Home improvement giant Lowe's (NYSE:LOW) closed out its fiscal year with solid profitability and a modest boost in the bottom line. A push for further growth in the face of continued challenging industry conditions is commendable, but much of any potential is already baked into the share price valuation. For more, see Earning Forecasts: A Primer.
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Full Year Recap
Net sales advanced a modest 2.9% to $50.2 billion. Management cited an extra week that accounted for 1.6% of the increase and growth in average square footage at its overall store base. Comparable store sales "were essentially flat," as was store count. Sales costs rose at a slightly faster rate than the top line and resulted in gross profit growth of only 1.2%. Selling, general and administrative expense operating costs also outpaced sales, rising 4.9% to help push pre-tax earnings down 10% to $2.9 billion. Lower income tax expenses helped temper the net income decline a bit to 8.5% as earnings fell to $1.8 billion.
However, the repurchase of nearly $3 billion in its own shares resulted in a penny increase in earnings to $1.43 per diluted share. Operating cash flow improved at a faster clip, rising 12.9% to $4.3 billion. Backing out $1.8 billion in capital expenditures resulted in free cash flow of roughly $2.5 billion, or nearly $2 per diluted share.
For 2012, Lowe's expects another year of modest sales growth of only between 1 and 2%, though it could be as high as 3% when backing out the effects of the extra week in this fiscal year. Management plans for comps in a range of 1 and 3% and 10 new stores during the year. This is projected to result in earnings per diluted share between $1.75 and $1.85 per diluted share.
The Bottom Line
Lowe's has had no problem staying firmly profitable in the face of a historic housing crash. However, sales have barely budged over the past three years and are up only a couple of percentage points annually over the past five years. Over both periods, profits have fallen and the annual drop has picked up pace to close to 9% over the past three years.
Along with archrival Home Depot (NYSE:HD), this has led to some soul searching. Americans are no longer willing to spend on major remodeling projects because, on average throughout the nation, the value of their largest asset continues to tread water, at best. In other markets, it continues to decline. Lowe's pre-tax margins reached nearly 11% back in 2007 but have fallen steadily since, and recently came in at less than 6%.
Lowe's has responded with a number of initiatives to boost sales, efficiencies and eventually profits. During its conference call, management spoke of "rightsizing actions," including store closures, staff reductions and spending to improve inventory management, information technology and its website. It could also start to push for better terms from key suppliers that include Masco (NYSE:MAS), Scotts Miracle-Gro (NYSE:SMG) and Stanley Black & Decker (NYSE:SWK).
Improvements are likely on the way, but at a forward P/E of close to 13, much of this operational upside is already priced into the stock. For prospective investors, a share price in the low $20 range would offer better upside potential, as well as downside protection should a return to more consistent profit growth still be a few years off. For additional reading, check out 5 Must-Have Metrics For Value Investors.
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.