Lowe's 2015 Annual Report Download - page 32

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13 of the 14 U.S. regions experienced increases in comparable store sales, as sales performance was well balanced across the
country.
Gross margin – Gross margin of 34.79% for 2014 represented a 20 basis point increase from 2013 and was primarily driven by
cost reductions associated with our Value Improvement initiative, which consisted of improved line review and product reset
processes to better position us to meet customers’ product needs and drive better inventory productivity.
During the fourth quarter of 2014, gross margin decreased one basis point as a percentage of sales. Gross margin was
negatively impacted by mix of products sold and price actions on specific categories, partially offset by our Value Improvement
program and better seasonal sell-through.
SG&A – SG&A expense for 2014 leveraged 46 basis points as a percentage of sales compared to 2013. This was primarily
driven by 21 basis points of leverage associated with operating salaries as we optimized payroll hours against customer traffic.
We also experienced 16 basis points of leverage associated with incentive compensation due to lower attainment levels
compared to the prior year and seven basis points of leverage in property taxes due to favorability in property valuations
recognized in the current year. In addition, we experienced six basis points of leverage in advertising expense due to increased
sales and five basis points of leverage in utilities due to decreased consumption due to favorable weather experienced in the
current year. These were partially offset by 23 basis points of deleverage in employee insurance costs, due to increased claims
as well as additional costs associated with the Affordable Care Act.
SG&A expense during the fourth quarter leveraged 88 basis points due primarily to long-lived asset impairments recorded in
the prior year, as well as leverage in operating salaries, and property taxes.
Depreciation – Depreciation expense leveraged 10 basis points for 2014 compared to 2013 primarily due to the increase in
sales. Property, less accumulated depreciation, decreased to $20.0 billion at January 30, 2015 compared to $20.8 billion at
January 31, 2014. At January 30, 2015 and January 31, 2014, we owned 86% of our stores, which included stores on leased
land.
Interest – Net – Net interest expense is comprised of the following:
(In millions)
2014
2013
Interest expense, net of amount capitalized
$
515
$
474
Amortization of original issue discount and loan costs
7
6
Interest income
(6
)
(4
)
Interest - net
$
516
$
476
Net interest expense increased primarily as a result of the issuance of $1.25 billion and $1.0 billion of unsecured notes in
September 2014 and 2013, respectively.
Income tax provision – Our effective income tax rate was 36.9% in 2014 compared to 37.8% in 2013. The lower effective tax
rate in 2014 was the result of the favorable settlement of certain federal tax matters during the year.
LOWE’S BUSINESS OUTLOOK
Fiscal year 2016 will consist of 53 weeks, whereas fiscal year 2015 consisted of 52 weeks. As of February 24, 2016, the date
of our fourth quarter 2015 earnings release, we expected total sales in 2016 to increase approximately 6%, including the 53rd
week. The 53rd week is expected to increase total sales by approximately 1.5%. We expected comparable sales to increase
approximately 4%. We expected to open approximately 45 home improvement and hardware stores during 2016. In addition,
earnings before interest and taxes as a percentage of sales (operating margin) were expected to increase 80 to 90 basis points,1
and the effective tax rate was expected to be approximately 38.1%. Diluted earnings per share of approximately $4.00 were
expected for the fiscal year ending February 3, 2017. Our guidance assumed approximately $3.5 billion in share repurchases
during 2016.
1 Operating margin growth excludes the impact of the non-cash impairment charge on the Australian joint venture. The non-cash
impairment charge negatively impacted operating margin by approximately 90 basis points in fiscal year 2015.