Lowe's says housing turnover is depressed, so why's the stock at a 7-month high?

By Emily BaryTomi KilgoreJames Rogers

Lowe's beat profit expectations by the widest margin in years, while revenue fell as DIY demand continued to slow

Shares of Lowe's Cos. rallied toward a seven-month high Tuesday, after the home-improvement retailer's surprisingly strong quarterly profit overshadowed downbeat outlooks for earnings and for "do-it-yourself" demand, as housing turnover remain depressed.

Net earnings for the company's (LOW) fiscal fourth quarter, which ended Feb. 2, rose to $1 billion, or $1.77 a share, compared with $957 million, or $1.58 a share, in the year-earlier period.

Excluding nonrecurring items, such as costs related to a Canadian retail-business transaction, adjusted earnings per share came in at $2.28, while analysts surveyed by FactSet were modeling $1.68.

That marked the biggest EPS beat on a percentage basis in at least five years, according to available FactSet data.

The stock rose 1.5% in afternoon trading, which puts it on track for the highest close since July 28, 2023.

Among the things that helped fuel the big beat were record Black Friday and Cyber Monday sales, increased demand for building materials, such as roofing and drywall, and strong demand for exterior paint, at least until the weather turned colder in January.

Then came the not-so-good news.

While profit increased amid improved gross margin, sales fell from a year ago due to "a slowdown in [do-it-yourself] demand and unfavorable January winter weather," the company said in a release.

Revenue fell 17% - to $18.6 billion from $22.4 billion - but topped the FactSet consensus of $18.5 billion. Lowe's noted that figures from the year-earlier quarter included about $1.4 billion from an extra week and $958 million from its Canadian retail business.

Comparable sales, or sales from stores open at least one year, fell 6.2%, but that beat the FactSet consensus for a 7% decline.

And then came the bad news.

Chief Executive Marvin Ellison said on the post-earnings call with analysts that sales of existing homes are at the lowest levels seen in nearly 30 years. Even as mortgage rates have pulled back recently, homeowners may be reluctant to enter the housing market, as roughly two-thirds of them remain locked in at mortgage rates below 4%, compared with current rates at just below 7%.

"[H]ousing turnover remains depressed and the consumer is still showing a greater preference for spending on services rather than goods," Ellison said, according to an AlphaSense transcript. "We are expecting these factors to pressure home improvement spending in 2024, especially fore the DIY."

Also read: 'Bad news for home buyers': Mortgage rates rise for third week in a row.

For the fiscal year that just began, Lowe's anticipates $84 billion to $85 billion in total sales as well as a 2% to 3% drop in comparable sales, forecasts that reflect "near-term macroeconomic uncertainty." Analysts were modeling for total sales of $85.4 billion and a comparable-sales decline of 1.5%.

Lowe's also models for full-year EPS of $12 to $12.30, while analysts were forecasting $12.68.

Ellison said while there is optimism that the Federal Reserve will start cutting interest rates as inflation slows, the timing of potential cuts and how fast consumers will change their spending behavior after the cuts come is still unclear.

Read: Inflation should slow enough to spur interest-rate cuts 'later this year,' Fed's Williams says.

Also read: 'What's the rush?' Fed's Waller says interest-rate cuts can wait.

While consumers are generally "financially healthy," they are still showing preferences for spending on experiences, such as travel, restaurants and other services, rather than on things for their homes.

"[W]hile we anticipate these trend will normalize, the timing is uncertain," Ellison said.

Separately, Lowe's said it spent $404 million to repurchase 1.9 million shares during the fiscal fourth quarter and spent $6.3 billion on repurchases for the full year. The company paid out $633 million in dividends in the latest quarter and $2.5 billion for the year.

And like companies in other parts of the retail sector, such as Walmart Inc. (WMT) and Macy's Inc. (M), Lowe's is utilizing generative artificial intelligence, which can be trained to harness vast quantities of data and generate carefully tailored content. Ellison said that Lowe's is using generative AI to "improve how we sell, shop and work, like our home-improvement ChatGPT plug-in."

The stock has climbed 17.5% over the past three months, while shares of rival Home Depot Inc. (HD) have run up 20.1% and the S&P 500 SPX has advanced 11.5%.

-Emily Bary -Tomi Kilgore -James Rogers

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02-27-24 1422ET

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