Shares of Lowe's Companies Inc (NYSE:LOW) were climbing higher today after the home-improvement retailer posted strong results in its second-quarter earnings report. The stock initially traded lower in pre-market trading due to a weaker-than-expected forecast as the company said it would close its Orchard Supply Hardware chain, but investors seemed to focus on the impressive quarterly results once the regular trading session started.
The stock was up 8.8% as of 10:53 a.m. EDT.
Following in the footsteps of rival Home Depot and other retailers, Lowe's showed off strong comparable sales growth of 5.2%, driving overall sales up 7.1% to $20.9 billion, which edged out estimates of $20.78 billion.
Gross margin improved by 25 basis points to 34.5%, and with the help of a lower tax rate thanks to tax reform, adjusted earnings per share jumped 32% to $2.07, beating expectations at $2.02.
The company also made the surprising announcement that it would close all 99 Orchard Supply Hardware stores, which are located in California, Oregon, and Florida. As a result, the company took a non-cash impairment charge of $230 million for the quarter, and it expects additional charges of $390 million to $475 million for the second half of the year.
CEO Marvin Ellison called the move a "necessary business decision" and summed up the rest of the quarter by saying:
We posted solid results this quarter by capitalizing on delayed spring demand. In addition to the decision to exit Orchard Supply Hardware, we are developing plans to aggressively rationalize store inventory, reducing lower-performing inventory while investing in increased depth of high velocity items. Our strategic reassessment is ongoing as we evaluate the productivity of our real estate portfolio and non-retail business investments.
As a result of the Orchard Supply closing, Lowe's cut its full-year EPS outlook to $4.50 to $4.60, down from a prior range of $5.40 to $5.50. The company also reduced its full-year comparable sales guidance to 3% from 3.5% and sees overall revenue growth of 4.5% rather than 5%, changes that appear to be due to Ellison's decision to rationalize store inventory.
Investors seemed willing to forgive the guidance cut as Ellison adjusts the company's strategy, and the housing market remains strong. Considering the strength in the broader retail industry, Lowe's continues to look like a winner.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.