Lowe's (LOW +1.86%) investors have a few good reasons to celebrate in early 2021. Sure, the home improvement giant's first-quarter report failed to extend its streak of market share wins against industry leader Home Depot (HD +1.56%). But the chain still took full advantage of the favorable selling conditions over the last few months and rewarded shareholders along the way.
Let's look at some standout metrics from Lowe's first-quarter operating update.
1. Sales growth: 24%
Comparable-store sales rose 26% overall year over year and increased 24% in the core U.S. market. That boost wasn't good enough to beat Home Depot, which expanded comps by a blazing 30% after trailing Lowe's in each of the last three quarters. And it marked a slowdown compared to the prior quarter. However, Lowe's passed its own sales targets and gained ground in some areas like the attractive professional contractor niche.
Image source: Getty Images.
These wins put the retailer on track to beat the high end of the initial 2021 growth outlook that management issued late last year following a record 2020 for the industry. "Our outstanding performance continued this quarter," CEO Marvin Ellison summarized in a press release.
2. Profitability: 13%
Lowe's has been targeting a steady uptick in annual operating margin toward 12% of sales. Home Depot routinely achieves over 14% profitability, but Lowe's had been stuck in the high single-digits for years before logging some big gains in 2020.
LOW Operating Margin (TTM) data by YCharts
That success continued in early 2021 thanks to strong pricing, modest cost increases, and high demand for premium services like home installation and renovations. Lowe's even beat its ambitious margin target this quarter as operating income jumped to 13% of sales this quarter compared to 10% a year ago. That boost helped net income soar to over 9% of sales from 7% despite higher tax payments. It gave management plenty of resources to invest back in the business, for example by strengthening the online selling platform and reducing shipping times.
3. Capital returns: $3.5 billion
Lowe's is intent on returning most of the extra cash resources to shareholders. Management spent over $3 billion on stock buybacks this quarter along with $440 million on dividend payments. That $3.5 billion total return in Q1 implies significant growth compared to the $6.4 billion it sent investors through all of 2020 and the $5.8 billion it returned in 2019.
Lowe's still doesn't quite measure up to its retailing peer for investors who prize capital returns. Home Depot returns about 55% of its annual earnings haul to investors as dividends (compared to Lowe's 35%) while spending aggressively on stock repurchases. But the gap is closing, and it should narrow even more as Lowe's pushes its profitability further above 10% of sales.
That's a win-win scenario for the business and for shareholders, even if Lowe's does end up lagging Home Depot in a few operating and financial metrics this fiscal year.
