How Will First Quarter Results Impact Lowe’s Stock?

+11.59%
Upside
180
Market
201
Trefis
LOW: Lowe's logo
LOW
Lowe's

Lowe’s (NYSE: LOW) is scheduled to report its fiscal first-quarter results on Wednesday, May 19. We expect the company’s stock to remain largely around the current market price post-first-quarter results – as its revenues are likely to beat consensus estimates marginally and earnings to come in line. The home improvement leader has seen revenue and net income grow by double-digits as millions of homeowners have found themselves spending substantially more time in their homes in 2020. The home improvement retailer has invested quickly and heavily to build out its digital capabilities to accommodate this demand surge during the pandemic. In fact, these capabilities could bring in customers even after the pandemic has run its course. Certainly, sales will not continue to grow at 20+% levels as seen in 2020, but the company will likely continue to benefit from the rollout of vaccines in Q1. As more consumers get vaccinated, they will be more comfortable allowing contractors into their homes leading to higher sales to professionals. Our forecast indicates that Lowe’s valuation is $201 a share, which is close to the current market price of $199. Look at our interactive dashboard analysis on Lowe‘s Pre-Earnings: What To Expect in Q1? for more details.-

(1) Revenues expected to marginally beat the consensus estimates

Trefis estimates Lowe’s Q1 2021 revenues to be around $24 Bil, slightly higher than the consensus estimate of $23.77 Bil. Lowe’s saw record sales growth in 2020 as it added over $17 billion year-over-year to its sales base and booked soaring profits through the year. In addition, the company also reported a strong comparable sales growth of 26.1% in fiscal 2020, which surpassed Home Depot’s comp sales of 19.7% in fiscal 2020. Particularly, Lowe’s saw a 12.1% increase in comparable average tickets and a 14.0% increase in comparable customer transactions during 2020, and we expect this trend to continue in fiscal Q1 as well. That said, the increase in remote working may be longer-lasting, which will allow the company to serve those customers looking to build and maintain a home office beyond the pandemic. In addition, as a consequence of the pandemic, more people are deciding that owning a home is a better bargain than renting an apartment – which means more business for home improvement retailers.

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2) EPS to be likely to come in line with consensus estimates

Lowe’s Q1 2021 earnings per share (EPS) is expected to be $2.62 per Trefis analysis, in line with the consensus estimate of $2.61. As a result of revenues growing substantially, the company’s operating margin of 8.6% in 2020 came 80 basis points higher than 2019 – despite higher safety, labor, and supply chain costs related to Covid-19. In fact, the company’s operating income grew a strong 38% y-o-y during this period. In addition, Lowe’s generated $5.8 billion of net income in 2020, compared to $4.3 billion in the prior-year period. 2020 also changed the way the customers shopped with Lowe’s, which became evident with a 111% sales growth on Lowes.com for the year. Also, roughly 60% of these online orders were picked up in-store. This largely indicates that the company is able to save major costs of shipping items to the customer’s homes in pick-up orders, consequently passing on these savings to its bottom line.

For the full year 2021, we expect Lowe’s net margin to grow 180 basis points from 6.5% in 2020 to 8.3% in 2021. This coupled with a marginal decline y-o-y (due to weak comparison compared to 2020) in Lowe’s revenues, could lead to a rise of $1.6 billion y-o-y in net income to $7.4 billion in 2021. All this, resulting in a potential EPS increase from $7.77 in 2020 to around $10.05 in 2021.

(3) Stock price estimate largely around the current market price

Going by our Lowe’s Valuation, with an EPS estimate of around $10.05 and P/E multiple of 20x in fiscal 2021, this translates into a price of 201, which is around the current market price.

E-commerce is eating into retail sales, but this might be an investment opportunity. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift.

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