Home improvement retailer Lowe’s (NYSE:LOW) is scheduled to release its Q2 earnings results on August 21. 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 higher demand for homes and home-related products. Although its total sales were down marginally by about 0.5% year-over-year in Q1 2013, we expect sales to be higher on a sequential basis in the second quarter. However, the company’s gross margins in the previous quarter rose marginally by 10 basis points from Q1 2012, primarily due to a favorable 25 basis point impact from its Value Improvement initiative. It was offset to some extent by an unfavorable impact from its proprietary credit program. We think that overall margins will show an improvement in the second quarter helped in some measure by better pricing due to higher demand. In short, investors have a good reason to look forward to solid results when the company reports its second quarter results on Wednesday. 
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Housing Recovery Remains Strong, Hurricane Sandy To Further Boost Sales
The housing market recovery continued in the second quarter of 2013, spurred by strong consumer confidence and mortgage rates at near record lows. New home sales rose well above 450,000 per month in the first three months of the year 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 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 solid second 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 has resulted in an uptick in demand for lumber in the affected areas. As the nation’s second largest home improvement chain, Lowe’s is poised to capture a good chunk of the spending even though it doesn’t have as many stores as rival retailer Home Depot has on the West Coast. 
Promotions May Temper Margin Gains
In the first quarter, Lowe’s gross margins increased by 10 basis points from Q1 2012. The benefits from the company’s “Value Improvement Plan”, which aims at making Lowe’s stores more efficient through better inventory management, was offset to some extent by factors such as higher sales penetration of the company’s proprietary credit value proposition. This program offers customers a choice of 5% off everyday or promotional financing mix.
This proprietary credit program helps Lowe’s comps by attracting more customers, but it takes a 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 $42 Trefis price estimate for Lowe’s stock, which we will revise based on the second quarter results.Notes: