Lowe’s Company Revenue Forecast

Desirea

Economic Forecasting- ECO 309

October 23, 2019

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Lowe’s Strategic Plan Forecast and Pro-Forma Plan

Executive Summary

An eight-quarter forecast was developed for Lowe’s revenue. This forecast was resolute

from observations of the company’s past revenue performance beside 2 X variable knowledge

observations that show sturdy correlation relationships to Lowe’s revenue. to work out the X

variable economic science knowledge that was most reliable and showed the strongest

correlation relationship, ARIMA forecast strategies were used. X Variable forecasts and revenue

seasonal data were enforced to clarify rotary variations and seasonality in Lowe’s revenue to

provide the most reliable eight-quarter/ biennial forecast. The regression models showed some

heteroscedasticity within the model not permitting a ninety fifth confidence in reliability and

accuracy of this forecast.

Project Objective

The objective of this project is to use macroeconomic variables, past company revenue,

company 10k reports, and the current company stock price to create the best pro forma strategic

plan to increase company revenue in the next eight quarters.

Methodology

For a company to be successful it must have a good forecasting plan in place. We must

look at The Company Pro-Forma Strat Plan 8 Building Process. We begin by focusing on the

company’s revenue and looking at what defines it while also describing the characteristics of the

revenue. We then must form a hypothesis to recognize the important macroeconomics variables

(X) and describe their characteristics. The next phase includes testing the hypothesis with an

early regression. This regression is typically written as Y = a + B1X1 + B2X2. We then proceed

to forecast the X variables that we described in an earlier step by using (X) variable historical
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data. This data will be used with the forecast methods exponential smoothing, decomposition,

and ARIMA.

After we have forecasted the X variables, we then choose the best X variable determining

the best fit model of the three methods. The X variable forecasts are then used to create the best

multiple regression forecast of company revenue. Next, we will use the regression forecast with

the Company 10K to establish a Pro-Forma Financial Strategic Plan. Finally, we reflect on our

results and make recommendations to help improve the company’s performance.

Company Performance

Hypothesis:

The hypothesis was developed to produce the best eight quarter forecast for Lowe’s

revenue. This is broken down by each variable to identify the variable significance to the

forecasted projections. The independent macroeconomic X variables used were Employment

Rate and Disposable income in the United States. Two dummy variables were also used to

explain the cycle variations and seasonality as shown in Lowe’s revenue. These variables

directly affect Lowe’s revenue and is shown below in a function form:

Y = f(X1+X2)

Lowes revenue (Y) = f (Employment Rate (x1) + Disposable Income (x2) + Market Expansion

(x3) + Market Decline (x4))

Rationale for Employment Rate

Employment Rate used as the first X variable, the data is represented by ages 15 to 64 in

the United States and not seasonally adjusted. The variable shows the rate of those in the age

range in the US that are employed in each quarter of year. The employment rate directly affects
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revenue for Lowe’s due to the decreased and increased income per household caused by

employment.

Rationale for Disposable Income

The second X variable is represented by Disposable Income, is representation of real

disposable personal income according to billions of chain 2012 dollars, measured quarterly and

seasonally adjusted at annual rate. Disposable Income represents the extra money consumers

have to spend at retail store such as Lowe’s. Therefore, the influx and outflux of this rate directly

affects Lowe’s revenue.

Rationale for Dummy Variables

The dummy variables Market Decline and Market Expansion were created and used to

explain the cycle variations and seasonality of Lowe’s Revenue.

Revenue shows clear seasonality and cycle variations, it also has a positive linear trend.
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Auto correlation shows significant lags in 1-12 and clear signs of seasonality.
Regression Equation
Revenue = -6123 - 140.0 Employment + 2.3351 Disposable Income
Coefficients
Term Coef SE Coef T-Value P-Value VIF
Constant -6123 5442 -1.13 0.263
Employment -140.0 70.1 -2.00 0.048 1.61
Disposable Income 2.3351 0.0704 33.18 0.000 1.61
Model Summary
S R-sq R-sq(adj) R-sq(pred)
1323.50 94.50% 94.40% 94.19%
Analysis of Variance
Source DF Adj SS Adj MS F-Value P-Value
Regression 2 3337684479 1668842239 952.73 0.000
Employment 1 6997231 6997231 3.99 0.048
Disposable Income 1 1928257112 1928257112 1100.83 0.000
Error 111 194432347 1751643
Total 113 3532116826
P values remain below 0.05. Rsquared adjusted percentage high at 94.4.

Coefficients did not change from correlation, p values below .05, t values above

1.960, and vif under 5.

