Investors were hopeful that they'd see some impressive operating and financial results from Lowe's (LOW 1.67%) this past week. After all, the home improvement giant had issued an encouraging outlook back in late November. And rival Home Depot (HD 1.01%) had recently announced accelerating sales gains in the fourth quarter as the home improvement market continued to expand.
Lowe's actual earnings results showed that the company is still struggling to win its share of that expansion, though, even as management shifts gears a bit to focus on higher profitability in 2020. Let's take a closer look at fiscal 2019 fourth-quarter earnings.
The sales update
Sales trends weren't as positive as management had expected. Comparable-store sales gains landed at 2.6% in the U.S. to mark a slowdown from the prior quarter's 3% boost. Executives had issued a slightly more optimistic outlook back in late November. Home Depot, meanwhile, saw its comps accelerate to 5% from 4% in the third quarter.
Lowe's blamed its online business for pressuring growth this quarter. That segment was flat in the third quarter even as Home Depot's comparable unit surged 22%. Without providing hard numbers, Lowe's executives implied that this performance gap carried through to the holiday season. "Our sales growth was driven almost entirely by our brick and mortar stores," CEO Marvin Ellison said in a press release. "We have a detailed road map in place to modernize our e-commerce platform and accelerate [digital] sales."
The news was better on the financial side, with gross profit margin holding steady at 31% of sales as selling expenses plunged. The combination of those two trends allowed operating income to jump to $6.3 billion, or 8.75% of sales for the full year, up from $4 billion, or 5.6% of sales in 2018. Home Depot's comparable metric is still far higher, though, clocking in at 14% of sales.
Yet Lowe's was encouraged by the financial progress and sees more on the way in 2020. "We are well positioned to capitalize on solid demand in a healthy home improvement market," Ellison said.
Looking ahead to 2020
To that end, executives projected comps growth between 3% and 3.5% this year, trailing Home Depot, which is targeting gains between 3.5% and 4%. On the bright side, Lowe's is expecting operating income to rise at a much faster clip of at least 12% after adjusting for one-time charges like the continued write-downs from its Canada business.
This outlook suggests that the management team has made progress in building a more efficient retailing operation in its physical stores that might soon compete more effectively with Home Depot in areas like the professional contractor niche.
Investors will be following that segment for signs of improvement, but they now have a second front to watch for hopes of a growth rebound in Lowe's weak e-commerce division. Until both of these sales channels are working well separately and on their own, the chain can't help but underperform its bigger retailing rival.