Lowe's Companies Inc.'s Mixed First Quarter Was Much Stronger Than You Think

Lowe's  (NYSE: LOW  ) , the second-largest home improvement specialty retailer in the world, has just released its first-quarter results for fiscal 2014 and its shares have reacted by making a slight move to the downside. Let's take a look at the results and the company's outlook on the rest of 2014 and then check in on its largest competitor, Home Depot (NYSE: HD  ) , to determine if this decline is our opportunity to buy or if we should avoid investing in Home Depot for now.

Source: Lowe's

The mixed first quarter
Home Depot released its first-quarter report before the market opened on May 21 and the results were mixed compared to analysts' expectations; here's a breakdown:

Metric Reported Expected
Earnings Per Share $0.61 $0.60
Revenue $13.40 billion $13.91 billion

Source: Benzinga

Home Depot's diluted earnings per share increased 24.5% and revenue increased 2.4% year-over-year, as comparable-store sales increased just 0.9%. The company noted that "poor winter weather" was a primary reason for the weak revenue results but its performance showed improvement in May, which led it to believe that this will not be an ongoing issue.

Source: Lowe's Facebook

Even with the weak revenue results, gross profit was a bright spot for Lowe's as it rose 4.5% to $4.76 billion. The gross margin showed strength as well, expanding 70 basis points to 35.5%. 

The above results and ample free cash enabled Lowe's to repurchase approximately $850 million of its common stock and pay out approximately $186 million in dividends during the quarter. Over $5.4 billion still remains on the company's share-repurchase authorization, so it will likely maintain this pace for the rest of the year.

Lastly, four new stores were opened during the quarter, bringing Lowe's total count to 1,836 worldwide and putting it on track to achieve its full-year expansion goal. 

Overall, it was a good quarter for Lowe's regardless of what analysts were expecting, but the stock reacted by falling a fraction of a percent in the trading session that followed. This appears to be a buying opportunity, but before we draw this conclusion, let's take a look at what the company expects going forward...

What will the rest of the year hold?
In its report, Lowe's reaffirmed most of its growth expectations for the year, but raised its earnings per share guidance and lowered the number of new stores it plans to open; here's what the company now expects the year to hold:

Source: Lowe's

  • Earnings per share of $2.63, up from its previous guidance of $2.60
  • Revenue growth of 5%
  • Comparable-store sales growth of 5%
  • Operating margin expansion of 65 basis points
  • Opening 10 new home improvement stores and five new hardware stores, down from its previous guidance of 15 new home improvement stores and five new hardware stores

The new outlook would result in earnings-per-share growth of 22.3% from fiscal 2013 and would propel revenue to over $56 billion for the year. Also, I believe management made a great move in slowing its expansion plans for the year following the weak quarter to prevent over-extension if weakness, like poor weather, were to strike again.

With Lowe's outlook now factored into the earnings results, I can finally conclude that its stock represents a great investment opportunity today. I believe this because the company has shown consistent growth over the last several quarters and its outlook calls for more of the same going forward; in addition, its management team is fully dedicated to maximizing shareholder value, and I think all of this will help drive the share price to fresh all-time highs by the end of the year.

A competitor's results are out as well
Home Depot, the largest home-improvement specialty retailer in the world and Lowe's top competitor, reported first-quarter earnings of its own on May 20 and the results were mixed compared to expectations as well; here's a summary of the report:

Metric Reported Expected
Earnings Per Share $1.00 $0.99
Revenue $19.69 billion $19.95 billion

Source: Benzinga

Home Depot's earnings per share increased 20.5% and revenue increased 2.9% year-over-year, driven by a global comparable-store sales rise of 2.6% that included strong 3.3% growth in the United States.

Source: Home Depot

Gross profit increased 3.1% to $6.89 billion and operating profit increased 8.7% to $2.28 billion. Also, the gross margin expanded 10 basis points to 35% and the operating margin expanded 60 basis points to 11.6%.

During the quarter, Home Depot repurchased approximately $1.25 billion of its common stock and paid out $646 million in dividends. The company aims to maintain this pace by repurchasing another $3.75 billion worth of shares over the next three quarters. When paired with dividend payments, the company will return about $7.5 billion to stockholders in 2014.

These results led Home Depot to reaffirm its revenue expectations and raise its earnings per share expectations for the full year of fiscal 2014; the company now expects to earn $4.42 per share, an increase of 17.6%, and grow revenue 4.8% from fiscal 2013.

In summary, it was a fantastic quarter for Home Depot and its stock reacted accordingly by rising more than 1.9% in the trading session. I believe Home Depot represents one of the best investment opportunities in the market today, so investors who are not sold on Lowe's should definitely take a deeper look and strongly consider picking some some shares of Home Depot. 

The Foolish bottom line
Lowe's has just reported a very solid first quarter, but the stock has declined because the results did not meet analysts' expectations. I believe this represents a great opportunity for Foolish investors to buy, as the company's outlook on the rest of the year calls for more growth and it is on pace to return over $4 billion to investors through share repurchases and dividend payments. Take a look and see if your portfolio could use the growth and dividend income that Lowe's can provide.

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