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Lowe's (LOW) Trims View Despite Q2 Earnings Beat, Stock Down
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Lowe’s Companies, Inc. (LOW - Free Report) reported second-quarter fiscal 2018 results, wherein both top and bottom lines improved year over year and came ahead of the Zacks Consensus Estimate. The solid performance was however not enough to placate investors who seem to be let down by management’s trimmed outlook for fiscal 2018. Markedly, shares of the company lost almost 3% during the pre-market trading session.
Incidentally, Lowe’s incurred non-cash pre-tax charges of nearly $230 million related to its strategic review of Orchard Supply Hardware, which, in turn, resulted in long-lived asset impairments and discontinued projects during the second quarter. Moreover, the company decided to exit these operations last week, in a drive to increase focus on its key home improvement business.
To this end, Lowe’s anticipates shutting down all 99 Orchard Supply Hardware stores (situated in California, Florida and Oregon), and also plans to wind up the related distribution facility by the end of fiscal 2018. In this regard, the company plans to undertake store closing sales and collaborated with Hilco Merchant Services to carry out the process seamlessly.
Well, management expects to incur incremental pre-tax costs of $390-$475 million in the second half of fiscal 2018, in connection with severance and lease obligations as well as accelerated depreciation and amortization costs. These factors along with management’s plan to rationalize inventory levels weighed on its outlook for fiscal 2018.
Q2 Performance
Excluding the aforementioned charges incurred in the second quarter (related to Orchard Supply), this home improvement retailer’s adjusted earnings came in at $2.07 per share, which surpassed the Zacks Consensus Estimate of $2.02. Moreover, the bottom line increased 31.8% from $1.57 in the year-ago quarter, following a rise of 15.5% in the previous quarter.
Lowe's Companies, Inc. Price, Consensus and EPS Surprise
Further, net sales of $20.9 billion beat the Zacks Consensus Estimate of $20.8 billion. Sales included the impact from the new revenue recognition accounting standard of ASU No. 2014-09, which was adopted in the first quarter of fiscal 2018.
Notably, sales in the second quarter advanced 7.1% year over year after posting improvement of 3% in the preceding period. Prior to that, the company posted sales growth of 1.8%, 6.5%, 6.8% and 10.7% in the fourth, third, second and first quarters of fiscal 2017, respectively.
Comparable sales (comps) rose 5.2% in the quarter under review, after 0.6% rise recorded in the preceding quarter. Comps increased 4.1%, 5.7%, 4.5% and 1.9% in the fourth, third, second and first quarters of fiscal 2017, respectively. Comps for the U.S. business jumped 5.3%, after increasing 0.5% in the first quarter of fiscal 2018. Comps for the U.S. business grew 4.7%, 5.1%, 4.6% and 2% in the fourth, third, second and first quarters of fiscal 2017, respectively.
Moving on, gross profit increased 7.9% year over year to $7,199 million and gross profit margin expanded roughly 25 basis points (bps) to 34.5%. However, operating income declined 9.2% to $2,163 million, thanks to higher SG&A expenses.
Other Financial Aspects
Lowe’s, which competes with Home Depot (HD - Free Report) , ended the quarter with cash and cash equivalents of $2,251 million, long-term debt (excluding current maturities) of $14,937 million and shareholders’ equity of $5,781 million. Cash flow from operations amounted to $5,787 million in the first six months of fiscal 2018.
In the reported quarter, the company kept its promise of returning surplus cash to stockholders as it repurchased shares worth $1.1 billion and distributed $338 million as dividends.
Outlook
Management remains impressed with Lowe’s robust second-quarter show, which was fueled by delayed spring season demand. Going ahead, the company remains committed toward delivering an even better performance by strengthening its retail fundamentals and putting greater focus on its core plan to become a solid omni-channel home improvement retailer.
While the company decided to exit Orchard Supply Hardware, it also remains strongly focused on rationalizing inventory levels. Both these factors led to a curtailed outlook for fiscal 2018.
For fiscal 2018, management now projects total sales growth of approximately 4.5%, down from the prior estimate of a rise of 5%. Further, comps for fiscal 2018 are now expected to rise about 3% compared with 3.5% anticipated earlier.
Additionally, Lowe’s now envisions operating margin to decline approximately 180 bps in fiscal 2018 compared with a 40-bp contraction expected earlier. The updated view takes into consideration the impact from non-cash charges as well as incremental costs associated with plans to exit Orchard Supply Hardware. These costs are anticipated to be incurred in the second half of fiscal 2018.
Further, effective tax rate is envisioned to be roughly 25%. Earnings are now anticipated in a band of $4.50-$4.60, considerably lower than the previously guided range of $5.40-$5.50. The Zacks Consensus Estimate for fiscal 2018 earnings is currently pegged at $5.44, which is likely to be revised downward.
Moreover, the company intends to open roughly 9 home improvement stores in fiscal 2018. As of Aug 3, 2018, the company operated 2,155 home improvement and hardware store in the United States, Canada and Mexico.
Zacks Rank
Lowe’s currently carries a Zacks Rank #3 (Hold). Shares of the company have rallied 39.2% in a year, outperforming the industry’s growth of 34.5%.
GMS Inc. (GMS - Free Report) with a Zacks Rank #2 has a long-term earnings per share growth rate of 7%.
