Lowe’s Earnings: Working On its Bottom-Line As Sales Improve

LOW: Lowe's logo

Lowe’s (NYSE:LOW) recently announced that its Q4 earnings that were better than expectations with double digit revenue growth as homeowners took on more home-improvement projects during the uncharacteristically warmer winter months. The home improvement retailer ended fiscal 2011 at the higher end of its sales guidance though it suffered some margin pressure. Even though the operating margin stood at 6.5% in 2011, the company has set a target to increase it to 10% by 2015. Lowe’s largest competitor in the U.S. is Home Depot (NYSE:HD).

See our complete analysis of Lowe’s here

Double Digit Sales Growth in 4Q Exceeds Expectations

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Warmer winters spurred strong demand for outdoor projects that drove up to 150 basis points of comparative same store sales growth for Lowe’s last quarter, offset by weaker demand for winter weather categories like heating and insulation.

The trend was similar to Home Depot, whose sales increased by an extra 2-2.5% because of the same reason. 4Q comparable store sales increased 3.4% though they remained flat for the complete year. With the strong performance last quarter, sales grew at 2.9% in fiscal 2011 compared to 2010. The performance was on the higher end of Lowe’s 2-3% guidance that was raised from 2% after 3Q.

Some Margin Compression, But Lowe’s Targets 10% Operating Margin by 2015 From Current 6.5%

4Q gross margin decreased by 130 basis points to 34% (y/y) due to increased promotional expenditures, input inflation, higher fuel costs and promotional pricing. For the complete year, gross margins stood at 34.6% representing a decrease of 60 basis points from fiscal 2010. It resulted in operating margin decline of 76 basis points reaching 6.5%.

Nonetheless, Lowe’s has set an ambitious target of achieving 10% operating margin by 2015 and hopes to improve operating margin by 100 basis points in fiscal 2012.

We are in the process of revising our $25 Trefis price estimate for Lowe’s stock.

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