Lowe’s Earnings Preview: Housing Market Recovery To Boost Sales

by Trefis Team
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Home improvement retailer Lowe’s (NYSE:LOW) Q4 2012 results will be out on Monday, and investors will be eager to see how much an impact the general resurgence in the US housing industry has had on the company’s final quarter and full-year earnings. The signs over the first nine months of 2012 have certainly been positive – an improvement in key housing industry metrics have gone hand-in-hand with an improved top-line performance for Lowe’s. The company’s internal cost-cutting and restructuring efforts, meanwhile, have helped it lower general expenses over the first three quarters, culminating in a whopping 80% increase in pre-tax profits for Q3 2012. With demand for housing remaining strong over the latter months  of 2012 (at least compared to 2011), we expect the year-end results to cap off a positive year for Lowe’s.

See our complete analysis of Lowe’s here

Top Line To Feed Off Resurgent Housing Demand, Hurricane Sandy To Further Boost Sales

The US housing industry has posted some impressive metrics over 2012. Housing starts (new home constructions initiated) for 2012 are estimated at around 894,000, the highest levels seen since 2008. Meanwhile, Standard & Poor’s Supercomposite Homebuilding Index, a benchmark for the housing industry as a whole, rose by more than 20% between June 2012 and the year end. All this equates to greater demand for home improvement products, and therefore more customers for  Lowe’s. Another key factor that should inspire confidence in investors are the rising prices of basic construction materials such as lumber – a very strong signal of strengthened demand for home improvement products.

The company’s performance over the first 9 months saw a moderate top-line growth of 2.6%. The growth over the final quarter could be somewhere above this mark, with damages caused by Hurricane Sandy also driving sales related to repair and new construction.

Bottom Line May Dip Due To New Store Openings

Lowe’s bottom line performance over the first nine months of 2012 was a solid one, helped along by improved inventory management as well as the closure of key under-performing stores in the US. The company’s Selling, General and Administrative expenses (SG&A) declined by more than 6% in Q3 2012, boosting the company’s net earnings. Although inventory management improvements should continue to help Lowe’s margins in the final quarter, their decision to open as many as 10 stores over the last 3 months of 2012 could weigh down any significant cost-savings realized by the company.

We have a  $36 Trefis price estimate for Lowe’s stock, which we will revise once the company’s Q4 results are out.

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