Lowe’s Earnings: Disciplined Focus on Productivity Is Paying Off, Despite Choppy Macro Backdrop

Key Morningstar Metrics for Lowe’s Companies

• Fair Value Estimate: $207.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Lowe’s Companies’ Earnings

The overarching theme of Lowe’s Companies’ LOW fiscal 2023 fourth-quarter report was analogous to its peer Home Depot’s HD report 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 (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).

While management attributed the meaningful drop in comparable sales to a slowdown in DIY (75% of sales), we believe Lowe’s prudent approach to enhance merchandising and the customer shopping experience will prove valuable in the longer term. The DIY loyalty program (set to roll out in March) strikes us as particularly encouraging, given the firm’s sizable DIY mix and its recent success in driving pro sales via a revamped pro loyalty program. Ultimately, we think this will lift return visits, customer stickiness, and service levels, further bolstering Lowe’s brand intangible asset.

On balance, our $207 fair value estimate shouldn’t see a material change as we absorb the mixed fourth-quarter results ($18.6 billion in sales lagging our $18.7 billion estimate, but $1.77 in earnings per share outpacing our $1.69), and we’ve adjusted our near-term forecasts to align with management’s fiscal 2024 outlook (including a 2%-3% drop in comparable sales and $12.00-$12.30 in earnings per share). After a 3% post-print pop, shares look overvalued. We suggest investors await a more compelling risk/reward.