Variables and Their Characteristics

The characteristics of the macroeconomic X variables used in the regression model above
are identified aside with the dummy variables used. These are listed in order as they represent in
the hypothesis function.
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Employment rate shows clear cycle peaks and valleys and negative linear trend.

Disposable income shows no signs of seasonality and positive linear trend.

Scatterplot shows negative relationship with employment and clear heteroscedascity.

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Disposable income shows very small signs of heteroscedascity in a positive linear relationship.

Correlations
Revenue Employment
Employment -0.632
Disposable Income 0.971 -0.614

Correlation shows a negative relationship with employment and a positive

relationship with disposable income.
X Variable Forecasts

The x variables are forecasted using ARIMA. The following models are models that

returned the best reliable and accurate forecast of the variable.

Employment Rate

Mape: 0.0034872
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Forecast Values:

70.8403
70.9564
71.0725
71.1887
71.3048
71.4209
71.5371
71.6532
71.7693

Final Estimates of Parameters

Type Coef SE Coef T-Value P-Value
MA 1 0.4775 0.0834 5.72 0.000
Differencing: 2 regular differences
Number of observations: Original series 114, after differencing 112

T values, p values, and coefficients are significant values and reliable.

Modified Box-Pierce (Ljung-Box) Chi-Square Statistic

Lag 12 24 36 48
Chi-Square 16.85 26.79 43.27 48.53
DF 11 23 35 47
P-Value 0.112 0.265 0.159 0.411
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The 12th and 24th lag show to be less than 21 and 36 respectively, meaning data was

not left out of the model.

Disposable Income

Mape 1.83561
Forecasts:
14427.5
14495.6
14562.0
14628.8
14695.6
14762.4
14829.1
14895.9
14962.7
Final Estimates of Parameters
SE T- P-
Type Coef Coef Value Value
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AR 1 -0.2758 0.0914 -3.02 0.003

MA 1 1.00130 0.00059 1683.88 0.000
Modified Box-Pierce (Ljung-Box) Chi-Square Statistic
Lag 12 24 36 48
Chi- 6.00 20.89 35.75 49.62
Square
DF 10 22 34 46
P-Value 0.816 0.528 0.386 0.331
T values and p values are significant to the reliability values. The 12th and 24th lag lbq values

are below 21 and 36.4 suggesting data was not left behind in the model.

Dummy Variables:

Two Dummy Variables were created to help explain the cycle variations and seasonality in

Lowe’s revenue. These variables does not require a forecast method.

The X Variable Forecast values:

Employment Rate Disposable Income Market Decline Market Expansion

70.8403 14427.5 1 0

70.9564 14495.6 1 0

71.0725 14562.0 1 0

71.1887 14628.8 1 0

71.3048 14695.6 1 0

71.4209 14762.4 1 0

71.5371 14829.1 1 0

71.6532 14895.9 1 0

71.7693 14962.7 1 0

Company Revenue Forecast Regression Model

Method
Categorical predictor coding (1, 0)
Regression Equation
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Market Market
Decline_1 Expansion
0 0 Revenue = -16260 - 115.0 Employment + 2.3283 Disposable Income

0 1 Revenue = -14164 - 115.0 Employment + 2.3283 Disposable Income

1 0 Revenue = -14958 - 115.0 Employment + 2.3283 Disposable Income

1 1 Revenue = -12862 - 115.0 Employment + 2.3283 Disposable Income

Coefficients
Term Coef SE Coef T-Value P-Value VIF
Constant -16260 6824 -2.38 0.019
Employment -115.0 87.4 -2.13 0.000 3.18
Disposable Income 2.3283 0.0683 34.08 0.000 1.93
Market Decline_1
1 1302 357 3.65 0.000 2.54
Market Expansion
1 2096 376 5.57 0.000 1.42
Model Summary
S R-sq R-sq(adj) R-sq(pred)
1172.14 95.76% 95.60% 95.34%
Analysis of Variance
Source DF Adj SS Adj MS F-Value P-Value
Regression 4 3382360408 845590102 615.46 0.000
Employment 1 217194564 217194564 16.02 0.000
Disposable Income 1 1595608353 1595608353 1161.36 0.000
Market Decline_1 1 18295500 18295500 13.32 0.000
Market Expansion 1 42641693 42641693 31.04 0.000
Error 109 149756418 1373912
Total 113 3532116826
Durbin-Watson Statistic
Durbin-Watson Statistic = 1.73480

The Regression Prediction Analysis both x variables as well as the dummy variable

shows these factors explain 95.60% (R squared value) of company revenue. We see that it is an

accurate model by P values of 0, VIF values under 5 and t values being above 1.960 absolute

value. The durbin-watson stastic registered very high at 1.73, showing the model to be accurate

and reliable with a 95% confidence level according to the K-B test.

