DBRS Morningstar Confirms Lowe’s Issuer Rating and Withdraws the Short-Term Issuer Rating and Senior Unsecured Debt Rating

DBRS Limited (DBRS Morningstar) confirmed Lowe’s Companies, Inc.’s (Lowe’s or the Company) Issuer Rating at BBB (high) with a Stable trend. DBRS Morningstar also discontinued and withdrew Lowe’s Short-Term Issuer Rating as well as the Senior Unsecured Debt rating. The discontinuation does not reflect any change in DBRS Morningstar’s view of the Company’s credit quality. The rating confirmation and Stable trend reflect DBRS Morningstar’s view that, while the Company’s operating results are expected to continue to moderate from the elevated levels experienced during the Coronavirus Disease (COVID-19) pandemic, as a result of a slowing housing market, persistent inflationary pressures, and a pullback in consumer discretionary spending, Lowe’s is well positioned to navigate these challenges within the context of the current BBB (high) rating category. The ratings continue to be supported by the Company’s strong brand and market position, large scale and geographic diversification, and free cash flow-generating capacity. The ratings also consider the intense competitive environment and the economic cyclicality of the home improvement sector.

Lowe’s operating performance for the last 12 months ended May 5, 2023 (LTM 2023) was better than DBRS Morningstar’s expectations as the Company managed to maintain strong operating margins, despite persistent inflationary pressure and demand moderation from the surge levels. While topline was relatively flat at approximately $95.7 billion, Lowe’s reported a 2.5% increase in EBITDA (excluding nonrecurring charges) to approximately $14.4 billion for LTM 2023, compared with $14.0 billion for LTM 2022.

The Company’s financial profile has remained relatively stable within the rating category, as it continued to balance this growth in operating income through growth investments and an increase in gross debt to fund shareholder returns, such that the leverage ratio increased to 2.69 times (x) at LTM 2023 from 2.40x at LTM 2022.

DBRS Morningstar expects the Company’s earnings profile to remain relatively stable over the medium term and to continue to support the current rating, despite the expectation of near-term earnings moderation. DBRS Morningstar expects the Company’s topline to be negatively affected given its higher exposure to the DIY segment (75% of total sales), cutbacks in big-ticket project spending, lumber deflation, as well as moderating demand in discretionary product categories, which constitutes around one third of the Company sales. DBRS Morningstar forecasts the Company's revenue to decline toward the $87 billion to $88 billion range in F2023 (period ending February 2024) and F2024, based on the mid-single-digit decline in comparable sales in F2023, and after adjusting for $5 billion contribution from the now-sold Canadian retail operations. DBRS Morningstar anticipates EBITDA margins to remain relatively flat in F2023 as negative impacts of inflationary pressures and operating deleverage are partially offset by productivity initiatives and the sale of the relatively lower-margin Canadian business. As such, DBRS Morningstar expects the Company’s EBITDA to decline toward $13 billion in F2023 and grow modestly toward $13.5 billion thereafter.

DBRS Morningstar believes the Company’s financial profile will continue to remain appropriate for the current rating category, supported by its strong cash generating capacity, and expects Lowe’s to manage shareholder returns in line with its financial policy and leverage threshold of 2.75x. DBRS Morningstar expects cash flow from operations of approximately $10 billion in F2023 and F2024 to remain more than sufficient for the Company’s capital expenditure target of $2.0 billion annually and dividend payments of approximately $2.5 billion each year. DBRS Morningstar anticipates Lowe’s will continue to use free cash flows and incremental debt toward shareholder returns.

A positive rating action may occur if the Company’s earnings profile continues to strengthen combined with a change in its financial policy such that financial leverage stays structurally below 2.5x. Conversely, a negative rating action may occur if leverage is sustained above 3.0x as a result of weaker-than-expected operating performance and/or more aggressive financial management.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

The principal methodology applicable to the rating is Global Methodology for Rating Companies in the Merchandising Industry (https://www.dbrsmorningstar.com/research/402334; September 2, 2022).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action.

DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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