Lowe's (LOW -0.30%) pandemic boost might be over. The home improvement giant this week announced declining comparable-store sales to mark a sharp turnaround from the 24% spike it posted in the previous quarter.
The results still described a stronger business than investors saw before the pandemic struck, especially with respect to profitability. But Lowe's market share battle with rival Home Depot (HD 0.28%) seems likely to continue pinching the business.
Market share updates
Lowe's announced a 2% sales decline at its core U.S. division while Home Depot a day earlier posted a 3% increase for the same period. That marked the second straight quarter in which Lowe's larger peer notched faster gains. Home Depot in Q1 grew U.S. sales by 30%, compared to Lowe's 24%.
Lowe's numbers still look strong when you account for pandemic-related noise. On a two-year basis, comps are up 32%, which translates into much faster annual growth than the chain was posting before 2020.
The retailer is seeing strength in its professional contractor niche, and in its newly revamped online platform. "Our strong results this quarter demonstrate that our ... strategy is working," CEO Marvin Ellison said in a press release.
Good news on earnings
The news was decidedly positive on profitability and earnings. Lowe's gross profit margin held steady at 34% of sales, while Home Depot posted a slight decline. Both companies are dealing with major profit pressures, including swinging lumber prices and surging costs for raw materials, labor, and transportation.
Despite those issues, Lowe's operating income was well above 14% of sales for a second straight quarter, implying that the chain might easily reach its target of 12% or better this year compared to 9% in 2020. Home Depot, for context, routinely posts margins between 14% and 15%. "We ... delivered significant operating margin expansion through our disciplined focus on driving productivity across the company," Ellison said.
While Home Depot earlier in the week declined to issue an annual outlook, Lowe's executives believe they've seen enough demand data to issue a cautious 2021 forecast. Sales will land at about $92 billion this year, they predict, compared to $90 billion in 2020. That result should equate to 30% comp growth on a two-year basis.
The outlook for operating margin is inching higher, too, and that metric should now reach roughly 12.2% of sales. Combined with the rising sales footprint, that boost should power significant earnings growth. Lowe's is expecting to spend a big portion of that haul on stock buybacks and on the dividend payout, which recently jumped 33%.
Customer traffic levels will likely fall in the second half of the year as compared to last year's surging results. But Lowe's and Home Depot both say they're seeing continued strength in the housing market that should lift their results for the foreseeable future. In fact, one of the chains' biggest challenges in the near term involves obtaining enough inventory to keep shelves fully stocked.
As a result, investors should be at least as excited about Lowe's business today as they were before the Q2 update. The retailer has a growing business and is expanding its profitability in an attractive industry. That's a recipe for strong shareholder returns over time.