Home-improvement retailer Lowe's (NYSE:LOW) has labored in the shadow of archrival Home Depot (NYSE:HD) for years. Yet recently, Lowe's has produced stronger share-price returns than Home Depot, as the No. 2 chain has made successful efforts to catch up to its primary competitor in the space. Coming into Wednesday morning's fourth-quarter earnings report, Lowe's investors had high hopes the company could keep pace or even exceed Home Depot's success. For the most part, Lowe's delivered on that promise, with impressive growth that lifted shares to new all-time record highs. Let's look at what Lowe's latest results say about how well the company could perform in 2015.
Lowe's growth soars like a skyscraper
Lowe's did better than investors were expecting on a number of key measures. Revenue climbed by 7.6% during the quarter, to $12.54 billion, easily topping the $12.31 billion consensus figure among those following the stock. Comparable-store sales rose by 7.3%, with Lowe's U.S. stores seeing slightly better comps of 7.4%. On the earnings front, net income soared by 47% over the year-ago quarter, to $450 million, and a drop in share count produced earnings of $0.46 per share, up more than 58% since 2013's fourth quarter.
The quarter helped end 2014 on a positive note for Lowe's. For the full year, Lowe's sales grew 5.3% to $56.2 billion on a 4.3% rise in comparable-store sales. Net income climbed to $2.7 billion, or $2.71 per share.
CEO Bob Niblock focused on his employees' contribution to Lowe's recovery, noting that "We remained focused on improving our profitability even while investing in key capabilities to drive sales growth." Niblock also sees the housing market remaining strong throughout the coming year. "Our transformation is gaining momentum," Niblock said, "and macroeconomic fundamentals are aligned for modestly stronger home improvement industry growth in 2015."
Lowe's earnings-per-share growth has partly resulted from its efforts to reward shareholders more. During the fourth quarter, Lowe's bought back about $1 billion in stock under its share repurchase program, capping a busy year in which the company used $3.9 billion of excess capital for stock buybacks. At the same time, Lowe's paid out $225 million in dividends, reflecting the increased payouts it implemented in mid-2014.
What's next for Lowe's in 2015?
Lowe's has ambitious targets for its business in 2015. On the whole, management expects revenue to climb between 4.5% and 5%, based primarily on a comparable-store sales gain of 4% to 4.5%. At the same time, Lowe's hasn't given up entirely on store expansion as a vehicle for growth, with plans to open between 15 and 20 new home-improvement and hardware stores. Earnings guidance of $3.29 per share is almost exactly what investors were looking for this year.
One key to Lowe's success will be cost containment. Lowe's is working at boosting its operating margin by as much as a full percentage point in 2015; with that margin running around 6.5% during the fourth quarter, the boost to the bottom line from improved cost controls could be as much as 25% to 30%. With the need to make the most of any sales gains, Lowe's is correct to focus on improving margins and maximizing its profit.
Investors were initially pleased with Lowe's results, pushing shares up 2.5% in the first two hours of pre-market trading after the company's 6 a.m. EST announcement. That's particularly impressive given that Lowe's posted significant gains yesterday following Home Depot's equally strong quarterly results. While valuations have raised concerns, the company's ability to deliver solid growth has thus far justified those high earnings multiples. As long as it can keep benefiting from strong conditions in the real-estate market, Lowe's appears poised to deliver more attractive returns to shareholders.
Dan Caplinger remains committed to shopping at Home Depot over Lowe's, but if Lowe's decides to put a store within 50 miles of his house, he might change his mind. He has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.