Lowes Corporation as the Retail Business - Essay Example

Introduction to Company: Lowe’s Corporation is engaged in retail business of home improvement that includes property maintenance, decoration, renovation and designing. Its services include appliances, paint, flooring, building materials, lawn & landscape products, fashion plumbing, hardware, lighting and tools, seasonal living, cabinets & countertops, nursery, rough electrical, home environment, and windows & walls. Lowe’s target market include private home owners who require services for their households and commercial clients such as offices, institutions (property and construction firms, banks, franchises etc.) and other organizations. The company has successfully extended its business operations all across America (1649 outlets) and Canada (11 outlets). Business Performance in 2008: Lowe’s, after considering the statistics provided by different relevant institutions estimated that US home improvement retailing market is worth more than $695 billion including both product demand and installed labor opportunity. However, due to the economic downturn within USA, the market size reduced by 7% in 2008. It is also estimated that the market will show some improvement in upcoming 2009 and demand will rebound in late 2010 or early 2011 once the recession is completely over. Lowe’s faces competition with other plumbing, electrical, hardware and electrical manufacturers plus suppliers and with merchandise stores, warehouses and e-businesses. Taking this into account as well tough economic conditions, Lowe’s paid special attention to adopting innovation centered approach to update its machinery by employing modernized and sophisticated technology, improving the store-outlook, productivity and efficiency within the stores by including information systems and store expansion so that it could cater customers all across USA. It must be pinpointed that better employment opportunities and subsequent increase in real personal income, growing housing sector and property ownership are the major determinants that contribute to higher sales. Unemployment rate of 5.7% and negative growth in property sector did affect the sales but the expansion policy (115 new stores in 2008 117,000-square-foot (117K) and 103,000-square-foot (103K) stores for large markets and a 94,000-square-foot (94K) store to serve smaller markets) of top management saved Lowe’s from the negative consequences because of the contribution from new stores in sales revenue that dropped by 7.2%. This reduction would have easily crossed 10-12% if this expansion policy had not been adopted. Expenses were increased considerably because of higher overheads such as leases, rents, salaries, advertising, utilities and others that actually resulted from expansion of stores. The Lowe’s corporation also faced other issues such as foreign currency risks for its various products and materials because it has been importing some products from abroad. Any changes in exchange rates affect company’s ability to absorb price shocks and profitability besides the financial risks and timely delivery of products. The interest rate risk is another factor that could company because it is main contributor in determining company’s finance cost that increased in fiscal year of 2008 compared to 2007. Also company outsource its works to people and vendors all across the world so any conflicts with those vendors or people associated could affect the entire supply chain and distribution of Lowe’s that in addition would sabotage its position, reputation and goodwill in marketplace. Moving towards the explanation of improvement techniques, the corporation adopted the policy of ‘resetting or re-lamping stores at regular intervals to ensure they remained bright’. This is done by inducting new products in portfolio and adding new displays, improving point-of-sale and directional signage, repainting our building exteriors, and re-striping our parking lots’. Secondly, Lowe’s also indulged in a process called remerchandising that ‘focused on moving entire departments, improving adjacencies and enhancing the shopability within the appliances, cabinets & countertops, flooring, fashion plumbing, paint, lighting, and home style & organization departments. In addition, Lowe’s ‘replaced or refurbished all of their selling centers as well as returns and customer service areas of these stores. All new interior graphics, signage, and way- -finding materials were also added to increase shopability and brighten the atmosphere.’  (Company annual report, 2008) Furthermore, in order to attract maximum customers towards Lowe’s products and services, the company placed special focus on improvement in marketing, management, advertising and distribution tactics. Special attention was paid to the Price factor of the marketing mix because it was considered a key to encourage growth of sales and trigger purchase responses. It also enabled the company to clear off its higher inventory levels which would become a headache if the company managers had focused on greater value addition. The Lowe’s introduced the different pricing policies that include “Everyday Low Prices” (through which company charges 10% lesser price than the price charged by a competitor for any product), “New Lower Price” (through which company charges lower prices for some specific products), “Installed Sales” (is about project selling), “Special Order Sales” (Lowe’s offers special products from its wide portfolio) and “Commercial Business Customers” (specifically targets business clients). In addition, Lowe’s has also focused on “credit financing” through which it offers a ‘credit card for retail clients’. Also it offers ‘Project Card that provides a major project, in-store financing solution to complement Lowe’s Consumer Revolving Credit Card.’ (Company annual report, 2008) Analysis of Financial Statements: Income Statements: The net sales decreased slightly to 48,230 in 2008 (ending January 30,2009) compared to 48,283 and 46927 in 2007 and 2006 that shows the strength of company’s strategic and top managers and marketers who were able to maintain a reasonable sales level in a challenging environment when consumers were reluctant to loose their pockets and when property demand in USA touched the lowest prices in past 5 years amid subprime mortgage crises. Cost of sales went slightly up to 31,729 against 31556 in 2007followed by a 0.43% reduction in Gross margin that stood at 16,501. Expenses also increased considerably and this is mainly attributed to a surge in selling, general and administrative expenses, Depreciation and Interest. So EBT fell to 3,506 from a level of 4,511 in corresponding last year resulting in a net profit of 2,195 (4.55% of sales) in 2008 from $2,889 (5.82) millions in 2007. Earning Per Share stood at 1.51$ against 1.9 and Cash dividend at 