Lowe's (LOW 1.49%) shareholders endured a tough fiscal 2018. The home-improvement giant's key operating metrics trailed those of rival Home Depot (HD 0.86%) 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.
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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) 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.
