Sales for the quarter increased 2.3% to $11.9 billion, up from $11.6 billion in the third quarter of 2010 and $200 million ahead of analyst estimates; the increase was due to a mix of stronger customer count (up 1.9%) and a slight increase in ticket (0.4%). For the first nine months of the year, sales were $38.6 billion, an increase of 0.6% compared to the first three quarters of 2010.
Gross profit in the quarter was $4 billion, essentially flat year over year on a dollar basis; as a percentage of sales, gross profit margin decreased 99 basis points (lapping an 85 basis point increase in Q3 2010) to 34.6%. The company attributed the decrease to a variety of factors, outlined here by CFO Robert Hall:
“Our proprietary credit value proposition negatively impacted gross margin by approximately 35 basis points. In Q3, the impact was larger than the 11 basis point impact in Q2 due to the launch of the commercial program at the end of Q2, as well as an increase in the mix of proprietary credit to total sales. This was more than offset by leverage in tender and other costs associated with our proprietary credit program…
Also, inflation hurt gross margin in the quarter by 23 basis points driven primarily by paint. During the quarter, higher fuel cost increased cost of sales and negatively impacted gross margin by 13 basis points… As we've discussed, we are working to lessen our promotional activity and move to an Every Day Low Price philosophy [the company specifically noted that they did not match extremely aggressive promotional activity from competitors in appliances]. Actions taken to date negatively impacted gross margin in Q3 by approximately 10 basis points.”
Pre-tax earnings came in at $352 million, 46% lower than in Q3 2010 and only 2.97% of sales compared to 5.62% in the year ago period. The reason for the fall off in pre-tax margin was due to a 197 basis point increase in SG&A, primarily driven by $324 million in asset impairment and other cost associated with store closing and discontinued projects.
Net earnings for the quarter of $225 million decreased 44.3% from the same period a year ago; diluted EPS was also down substantially (37.9%), and came in at $0.18 per share. After adjusting for charges related to store closings and discontinued projects, EPS was equal to $0.35, an increase of 21% over Q3 2010 and $0.02 ahead of analyst estimates.
Year to date, net earnings and diluted EPS decreased 12.1% and 3.3% to $1.52 billion and $1.17 per share, respectively. For the full year, management expects diluted EPS of $1.37- $1.40, including approximately $0.20 per share impact from charges associated with store closings and discontinued projects.
At the close, shares in Lowe’s were up 1.75% compared to a decline for the day of 0.61% and 0.94% for the DJIA and the S&P 500, respectively.
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I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.