Regression Equation
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sq resi = 181497
+ 0.01169 sq fits
Coefficients
Term Coef SE Coef T-Value P-Value VIF
Constant 181497 266181 0.68 0.497
sq fits 0.01169 0.00199 5.88 0.000 1.00
Model Summary
S R-sq R-sq(adj) R-sq(pred)
1962729 23.59% 22.91% 19.92%
Analysis of Variance
Source DF Adj SS Adj MS F-Value P-Value
Regression 1 1.33237E+14 1.33237E+14 34.59 0.000
sq fits 1 1.33237E+14 1.33237E+14 34.59 0.000
Error 112 4.31458E+14 3.85231E+12
Total 113 5.64696E+14
The fits and residuals of the revenue regression model were squared and shown above to test t

values. A higher than 1.960 absolute value t value presents heteroscedascity in the model. With a

t value of 5.88, it is shown that heteroscedascity is present in the model.

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Forecast Values:
18649.7
18806.9
18960.2
19114.6
19268.7
19422.9
19577.1
19731.3
19885.5

The regression prediction forecast produced and accurate and reliable set of values. The model

presents with a MAPE of 357.58 and an RMSE of 35427.

Company Pro Forma Plan

Using the latest company 10 k report a pro forma plan was created in conjunction with the

current company stock price and revenue regression forecasted predictions. This plan is used to

examine the company’s EPS, stock, and net income after expenses. Using this information, two

plans are created to present the best positive effects for the company’s future. The first template

is before any plans are put into place.

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Industry Pro-Forma Planning Template

Lowes
(LOW) Company Revenue Forecast Per Plan Quarter
3rd

Quarter Ending: 11/2/2018 Revenue Share 12/31/2018 3/31/2019 6/31/2019 9/30/2019 12/31/2019 3/31/2020 6/31/2020 9/30/2020

Total Revenue $17,415 18806.90 18960.20 19114.60 19268.70 19422.90 19577.10 19731.30 19885.50

Cost of Revenue $11,755 0.67 12694.52 12798.00 12902.22 13006.23 13110.32 13214.40 13318.49 13422.57

Gross Profit $5,660 6112.38 6162.20 6212.38 6262.47 6312.58 6362.70 6412.81 6462.93

Operating Expenses

Research and Development $0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Sales, General and Admin. $4,270.0 0.25 4611.28 4648.87 4686.73 4724.51 4762.32 4800.13 4837.94 4875.74

Non-Recurring Items $0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Operating Expense &

$14.0 0.00 15.12 15.24 15.37 15.49 15.61 15.74 15.86 15.99
Provisions

Other Operating Income ($419.0) -0.02 -452.49 -456.18 -459.89 -463.60 -467.31 -471.02 -474.73 -478.44

Operating Income or EBIT $957.0 1938.47 1954.27 1970.18 1986.06 2001.96 2017.85 2033.75 2049.64

Non Operating (Income) / expense

$0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
items

Net Interest Expense $153.0 0.01 165.23 166.58 167.93 169.29 170.64 172.00 173.35 174.70

Earnings Before Tax / Pre tax

$804.0 1773.24 1787.69 1802.25 1816.78 1831.32 1845.86 1860.40 1874.93
Income

Income Tax (Benefit)/ Expense $175.0 0.01 188.99 190.53 192.08 193.63 195.18 196.73 198.28 199.83

Equity (Earnings)/Loss
$0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Unconsolidated Subsidiary

Net/ Income-Cont. Operations $629.0 1584.25 1597.16 1610.17 1623.15 1636.14 1649.13 1662.12 1675.11

Discontinued Op $0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Minority Interest $0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net Income $629.0 1584.25 1597.16 1610.17 1623.15 1636.14 1649.13 1662.12 1675.11
Pref Dividend $0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Abnormal Loss (Gain) $319.0 0.02 344.50 347.30 350.13 352.96 355.78 358.60 361.43 364.25

Net Income Available to Common

$948.0 1928.75 1944.47 1960.30 1976.11 1991.92 2007.73 2023.55 2039.36
Shareholders

Number of Share Outstanding

1,131 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0
(Common Stock) in Millions
EPS $0.84 $1.71 $1.72 $1.73 $1.75 $1.76 $1.78 $1.79 $1.80

Stock Price 103.77 You supply this $211.12 $212.85 $214.58 $216.31 $218.04 $219.77 $221.50 $223.23
P/E Ratio 123.80
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Before taking action to implement changes, with the current plans and forecasts the stock price is

expected to increase up to more than $221 in the next eight quarters. Eps is also expected to increase over

100% of the $.84 it currently registers.

