Lowe's "Never Stop Improving" Annual Report Strategy Presentation

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Information about Lowe's "Never Stop Improving" Annual Report Strategy Presentation

Published on March 13, 2014

Author: paigeesinger

Source: slideshare.net


Slide presentation of Lowe's Home Improvement Annual Report strategy, created by Curran & Connors.

Strategy Overview

Forward Looking Language This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Statements of the Company’s expectations for sales growth, comparable sales, earnings and performance, shareholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, the Company’s strategic initiatives and any statement of an assumption underlying any of the foregoing, constitute “forward-looking statements” under the Act. Although we believe that the expectations, opinions, projections, and comments reflected in these forward-looking statements are reasonable, we can give no assurance that such statements will prove to be correct. A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to, changes in general economic conditions, such as continued high rates of unemployment, interest rate and currency fluctuations, higher fuel and other energy costs, slower growth in personal income, changes in consumer spending, changes in the rate of housing turnover, the availability and increasing regulation of consumer credit and of mortgage financing, inflation or deflation of commodity prices, and other factors which can negatively affect our customers, as well as our ability to: (i) respond to adverse trends in the housing industry, such as the psychological effects of lower home prices, and in the level of repairs, remodeling, and additions to existing homes, as well as a general reduction in commercial building activity; (ii) secure, develop, and otherwise implement new technologies and processes designed to enhance our efficiency and competitiveness; (iii) attract, train, and retain highly-qualified associates; (iv) manage our business effectively as we adapt our traditional operating model to meet the changing expectations of our customers; (v) maintain, improve, upgrade and protect our critical information systems; (vi) respond to fluctuations in the prices and availability of services, supplies, and products; (vii) respond to the growth and impact of competition; (viii) address changes in existing or new laws or regulations that affect consumer credit, employment/labor, trade, product safety, transportation/logistics, energy costs, health care, tax or environmental issues; and (ix) respond to unanticipated weather conditions that could adversely affect sales. In addition, we could experience additional impairment losses if the actual results of our operating stores are not consistent with the assumptions and judgments we have made in estimating future cash flows and determining asset fair values. For more information about these and other risks and uncertainties that we are exposed to, you should read the “Risk Factors” and “Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K to the United States Securities and Exchange Commission (the “SEC”) and the description of material changes therein or updated version thereof, if any, included in our Quarterly Reports on Form 10-Q. The forward-looking statements contained in this document are based upon data available as of the most recent quarterly release or other specified date and speak only as of such date. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf about any of the matters covered in this release are qualified by these cautionary statements and the “Risk Factors” included in our Annual Report on Form 10-K to the SEC and the description of material changes, if any, therein included in our Quarterly Reports on Form 10-Q. We expressly disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, change in circumstances, future events, or otherwise. 1 Strategy Overview

Key Messages • We have been focused on improving our core business to compete more effectively in the near-term • We remain committed to satisfying customers’ needs whenever and wherever they choose to engage with us • We will differentiate ourselves by delivering better customer experiences than any other home improvement provider • We continue to evaluate opportunities in new and existing international markets • We are well-positioned to deliver top-line growth, increased profitability and strong cash flows, enabling us to continue making necessary investments while returning cash to shareholders 2 Strategy Overview

Business Overview* United States • ~$640 billion home improvement market Lowe’s Home Improvement • 1,717 stores with online, contact center and in-home / on-site capabilities • Average 112,000 square feet of selling space • Strategic Focus—Asset productivity through improved capabilities within existing channels Orchard Supply Hardware • 72 stores with online capabilities • Average 36,000 square feet of selling space, offering a product selection focused on paint, repair and backyard categories • Strategic Focus—Operate under its own brand accessing high-density neighborhoods on the West coast International Canada • ~US$40 billion home improvement market • 35 stores with online capabilities • Strategic Focus—Build scale while continuing to evaluate expense structure Mexico • ~US$25 billion home improvement market • 8 stores • Strategic Focus—Build scale while continuing to evaluate expense structure Australia • ~US$40 billion home improvement market • JV (1/3 ownership) with Woolworths • 38 Masters stores with online capabilities • Home Timber & Hardware Group, retail stores and wholesale distribution • Strategic Focus – Build scale while continuing to evaluate expense structure 3 Strategy Overview *as of January 31, 2014

Capital Allocation* Investing in: • Capabilities that create simpler, differentiated omni-channel home improvement experiences Returning Cash to Shareholders through: • Dividends** 4 • Share repurchases • Maintaining and upgrading our infrastructure • International markets, after careful study of regulatory risk, culture, and historical and
forecasted opportunity COMPELLING LONG-RUN RETURNS Strategy Overview * Targeted Lease Adjusted Debt to EBITDAR of 2.25x **Targeted dividend payout ratio of 35%

Drive ROIC through a disciplined capital allocation strategy and operational excellence 5 Strategy Overview ROIC Operating Profitability Asset Productivity • Sales growth • EBIT margin growth • Earnings growth • Sales per square foot growth • Inventory turnover improvement • Asset turnover improvement

Investment Thesis 6 Strategy Overview Strong brand Solid cash flow Strategic investments Return cash to shareholders Dividends Share repurchase

