For a short while late last year, it almost looked as if Lowe’s Companies, Inc. (NYSE:LOW) was going to get out from under the shadow of bigger rival (and generally better performer) Home Depot Inc (NYSE:HD).
That was a short-lived idea though, bolstered by only a temporary surge in growth. Home Depot is back to its old self, and unfortunately, Lowe’s appears to be working its way back to its typical second-fiddle status again. How so? Lowe’s second-quarter numbers posted on Wednesday morning — in addition to reeled-in profit guidance for all of 2017 — evaporated what little bullish hope was left.
That’s not to say the numbers were horrible. There was simply no margin for error, and Lowe’s came up short. Investors are forced to wonder if that glimmer of hope that started to shine last year was just a lucky fluke.
Lowe’s Stock Earnings Recap
For its second quarter of the year, Lowe’s turned $19.49 billion worth of revenue into an operating profit of $1.57 per share. The home improvement retailer earned $1.37 per share in the comparable quarter from a year earlier, when its top line totaled $18.26 billion. Analysts were calling for a profit of $1.62 per share on sales of $19.55 billion, though some investors were quietly expecting earnings of $1.64 per share of LOW stock.
Same-store sales grew 4.5%, just eclipsing the 4.3% improvement analysts were looking for.
Between the earnings miss and the contracted profit margin forecast for the full year, investors saw the glass as half-empty rather than half-full, sending LOW stock lower to the tune of 5% in Tuesday’s early trading.
The numbers partially contrast with those from rival retailer Home Depot posted on Tuesday of last week, though the outcome was the same. Despite earning $2.25 per share versus estimates of only $2.22 in addition to a 14% improvement on the company’s bottom line from a year earlier, HD shares slumped on fears that the nation’s hot housing market is cooling off. Not even record second-quarter revenue could convince Home Depot investors to hold onto their shares.
Lowe’s CEO Robert Niblock said of the company’s second quarter results:
“While our results were below our expectations in the first half of this year, the team remains focused on making the necessary investments to improve the customer experience and drive sales. This includes amplifying our consumer messaging and incremental customer-facing hours in our stores which will put pressure on our operating margin. We believe this is the right strategy to more fully capitalize on strong traffic trends in what we believe is a supportive macroeconomic backdrop for home improvement.”
Still Second Fiddle to Home Depot?
For years, Lowe’s has struggled to keep up with its bigger and better-funded rival, with only modest success. There are some (though hardly a plethora of) analysts that increasingly view Lowe’s stock as the better buy of the two though. The tide started to turn in earnest as of the fourth quarter of last year, when same-store sales grew 5.1% but didn’t require thinner margins. E-commerce really started to gain traction.
The first quarter of this year wasn’t quite as impressive, however, underscoring how young the overhaul effort has been. With same-store sales only rolling in 1.9% better (falling short of an expected 2.9% rise) and earnings of $1.03 per share of Lowe’s stock missing estimates of $1.06. LOW stock plunged 4% on that news, and ultimately lost 12% before hitting bottom in July. Last quarter’s results were similarly mixed.
Nobody ever said it was going to be easy or quick.
With that as the backdrop, if Home Depot shares fell despite the earnings beat and the mere suspicion of a housing market slowdown, Lowe’s stock didn’t have a chance of making forward progress with an earnings shortfall.
The irony? Spending on home remodeling in the U.S., which is Lowe’s proverbial bread and butter, is expected to grow 6.8% this year … proving that perception is more important than reality for investors.
Looking Ahead for LOW Stock
For the quarter currently underway, analysts expect — or did expect — Lowe’s to earn $1.07 per share on revenue of $16.49 billion, which would be a marked improvement on the top line of $15.74 billion generated in the third quarter of 2016.
Those figures may change now, however, with last quarter’s results in hand.
Ditto for the full year. For all of 2017, the pros were modeling earnings of $4.62 per share, up from year-ago profits of $3.99 per share of LOW stock, on sales of $68.25 billion. That top line would be up 5% from the Q3-2016 top line of $65.02 billion. Lowe’s offered full-year profit guidance of between $4.20 and $4.30 per share of Lowe’s stock, though that predicted profitability factors in costs linked to the retirement of some of its debt. Sales are projected to rise 5% by the company, though Lowe’s only expects 3.5% growth in same-store sales. That should still be enough to improve operating margins between 80 and 100 basis points, though at one point the company had suggested a 120 basis point improvement in 2017’s profitability.
The report makes it very difficult to give Lowe’s the benefit of the doubt, and the market clearly didn’t.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.