The first plan implemented is a 50% slash/decrease in cost of revenue, which will be done by new input

sourcing and new technology but will not be able to be implemented in the next quarter, it will require

time to see changes.

Net Income $5,629.0 6983.88 7040.80 7098.14 7155.37 7212.63 7269.89 7327.15 7384.41
Pref Dividend $0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Abnormal Loss (Gain) $319.0 0.02 344.50 347.30 350.13 352.96 355.78 358.60 361.43 364.25

Net Income Available to Common

$5,948.0 7328.37 7388.11 7448.27 7508.32 7568.41 7628.49 7688.58 7748.67
Shareholders

Number of Share Outstanding

1,131 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0
(Common Stock) in Millions
EPS $5.26 $6.48 $6.53 $6.59 $6.64 $6.69 $6.74 $6.80 $6.85

Stock Price 103.77 You supply this $127.85 $128.89 $129.94 $130.99 $132.04 $133.09 $134.14 $135.18
P/E Ratio 19.73

As shown with the first plan implementation, Stock price is still expected to increase but by far

less than before. In this plan, EPS raises to over $6.50 from less than $1, and net income

increases by over $5,000. The second plan is to increase revenue by 20% by implementing new

products in the next quarter, shown below:

Net Income $4,029.0 4397.46 4433.31 4469.41 4505.44 4541.50 4577.55 4613.61 4649.66
Pref Dividend $0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Abnormal Loss (Gain) $319.0 0.02 288.22 290.57 292.94 295.30 297.67 300.03 302.39 304.75

Net Income Available to Common

$4,348.0 4685.69 4723.88 4762.35 4800.74 4839.16 4877.58 4916.00 4954.42
Shareholders

Number of Share Outstanding

1,131 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0 1131.0
(Common Stock) in Millions
EPS $3.84 $4.14 $4.18 $4.21 $4.24 $4.28 $4.31 $4.35 $4.38

Stock Price 103.77 You supply this $111.83 $112.74 $113.66 $114.58 $115.49 $116.41 $117.33 $118.24
P/E Ratio 26.99

The results of the second plan shows an increase in eps from less than $1 to over $3 and it is still

expected to increase by the next quarter. Stock price is also still showing to increase but at a

drastically slower rate, and net income only increased by a little more than $3,000. The best plan

course of action is plan option 1, to decrease cost of revenue by 50%.

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Conclusion:

To improve company revenue and performance, Lowe’s must decrease Cost of Revenue.

This was determined by using macroeconomic variables in relations with company revenue.

Forecasts were made to predict the next eight quarter company revenue values by first

forecasting x variable values and creating a dummy variable to describe market changes. This

model was not able to reach a 95% confidence level because heteroscedasticity is shown, but the

model does prove to be accurate and reasonable.

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Data Appendix
Date Revenue Employment Disposable Income
3/30/1990 720.9 72.40 6845.103
6/29/1990 818.1 72.10 6842.681
9/28/1990 708.1 71.70 6784.328
12/31/1990 586.0 71.20 6801.283
3/29/1991 693.4 71.00 6851.042
6/28/1991 863.0 70.90 6879.012
9/30/1991 790.3 70.70 6936.200
12/31/1991 709.6 70.70 7075.791
3/31/1992 883.3 70.90 7145.957
6/30/1992 1062.0 70.90 7179.108
9/30/1992 991.2 70.70 7211.805
12/31/1992 910.3 70.90 7238.787
3/31/1993 992.1 71.20 7261.182
6/30/1993 1242.0 71.30 7267.508
9/30/1993 1158.0 71.40 7318.014
12/31/1993 1146.0 71.60 7366.339
3/31/1994 1397.0 71.80 7440.527
6/30/1994 1647.0 72.10 7483.917
9/30/1994 1579.0 72.60 7591.307
12/30/1994 1488.0 72.70 7656.201
3/31/1995 1635.0 72.50 7677.910
6/30/1995 1978.0 72.50 7748.260
9/29/1995 1766.0 72.50 7793.543
12/29/1995 1697.0 72.50 7867.340
3/31/1996 1906.0 72.70 7939.476
6/30/1996 2459.0 73.10 8003.765
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9/30/1996 2193.0 73.20 8046.395

