Its industry is in a slump, but Lowe's (LOW -0.04%) is still generating excellent returns for its shareholders these days. The retailer's stock broke through a fresh 12-month high following its late-February earnings announcement, in fact.
Wall Street was thrilled to see the chain move closer to Home Depot's (HD 0.94%) industry-leading profit margin in 2023. But Lowe's also predicted another tough year of declining sales ahead. Does this mixed momentum make the stock a clear buy, or one to avoid in 2024? Let's take a closer look.
Lowe's gets it done
The operating update didn't change the weak growth narrative that investors have seen for more than a year. Lowe's revealed that Q4 comparable-store sales were down 6%, marking just a modest improvement versus the previous quarter's 7% slump. Executives said poor winter weather was a major culprit, but keep in mind that Home Depot faced the same issue yet managed just 4% lower comps in the period.
The main difference is that Lowe's gets three-quarters of its sales from do-it-yourself shoppers while Home Depot handles more business in the professional contractor niche. These pros aren't reining in their spending as quickly, giving the industry leader a lift that Lowe's can't match.
Lowe's executives said they were still happy with their broader performance. "We delivered strong operating profit and improved customer satisfaction, despite the continued pullback in DIY spending," CEO Marvin Ellison said in a press release.
Better news on profits
The upside is Lowe's customer traffic struggles didn't translate into weaker profits. Instead, the chain pushed its operating profit margin up to 13.4% of sales from 10.5% a year ago. Home Depot's industry-leading rate is about 14.5%, for context.
LOW Operating Margin (TTM) data by YCharts
That success translated into much higher earnings for Lowe's even though revenue declined in 2023. Pre-tax profit rose 15% to $8.8 billion in a down sales year, which is a great sign for the future once the home improvement industry starts expanding quickly again.
Yet investors should know that this recovery isn't imminent. Lowe's is calling for comps to fall by between 2% and 3% in 2024 compared to Home Depot's forecast of a 1% drop.
Watch for now
So why is the stock rallying in a down industry year?
The short answer is investors just aren't as worried about a recession developing and harming the home improvement market in 2024. That's not enough reason to buy Lowe's stock right now, though.
Start with the fact that Lowe's is expecting another year of declining sales in 2024 and more market share losses. The retailer is also warning investors to expect profit margin to take a step backward this year, falling to about 12% of sales. Combined, these two trends will result in lower per-share earnings this year as compared to 2023.
The stock isn't priced at a huge discount, either. You'll pay 1.6 times sales for this business, which isn't far from the pandemic-era high of about 1.8 times sales. Sure, Home Depot is more expensive at 2.5 times sales. But both stocks seem pricey relative to their prospects for declining revenue and earnings at least through 2024.
A rebounding home improvement market would change Lowe's growth trajectory and help it earn that premium over the next few quarters. But it's too early to be feeling very optimistic about this retailer's business today. Keep Lowe's on your watch list for now.
