Unseasonably Cold Weather To Dampen Lowe’s First Quarter Results

by Trefis Team
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Lowe’s (NYSE:LOW) is slated to report its first quarter earnings on May 23, wherein a 5% rise in revenues and a 23% growth in earnings is expected. Revenue growth is expected to be driven by the improving housing market, as well as an increase in online sales. However, the unseasonably cold weather conditions during April may play a dampener on the sales growth, as it did with Home Depot. The substantial growth in earnings is expected to be a result of the decline in taxes. For a company like Lowe’s, which generates a bulk of its revenues from the U.S., the decline in the corporate tax rate will be immensely beneficial. For FY 2018, Lowe’s has guided for a 4% growth in sales, 3.5% improvement in comps (deceleration compared to FY 2017), with a flat gross margin and continued decline in the operating margin.

We have a $105 price estimate for Lowe’s, which is higher than the current market price. The charts have been made using our new, interactive platform. The various driver assumptions can be modified by clicking here, to gauge their impact on the earnings and price per share metric.

Factors That May Impact The Performance

1. Colder Than Normal Weather Conditions: Poor weather conditions during the month of April in some parts of the country may have had an impact on the traffic, as well as on the sales of outdoor items, particularly in the gardening category. This same factor resulted in Home Depot reporting a miss on analyst estimates for revenue in their recently reported first quarter results, when snowy conditions in April resulted in just a 2.2% rise in comparable sales growth in the month. In the first quarter for Home Depot, the comps improved 4.2% for the company as a whole, and 3.9% in the U.S., lower than the 5.6% and 5.5% anticipated by analysts.

2. Strong Macroeconomic Conditions: Unemployment is at its lowest since 2000, and wages are improving. Although interest rate hikes make mortgages more expensive, on the whole, it is indicative of a strong economy. These factors signal a solid U.S. economy, and have given rise to supportive housing fundamentals. This bodes well for a company like Lowe’s that is heavily reliant on the improvement of the housing industry.

3. Effect of Tariffs On Housing Market: According to the Housing and Mortgage Market Review published by Arch MI, a leading mortgage insurance provider in the United States, the direct impact of the steel and aluminum tariffs on the housing market are expected to be “inconsequential.” As per the review, although the costs of some building construction materials will rise, the direct impact on the total cost of a new home should be relatively insignificant. This is because steel frames accounted for less than 0.5% of new single-family houses and about 4% of multifamily buildings, according to the U.S. Census Bureau estimates. On the other hand, the imposition of lumber tariffs can raise the cost of building the average new single-family home by an estimated $1,400 and each multi-family unit by roughly $500, according to the National Association of Home Builders (NAHB).

4. Growth Driven By Omnichannel Segment: Lowe’s has provided an upgraded online shopping experience, with enhanced functionality and optimization for touch and mobile devices. The company’s MyLowe’s platform has also helped to drive brand loyalty and build deeper relationships with customers, a consequence of which has been that MyLowe’s members spend approximately 35% more on average than non-members. Lowe’s also provides flexible fulfillment options of buy online, pick up in store, and buy online, deliver from store, besides making it easier for customers to engage with its in-home project specialists to request services. As a result of the efforts undertaken by the company, 60% of the online orders are picked up in the store, with 40% of those customers buying incremental products when they go to collect their products. Lowe’s has received positive feedback for its omnichannel initiatives, a key factor in driving a 28% online comps improvement in the fourth quarter of FY 2017, and 34% for the year. We expect strong growth from this segment to continue.

5. Margin Pressure To Remain: A number of factors resulted in margin pressure for Lowe’s in FY 2017. This included the greater focus by the company on getting more competitive, and increasing its value perception among consumers, in order to gain market share, which resulted in higher staff and marketing expenditure. This is expected to continue this year. Moreover, Home Depot cited higher transportation costs as a factor for margin pressure in Q1. This should have a negative impact on Lowe’s results, as well. The company has guided for a flat gross margin for this year, along with a decline in operating margins, as mentioned earlier.

See our complete analysis for Lowe’s.


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