Home improvement retailer Lowe’s (NYSE:LOW) released its Q2 earnings results on August 21. Earnings for the quarter stood at $941 million, a gain of nearly 26%. Net earnings were propelled by top-line growth with a steady recovery in the U.S. housing market driving consumer appetite for home improvement products. The company’s net sales for the quarter stood at $22.5 billion, an increase of about 9.5% over Q2 2012.
Based on its solid performance and outlook for the balance of the year, Lowe’s raised its sales expectations. It now expects sales to be up by approximately 5% year-over-year with a rise in comparable store sales of approximately 4.5%. Earlier, Lowe’s had anticipated sales and comparable store sales to increase 4% and 3.5%, respectively. 
In addition to housing market recovery, a change in its product mix and inventory composition, supply chain improvement and a conscious effort to get the workforce to spend more time with customers on the shop floor helped results.
Housing Market Recovery Boosts Sales
Strong consumer confidence and mortgage rates at near record lows helped fuel the housing market. New home sales were well above 450,000 per month in each of the quarter and touched nearly 500,000 per month in June. Sales of existing homes continued to be strong as well during this period. The National Association of Realtors is expected to report existing home sales data for July shortly, which may provide further boost to Home Depot’s stock price. The reason that sales of new as well as existing homes benefit Home Depot is the spending on home improvement by new occupants. 
The housing recovery was especially robust in Lowe’s markets on the West Coast and Florida and comparable same-store sales growth figures ranged from high single to double digits.
Lowe’s net sales in Q2 2013 were around 10.3% higher year-over-year and reached $15.7 billion. The main sales drivers in the second quarter were macroeconomic in nature – primarily declining unemployment, increasing home occupancy rates, higher rates of home construction and spending as well as new home sales.
The company’s comparable same-store sales (comps) increased by a healthy 5% over the quarter. About half of this increase was driven by value improvement, product differentiation, proprietary credit value proposition, outside selling positions, and the weekday labor hours investment. The rest of the comparable same-store sales growth was accounted for by improved execution and strengthening industry demand. ((Lowe’s Q2 2013 Earnings Conference Call, Seeking Alpha))
Margins Remain Strong
Gross margin for the second quarter was 34.35% of sales, an increase of 42 basis points over Q2 2012. The rise in margins was driven mainly by value improvement which caused an increase of approximately 55 basis points. Also, more effective promotional activity in comparison to Q2 2012 aided had a positive impact of 20 basis points on the gross margin.
The improvement in margin caused by these two items was offset to some extent by Lowe’s credit value proposition program, which impacted gross margin negatively by approximately 15 basis points. This program offers customers a choice of 5% off everyday or promotional financing mix. It helps Lowe’s comparable store-sales figures by attracting more customers, but takes its toll on the cost structure.
In addition, a change in the product mix impacted gross margin negatively by 14 basis points. Finally, lumber inflation had a negative impact of about 10 basis points on gross margin.
Update On The Acquisition Of Orchard Supply Hardware
In June, Lowe’s announced the acquisition of the Orchard Supply Hardware chain for $205 million. The company informed in the earnings conference call that the government antitrust review has now concluded and the bankruptcy court has approved its bid for the 72 stores which are to be included in the transaction. Lowe’s expects to conclude the deal by the end of August and fund the acquisition through operating cash flows. The acquisition is expected to bolster Lowe’s position vis-a-vis rival retailer Home Depot in California.
We have a $42 Trefis price estimate for Lowe’s stock, which we will revise based on the latest results.Notes: