Home improvement giant Lowe's Companies (LOW -1.09%) has been a market-beating stock for much of its history. Over any meaningful span of time, Lowe's has trounced the S&P 500's returns. In fact, an investment of $10,000 at Lowe's IPO in 1961 would be worth nearly $3 million today.
Despite this impressive track record, Lowe's shares are down 27% from the all-time high reached in early 2022. Has the business degraded over the past year, or has Lowe's been collateral damage in the bear market? Let's dig in and find out.
A challenging 2022
There's no doubt that the macroeconomic conditions in 2022 impacted Lowe's performance. Revenue for the fourth quarter was $22 billion, which amounted to an increase of 5% over Q4 of 2021. U.S. comparable sales for the quarter were down 0.7% compared to the previous year.
Despite the underwhelming U.S. comp sales result, there are some interesting trends within that metric. While overall comp transactions were down 5.5% in the quarter, the average ticket increased by 4.8%, and the number of tickets that were greater than $500 increased by 2%. In short, despite fewer actual transactions in the quarter, the average spend was higher.
At first glance, Lowe's bottom line result was disappointing. On a generally accepted accounting principles (GAAP) basis, earnings per share were $1.58, resulting in an 11% year-over-year decline. However, there was an impact in Q4 from the sale of Lowe's Canadian business. Adjusting for that impact, Lowe's would have posted earnings per share of $2.28, a 28% increase compared to the year-ago quarter.
Adjusted numbers should always be viewed skeptically because they're easily manipulated by companies. However, in this case, the adjustment is clear and makes sense. This was a one-time impact, and therefore investors can consider the adjusted metrics along with the GAAP metrics.
Continued growth in the Pro segment
Over the past few years, Lowe's has focused on improving the experience for its Pro customers, the contractors who shop at Lowe's to get supplies for their jobs. This strategy has been very successful, and the impact has been felt in several areas.
Pro sales for Q4 of 2022 increased 10% year over year and represented the 11th consecutive quarter of double-digit Pro growth. Part of the success of this initiative has been through new programs catering to Pros. For example, Lowe's started a loyalty program designed specifically for Pros and has enhanced its product lines with the tools and apparel that Pros prefer to use.
Looking ahead
The investments in the Pro segment have been accretive to sales in the short term but should also provide momentum moving forward. With higher interest rates, mortgages are now much more expensive than they were in the past, meaning fewer people may decide to move. Combine this with the fact that half of all homes in the U.S. are over 40 years old, and that's a recipe for a continued trend of home improvement.
Lowe's Pro customers reported that they are booked for work the same or more in 2023 as they were in 2022, putting some data behind these trend assumptions. This is partially due to the fact that homeowners still have record levels of equity in their homes that they can use to fund home improvement projects even if the economy slows.
Rewarding shareholders
In fiscal 2022, the company returned $17 billion to shareholders through dividends and share repurchases. This should not be a surprise, considering the company has been doing this for more than a decade. Lowe's has increased its dividend for 48 consecutive years and has reduced its shares outstanding by 45% over the past 10 years.
Shares currently trade for 1.2 times trailing sales, near the company's historical average. With its reasonable valuation, shareholder-friendly capital allocation, and momentum in its Pro segment, Lowe's is a buy today and a great long-term anchor in any portfolio.