A weak earnings report by its chief rival earlier in the week put investors in a cautious mode heading into Lowe's (LOW 2.54%) third-quarter announcement. The softer sales environment that Home Depot (HD 2.06%) described suggested that growth will be harder to achieve over the next few months and heading into fiscal 2020.
Lowe's actual results on Wednesday looked a lot like Home Depot's in showing steady but modest sales gains in the home improvement industry. Yet the retailer also confirmed that it faces major challenges in its plan to more effectively compete against Home Depot and other peers.
Let's dive right into Lowe's Q3 report.
Image source: Getty Images.
Mixed sales results
The demand picture was positive, but not as strong as in recent quarters. Comparable-store sales growth in the core U.S. division held steady at 3% to mark the first time in three quarters that Lowe's trailed Home Depot's result. Home Depot earlier revealed an acceleration of its sales gains to 3.8% from 3% in the second quarter.
Lowe's cited a few key factors supporting the company's steady sales gains, including a strong economy and improvements to the shopping experience. Management noted challenges in the online segment, however, and much bigger issues in the Canadian segment. That struggle convinced Lowe's to announce the closure of another 34 underperforming stores in Canada, on top of the 31 locations it had previously closed.
The new restructuring plan led to a $53 million write-down but should put Lowe's on a path to more sustainable growth in that key market, executives said. The company also sees as much as $225 million of extra costs coming from inventory liquidation tied to the closures.
Profits and outlook
The news was more positive on the financial side of Lowe's business. Gross profit margin rose by more than a full percentage point to 32% of sales and selling expenses fell slightly as a percentage of sales. Those two positive trends combined to push operating income up to 9% of sales from 5.5% a year ago. Home Depot's comparable figure is 14.4%, though, which shows the wide performance gap that remains between the two retailing giants.
Yet, as Home Depot did a day earlier, Lowe's raised its earnings outlook slightly and now sees adjusted earnings landing between $5.63 and $5.70 per share. The company had predicted a range of between $5.45 and $5.65 per share back in late August.
Lowe's sales growth outlook held steady at 3% while Home Depot's edged lower for the second consecutive quarter. However, industry leader Home Depot is still targeting faster gains in 2019 as comps rise by 3.5%. The good news for investors is that both consumer companies agree that industry conditions are healthy heading into 2020. "As we enter the fourth quarter," Lowe's CEO Marvin Ellison said in a press release, "we are building strong momentum in the U.S. and are well positioned to deliver strong topline performance while also driving margin improvement."
That solid growth is a significant step in Lowe's transformation plan, but its continued underperformance compared to Home Depot and its new challenges in Canada demonstrate that investors will need plenty of patience as they wait for confirmation that the company is finally on a steadier growth path.
