Lowe's (LOW 0.22%) might have bigger problems than just a simple growth hangover driven by soaring demand in earlier phases of the pandemic. The home improvement retailer recently lowered its sales outlook for 2022 after revenue declined in the second quarter. The results were a disappointment to investors who were looking for better numbers, especially after rival Home Depot (HD -0.60%) affirmed its bright outlook for the year.
Lowe's business has a few weaknesses that its larger peer doesn't, and these issues translated into flat earnings and falling sales. Let's look at whether investors can safely tune out these problems as short-term noise, or if they imply a more foundational problem with the bullish stock thesis.
Sales trend downward for Lowe's
The main letdown for investors in the second quarter was surprisingly weak sales. Home Depot reported a 5% boost in its second quarter comparable-store sales in the core U.S. market, while Lowe's sales were flat.
Part of the problem was the fact that Lowe's gets more of its revenue from do-it-yourself shoppers while Home Depot's business is tilted toward professionals.
That DIY segment was less eager to spend on remodels and upgrades compared to last year, in part thanks to short-term issues like weather and inflation. "Our results in the first half were disproportionately impacted by our ... customer mix," CEO Marvin Ellison said in a press release. It is also possible that the chain lost market share to Home Depot and others, and that's the key concern investors have following this report.
Lowe's had good news on profits
The news was better around earnings. Lowe's gross profit margin held steady at about 33% of sales despite soaring costs. Operating income actually ticked higher, rising to 15.4% of sales compared to 15.3% of sales a year ago. That's impressive considering how many large retailers, including Walmart and Target, are seeing far weaker margins today.
LOW operating margin (TTM). Data by YCharts. TTM = trailing 12 months.
That profitability win allowed earnings to hold steady despite the modest sales decline. It's also good news for the stock.
Looking ahead
Lowe's management now believes the company's sales will land near the low end of its prior outlook, meaning comps will likely fall by about 1% after jumping last year. Home Depot management is projecting a 3% gain, for context.
The good news is that Lowe's is still expecting to take a small step toward Home Depot's industry-leading 15% profit margin as operating income is projected to land at about 13% of sales in 2022. The company should also deliver plenty of cash to investors in the form a rising dividend and stock-buyback spending of about $12 billion.
Those benefits should outweigh the negative news of declining sales this year. Lowe's stock has plenty going for it, including rising earnings power, and so investors shouldn't abandon shares due to a few weak sales quarters.
But these results underscore how hard it is to win market share away from Home Depot in this competitive industry.
Lowe's has tried for years to close the gap on growth and profits, and even huge demand swings during the pandemic failed to disrupt that first-place, second-place dynamic. There is a clear leader in the home improvement industry, and Lowe's has its hands full in simply keep up with that retailer.
