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Lowe's Waiting To Take Off
Home improvement giant Lowe's (NYSE:LOW) reported third quarter earnings on Monday, and profits that fell below analyst expectations. The firm remains a leader in its industry and firmly profitable, but until growth trends start picking up the stock stands little chance of catching fire.
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Third Quarter Review
Sales grew 1.9% to $11.6 billion as same-store sales eked out a 0.2% gain and 10 new stores were opened to bring the total to 1,734 locations in the United States, Canada and Mexico. Retailing sales space rose 1.9%. Management detailed that comparable traffic and average ticket size were positive but that store cannibalization hit comps by about 30 basis points as new stores sales slightly ate into existing store ones.
It also relayed that consumers are still holding back on larger home improvement projects "until they have better clarity about their personal financial situations, the value of their homes, and the overall macroeconomic outlook". However, some "larger ticket items" including appliances from the likes of Whirlpool (NYSE:WHR) and grill sales did well during the quarter.
Lower product costs boosted gross margins slightly to just over 35% of sales. Management was also able to lower other expenses as a percent of sales, which pushed operating earnings ahead by more than 23% to $651 million, or 5.62% of sales. Higher income taxes tempered the bottom-line increase to 17.4% as net income reached $404 million, or 29 cents per diluted share. This came in below analyst profit projections.
Outlook
For the full year, Lowe's currently anticipates total sales growth between 3% and 4% as comps should increase 1% to 2% and 42 new stores are opened for 2% square footage growth. Earnings should reach a range of $1.37 and $1.40 per diluted share. This would represent year-over-year growth of about 15%, if the company reaches the high end of its profit guidance.
Bottom Line
At a forward P/E of nearly 16, shares of Lowe's are already pricing in a return of sales and earnings growth. However, it has been five years since the firm has seen any bottom-line growth. If it hits the high end of its guidance, earnings will just have returned to 2005 levels. Sales have grown by nearly a third since that time, but profit margins are far less.
The company has boosted cash flow significantly over the past five years and free cash flow has reached more than $2 billion last year, or approximately $1.43 per diluted share. But again, the free cash flow multiple is not sufficiently low to consider the stock a deal at current levels.
Lowe's, like major suppliers including Masco (NYSE:MAS), the housing products division of Fortune Brands (NYSE:FO), and Valspar (NYSE:VAL), continues to wait on a sustained industry recovery. Investor returns will likely continue to be subdued until this happens. (For related reading, see Analyzing Retail Stocks.)
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Third Quarter Review
Sales grew 1.9% to $11.6 billion as same-store sales eked out a 0.2% gain and 10 new stores were opened to bring the total to 1,734 locations in the United States, Canada and Mexico. Retailing sales space rose 1.9%. Management detailed that comparable traffic and average ticket size were positive but that store cannibalization hit comps by about 30 basis points as new stores sales slightly ate into existing store ones.
It also relayed that consumers are still holding back on larger home improvement projects "until they have better clarity about their personal financial situations, the value of their homes, and the overall macroeconomic outlook". However, some "larger ticket items" including appliances from the likes of Whirlpool (NYSE:WHR) and grill sales did well during the quarter.
Lower product costs boosted gross margins slightly to just over 35% of sales. Management was also able to lower other expenses as a percent of sales, which pushed operating earnings ahead by more than 23% to $651 million, or 5.62% of sales. Higher income taxes tempered the bottom-line increase to 17.4% as net income reached $404 million, or 29 cents per diluted share. This came in below analyst profit projections.
For the full year, Lowe's currently anticipates total sales growth between 3% and 4% as comps should increase 1% to 2% and 42 new stores are opened for 2% square footage growth. Earnings should reach a range of $1.37 and $1.40 per diluted share. This would represent year-over-year growth of about 15%, if the company reaches the high end of its profit guidance.
Bottom Line
At a forward P/E of nearly 16, shares of Lowe's are already pricing in a return of sales and earnings growth. However, it has been five years since the firm has seen any bottom-line growth. If it hits the high end of its guidance, earnings will just have returned to 2005 levels. Sales have grown by nearly a third since that time, but profit margins are far less.
The company has boosted cash flow significantly over the past five years and free cash flow has reached more than $2 billion last year, or approximately $1.43 per diluted share. But again, the free cash flow multiple is not sufficiently low to consider the stock a deal at current levels.
Lowe's, like major suppliers including Masco (NYSE:MAS), the housing products division of Fortune Brands (NYSE:FO), and Valspar (NYSE:VAL), continues to wait on a sustained industry recovery. Investor returns will likely continue to be subdued until this happens. (For related reading, see Analyzing Retail Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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