Lowe’s Earnings: Fair Quarter but Meaningful Improvement Contingent on DIY Turnaround; Shares Rich

Wide-moat Lowe’s fourth quarter echoed sentiment of competitor wide-moat Home Depot, conveying concern around higher interest rates and the willingness to spend on DIY projects. That said, the top line print of $18.6 billion was ahead of our $18.2 billion estimate, and comparable sales grew 0.2%, marking the first positive result in eight quarters. Gross margin rose 46 basis points to 32.9% (versus our 32.7% forecast) and the adjusted operating margin lifted 36 basis points to 9.4% (9.3%) thanks to productivity improvements. Notably, while comparable transactions declined 1.3% in the quarter due to fewer DIY projects, the comparable average ticket grew 1.5%, which we see as a positive sign that consumers are trading up in areas like appliances and spending on small pro projects. As such, we plan to maintain our $225 fair value estimate and see shares as modestly overvalued.