Please ensure Javascript is enabled for purposes of website accessibility

Lowe's Earnings: 3 Trends to Watch

By Demitri Kalogeropoulos – May 16, 2019 at 7:28AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A preview of the retailer's upcoming report, set for May 22.

Lowe's (LOW 0.01%) shareholders endured a tough fiscal 2018. The home-improvement giant's key operating metrics trailed those of rival Home Depot (HD 0.67%) despite the best efforts of new CEO Marvin Ellison. Lowe's took several large restructuring charges, too, as the retailer closed underperforming store brands and embarked on an aggressive plan aimed at stemming its market-share slide.

Ellison and his team are hoping that these difficult moves positioned Lowe's for better operating and financial results in fiscal 2019. Its first-quarter earnings report on Wednesday, May 22, will be investors' first window into determining whether that's true.

A customer selects a piece of lumber from store shelves

Image source: Getty Images.

Sales growth

Lowe's underperformed its bigger rival by a wide margin last year, with comparable-store sales gains landing at 2.4% versus Home Depot's 5%. That's hardly a new development, though, as the market leader routinely maintains a big performance gap over its peers.

What's new is that Lowe's failed to execute around a few core retailing competencies, including keeping inventory at appropriate levels. These challenges pressured sales growth even when customer traffic was strong. Investors are expecting that, at a minimum, these headwinds will disappear over the next few quarters to allow Lowe's to grow sales at a rate that more closely approximates the broader home-improvement industry. Thus, look for comps to accelerate compared to last quarter's 1.7% increase, as management forecast back in late February.

Pricing trends

Key profitability metrics also appear set to rebound following a tough showing in 2018. Lowe's gross profit margin dipped to 31% of sales from 32% in the most recent quarter. Its adjusted operating margin was a disappointment, too, landing at 8.6% of sales compared to Home Depot's 14.4%.

HD Operating Margin (TTM) Chart

HD Operating Margin (TTM) data by YCharts.

Ellison said the company has taken all the right steps necessary to get that figure growing again. Lowe's revamped its supply chain and has totally refreshed its inventory to focus better on in-demand products. That move included getting all the right merchandise in place ahead of the all-important spring selling season.

Investors will find out on Wednesday whether these initiatives added to Lowe's encouraging momentum at the end of 2018, or if they left the chain continuing to struggle to meet customers' demands.

Economic outlook

Rival Home Depot will announce its first-quarter results a day before Lowe's posts its figures. The industry leader will likely update its outlook, which currently calls for sales gains to hold steady at 5%. Investors will also hear from the retailer about whether it sees industry trends like home prices, demographics, and the average age of housing stock as continuing to support another year of healthy growth in the home-improvement niche.  

Lowe's comments on these topics will likely be the biggest driver of any share-price volatility over the next few trading days. The company in February said it saw sales growth again trailing its peer and landing at around 3% in 2019. Operating margin should rise after falling in each of the last two years, though.

All of those targets are subject to revision throughout the year, but this week's report might produce the biggest changes of all since it covers the start of the key spring selling season. As a result, investors shouldn't be surprised to see Lowe's stock have an unusually volatile week as Wall Street reacts to the updated earnings outlook.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$188.13 (0.01%) $0.01
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$270.94 (0.67%) $1.80

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.