Image: Lowe’s shares have rallied nicely since the beginning of 2023.
By Brian Nelson, CFA
Home improvement retailer Lowe’s (LOW) recently reported third quarter results that showed a beat on both the top and bottom lines. Net sales fell 1.5% in the quarter as comparable sales fell 1.1%, which beat the consensus estimate expecting a fall of 3.3% in comparable sales. Management attributed the weakness to “continued softness in Do-It-Yourself [DIY] bigger-ticket discretionary demand” that was only “partly offset by storm-related sales and positive comparable sales in Pro and online.” Diluted earnings per share of $2.99 in the quarter, inclusive of a pre-tax gain associated with the 2022 sale of its Canadian retail business, compared to $3.06 in the same period a year ago.
Management had the following to say about the quarter:
Our results this quarter were modestly better-than-expected, even excluding storm-related activity, driven by high-single-digit positive comps in Pro, strong online sales and smaller-ticket outdoor DIY projects. I’d like to extend my heartfelt sympathy to those who suffered losses from Hurricanes Helene and Milton. I would also like to express my appreciation for our associates, suppliers and first responders for their commitment to the impacted communities.
Buoyed in part by anticipated modest storm-related demand in the fourth quarter, management expects total sales for the full year 2024 of $83.0-$83.5 billion (was $82.7-$83.2 billion)—consensus was $82.99 billion–and comparable sales to be between -3.0% to -3.5% (was -3.5% to -4.0%). Its adjusted operating margin for the year is now targeted in the range of 12.3%-12.4% (was 12.4%-12.5%), while adjusted diluted earnings per share is expected in the range of $11.80-$11.90 (was $11.70-$11.90), the midpoint above consensus of $11.81.
Management talked about the economic outlook on the conference call:
When it comes to the macro environment, this remains a challenging home improvement market. While interest rates are beginning to drop, consumers continue to face affordability challenges as both inflation and interest rates are putting pressure on their wallet.
Mortgage rates also remained stubbornly high and there’s still a meaningful gap between current mortgage rates to purchase a home and the homeowners existing rates with over half of current rates below 4%. Combined with the lack of available homes for sale, housing turnover remains near 30-year lows. Looking ahead, it’s unclear when lower rates and improved consumer sentiment will translate into improved home improvement demand.
However, the three primary drivers of our business continue to work in our favor. One, strong home price appreciation. Two, disposable personal income is outpacing inflation. And three, the medium age of homes is the oldest it’s been in U.S. history currently sitting at 41 years old. These drivers will support demand over the long term, which means existing homeowners are likely to continue investing in repairs and upgrades to their homes.
Especially as interest rate pressures ease, we expect that homeowners will start to tap into the record $35 trillion in home equity to finance larger home improvement projects. These factors along with long-term demand drivers like millennial household formation, Baby Boomers aging in place and continued remote work reinforce our optimism around the medium- to long-term outlook for the home improvement industry.
Lowe’s ended the quarter with $3.6 billion in cash and short-term investments and $35.5 billion in short- and long-term debt. During the quarter, Lowe’s repurchased approximately 2.9 million shares for $758 million, while it paid out $654 million in dividends. Our fair value estimate of $242 for Lowe’s shares is roughly in-line with where the firm’s equity is trading, and while its recently raised guidance was well-received, we remain on the sidelines with respect to the company in the newsletter portfolios. Shares yield 1.9%.
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Brian Nelson owns shares in SPY, SCHG, QQQ, QQQM, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, QQQM, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, QQQM, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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