Investors have some high expectations heading into Lowe's (LOW 0.11%) first-quarter earnings report in a few days. The retailer likely enjoyed continued record sales growth in early 2021 after a record 2020. Several big trends are working in its favor, including surging demand for home improvement projects and rising prices for products like lumber.
We'll find out this week whether Lowe's fully capitalized on those favorable factors, or if it lost ground to industry leader Home Depot (HD 0.78%), which also reports earnings this week. Let's look at some of the key trends to watch in Lowe's announcement set for May 19.
Both Home Depot and Lowe's welcomed millions of new customers to the fold in 2020 as the pandemic put a sustained new focus on people's homes. But Lowe's captured more growth, with comparable-store sales rising 26% compared to Home Depot's 21% increase. The big question is whether the market-share gap between the two retailers continued to shrink in early 2021.
The comps metrics will be just one way to judge that competition. Investors will also be watching customer traffic, both in stores and online, for signs that Lowe's is still winning more business in areas like home installation services.
The management team credited strong execution around inventory management, merchandising, and marketing for the chain's recent wins, and we'll find out on Wednesday whether that performance carried through into the winter season.
Lowe's isn't as profitable as its bigger rival, but it has closed that gap in recent quarters. Operating margin hit 11% of sales in 2020 compared to 9% a year earlier. Home Depot consistently notches a 14% profit margin.
Both companies this year had to deal with soaring prices, especially on lumber, which could help or hurt profitability. But management's bigger target has operating margin improving to roughly 12% of sales in 2021. "We're really focused on margin expansion," CFO David Denton told investors back in late February.
The new outlook
Fiscal 2021 will be unusually volatile and unpredictable as the pandemic threat wanes and consumer spending patterns move back toward normal levels. But Lowe's latest forecast calls for slightly lower sales, higher market share, and rising profitability. Factors supporting the industry include surging demand for homes, rising housing prices, and increased consumer spending.
We'll get an update this week on how each of these trends are looking as Lowe's enters the peak spring selling season. CEO Marvin Ellison and his team will likely have some positive comments about that period, and the wider 2021 year, assuming growth trends held up over the last few weeks.
Looking further out, Lowe's might get more ambitious about its sales and earnings opportunities now that it has built itself into a business that can compete on equal footing with world-class retailers like Home Depot. The bearish argument is that this was just a temporary boost brought on by once-in-a-century selling conditions in 2020. But Lowe's on Wednesday should make the case for a fundamentally stronger expansion path from here.