Company Reports

Lowe's is the second-largest home improvement retailer globally, set to capture around $84 billion in sales in fiscal 2024. With continued focus on retail fundamentals (merchandising, operational efficiency, supply chain improvements, omnichannel shopping experience, and customer engagement), Lowe's has been able to better leverage costs while maintaining its low-cost position. The firm retains some of the cost savings and passes the rest on to its customers through everyday low prices, creating a flywheel effect. Intangible asset and scale-based cost advantage support our wide moat rating.

Wide-moat Lowe’s fiscal 2024 first-quarter marks included little surprise—$21.4 billion in sales and $3.06 in diluted EPS aligned closely with our $21.1 billion and $3.08 prerelease estimates, respectively—prompting management to reaffirm its full-year outlook of $84 billion-$85 billion in revenue and 12.6%-12.7% in operating margin. As the reiterated guidance squares with our $84.3 billion and 12.7% respective forecasts, our $211 fair value estimate shouldn’t see a material change beyond time value. Even with a 3% drop in shares following the report, shares continue to appear a touch rich relative to our existing intrinsic valuation.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Lowe's is the second-largest home improvement retailer globally, set to capture around $84 billion in sales in fiscal 2024. With continued focus on retail fundamentals (merchandising, operational efficiency, supply chain improvements, omnichannel shopping experience, and customer engagement), Lowe's has been able to better leverage costs while maintaining its low-cost position. The firm retains some of the cost savings and passes the rest on to its customers through everyday low prices. Intangible asset and scale-based cost advantage support our wide economic moat rating.

The overarching theme of wide-moat Lowe’s fiscal 2023 fourth-quarter report was analogous to its wide-moat peer Home Depot’s (reported last week), sharing sentiment around soft demand in discretionary categories and big tickets (down 8.8%). We applaud Lowe’s stringent focus on driving operational efficiencies, which we surmise limited pressure in the adjusted operating margin to a mere 48 basis points (to 9.1%) despite a 6.2% decline in comparable sales. We believe Lowe’s will continue to leverage its extensive scale and pull multiple levers—such as a flexible labor model and real-time cost optimization tool, allowing it to surgically negotiate vendor pricing—to blunt near-term macro headwinds while continuing to invest in supply chain and IT infrastructure. We maintain our long-term estimates, which include low-single-digit average sales growth and nearly 15% operating margin (from 13.4% in fiscal 2023).

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Lowe's is the second-largest home improvement retailer globally, set to capture around $87 billion in sales in fiscal 2023. With continued focus on retail fundamentals (merchandising excellence, operational efficiency, supply chain improvements, omnichannel shopping experience, and customer engagement), Lowe's has been able to better leverage costs while maintaining its low-cost position. The firm retains some of the cost savings and passes the rest on to its customers through everyday low prices. These competitive advantages support our wide economic moat rating.

Wide-moat Lowe’s third-quarter results included $20.5 billion in net sales and $3.06 in diluted earnings per share, edging our respective $20.2 billion and $2.97 estimates. More critically, gross and adjusted operating margins expanded 36 and 46 basis points to 33.7% and 13.2%, respectively, despite a 7.4% decline in comparable sales. We think these marks show the firm’s focus on expense management and ability to pull diverse levers to blunt sales deleverage. However, management's tempered full-year outlook for $86 billion in net sales (from $87 billion-$89 billion) and $13 in adjusted EPS (from $13.20-$13.60) suggests that comparable sales will decelerate further in the fourth quarter. As we incorporate these results, the weaker full-year guidance, and time value, we plan to trim our $213 fair value estimate by a low-single-digit percentage, in line with the market’s reaction, rendering the shares a tad undervalued.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Lowe's is the second-largest home improvement retailer globally, set to capture around $90 billion in sales in 2023. With continued focus on retail fundamentals (merchandising excellence, operational efficiency, supply chain improvements, omnichannel shopping experience, and customer engagement), Lowe's has been able to better leverage costs while maintaining its low-cost position. The firm retains some of the cost savings and passes the rest on to its customers through everyday low prices. These competitive advantages support our wide economic moat rating.

