DBRS Confirms Lowe’s Companies, Inc. at A (low), R-1 (low)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Lowe’s Companies, Inc. (Lowe’s or the Company) at A (low) and its Short-Term Rating at R-1 (low), all with Stable trends. The confirmation of the ratings reflects strengthening of Lowe’s operating performance balanced by its use of incremental debt to fund increasing shareholder returns, and the recent acquisition of RONA Inc. (RONA). The ratings reflect the Company’s strong brand and its number two position in an intensely competitive and cyclical U.S. home improvement retail market. The ratings also consider the mature and largely saturated nature of Lowe’s core market and incorporate the Company’s stated financial management guidelines.

Lowe’s maintained steady growth in its sales (primarily because of robust growth in comparable sales) and earnings in F2015 and the trend continued in the first quarter of F2016. Lowe’s EBITDA tracked the growth in net sales and benefited from operating leverage to increase to $7 billion in F2015 ($6.3 billion in F2014).

In February 2016, Lowe’s announced that it entered into a definitive agreement to acquire all issued and outstanding common shares of RONA (transaction valued at $2.4 billion). Prior to the closing of the transaction on May 20, 2016, the Company raised $3.3 billion of debt in the first quarter of F2016 to finance RONA’s acquisition, and to partly refinance maturing debt. Consequently (as forecast by DBRS at the time of its last review of the Company in February 2016) Lowe’s lease-adjusted debt-to-EBITDAR increased to 2.38x as at the end of Q1 of F2016. DBRS believes that this reflects a temporary increase in Lowe’s financial leverage due to the acquisition. At the time DBRS confirmed the ratings despite the risks associated with the effective integration of RONA, based on the relatively modest magnitude of the transaction and the temporary increase in financial leverage.

Going forward, DBRS forecasts that the Company’s consolidated cash from operations will be approximately $5.25 billion to $5.75 billion in F2016. In this period, the Company is expected to incur about $1.5 billion capex primarily for new stores, existing store remodels, IT investments and supply-chain improvements. With dividend payout likely to be moderately higher than the previous year, DBRS estimates that, in F2016, the Company will generate free cash flow (after dividends but before changes in working capital) of about $2.50 billion to $3.00 billion. In view of the Company’s ongoing share repurchase program, DBRS anticipates that the Company will repurchase approximately $3.5 billion of shares in F2016, financed with a combination of free cash flow and incremental debt. That said, steady growth in Lowe’s operating earnings will enable it to reduce financial leverage to between 2.00x and 2.25x and within the range of the current rating category in approximately one year’s time.

Overall, should Lowe’s be challenged to maintain credit metrics in a range acceptable for the current A (low) rating because of weaker-than-expected consolidated operating performance and/or more aggressive-than-expected financial management, the current ratings could be pressured.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.