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Lowe's Earnings Preview: Seeking Balanced Growth

By Demitri Kalogeropoulos – Aug 18, 2019 at 10:10AM

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The home improvement giant will update investors on its 2019 outlook on Wednesday.

Investors have been frustrated by Lowe's (LOW 1.52%) last few earnings reports. The home improvement chain's first year under the leadership of CEO Marvin Ellison, who worked for rival Home Depot (HD 1.51%) before taking over at J.C. Penney, has been a mixed bag. Sales growth has improved at times while profitability slumped, but the retailer hasn't yet achieved solid market share gains and robust earnings.

On Wednesday, shareholders will learn whether those disappointing big-picture trends have shifted at all over the last few months. Below, we'll look at the metrics that will determine whether Lowe's is winning -- or losing -- ground against Home Depot and others as it heads into the second half of fiscal 2019.

A man and a woman painting a room.

Image source: Getty Images.

Attracting the pro customer

Lowe's intense focus on winning market share, especially in the professional contractor niche, appeared to start paying off last quarter. Sales growth sped up during the key spring selling season, in fact, and its 3.5% comps gain edged past Home Depot's result for a rare win over the industry leader.

Home Depot likely had an aggressive response to the challenge since it sees the professional segment as critical to its long-term plans to surpass $115 billion in annual sales by 2020. The home improvement giant reports its results on Tuesday, and investors will likely judge Lowe's growth rate, in part, by comparing it directly with its larger competitor, which is expecting comparable-store sales gains of around 5%.

Fixing the issues

Lowe's struggled last year to deliver basic retailing fundamentals like having the right in-stock levels. Those issues led to weak sales despite healthy customer traffic growth. The chain fixed those problems in Q1, but a new issue hampered results at the start of 2019: pricing.

Ellison said Lowe's was caught by surprise with major cost increases that, combined with its restructuring initiatives, drove down profitability last quarter. Gross profit margin fell by 2 percentage points to below 32% of sales while Home Depot's result held steady at 34%. Executives suggested that they had a grasp on the issue, and so investors will be watching for margin trends to improve this quarter and through the second half of 2019.

The 2019 outlook

The cost challenges led Lowe's to reduce its earnings outlook last quarter so that operating margin is on pace to stay under 10% of sales compared to Home Depot's 14.5%. Management's updated outlook will determine whether investors can expect to see another year of falling profitability before a rebound starts in 2020.

Meanwhile, look for Lowe's to comment on the health of the broader economy and the home improvement industry following the critical spring quarter. Back in May, executives said they saw fundamental metrics like home prices and the age of housing stock as supporting another year of healthy growth for the industry. They predicted this strength would help deliver comps of about 3% compared to Home Depot's 5% boost.

Both companies will update their outlooks this week to reflect all the latest demand trends, in addition to major shifts in economic fundamentals like the impact of falling mortgage rates in recent weeks. Another quarter of results in the books should mean Lowe's annual forecast is more concrete. However, that stability might be offset by the trade skirmishes that have boosted volatility in the stock market lately.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short August 2019 $195 calls on Home Depot and long January 2021 $120 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$188.84 (1.52%) $2.83
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$270.62 (1.51%) $4.04

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