Many Lowe's (LOW 2.56%) investors have been frustrated with the retailer's last few quarterly earnings reports. The home improvement chain's rebound initiatives haven't delivered clear results yet, with sales gains and profitability trends often lagging those of the industry leader, Home Depot (HD 1.96%).
The company just delivered another mixed report that included some encouraging signs of rebound paired with a significant financial disappointment. CEO Marvin Ellison explained the factors driving both the good and the bad news from Lowe's key spring selling quarter in a conference call with investors. Let's take a look at the highlights from that presentation.
A good quarter for growth
Our first quarter comp performance is a clear indication that our focus on retail fundamentals is gaining traction.
Lowe's put intense focus on winning market share over the key spring selling season, and the effort paid off. Comparable-store sales growth accelerated to a 3.5% rate to nearly double the prior quarter's result despite tough selling conditions in parts of the country. Lowe's even outpaced Home Depot, in part thanks to gains within the competitive professional contractor niche.
Executives said the growth rebound was a direct result of their turnaround efforts, especially given that customer traffic gains are finally starting to reappear. These improving metrics "giv[e] us confidence that we are taking the right strategic steps," Ellison said.
Stumbles at passing along higher costs
Our challenges with pricing tools and processes aren't new to Lowe's. However, we did not anticipate the impact of ... cost increases, significant organizational changes, ... and legacy ineffective pricing tools and processes.
Shareholders have heard Ellison describe major retailing stumbles in recent quarters, especially around maintaining the right inventory and converting shopper traffic into rising sales. This quarter brought its own significant issue, this time around a mismatch between prices and costs that drove gross profit margin down by more than 2 full percentage points to 31.5% of sales. Home Depot's comparable figure held steady at 34% of sales.
Management says the issue was driven by an elevated level of turnover at the merchandise buyer level and it shouldn't repeat in future quarters. In fact, Lowe's is predicting improving gross margin for the remainder of fiscal 2019, but the pricing issues should still hurt full-year profits.
Still early going
We're early in our transformation, but we now have a management team in place with the expertise required to tackle the opportunities ahead of us.
-- CFO David Denton
Lowe's updated 2019 outlook depicts a business that's still in recovery mode. Sales gain projections remain at about 3%, compared to Home Depot's 5%. Operating margin is now expected to hold roughly flat rather than increase slightly, due to the pricing challenges the company is working through today.
Lowe's still sees plenty of reason for optimism, both with respect to growth in the home improvement industry and around the chain's specific opportunities to stabilize sales and capture market share in areas like the pro segment. However, its outlook highlights the fact that investors will likely have to wait until at least fiscal 2020 before they start seeing its rebound strategies pay off. That's the point when the chain's operating margin might inch closer toward Home Depot's 15% of sales rather than Lowe's current 9% rate.