Lowe's Takes a Financial Hit as Sales Stabilize
Lowe's (NYSE: LOW) this week reported fiscal fourth-quarter results skewed by a $1.6 billion charge that generated a net loss for the period. The retailer made important progress in its restructuring plan, though, while narrowing the performance gap just slightly against rival Home Depot (NYSE: HD). Lowe's also had positive things to say about the 2019 fiscal year, which should move it closer toward management's long-term rebound hopes.
More on that forecast in a moment. First, here's how the recent numbers compare with the prior-year period:
What happened with Lowe's this quarter?
Sales growth stabilized overall, with rebounds especially pronounced in the core U.S. sales division. Lowe's operating metrics still imply plenty of work left for the chain to do as it moves to recapture lost market share.
Key highlights of the quarter:
- Sales at existing locations rose 1.7% to mark a modest improvement over the prior quarter's 1.5% uptick. Lowe's continued to trail Home Depot in this key market share metric, with the industry leader announcing a 3.2% increase for the period.
- Gross profit margin declined to 31.3% of sales from 32%.
- Expenses soared, mainly thanks to a $1.6 billion charge the retailer took in association with its restructuring plan. Most of the charge applied to Lowe's Canadian business, its exiting of the Orchard Supply Hardware brand, and its divestment of the Mexican division. Adjusting for these one-time events, operating margin landed at 8.6% of sales for the year, compared to Home Depot's 14.4%.
- Absent the pre-tax charges, Lowe's earnings would have risen 8% to $0.80 per share from an adjusted $0.74 per share a year earlier.
What management had to say
CEO Marvin Ellison sounded a more optimistic tone than in the past two quarters. "Overall," he explained in the press release, "we are pleased with the progress we are making in our business." Executives highlighted an improving pace of sales growth over the last few months that culminated in an almost 6% gain in January. Management said that increase is "evidence that we are focused on the right actions at this stage of our transformation."
Looking forward
Many of Lowe's recent product portfolio and store footprint moves have been aimed at positioning the retailer to win during the upcoming spring selling season. Executives say that early seasonal category sales results suggest that the company could see healthy returns in this period.
As for broader 2019, Lowe's echoed comments made by Home Depot earlier in the week that highlighted generally strong fundamentals in the U.S. economy and the housing industry. These tailwinds should support modestly higher sales and profitability for both home improvement giants.
However, Lowe's outlook reflects a business still struggling to regain its footing. The company forecast comparable-store sales growth of about 3%, compared to the 5% that Home Depot predicted. Its adjusted operating margin should inch higher to just under 10% of sales, meanwhile, as Home Depot's comparable metric is set to reach nearly 14.5%.
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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.