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Why Lowe's Stock Was Falling Today

By Jeremy Bowman – Updated Nov 20, 2018 at 3:52PM

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Shares of the home-improvement retailer dipped after it slashed guidance in its third-quarter earnings report.

What happened

Shares of Lowe's (LOW 3.80%) were trading lower today after the home-improvement retailer posted solid results in its third-quarter earnings report, but lower full-year guidance prompted a sell-off. In recent weeks, a weakening housing sector has pushed down housing stocks, including Home Depot and Lowe's, and that trend continued following Lowe's report. Shares were down 5.4% as of 2:44 p.m. EST on Tuesday.

So what 

Comparable-store sales ticked up 1.5% in the quarter and 2% in the U.S. business, driving overall revenue up 3.8% to $17.42 billion, edging out expectations at $17.36 billion. However, gross margin fell from 34.1% to 32.5%, a sign that profitability may be getting pressured by rising costs or poor inventory management. And adjusted earnings per share slipped by a penny to $1.04, but that still beat estimates at $0.98. 

The front of a Lowe's store

Image source: Lowe's.

As part of the ongoing strategic review since Marvin Ellison became CEO earlier this year, the company said it would exit Mexico, leaving behind 13 stores, and its contracting businesses in the U.S., including Alacrity Services and Iris Smart Home.

Ellison acknowledged the company still faced challenges: "During the quarter, the favorable macroeconomic environment, combined with great values, drove traffic to our stores and website. However, continued challenges with inventory out of stocks, poor reset execution, and assortment concerns in certain categories pressured our ability to turn those visits into transactions."

Now what 

Due to those ongoing issues, Lowe's lowered its full-year guidance modestly, adjusting revenue growth from 4.5% to 4% and comps growth from 3% to 2.5%. It also sees operating margin falling 240 to 255 basis points, versus a previous forecast of 180 basis points, and it lowered EPS guidance from a range of $4.50 to $4.60, to a range of $4.08 to $4.24. Adjusted for charges from the Orchard Supply Hardware closing and other one-time events, the company expects EPS of $5.08 to $5.13.

Given that lower guidance and fears of a slowing housing market, Lowe's shares will likely struggle to bounce back in the near future.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

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