For a company that gave what its CFO termed a "modestly lower" sales outlook for the second half of this year, home-improvement retailer Lowe's (LOW -0.04%)executives are excited about its near-term future. The company's most recent earnings conference call was one of those calls in which different members of management were almost competitively talking over each other, enthusiastic to get a positive word in.
Margins will help
Chief Financial Officer Bob Hull said he expects overall sales for FY14 to be up 4.5% YOY and same-store sales to rise 3.5%, but, more importantly, the company's bottom-line profitability outlook remains unchanged. The reason is "improved flow-through assumptions" or higher profit margin expectations that make up for the sales expectations that are lower than they had been.
Said Hull: "Our sales outlook is modestly lower as a result of our year-to-date performance. However, our improved flowthrough assumptions allowed us to maintain our prior EBIT expectations." Profits are what matter most, and on that Lowe's is all good.
The macro picture is golden
According to CEO Robert Niblock, "As we look at the backdrop for the second half of 2014, economic forecasts suggest continued strength in the home-improvement market as employment, income and consumer spending levels continue to improve."
He acknowledged data showing a decline in sales of existing homes, but said the data are misleading:
When distressed sales are omitted from the data, which we believe is a more appropriate indicator of the long-term health of our industry, existing home sales have seen a slight increase through the first half of the year revealing a more positive and sustainable trend. In light of the positive trajectory of these factors we believe home-improvement spending will continue to progress in tandem with strengthening job and income growth. ... Consumers are indicating stronger intentions to complete a home-improvement project with most of them planning a specific project in the next three months. And while most of these planned projects are still small ticket we are seeing a rise in homeowners planning big-ticket projects.
Anywhere you go, Lowe's is flexing its muscle
Lowe's management wants you to know that the company is operating successfully, and not just at the macro scale. Niblock stated, "All 14 regions had positive comps for the quarter; likewise, all 12 product categories had positive comps." Lowe's categories include appliances, tools, and lumber. That's a lot of places and a lot of categories that each has its own challenges and opportunities for things to go wrong, yet Lowe's delivered in them all. You can't get that in any industry without great execution.
Chief Operating Officer Rick Damron added during the conference call: "As [Niblock] shared with you we generated positive comps across all regions and product categories as we continue to capitalize on an improving macro backdrop through our enhanced sales and operations planning process, improved relevance with the pro and develop customer experience design capabilities."
A new way to go pro
Executives during the conference call were excited about Lowe's ProServices program, which is focused on business customers. Damron said:
... our pro business continued to perform well. In fact, ProServices comps outpaced the company average for the 12th consecutive quarter. Increasing customer willingness to complete refresh projects coupled with our strong product offering led to notable pro sales strength.
Hull said that there is "still a lot of focus in [ProServices] and we expect continued traction and momentum in the second half of the year, which gives us confidence in our second-half outlook."
Cash continues to be king
On the subject of money, Lowe's is built like a brick cash house. As Hull pointed out, cash flow from operations was $3.9 billion for the first half of the year, an increase of 17%, while free cash flow rose 19% to $3.5 billion.
Lowe's continues to be committed to putting that cash to work in returning shareholder value. "Delivering on our commitment to return excess cash to shareholders in the quarter we repurchased $1.1 billion of stock and paid $183 million in dividends," Niblock said. Hull added that the company has about $4.3 billion left in its share buyback authorization.
I'm always a big fan of aggressive stock buybacks, because such moves tend to speak louder about management's confidence than any words can do. Between the evidence of company execution, the profitability outlook, the macro picture, the ProServices program, and the buybacks, it appears that shareholders have much value ahead yet to look forward to.
