Monday, February 22, 2010

With moderating CAPEX, Lowe's will boost cash flow. (LOW)

Home improvement retailer Lowe's (LOW) beat earnings this morning.  Guidance for the coming quarter was a bit weak, largely due to severe weather throughout the country, and its impact on projects.

Impressively, Lowe's had its highest annual gross margin in company history during 2010, as they fought back in a tight-fisted environment by offering their customers products across the price spectrum.  Yep, the trade down effect happens in faucets too...

In 2010, they will face cost headwinds, as multiple states have raised  - even doubled - unemployment insurance rates.  Also hitting the cost side will be ongoing - yet critical - spending to improve the customer experience, in part by having more employees to serve the customer.

Based on the company's moderating store expansion plans for 2010 - they're slowing square footage growth to +2% compared to +3.5% in 2009 - capital expenditures should moderate considerably, allowing for a potential 7%ish Free Cash Flow Yield.  Not massive by any means, but not bad at all for a company still expanding.

The biggest negative for me is the announcement of a huge stock buyback, to the tune of $5billion.  I would much rather see them use this money for a dividend increase.  The logic is that if things turn south, the buyback can be halted with less negative PR than a reduced dividend, but their share repurchases haven't been profitable in the past, I don't know why they would be in the future...

Copyright 2010 AlphaNinja

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