Lowe's Announces Store Closures as Growth Remains Sluggish

Three months ago, Lowe's (NYSE: LOW) first-quarter results lagged Home Depot's (NYSE: HD) as both retailers struggled with weather-driven customer traffic challenges. This week, Lowe's joined its larger rival in announcing a solid second-quarter sales rebound after home improvement shoppers shifted their seasonal spending into the period. However, the operating gap between the two companies only widened over the last few months.

Under new management now, Lowe's announced the closing of all 99 stores within the Orchard Supply Hardware brand and telegraphed strategic changes to come for its core retailing locations. The company also lowered its full-year sales growth outlook.

More on that forecast in a moment. First, here's how the recent results compare with the prior-year period:

What happened with Lowe's this quarter?

Sales gains rebounded, just as management had predicted they would back in late May. But Lowe's expansion pace still implied market share losses, as both its comparable-store sales and its bottom-line profitability trailed Home Depot's results.

The key highlights of the quarter:

• Comparable-store sales rose 5% to mark a solid jump over the prior quarter's less-than-1% uptick. Home Depot, by comparison, grew comps at a more robust 8% rate.
• Gross profit margin was unchanged at 34%, but operating margin fell sharply, to 10% of sales from 12% a year ago. The drop was powered by the combination of higher selling expenses and one-time charges associated with the store closures. Home Depot's comparable metric sits at 14.5%.
• After adjusting for the $230 million closure charges, per-share earnings would have risen 32%, mainly thanks to falling tax liabilities.
• Lowe's spent about $1.4 billion on direct capital returns, split between $338 million of dividend payments and $1.1 billion of stock repurchases.

What management had to say

In his first quarter as CEO, Marvin Ellison said management was happy with the results but also determined to make significant changes aimed at accelerating growth. "We posted solid results this quarter by capitalizing on delayed spring demand," Ellison said in a press release. "We are committed to driving even stronger performance in the future," he continued, "by sharpening our focus on retail fundamentals and by limiting any projects and initiatives that take us away from our core mission."

That sharpening focus led to the closure of all of the company's Orchard Supply Hardware stores this quarter. But that's just the first step. "We are developing plans to aggressively rationalize store inventory, reducing lower-performing inventory while investing in increased depth of high velocity items," Ellison said.

Looking forward

Executives are also engaged in a review of Lowe's operations that should result in major changes to its growth strategy, which might include more closures or the exiting of other non-core businesses. Ellison, who headed up Home Depot's U.S. store portfolio for many years, plans to announce the results of that assessment at the retailer's annual investor conference in December. Ellison left his post as CEO of J.C. Penney to rejoin Lowe's in early July.

Meanwhile, the company's streak of trailing Home Depot appears set to continue. In fact, Lowe's lowered its revenue outlook slightly and now expects comparable-store sales to rise by 3% for the full year rather than the 3.5% it had previously predicted. Its larger rival, on the other hand, just raised its 2018 expansion forecast, up to 5.3% from the prior target of 5%.

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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.