Solid macroeconomic fundamentals support Lowe's (LOW) outlook for another year of healthy growth in 2017. The company pointed out the usual contributors, including housing turnover, still-rising home prices, income and employment growth, low debt-service ratios, and healthy consumer balance sheets. We agree that the home-improvement retailers are relatively better positioned than most brick-and-mortar businesses to benefit from the rising wealth effect factor, given the differentiated business model and the scale of the domestic industry leaders, Lowe’s and Home Depot, which render both companies wide economic moats. We plan to modestly raise our $83 fair value estimate for Lowe's in response to better-than-expected fourth-quarter results, the time value of money, and operating margins largely in line with our 2017 projection (the company forecasts 120 basis points over 2016's 9% GAAP result versus our 10% estimate).
Lowe’s 2017 outlook calls for revenue to rise 5%, helped by same-store sales growth of 3.5%, the expansion of 35 locations, and the inclusion of Rona for the first half. This is slightly softer than the 6% top-line growth, in line with the 3.5% comps, and slower than the location growth we anticipated. The revision downward of square footage growth and top-line performance will offset the higher productivity we plan to incorporate into our model after the recent restructuring to ensure appropriate store staffing levels. Inventory levels rose 10.6% to $10.5 billion, but more than half was attributable to the addition of Rona, which appeared to be the only inflated number in the quarter. The company continues to generate rising free cash flow, and with a recently authorized $5 billion repurchase plan, we think Lowe’s will buy back the $3.5 billion in shares it plans and continue to raise its dividend over the year ahead.
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Jaime M. Katz, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.