12/31/1996 2042.0 73.20 8123.032
3/31/1997 2401.0 73.40 8195.020
6/30/1997 2808.0 73.70 8291.452
9/30/1997 2530.0 73.70 8413.567
12/31/1997 3369.0 73.80 8590.692
3/31/1998 3150.0 73.90 8708.815
6/30/1998 3734.0 73.80 8796.547
9/30/1998 3278.0 73.90 8866.183
12/31/1998 3169.0 74.00 8946.329
3/31/1999 3772.0 73.90 8966.482
6/30/1999 4435.0 73.90 9027.656
9/30/1999 3909.0 74.00 9163.245
12/31/1999 3789.0 74.20 9338.678
3/31/2000 4467.0 74.30 9441.952
6/30/2000 5264.0 73.90 9551.595
9/30/2000 4504.0 74.00 9585.736
12/31/2000 4543.0 73.90 9672.598
3/31/2001 5276.0 73.40 9655.706
6/30/2001 6127.0 72.80 9878.502
9/30/2001 5455.0 72.30 9753.663
12/31/2001 4856.0 72.20 9973.532
3/31/2002 6471.0 71.90 10041.054
6/30/2002 7488.0 71.90 10032.300
9/30/2002 6415.0 71.70 10091.868
12/31/2002 5739.0 71.50 10115.601
3/31/2003 7118.0 71.30 10238.895
6/30/2003 8666.0 71.00 10411.905
 19

9/30/2003 7802.0 71.10 10439.340

12/31/2003 7252.0 71.20 10487.421
3/31/2004 8681.0 71.10 10607.594
6/30/2004 10170.0 71.20 10676.852
9/30/2004 9064.0 71.30 10811.704
12/31/2004 8550.0 71.30 10684.945
3/31/2005 9913.0 71.50 10786.450
6/30/2005 11930.0 71.70 10818.340
9/30/2005 10590.0 71.60 10956.911
12/31/2005 10810.0 71.80 11170.065
3/31/2006 11920.0 71.90 11197.381
6/30/2006 13390.0 72.10 11226.350
9/30/2006 11210.0 72.20 11374.500
12/31/2006 10400.0 72.00 11471.408
3/31/2007 12170.0 71.70 11500.783
6/30/2007 14170.0 71.70 11510.998
9/30/2007 11560.0 71.60 11518.824
12/31/2007 10380.0 71.50 11550.819
3/31/2008 12010.0 71.20 11762.205
6/30/2008 14510.0 70.70 11515.015
9/30/2008 11730.0 70.00 11615.324
12/31/2008 9984.0 68.70 11565.491
3/31/2009 11830.0 67.90 11689.821
6/30/2009 13840.0 67.30 11557.640
9/30/2009 11380.0 66.60 11554.792
12/31/2009 10170.0 66.80 11619.754
3/31/2010 12390.0 66.80 11811.199
6/30/2010 14360.0 66.70 11895.286
 20

9/30/2010 11590.0 66.50 11961.982

12/31/2010 10480.0 66.70 12083.876
3/31/2011 12180.0 66.50 12057.571
6/30/2011 14540.0 66.60 12110.213
9/30/2011 11850.0 66.80 12147.876
12/31/2011 11630.0 67.00 12375.275
3/31/2012 13150.0 67.00 12487.781
6/30/2012 14250.0 67.10 12398.390
9/30/2012 12070.0 67.40 12741.861
12/31/2012 11050.0 67.20 12231.915
3/31/2013 13090.0 67.30 12323.044
6/30/2013 15710.0 67.50 12376.321
9/30/2013 12960.0 67.40 12425.218
12/31/2013 11660.0 67.80 12614.446
3/31/2014 13400.0 68.00 12765.912
6/30/2014 16600.0 68.20 12906.923
9/30/2014 13680.0 68.50 13065.177
12/31/2014 12540.0 68.50 13226.570
3/31/2015 14130.0 68.70 13327.808
6/30/2015 17350.0 68.70 13440.357
9/30/2015 14360.0 68.90 13471.391
12/31/2015 13240.0 69.30 13562.267
3/31/2016 15230.0 69.20 13541.451
6/30/2016 18260.0 69.30 13592.919
9/30/2016 15740.0 69.50 13685.364
12/31/2016 15780.0 69.80 13835.338
3/31/2017 16860.0 70.00 13909.765
6/30/2017 19500.0 70.20 13986.194
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9/30/2017 16770.0 70.34 14065.919

12/31/2017 15490.0 70.51 14219.828
3/31/2018 17360.0 70.64 14281.956
6/30/2018 20890.0 70.72 14365.366