Investors were worried heading into the Q1 earnings update from Lowe's (LOW 0.22%). This announcement arrives just at the start of the home improvement giant's highest-volume sales weeks in early spring, raising the stakes for its business. And rival Home Depot had complained earlier about softening consumer demand and sales pressures from slumping lumber prices.
Lowe's followed its larger peer in reducing its fiscal-year outlook on both the top and bottom lines. But does this downgrade change the investing thesis for this successful retailer?
Let's dive right in.
Lowe's endures sales pressure
Lowe's said its business was hit by the same three challenges that featured prominently in Home Depot's mid-May announcement. Slumping lumber prices compared to a year ago pushed sales lower, executives said in a press release. Revenue through early May was also pressured by some extreme weather in parts of the country, plus weaker demand in many of its consumer discretionary niches.
Overall, comparable-store sales declined 4.3%, compared to Home Depot's 4.6% drop. Lowe's CEO Marvin Ellison said, "We are pleased with the performance of our business despite record lumber deflation and unfavorable spring weather."
Bright spots
Lowe's did see growth in its professional contractor segment and in its large e-commerce business. But these gains were offset by weaker demand among do-it-yourself shoppers.
The other bright spot in the report is that Lowe's didn't take a big hit to profitability. Its gross profit margin held steady at roughly 34% of sales, and expenses declined. These trends resulted in operating income of $3.3 billion, or nearly 15% of sales. That's an unusually high profit margin for Lowe's and right on par with Home Depot's industry-leading results.
Yet the retailer isn't expecting the good earnings news to carry through into the wider fiscal 2023 year, which is now likely to show weaker profit and sales trends than management originally predicted.
Looking to 2024
Lowe's reduced its fiscal-year outlook and now expects comps to be lower by between 2% and 4%, compared to its previous range from flat to a 2% drop. Home Depot is calling for a similar decline in 2023 following several years of above-average growth.
Likewise, the industry's second-largest player reduced its operating profit margin forecast to about 13.5% from the prior forecast of roughly 13.7%. Home Depot is expecting just above 14%, by comparison.
None of these factors materially change the investing thesis for Lowe's, which includes a mix of solid earnings growth that trails its larger peer. The dividend giant is likely to continue raising its payout each year, as it has for more than 25 consecutive years. And Lowe's is priced at a discount to Home Depot, with a price-to-sales ratio of about 1.3 compared to the leader's 1.9.
A tough short-term selling environment might keep the stock off many investors' list of must-buy stocks, but there's also no reason to abandon the growth thesis ahead of an eventual rebound in the home improvement industry. Lowe's remains an attractive investment to hold, especially for income investors seeking a cheaper alternative to Home Depot.