0.335$ higher than what paid to shareholders last year. Balance Sheets: The total current assets jumped to $9,251 millions including cash and cash equivalents, Short-term investments, Merchandise inventory, deferred income taxes and others of worth 245, 416, 8,209, 166 and 215 respectively whereas fixed assets including property after depreciation, long-term investments and others were 23,435 resulting in a total of 32,686 against 30,869 of 2007. This increase can be attributed to increase in fixed assets that jumped because of new investment in 115 stores and machinery purchases. The current liabilities including short-term borrowings, accounts payable, deferred revenues, accrued employees benefits and salaries, self-insurance and others of worth 987, 4109, 674, 751, 1083 bringing total to 8022$ million (24.5% of sales) in 2008 against 7,751$ last year. Total liabilities stood at 14,631 (44.8% of sales) down from 14,771 in 2007. Total shareholders’ equity stood at $18,055 million (55.2% of sales) compared to 16,098 last year on account of higher retained earning figure. Total equity figure stood at $32686 than 30,869 in 2007 which shows an increase of approximately 6% year-on-year basis. Cash Flow statements: Cash flows from operating activities recorder (in millions $) at 4,122 in fiscal year 2008 compared to 4,347 in 2007 and 4,502 respectively which shows that inflows of cash is reduced amid global recession that resulted in decreased net earnings and a higher inventory at hand because of store expansion programs. Similarly, cash outflow of 3,226 from investing activities remained quite lower than that of previous two years and decreased surprisingly by an average 20% although the company was busy in expansion, reset and remerchandising programs, improvements in business infrastructure such as in distribution network and in information systems to improve layout, organizational efficiency, customer attraction towards stores and quality of services to get an edge over competitors. Cash outflows from financing activities jumped to 939 amid expansion programs and overall cash and cash equivalents represent a positive 245 level although 12% and 28% approximately lower than what company achieved in 2007 and 2006 respectively. Property acquisitions were $3.3 billion, $4.0 and $3.9 billion in 2008, 2007 and 2006 respectively. In March 2008 Lowe’s conducted an repurchase of nearly $187 and 164$ million of principal and carrying amount respectively of senior convertible notes originally issued in October 2001 and then redeemed in June 2008 for 392 and 343 million US dollars respectively in an attempt to convert debt into equity. Cash dividend for 2008 stood at $0.085 per share. The cash flows from business operations were a major source of liquidity which is further supported by the short-term borrowing. Lowe’s has a $1.75 billion senior credit facility that expires in June 2012. Also, Lowe’s had a Canadian dollar (C$) denominated credit facility in the amount of C$200 million that expired March 30, 2009. This facility was availed in order to expand business by building new stores in Canada and to finance the machinery and other capital expenditures incurred during the expansion stage. The total shareholders’ equity in 2007 was 16,098 in which when added net income of 2,181 and others whereas subtracted cash dividend of 491$ millions, it resulted in a total of 18,055$ million balance on January 30, 2009. At January 30, 2009, Lowe’s has contractual obligations (of less than a year, 1-3, 4-5 and over 5 years) including long-term debts, Capital lease obligations, Operating leases and Purchase obligations of approximately $16,979 millions and commercial commitments (of less than a year, 1-3, 4-5 and over 5 years) including Letters of credit of nearly $224 millions. Lowe’s Business Outlook 2009: According to a press release issued on February 20, 2009 to announce Lowe’s 2008 fourth quarter financial results, Lowe’s has an inclination to expand its business operations by opening at least 60 to 70 new stores to improve its market presence and to accomplish its aim to cater potential customers in every area of USA. This would help company to enhance its sales revenue and to get a competitive advantage over its rivals. However, it is worthwhile to mention that since Lowe’s sales are directly associated with overall economic growth, employment and inflation factors; therefore, the company was hard-hit by USA’s negative economic growth and financial crunch situation that adversely affected its overall sales in fiscal year 2008. The company is cautious in stores expansion and is only willing to open 60-70 new stores against 115 outlets in 2008 because it expects that US economy would take some time to completely come out of recession so there is greater probability that Lowe’s total sales in 2009 would range from a decline of 2% to an increase of 2% and comparable store sales to decline 4% to 8%. It must be highlighted that Lowe’s expects its store opening costs to be approximately $50 million and earnings per share of $1.04 to $1.20 for fiscal year ending January 29, 2010. The company is not interested in purchasing any treasury stock.   (Company annual report, 2008) Lowe’s 2009 capital budget is estimated at $2.5 billion that includes lease commitments of worth $300 million bringing net outflow to 2.2 billion of which almost 70% is aimed to be invested in business expansion to increase sales revenue. It is planned to that Lowe’s will own 98% of its all 2009 projects. In simple words, the company owned and operated 14 RDCs and 15 FDCs for the handling of lumber, building materials and other long-length items.  The company will continue to face tough economic conditions in market because of increase in average unemployment rate of 8.6% for 2009, below average housing prices, overall US economic budget deficit and changes in demand/supply equilibrium endorses the fact that sales will go down although ‘real disposable personal income will continue’ to grow at a projected annual increase of 1.7%, calculated from 1960 to 2008’. To become competitive and grapple with this scenario, Lowe’s will strongly focus on cost-cutting procedures through which it could rationalize its selling, general and administrative expenses, maintenance and others. Also, the company would improve ‘performance improvement’ programs for employees so that higher productivity could lead to economies of scale and lesser per unit cost. It must be highlighted that company will continue expanding its operations within USA and Canada as well as would open 2 new stores in Mexico in an attempt to become truly global. (Company annual report, 2008) References: No author (2009). Lowe’s Annual Sec 10-K report 2008. Investor.shareholder.com Available at http://investor.shareholder.com/lowes/secfiling.cfm?FILINGID=60667-09-36& Read More