Lowe's takes $126 million hit

Don Hogsett, May 24, 2004

Helped by sharply stronger same-store sales, first-quarter profits at Lowe's Companies Inc. advanced 8.1 percent, to $455 million from $421 million last year.

Profits would have soared substantially higher, 38 percent, to $581 million, but for a $126 million one-time charge stemming from a change in accounting for vendor allowances. Underlying the importance of vendor allowances to a retailer's bottom line, the $126 million represented almost 22 percent of Lowe's entire profit before the one-time charge.

Sales at the home-improvement specialist were up 22 percent, to $8.7 million from $7.1 million a year ago. More importantly, same-store sales jumped 9.9 percent.

"Strength in every product category and across every geographic region drove solid earnings growth in the first quarter," said Robert Niblock, Lowe's president. "Continued strong sales in big-ticket categories, such as outdoor power equipment and kitchen cabinets, are an indication that consumers are not only willing, but are enthusiastic about investing in products and projects that maintain and enhance their greatest asset — their home."

Under the change in accounting rules, vendor allowances, which in the past had been used to reduce SG&A expenses, are now used to reduce the cost of goods, boosting average gross margin. In this case, the change had the effect not only of increasing margins, but skewing expenses sharply higher this year versus last year.

As a result of the change, average gross margin widened to 33.1 percent from 31.2 percent a year ago. Costs correspondingly shot to 21.3 percent of sales from 18.2 percent last year.

Looking ahead, Lowe's said it expects sales to rise about 19 percent during the second quarter, with same-store sales rising 6 to 7 percent.

Lowe's Companies Inc.

Qtr. 4/30 (x000) 2004 2003 % chg
a-First-quarter results include $22 million in store opening expenses, compared with $19 million in the same period a year ago; and a $126 million one-time charge stemming from a change in accounting for vendor allowances. Excluding the charge, earnings jumped 38 percent, to $581 million from $421 million the preceding year. The prior-year period includes $2 million in earnings from discontinued operations.
Sales $8,681,000 $7,118,000 22.0
Oper. income (EBIT) 1,017,000 920,000 10.5
Net income 455,000a 421,000a 8.1
Per share (diluted) 0.57 0.53 7.5
Average gross margin 33.1% 31.2%
SG&A expenses 21.3% 18.2%

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