Lowe's Companies Reduces Earnings Outlook

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Lowe's (NYSE: LOW) investors had modest expectations heading into this week's earnings report, given that the retailer has consistently trailed Home Depot (NYSE: HD) on key growth and profitability metrics.

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That performance gap continued in the second quarter, and contributed to a reduced full-year earnings forecast. More on that slipping outlook in a moment. First, here's how the headline results stacked up against the prior-year period:

 Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$19.5 billion

$18.3 billion

6.8%

Net income

$1.4 billion

$1.2 billion

21.6%

EPS

$1.68

$1.31

28.2%

What happened with Lowe's this quarter?

Sales growth sped up from the prior quarter's disappointing pace. Lowe's also managed a solid boost in profit margin. However, the broader results were below management's expectations and so the retailer lowered its full-year profit outlook while reducing its expansion plans.

The key highlights of the third quarter:

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  • Comparable-store sales improved 4.5% to mark a solid acceleration over the prior quarter's 2%. That figure implies more market share losses to Home Depot, though, which grew comps by over 6%.
  • Gross margin held steady at 34% of sales.
  • Expenses dropped, which lifted operating income to $2.4 billion, or 12.2% of sales, from $2.1 billion, or 11.2% of sales, a year ago.
  • Net income spiked by over 20%, in part because of a one-time gain. Excluding that temporary factor, Lowe's earnings rose 15%.
  • The company sent $1.55 billion of cash back to investors through $1.25 billion of stock buybacks and $300 million of dividend payments.

What management had to say

Executives focused their comments on the sales growth rebound between the first and second quarter. "We are pleased with our improved comparable sales performance relative to last quarter, and the strong momentum we built throughout the second quarter," CEO Robert Niblock said in a press release. That momentum included a particularly strong July, Niblock explained, during which comps spiked by 7.9%.

Still, management noted that results for the first half of the fiscal year didn't meet their expectations. "The team remains focused on making the necessary investments to improve the customer experience and drive sales," Niblock said. These changes will include increased staffing at stores and longer operating hours at some locations, executives explained.

Looking forward

Lowe's left its full-year comps forecast in place that calls for growth of 3.5%. That decision sets up a sharp contrast with Home Depot, which last week raised its comps target to 5.5% from 4.6%. In addition, Lowe's executives now expect to post a more modest uptick in operating margin this year due to the extra spending they'll allocate to staffing stores. This shift will result in earnings coming in at between $4.20 per share and $4.30 per share in 2017, the company estimates, down slightly from the $4.30-per-share target management issued in late May.

Like Home Depot, Lowe's appears set to continue benefiting from the long-running rebound in the housing industry. Yet management's focus is shifting to speeding up comps growth to a rate that's not so far from the industry leader.

In support of that goal, Lowe's is willing to sacrifice a small amount of short-term profits. It's also planning to reduce its expansion pace, with just 25 new stores set to launch this year, down from the 35 executives had originally targeted.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.