Investors are about to get some fresh data about Lowe's (LOW 0.69%). The home improvement chain will announce its fiscal first-quarter update in May, about a week after rival Home Depot (HD 0.58%) reports its results. The announcement will answer key questions about customer traffic and market share trends, while featuring a potential change in Lowe's fiscal 2023 outlook.
Let's look at whether the stock is an attractive buy heading into that May 23 earnings update.
The growth hangover
Lowe's fiscal 2022 performance was disappointing to many investors. Yes, the chain was sure to see pressures from slowing consumer spending after years of rising demand. But it didn't fare as well as Home Depot in growth or profits.
Comparable-store sales fell 1% for the full year, compared to Home Depot's 3% uptick in the core U.S. market. While both companies benefited from rising prices, customer traffic fell. But, again, Lowe's underperformed. Home Depot posted a 5% traffic decline while Lowe's handled 8% fewer transactions.
Some of that gap can be explained by Home Depot's leadership position in the industry. Lowe's is also more focused in the do-it-yourself niches while its main rival performs better with professional contractors.
Profit stumbles
Lowe's also struggled to close the profitability gap with Home Depot. Operating profit margin shrank by 2 full percentage points last year to land at 10.5% of sales. Home Depot, meanwhile, protected its 14% profitability despite slowing sales growth and a shift in demand away from many consumer discretionary niches.
HD Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
It's hard to see a clear path toward market-beating returns for Lowe's stock without a rebound in this key metric. Unfortunately, shareholders haven't seen real progress at closing the profitability gap with Home Depot despite a sustained push targeting higher margins over the last several years.
Dividends and value
Income investors will likely prefer Home Depot stock over Lowe's as well. Home Depot's dividend yield is 2.8% today compared to Lowe's 2%. The industry leader returns a larger portion of annual earnings to shareholders as dividends, too. Lowe's aims to send 35% of annual earnings to its investors, while Home Depot targets 55%. Yet Lowe's does have a longer track record of unbroken annual raises, having boosted its payout for more than 25 years.
Heading into its late-May update, Lowe's 2023 forecast calls for another slight sales decline paired with a solid improvement in profitability. Comps should fall by about 1%, executives said in early March, while operating margin climbs to between 13.6% and 13.8% of sales.
Since then, there have been encouraging signs about the health of the housing market, which might contribute to a slight upgrade in the chain's sales and earnings outlook. Shares are priced at a discount to Home Depot, too.
But the stock doesn't look like an obvious buy today since investors can pay a slight premium to own the market share leader. Until Lowe's can improve core metrics like market share, operating profit margin, and cash returns, the stock is likely to continue lagging in total shareholder returns.
