lease adjusted debt-to-EBITDAR was 2.21 times.

Return on invested capital was 15.8%.

The impact of the charges hurt ROIC by 154 basis points.

Now looking at the statement of cash flows, annual operating cash flow was $5.6 billion and capital expenditures were $1.2 billion resulting in free cash flow of over $4.4 billion, which was up 24% to last year.

In November, we entered into $190 million accelerated share repurchase agreement, which settled in the quarter for 2.6 million shares.

We also repurchased approximately 5 million shares for $361 million through the open-market.

In total, we have repurchased $551 million of stock in the quarter and $3.5 billion for the year.

In January, our Board of Directors authorized a new $5 billion share repurchase program.

The new program has no expiration date and when combined with our prior share repurchase program, we have approximately $5.1 billion remaining authorization.

In 2017, we expect total sales increase of approximately 5%.

We're forecasting a comp sales increase of approximately 3.5%.

Sales growth to be higher for the first five months until we anniversaried the RONA acquisition which rise about 2% growth.

We plan to open 35 stores, which add approximately 1%.

Total sales growth will be reduced by roughly 1.5% related to the comparison of 52-weeks in 2017 versus 53-weeks in 2016.

On an adjusted basis, we are anticipating an EBIT increase of approximately 50 basis points, driven entirely by expense leverage.

2017, we expect expenses to grow at roughly 60% of sales growth.

Regarding EBIT, a full year RONA results versus roughly 7 months last year will pressure EBIT by an estimated 15 to 20 basis points for 2017.

Effective tax rate is expected to be 37.8%.

For the year, we expect to earnings per share of approximately $4.64, which represents a 16.3% increase over 2016 adjusted EPS.

On a 52-week versus 52-week basis EPS growth will be 240 basis points higher.

This year's first quarter will include one less week of winter and one more week of springs than last year.

While this has no impact on comp sales it does benefit first quarter total sales by approximately $500 million.

The estimated negative impact for the first quarter EBIT is approximately 60 basis points.

We are forecasting free cash flows from operations to be approximately $5.9 billion and capital expenditures of approximately $1.4 billion.

This results in an estimated free cash flow of approximately $4.5 billion for 2017.

Our guidance assumes approximately $3.5 billion from share repurchases in the 2017.