Lowe's Earnings Bring Fears of a Housing Slowdown

By Markets Fool.com


Image: Lowe's.

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In recent quarters, home-improvement retailer Lowe's has chosen to release its quarterly results after rival Home Depot reports, in some ways affirming its No. 2 position by giving way to the industry leader. In waiting an extra day, Lowe's often creates expectations among investors to keep up with or surpass Home Depot, and coming into Wednesday morning's first-quarter earnings report, Lowe's investors wanted the company to confirm the solid growth that Home Depot had achieved. Even though Lowe's did manage to boost its sales and net income during the quarter, the rate at which it grew left something to be desired and raised questions about the strength of the overall home-improvement retail market. Let's look more closely at how Lowe's did and why its results were disappointing for some investors.

Lowe's keeps growing ... more slowly
Lowe's first-quarter numbers weren't ugly, but they didn't give investors the full growth they had hoped to see. Sales for the quarter rose 5.4% to $14.13 billion, falling $150 million short of producing the 6.5% growth rate that investors had wanted to see. Comparable-store sales climbed at 5.2%, more than two percentage points slower than we saw last quarter, with U.S. comps just barely surpassing that number at 5.3%. Net income growth also slowed, with earnings of $673 million up less than 8% from the year-ago quarter, producing earnings of $0.70 per share. Despite the growth, those results were almost a nickel per share weaker than those following the stock had expected.

Once again, Lowe's relied largely on share buybacks in order to boost earnings per share at a faster rate than its overall net income. During the first quarter, Lowe's spent another $1 billion on repurchasing its stock, further contributing to the 6% drop in outstanding shares that the home-improvement retailer has seen over the past year. Yet the company hasn't seen any real deterioration in the quality of its balance sheet, as cash and short-term investments actually rose from year-ago levels without major changes to the company's long-term debt.

CEO Bob Niblock noted that Lowe's continues to do well in its overall results. "We generated comparable sales growth in all regions of the country and across all product categories, driving strong earnings-per-share growth," Niblock said. The news on its overall network was particularly welcome, as some areas of the country have seen worse weather conditions this winter and spring than others, and so some had concerns that growth would be weaker in harder-hit parts of the nation.

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Image: Lowe's.

Can Lowe's bounce back?
For the most part, Lowe's didn't let its less-than-perfect results dampen its enthusiasm for the remainder of the year. Lowe's still believes that it will be able to grow its overall sales by 4.5% and 5%, and the key element of that growth will come from its existing base of more than 1,800 stores in the U.S., Canada, and Mexico, as the home-improvement retailer expects comparable-store sales growth to come in between 4% and 4.5%. Expansion will play a minor role, with a roughly 1% expansion in store count coming from expected openings of between 15 and 20 new hardware and home improvement stores during the year. Lowe's left unchanged its earnings per share guidance of $3.29, which would represent more than 20% growth from the 2014 year.

Yet one reason why investors might not be happy with Lowe's results is exactly because the company didn't do anything to raise expectations for the remainder of the year. Housing data has been particularly strong lately, with the market behaving well despite the likelihood that the Federal Reserve will start to raise rates at some point later this year or in early 2016. Already, long-term interest rates have risen from their lows, pulling mortgage rates higher and threatening the health of the housing market, but so far, figures on housing starts and other key measures aren't showing any great slowdown. The fact that Lowe's couldn't match Home Depot's boosts in guidance suggests that the No. 2 retailer hasn't been able to take advantage of those favorable trends as much as its rival has.

Largely because of that disappointment, investors saw shares of Lowe's sell off dramatically, with the stock dropping almost 6% in the first hour of pre-market trading after the company's announcement. Given the big jump in Lowe's shares in the recent past, that sell-off could mark a turning point for Lowe's unless it can reaffirm its ability to take advantage of favorable housing conditions and restart its growth engines for the remainder of 2015.

The article Lowe's Earnings Bring Fears of a Housing Slowdown originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.