What happened
One week after home improvement giant Home Depot (HD 1.07%) shocked the stock market with a sales miss and weak guidance, investors are having the opposite reaction to news that its archrival has beaten on sales (and issued weak guidance).
This morning, home improvement retailer Lowe's Companies (LOW 0.86%) announced that it earned an adjusted profit of $3.67 per share on $22.3 billion in sales in the first quarter of 2023 versus analyst expectations of $3.44 and $21.6 billion.
And Lowe's shares are up 2.4% as of 10:45 a.m. ET because of it.
NYSE: LOW
Key Data Points
So what
Not all of Lowe's news was good -- but not all of it was bad, either. Sales beat expectations but were still down 5.5% year over year, and same-store sales declined 4.3%. Gross margins on those sales inched down 35 basis points to 33.7%.
On the other hand, operating profit margins improved by 70 basis points to 14.7% in Q1, and in the end, the company's net profit margin was up about 20 basis points at 10.1%. In a pleasant turn, actual earnings, as calculated according to generally accepted accounting principles (GAAP), were stronger than the company's adjusted figure (which is not often the case on Wall Street).
Lowe's enjoyed a modest $0.10-per-share profit on the sale of its Canadian retail business in the quarter, and with that assistance, GAAP profits for the quarter came in at $3.77 per share, up 7% from a year ago. (Profits would still have been up 5% without the Canadian gain.)
Now what
All that being said, Lowe's guidance was a bit on the disappointing side, lower than what the company previously said and tracking with what Home Depot told us last week.
For the full fiscal year, Lowe's sees sales coming in between $87 billion and $89 billion, with same-store sales continuing to tick downward 2% to 4%. Operating profit margins will also weaken, and on the bottom line, Lowe's is forecasting adjusted earnings of somewhere between $13.20 and $13.60 per share, or about $0.40 below previous forecasts.
Assuming GAAP earnings are similar (as they probably will be), this implies that Lowe's stock is selling for about 15.5 times current-year earnings at the midpoint of its guidance range. Strangely, though, that actually doesn't look cheap, given that analysts are forecasting only 10.5% earnings growth for Lowe's over the next five years -- versus 16% projected growth for Home Depot.
On the one hand, Home Depot appears more expensive at 17.8 times current-year projections for earnings. On the other hand, though, it might be a better bargain than Lowe's.
Maybe that's why, after initially selling off following its earnings report, Home Depot stock has rebounded strongly over the past week. It could also be a reason why, after watching it bounce higher this morning, we might see Lowe's stock disappoint.