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Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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Lowe's (LOW) Trims View Despite Q2 Earnings Beat, Stock Down
Lowe’s Companies, Inc. (LOW - Free Report) reported second-quarter fiscal 2018 results, wherein both top and bottom lines improved year over year and came ahead of the Zacks Consensus Estimate. The solid performance was however not enough to placate investors who seem to be let down by management’s trimmed outlook for fiscal 2018. Markedly, shares of the company lost almost 3% during the pre-market trading session.
Incidentally, Lowe’s incurred non-cash pre-tax charges of nearly $230 million related to its strategic review of Orchard Supply Hardware, which, in turn, resulted in long-lived asset impairments and discontinued projects during the second quarter. Moreover, the company decided to exit these operations last week, in a drive to increase focus on its key home improvement business.
To this end, Lowe’s anticipates shutting down all 99 Orchard Supply Hardware stores (situated in California, Florida and Oregon), and also plans to wind up the related distribution facility by the end of fiscal 2018. In this regard, the company plans to undertake store closing sales and collaborated with Hilco Merchant Services to carry out the process seamlessly.
Well, management expects to incur incremental pre-tax costs of $390-$475 million in the second half of fiscal 2018, in connection with severance and lease obligations as well as accelerated depreciation and amortization costs. These factors along with management’s plan to rationalize inventory levels weighed on its outlook for fiscal 2018.
Q2 Performance
Excluding the aforementioned charges incurred in the second quarter (related to Orchard Supply), this home improvement retailer’s adjusted earnings came in at $2.07 per share, which surpassed the Zacks Consensus Estimate of $2.02. Moreover, the bottom line increased 31.8% from $1.57 in the year-ago quarter, following a rise of 15.5% in the previous quarter.
Lowe's Companies, Inc. Price, Consensus and EPS Surprise
Lowe's Companies, Inc. Price, Consensus and EPS Surprise | Lowe's Companies, Inc. Quote
Further, net sales of $20.9 billion beat the Zacks Consensus Estimate of $20.8 billion. Sales included the impact from the new revenue recognition accounting standard of ASU No. 2014-09, which was adopted in the first quarter of fiscal 2018.
Notably, sales in the second quarter advanced 7.1% year over year after posting improvement of 3% in the preceding period. Prior to that, the company posted sales growth of 1.8%, 6.5%, 6.8% and 10.7% in the fourth, third, second and first quarters of fiscal 2017, respectively.
Comparable sales (comps) rose 5.2% in the quarter under review, after 0.6% rise recorded in the preceding quarter. Comps increased 4.1%, 5.7%, 4.5% and 1.9% in the fourth, third, second and first quarters of fiscal 2017, respectively. Comps for the U.S. business jumped 5.3%, after increasing 0.5% in the first quarter of fiscal 2018. Comps for the U.S. business grew 4.7%, 5.1%, 4.6% and 2% in the fourth, third, second and first quarters of fiscal 2017, respectively.
Moving on, gross profit increased 7.9% year over year to $7,199 million and gross profit margin expanded roughly 25 basis points (bps) to 34.5%. However, operating income declined 9.2% to $2,163 million, thanks to higher SG&A expenses.
Other Financial Aspects
Lowe’s, which competes with Home Depot (HD - Free Report) , ended the quarter with cash and cash equivalents of $2,251 million, long-term debt (excluding current maturities) of $14,937 million and shareholders’ equity of $5,781 million. Cash flow from operations amounted to $5,787 million in the first six months of fiscal 2018.
In the reported quarter, the company kept its promise of returning surplus cash to stockholders as it repurchased shares worth $1.1 billion and distributed $338 million as dividends.
Outlook
Management remains impressed with Lowe’s robust second-quarter show, which was fueled by delayed spring season demand. Going ahead, the company remains committed toward delivering an even better performance by strengthening its retail fundamentals and putting greater focus on its core plan to become a solid omni-channel home improvement retailer.
While the company decided to exit Orchard Supply Hardware, it also remains strongly focused on rationalizing inventory levels. Both these factors led to a curtailed outlook for fiscal 2018.
For fiscal 2018, management now projects total sales growth of approximately 4.5%, down from the prior estimate of a rise of 5%. Further, comps for fiscal 2018 are now expected to rise about 3% compared with 3.5% anticipated earlier.
Additionally, Lowe’s now envisions operating margin to decline approximately 180 bps in fiscal 2018 compared with a 40-bp contraction expected earlier. The updated view takes into consideration the impact from non-cash charges as well as incremental costs associated with plans to exit Orchard Supply Hardware. These costs are anticipated to be incurred in the second half of fiscal 2018.
Further, effective tax rate is envisioned to be roughly 25%. Earnings are now anticipated in a band of $4.50-$4.60, considerably lower than the previously guided range of $5.40-$5.50. The Zacks Consensus Estimate for fiscal 2018 earnings is currently pegged at $5.44, which is likely to be revised downward.
Moreover, the company intends to open roughly 9 home improvement stores in fiscal 2018. As of Aug 3, 2018, the company operated 2,155 home improvement and hardware store in the United States, Canada and Mexico.
Zacks Rank
Lowe’s currently carries a Zacks Rank #3 (Hold). Shares of the company have rallied 39.2% in a year, outperforming the industry’s growth of 34.5%.
Don’t Miss These Solid Retail Stocks
Fastenal (FAST - Free Report) has long-term earnings per share growth rate of 14%. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
GMS Inc. (GMS - Free Report) with a Zacks Rank #2 has a long-term earnings per share growth rate of 7%.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>