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Lowe's (LOW) Up 2.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Lowe's (LOW - Free Report) . Shares have added about 2.7% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Lowe's Beats Q3 Earnings Estimates, Raises View

Lowe’s reported third-quarter fiscal 2019 results, wherein earnings improved year over year and beat the Zacks Consensus Estimate but revenues missed the same. Nonetheless, management raised its adjusted earnings guidance for fiscal 2019.

Adjusted earnings of $1.41 a share exceeded the Zacks Consensus Estimate of $1.35 and increased 35.6% year over year. Bottom-line growth was backed by better execution. Including pre-tax charges related to the strategic review of Lowe’s Canadian operations, earnings were $1.36 per share compared with 78 cents reported in the year-ago period.

Markedly, the company commenced a review of operations in Canada in the third quarter, which included the impairment of long-lived assets and amendments in the leadership team. Also, management decided to take several actions to enhance sales and profits. These include reshuffling the corporate support system in Canada, shutting 34 underperforming Canadian stores, simplifying Canadian store banners and rationalizing assortments across these banners.

Q3 in Detail

Net sales of $17.39 billion edged down 0.2% year over year and missed the Zacks Consensus Estimate of $17.69 billion. Comparable sales for the U.S. home improvement business rose 3% in the quarter, following an increase of 2.3% and 3.5% in the second and first quarters of fiscal 2019, respectively.

Management is impressed with its U.S. home improvement stores’ performance in the third quarter, backed by strong macroeconomic landscape along with constant efforts to enhance customers’ experience, solid performance of the merchandise category and strength in the Pro business.

Gross profit grew 4.9% year over year to $5,640 million, while gross margin expanded 150 basis points to 32.4%.

Other Financial Aspects

Lowe’s ended the quarter with cash and cash equivalents of $794 million, long-term debt (excluding current maturities) of $16,635 million, and shareholders’ equity of $2,458 million.

The company generated cash flow from operations of $4,111 million in the nine months ended Nov 1. In the reported quarter, Lowe’s repurchased shares worth $835 million and distributed $428 million as dividends.

The company ended the quarter with 2,004 home improvement and hardware stores across the United States and Canada.

Outlook

Management focuses on improving Canadian operations. Further, the company is seeing solid momentum in its U.S. business and is on track to drive the top line, expand margins and attain operational efficacy. For fiscal 2019, management continues to project total sales growth of 2%, with comparable sales expected to rise 3%.

Additionally, management raised its adjusted earnings and operating margin guidance for fiscal 2019. Lowe’s now envisions adjusted operating margin expansion of 40-60 basis points for fiscal 2019, up from growth of 20-50 basis points mentioned earlier.

The company now anticipates adjusted earnings per share of $5.63-$5.70 compared with $5.45-$5.65 stated previously.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Lowe's has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile 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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