Wide-moat Lowe's delivered solid second-quarter results, with revenue clocking in at $25 billion and diluted EPS arriving at $4.56, edging our $24.7 billion and $4.36 preprint forecasts, respectively. Still, considering management's reiterated fiscal 2023 outlook ($87-$89 billion in revenue and $13.20-$13.60 in diluted EPS) and our estimates that sit within the guided range ($89 billion and $13.43), we don't plan a material change to our $218 fair value estimate, leaving shares a tad rich.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Lowe's is the second-largest home improvement retailer globally, set to capture around $90 billion in sales in 2023. With continued focus on retail fundamentals (merchandising excellence, operational efficiency, supply chain improvements, and customer engagement), Lowe's has been able to better leverage costs while maintaining its low-cost position. The firm retains some of the cost savings it achieves and passes the rest on to its customers through everyday low prices. These competitive advantages support our wide economic moat rating.

We believe wide-moat Lowe’s better-than-expected fiscal 2023 first-quarter results highlighted the firm’s agile execution and its ability to mitigate sales deleverage and higher wage costs. Lowe’s net sales of $22.3 billion (down 5.5%) and adjusted EPS of $3.67 outpaced our preprint forecasts of $21.1 billion and $3.31, respectively. Nonetheless, we plan to reduce our $218 fair value estimate by a mid-single-digit rate after incorporating the tempered 2023 guidance due to a lower near-term outlook (now calling for net sales of $87 billion-$89 billion and adjusted EPS of $13.20-$13.60, from $88 billion-$90 billion and $13.60-$14.00, respectively). With a 2%-3% pop on the report, shares appear fully valued, trading near our intrinsic valuation.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Lowe's is the second-largest home improvement retailer globally, set to capture $90 billion in sales in 2023. With continued focus on retail fundamentals (merchandising excellence, operational efficiency, supply chain improvements, and customer engagement), Lowe's has been able to better leverage costs while maintaining its low-cost position. The firm retains some of the cost savings it achieves and passes the rest on to its customers through everyday low prices. These competitive advantages support our wide economic moat rating.

Although wide-moat Lowe’s fourth-quarter results came in line with our expectations (sales of $22.4 billion and adjusted diluted EPS of $2.28 versus our $22.4 billion and $2.20, respectively), shares slid roughly 6% on the print. We contend the pessimistic market sentiment stems from a fiscal 2023 sales outlook that is normalizing (net sales of $88 billion-$90 billion, below our $91 billion preprint forecast, which includes the loss of the divested Canadian business) and the near-term macro uncertainties, despite secular industry tailwinds that remain solid. Impressively, Lowe’s 2023 operating margin goal of 13.6%-13.8% is largely unchanged, despite lower sales, set to benefit from perpetual productivity initiatives. We plan to lift our $212 fair value estimate by a low-single-digit rate to account for time value and view shares as undervalued.

Lowe's is the second-largest home improvement retailer globally, set to capture $97 billion in sales in 2022. With continued focus on retail fundamentals (merchandising excellence, operational efficiency, supply chain improvements, and customer engagement), Lowe's has been able to better leverage costs while maintaining its low-cost position. The firm retains some of the cost savings it achieves and passes the rest on to its customers through everyday low prices. These competitive advantages support our wide economic moat rating.

Wide-moat Lowe’s offered a peek into its near- and long-term prognosis for the business at its Dec. 7 investor day that were largely in line with our existing forecasts. While 2023 is slated to see a sales decline to $90 billion from $97 billion in 2022 (in a moderate market condition), this downtick includes the divestiture of the $6 billion revenue Canadian business. We plan to nudge our $96 billion 2023 sales forecast lower, but near Lowe’s robust market scenario outlook ($92 billion) given a solid opportunity set. From a profitability perspective, our existing 2023 outlook incorporated a 13.6% operating margin, which is at the midpoint of Lowe’s 13.3%-13.9% guidance. Longer term, we see no reason to adjust our forecast, and as such, we don’t plan any material change to our $218 fair value estimate and view shares as fairly valued.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.