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Lowe's (LOW) Up 7% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Lowe's (LOW - Free Report) . Shares have added about 7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lowe's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Lowe's Misses on Q1 Earnings, Slashed Outlook

Lowe’s Companies, Inc. reported first-quarter fiscal 2019 results, wherein both top and bottom lines improved year over year. However, earnings missed the Zacks Consensus Estimate. Also, gross margin contracted owing to cost pressures, among other factors. This compelled management to slash earnings guidance for fiscal 2019.

Earlier, Lowe’s had unveiled plans to exit Mexico retail operations and also intended to divest the operating business. Nevertheless, during the first quarter, the company decided to sell the assets of the business, which generated a tax benefit of nearly $82 million in the quarter. However, this was excluded from the adjusted results.

Q1 Performance

Lowe’s posted adjusted earnings of $1.22 a share that fell short of the Zacks Consensus Estimate of $1.33 but increased 2.5% from $1.19 reported in the year-ago quarter.

Net sales of $17.7 billion beat the Zacks Consensus Estimate of $17.6 billion. Notably, sales in the quarter under review advanced 2.2% year over year on the back of Lowe’s focus on enhancing customers’ experience and improving in-stocks, and strength of pro customers. Prior to this, the company posted sales growth of 1%, 3.8%, 7.1% and 3% in the fourth, third, second and first quarters of fiscal 2018, respectively.
 
Comparable sales rose 3.5% in the quarter under review, following an increase of 1.7%, 1.5%, 5.2% and 0.6% recorded in the fourth, third, second and first quarters of fiscal 2018, respectively. For lowes.com, comparable sales surged 16% during the quarter.

Comparable sales for the U.S. home improvement business improved 4.2% during the quarter under review. Comparable sales for the U.S. business grew 2.4%, 2%, 5.3% and 0.5% in the fourth, third, second and first quarters of fiscal 2018, respectively.

Gross profit decreased 2.9% year over year to $5,581 million, while gross margin contracted around 160 basis points to 31.5%. This can be attributable to cost pressures, considerable transitions in the company’s merchandise organization and certain ineffective pricing tools.  Operating margin shrunk 45 basis points to 8% of sales.

Other Financial Aspects

Lowe’s ended the quarter with cash and cash equivalents of $2,973 million, long-term debt (excluding current maturities) of $16,542 million and shareholders’ equity of $3,236 million.

The company generated cash flow from operations of $2,137 million and incurred capital expenditure of approximately $205 million, resulting in free cash flow of $1.9 billion in the first quarter. Management envisions capital expenditure of approximately $1.6 billion and free cash flow of approximately $3 billion for fiscal 2019

In the reported quarter, it repurchased shares worth $818 million and distributed $385 million as dividends. The company still had approximately $13.1 billion remaining under share repurchase authorization. The target leverage ratio is 2.75x, therefore the company expects to repurchase approximately $4 billion of stock.

Outlook

Management is pleased with the progress of its retail fundamentals along with a healthy consumer environment. These factors along with robust strategies drove Lowe’s sales. The company is on track to undertake the necessary pricing and other actions to battle cost-related headwinds. To this end, its takeover of Retail Analytics platform is expected to help enhance the pricing approach.

For fiscal 2019, management continues to project total sales growth of approximately 2%, with comparable sales expected to increase roughly 3%.

However, the company is still in the initial stages of transformation. It revised its fiscal 2019 operating margin and earnings outlook, owing to the gross margin contraction witnessed in the first quarter. Lowe’s now envisions adjusted operating margin to expand 20-50 basis points compared with 85-95 basis points growth anticipated earlier. The company now projects adjusted earnings per share of $5.45-$5.65, down from the previous guidance of $6.00-$6.10.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -10.75% due to these changes.

VGM Scores

Currently, Lowe's has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lowe's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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