Strategy Overview— U.S. Home Improvement 7

2014 Priorities • Capitalize on opportunities within an improving economy • Continued use of our enhanced Sales & Operations Planning process • Improve our product and service offering for the Pro customer • Build customer experience design capabilities 8 Strategy Overview—U.S. Home Improvement Top-Line Growth • Developing systems and process infrastructure Drive Productivity and Profitability Beyond 2014 Customer-Centered Omni-Channel Retailer • Leverage 2013’s investments in payroll and inventory • Continue to optimize marketing efforts

Sales & Operations Planning Intent is to better understand and anchor around the consumer mindset season-to-season 9 Strategy Overview—U.S. Home Improvement • Starts earlier • Considers detailed input from all functions to determine resource allocation • Provides consistent message and experience across all selling channels • Determines: • Which projects we expect customers will complete • Key products needed • Which products will be promoted to drive traffic • Which products will be merchandised nearby as project completers • Amount and timing of inventory • Staffing and training needs for each store department Enhanced Process

ProServices Opportunities Product Offering • Ensure right offering of products and brands • Dedicated focus on product categories with highest Pro penetration: • Lumber & Building Materials • Millwork • Rough Plumbing & Electrical • Tools & Hardware Service Offering • Re-launch lowesforpros.com in Q2 • Key Functionality: • Dedicated commerce website • Access contract pricing • Develop requisition lists • View purchase history • Convenient mobile access 10 Strategy Overview—U.S. Home Improvement

Build Customer Experience Design Capabilities Design occasion-based experiences based on customer insights • Inspire customer devotion • Differentiate Lowe’s in the marketplace • Produce superior business results Customer experiences must meet three critical criteria: • Desirable—to our target customer • Feasible—must fit within our organization’s competencies • Viable—can be delivered in a profitable and sustainable way 11 Strategy Overview—U.S. Home Improvement

Current Multi-Channel 12 Strategy Overview—U.S. Home Improvement STORES ONLINE/ MOBILE PROJECT SPECIALISTS EXTERIOR / INTERIOR CONTACT CENTER Plan Purchase Fulfill Plan Purchase Fulfill Future Omni-Channel MyLowe’s Enhanced Mobile Technology: iPhones & Product Locator Flexible Fulfillment: • Buy online pick up in store • Buy online parcel ship from distribution network • Buy online deliver from store New Project Management Tools Expanded Fulfillment Capabilities

Customer Experience Design Omni-Channel Retailing Multi-Year Transformation 13 Strategy Overview—U.S. Home Improvement Retail Relevance Multi-Channel IT Infrastructure 201320122011

Strategy Overview— Appendix 14

Market Size 15 Strategy Overview—Appendix NAICS 444 Total Market Lowe’s is roughly 17% of NAICS 444, the Census Bureau’s measurement of sales from retailers classified as Building Materials, Garden Equipment and Supplies. The Total Market for our products and services is roughly twice as large as NAICS 444.

16 Strategy Overview—Appendix $0 $50 $100 $150 $200 $250 $300 $350 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 SALES PER SELLING SQUARE FOOT 2015 Target: ~$300 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 EPS 2015 Target: $3.44 0.0% 5.0% 10.0% 15.0% 20.0% ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ROIC 2015 Target: ~17% 0.0% 10.0% 20.0% 30.0% 40.0% ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 PROFITABILITY 2015 EBIT Target: 9.7%

17 Strategy Overview—Appendix 0.00 1.00 2.00 3.00 4.00 5.00 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 INVENTORY TURNS 2015 Target: 4.4x 0 1000 2000 3000 4000 5000 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 CAPITAL EXPENDITURES Current Annual Average Target: $1.2B 0.00 0.50 1.00 1.50 2.00 2.50 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 LEASE-ADJUSTED DEBT TO EBITDAR 2015 Target: 2.25x $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 FREE CASH FLOW 2015 Target: $4.2B

Non-GAAP Measures EBIT Margin (Operating Margin) We define EBIT Margin as earnings before interest and taxes as a percentage of sales. Lowe’s believes that EBIT Margin is a useful measure to describe the Company’s operating profit. EBITDAR We define EBITDAR as earnings before interest, taxes, depreciation, amortization, share-based payments and rent. Lease Adjusted Debt We define Lease Adjusted Debt as short-term debt, current maturities of long-term debt, long-term debt excluding current maturities, and eight times the last four quarters’ rent. We believe eight times rent is a reasonable industry standard estimate of the economic value of our leased assets. Lowe’s believes the ratio of Lease Adjusted Debt to EBITDAR is a useful supplemental measure, as it provides an indication of the results generated by the Company in relation to its level of indebtedness by reflecting cash flow that could be used to repay debt. 18 Strategy Overview—Appendix

Non-GAAP Measures ROIC We define ROIC as trailing four quarters’ Net Operating Profit after Tax (NOPAT) divided by
 the average of ending debt and equity for the last five quarters. Lowe’s believes ROIC is a useful measure of how effectively the Company uses capital to
generate profits. Free Cash Flow We define Free Cash Flow as net cash provided by operating activities less capital expenditures. Lowe’s believes Free Cash Flow is a useful measure to describe the Company’s financial performance and measures its ability to generate excess cash from its business operations. 19 Strategy Overview—Appendix

IR Contacts Tiffany Mason Vice President, Finance & Treasurer 704.758.2033 tiffany.l.mason@lowes.com Jim Shaw Director, Investor Relations 704.758.3579 jim.b.shaw@lowes.com Investor Relations Website www.Lowes.com/investor 20 Strategy Overview—Appendix

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