Home improvement retailer Lowe’s (NYSE:LOW) is scheduled to release its Q1 earnings results on May 22. The company is expected to report solid growth in year-over-year revenues on a recovering housing market as well as continued reconstruction activity after Hurricane Sandy. The positive sentiment is reflected in the company’s stock price due to improvements in key housing data such as record levels of home construction, declining vacancies, lower mortgage default rates and rising home prices.
Lowe’s looks to have positioned itself well for the higher demand for homes and home-related products well. Its total sales were up about 0.6% year-over-year in 2012. However, the company’s gross margins dipped marginally by 26 basis points from 2011, primarily due to an unfavorable 19 basis point impact related to its proprietary credit value proposition. In addition, it experienced a 7 basis point unfavorable impact due to to pricing and promotional activity. We think these are one-time items and margins will show an improvement this year, helped in some measure by better pricing due to demand. In short, investors have good reason to look forward to solid results when the company reports its first quarter results on Wednesday. 
Resurgent Housing Demand, Hurricane Sandy To Further Boost Sales
The U.S. housing industry posted some impressive gains in 2012, and the party has continued in the first quarter of 2013 as well. This is due to positive consumer confidence as well as mortgage rates at near record lows. New home sales rose well above 400,000 per month in the first three months of the year. Sales of existing homes continued to be strong as well in this period. The National Association of Realtors is slated to report existing home sales data for April on Wednesday, which may provide further boost to Lowe’s stock price. The sales of new as well as existing homes will benefit Lowe’s as new occupants spend on home improvement. 
Meanwhile, sales related to household repairs following the damage caused by Hurricane Sandy should also factor in to first quarter results, further boosting the top line. Although a majority of the repair work commenced towards the end of 2012, the sales effect of Sandy will most likely be spread throughout 2013. 
The Federal Emergency Management Agency has approved $1.38 billion in assistance for Sandy victims which will help the demand for lumber and other construction materials. As the nation’s second largest home improvement chain, Lowe’s is poised to capture a meaningful amount of this spending along with market leader Home Depot. ((Sandy’s Effects Likely to Bolster Home Depot, Lowe’s, WSJ))
Promotions Hurt Margin Gains
Last year, Lowe’s gross margins decreased by 26 basis points from 2011. The benefits from the company’s “Value Improvement Plan”, which aims at making Lowe’s stores more efficient through better inventory management, was offset by factors such as the company’s proprietary credit value proposition that offers customers a choice of 5% off everyday or promotional financing mix.
This plan helps Lowe’s comps by attracting more customers, but it takes its toll on profitability. Going forward, we expect the company to make slow but steady gains in margins as the ‘Value Improvement’ plan progresses.
We have a $39 Trefis price estimate for Lowe’s stock, which we will revise based on the first quarter results.Notes: