Lowe’s Earnings Review: Misses On Revenues But Optimistic Outlook Persists

America’s second largest home improvement retailer, Lowe’s (NYSE:LOW), reported its fiscal first quarter results on May 20. The retailer delivered a 5.4% sales increase in the quarter to $14.1 billion, with comp sales growing 5.2% on a year-on-year basis, against a 2.9% increase in average ticket sizes and a 2.2% increase in transactions. EPS in the quarter gained almost 14.8% year on year, to reach $0.70. ^[1] Here are the key takeaways from Lowe’s earnings report for the quarter, along with what can be expected going forward.

Sales Increased But Failed To Meet Expectations

According to the fiscal 2014 earnings call transcript, Lowe’s anticipated the first quarter of the year to be most promising. However, this did not happen. While Lowe’s recorded gains year-on-year, the results missed Thomson Reuter expectations of $14.3 billion in revenues and $0.74 in EPS, with the shares falling 6.6% in premarket trading. ^[2] Although part of this may be because the retailer pushed the lucrative Spring Black Friday event in the North to Q2 from Q1, a relatively slack U.S. economy, coupled with difficult trading conditions on the West Coast, and harsh winter weather, are also to blame.

The past few years, strong macroeconomic conditions in the U.S. propelled Lowe’s to report stellar performance. However, performance of the economy was hardly favorable in the quarter, with GDP growing just 0.2%, instead of the predicted 2.3%. ^[3] The slowdown in the U.S. economy at large, also exerted an impact on the housing markets in the earlier part of the quarter, with the sale of existing houses falling 4.9% in January, to a seasonally adjusted average rate (SAAR) of 4.82 million, the lowest recorded since May 2014. ^[4] Even against these circumstances, Lowe’s managed to report positive comps in all product categories with notable performance in appliances, outdoor power equipment, and seasonal living. ((Lowe’s Companies’ (LOW) CEO Robert Niblock on Q1 2015 Results – Earnings Call Transcript))

New Brands And Continued Focus On Pros Could Drive Revenues

In spite of lower than expected performance in the first quarter, Lowe’s could regain positive prospects due to a number of factors. For one, the retailer is credited to have a strong brand portfolio and has taken steps to enhance this further. For instance, last year saw the addition of Hitachi’s pneumatic tools, in tools and hardware, and Kichler in decorative lighting, all of which are market leaders in their respective categories. ^[5] Even in this quarter, double digit comps in appliances were driven, courtesy of leading appliance brands such as Whirlpool, KitchenAid, Bosch, Samsung, LG, Electrolux, Frigidaire, and GE. Another addition to its portfolio in April was Sherwin-Williams, a market leader in paints. Lowe’s has taken steps to effectively push this brand and has successfully leveraged its “omni-channel approach” to market the product with its kitchen vignettes, bath vignettes, and home decor offerings. Furthermore, they have used a color visualizer on lowes.com, which will allow customers to virtually use the paint on their rooms. This brand, along with brands such as Valspar and PPG Olympic, could ensure market share gains in the paint category. ((Lowe’s Companies’ (LOW) CEO Robert Niblock on Q1 2015 Results – Earnings Call Transcript))

Apart from a general focus on broadening its brand selection, Lowe’s has directed focus on building brands particularly for its Pro customers. In this respect, they recently rolled out brands such as Kobalt masonry tools, GAF Roofing, and  Owens Corning insulation, which could go on to ensure high Pro penetration. ^[1] Lowe’s also relaunched LowesForPros, a dedicated online platform for purchase by professional customers. The site is well integrated with the retailer’s purchasing system, which could improve ease of use for Pros by allowing them to streamline their purchases and also customize their product catalogs.

Another promising avenue for Lowe’s is its online segment, which grew 25.5% in the quarter, with customer traffic experiencing double digit gains. Lowe’s worked further to build its online presence by improving ease of use through better search capabilities and filtering. In the quarter, Lowe’s added close to 360 new products to its online space, introduced product videos to 214 items, enhanced customer interaction through videos, and improved images to better showcase products. Given this, Lowe’s saw double digit growth in its online platform every month of the quarter. ^[1] We expect the “dotcom” sphere to prove to be extremely lucrative for Lowe’s even going forward.

Upbeat U.S. Economy And Housing Markets Bodes Well For Lowe’s

Although macroeconomic fundamentals proved to be weaker in the quarter, the full year projections for the U.S. economy and housing markets continues to remain positive, with GDP projected to grow at about 3% and unemployment rates to reach 5.5%. In addition, key drivers such as existing home sales and new home sales are also expected to witness notable gains in 2015 at 6.4% and 33%, respectively, against low interest rates, stability in the job market, and improving consumer confidence. ((U.S. Economic Outlook: April 2015)) Although the housing markets showed a slowdown in the beginning of the quarter, it picked up, with existing home sales surging 6.1% to reach a SAAR of 5.19 million in March, the highest in 18 months. ^[6] In spite of this, existing home sales in absolute numbers have not yet reached their pre-recession levels, which is indicative of immense potential in the years going forward, which bodes very well for the home improvement industry.

According to a survey conducted by Lowe’s, around 50% of homeowners believe that the value of their homes is increasing, which could motivate home improvement spending in the future. Leveraging this, Lowe’s expects to deliver total sales increases of approximately 4.5-5% this year, with comps increasing 4-4.5%. The management has also indicated the opening of 15-20 stores over the year, which comprises of six Orchards and two City Centers that are also expected to bring in revenues. The retailer expects EBIT to increase 80 to 100 basis points, with some seasonality persisting from quarter to quarter. ((Lowe’s Companies (LOW) Earnings Report: Q4 2014 Conference Call Transcript))

We expect Lowe’s to deliver on their full-year numbers guided by growing pro sales, a booming online business, and strength in the housing markets. In a duopolistic home improvement market, with Home Depot being the other dominant player, Lowe’s’ prospects are bound to be contingent on Home Depot’s performance. While Home Depot beat analyst expectations in the first quarter, Lowe’s fell short of that predicted. Given that Home Depot is also increasingly targeting Pro customers and the online sphere, Lowe’s prospects in these lucrative segments continues to remain vulnerable to competition. However, Home Depot continues to be threatened by a massive data breach, costs related to which, might drastically impact prospects for the retailer. In this situation, Lowe’s might continue to gain customer traffic going forward, to put them in better stead.

See our complete analysis of Lowe’s here

We have a $78 Trefis price estimate for Lowe’s stock, which is currently above the market price.

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1. Lowe’s Companies’ (LOW) CEO Robert Niblock on Q1 2015 Results – Earnings Call Transcript [↩] [↩] [↩]
2. Lowe’s Misses on Top, Bottom Lines [↩]
3. Economic Growth Slows Sharply In Q1 2015: 5 Factors Slowing US GDP [↩]
4. January 2015 Existing-Home Sales [↩]
5. Lowe’s Companies (LOW) Earnings Report: Q4 2014 Conference Call Transcript [↩]
6. Existing-Home Sales Spike In March [↩]