Lowe's Earnings: What to Watch

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Thanks to positive results from giants like Walmart and Home Depot over the last few weeks, investors are growing more optimistic about the retailing industry. Lowe's has a chance to add to that optimism with its second-quarter earnings, due out before the market opens on Aug. 22.

It will be the first earnings report under new CEO Marvin Ellison, who was a key executive for rival Home Depot for many years. But that fact is just one of several reasons shareholders will be paying attention to this report.

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Let's take a closer look at the trends investors will be watching for in Lowe's upcoming announcement.

A sales growth rebound

The key headline number to watch will be comparable-store sales, and all signs point to a significant acceleration for this fundamental metric. Home Depot saw its growth rate double between the first and second quarter as customers made their spring purchases a bit later than usual. Lowe's executives suggested in late May that a similar trend would play out for its business, so look for a big boost here.

Lowe's might not be able to close the performance gap with its larger rival, though. It's unlikely it will match Home Depot's 8% second-quarter growth rate, given that its comps were less than 1% in the fiscal first quarter compared with a 4% jump for its chief competitor.

Home Depot lifted its 2018 growth outlook to 5.3% from 5% following its second-quarter report. Thus, it will be interesting to see whether Lowe's annual target rises at all from management's current 3.5% prediction.

Stabilizing profit margins

Lowe's is aiming to improve gross profit margin this year through higher prices and better inventory management, so investors can expect a detailed update from Ellison and his team on progress toward this goal.

The company's operating margin, which factors in selling expenses and better describes overall profitability, is far lower than Home Depot's. Last quarter the metric stood at 8.4% for Lowe's, versus Home Depot's 13.6%. Over the longer term, Home Depot's margin has roughly doubled to 14.5% of sales since the housing recession, while Lowe's remains in single digits. Closing that gap will likely be a key goal for Ellison.

Looking forward

It's just Ellison's first quarter as Lowe's CEO, and so it's possible the new leader won't announce any sweeping strategic changes to the retailer's operating strategies or its financial goals. However, given his extensive experience in the industry, including as leader of Home Depot's U.S. division for many years, Ellison might have some well-formed ideas for where he'd like to take Lowe's during his tenure.

That means investors could hear about new initiatives aimed at speeding up market-share growth on Wednesday, perhaps by more aggressively targeting home-repair professionals, who have been lifting Home Depot's results lately. Lowe's also might take the opportunity to shift its capital return policy to more closely align with its peers. It currently targets spending just 35% of annual profits as dividends, compared with Home Depot's 55%.

Lowe's updated industry outlook is likely to reflect the trends that are supportive of modest growth, including a healthy economy and rising housing prices. Cutting against those tailwinds is the fact that sales in the second half of the year are going up against a prior-year period that was impacted by hurricane rebuilding efforts. Overall, though, Lowe's forecast should at least inch higher, just as Home Depot's did earlier in the month.

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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.