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Analyst Blog

On Jun 12, 2014 we issued an updated research report on Lowe's Companies Inc. (LOW - Analyst Report) following the company’s first-quarter fiscal 2014 earnings results.

Lowe’s posted lower-than-expected results in spite of a year-over-year rise. Unfavorable weather conditions were mainly to be blamed for this weak performance. Excluding the tax-related benefit and charges, Lowe’s earnings came in at 58 cents per share, up 18.6% year over year but below the Zacks Consensus Estimate of 61 cents per share.

Lowe’s witnessed a 2.4% rise in total revenue to $13,403 million but fell short of the Zacks Consensus Estimate of $13,875 million.

Moreover, Lowe’s reaffirmed its fiscal 2014 sales outlook while raising its earnings guidance. The company continues to expect its sales and comparable-store sales to register year-over-year growth of approximately 5% and 4%, respectively, whereas it anticipates its earnings for fiscal 2014 to be approximately $2.63 per share compared with the earlier guidance of $2.60 per share.

Additionally, Lowe’s efforts to expand in high-growth markets to improve sales and profitability are impressive. The company’s decision of closing its underperforming stores along with its strategy of enhancing customers' shopping experience and merchandising transformation is likely to help generate incremental sales. The company has reset product differentiation in 1,400 stores and expects to extend it to the remaining stores by the first half of fiscal 2014.

A special mention for the ProServices business that excelled in the quarter and is expected to perform consistently well going forward. Further, the company has introduced its ‘Outdoor Living Experience’ section in some of the outlets to help customers find necessary products to construct their entire outdoor room under one roof.  Moreover, the company’s sustained focus on price management and addition of extra labor hours will help boost its market share.

The company’s strong liquidity positions it well for future growth and enhancement of shareholder return.

However, the mixed recovery signals from the housing market are discouraging. A severe winter froze its growth prospects during the initial part of the year. Nevertheless, with the improvement of weather, key growth indicators like employment, income and consumer spending have recently begun to recover.

Meanwhile, declining home sales in the last couple of months do not give positive signals. Despite this, management remains upbeat about recovery in the coming months owing to the expectation of a stronger job market and growth in income as well as an improvement in credit conditions. We remain skeptical about the stock as recovery appears to be a time-consuming affair.

Currently, Lowe’s carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Better-ranked stocks worth investment in the retail sector include Aaron’s, Inc. (AAN - Snapshot Report), Build-A-Bear Workshop Inc. (BBW - Snapshot Report) and Citi Trends, Inc. (CTRN - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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