Lowe’s Earnings: Macro Pressures Linger, but Operational Agility and Business Strategy Encouraging

Lowe’s Stock at a Glance

• Fair Value Estimate: $218.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Lowe’s Earnings Update

Lowe’s LOW delivered solid second-quarter results, with revenue clocking in at $25 billion and diluted earnings per share arriving at $4.56, edging our forecasts of $24.7 billion and $4.36, 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.

Comparable sales declined modestly by 1.6%, mainly due to a 1.9% drop in comp transactions which was partially offset by a 0.3% lift in comp average ticket (to $100.66). Lowe’s shared a similar read on the consumer as Home Depot HD, despite consumers’ reluctance to take on big projects (as illustrated by a 4.6% drag in big-ticket sales), pro remains resilient, with 75% of the cohort reporting healthy backlogs and consistent sequential lead volumes. More critically, pro comp sales growth was positive (qualitatively stated), even with a 315-basis-point hit from lumber deflation. We see this as a result of Lowe’s multiyear efforts to elevate its assortment, online tools, and loyalty programs. We view such initiatives as prudent and essential to maintaining Lowe’s competitive edge. Against the negative consolidated comp, operating margin improved by 18 basis points to 15.6%, which we attribute to the firm’s productivity and cost-saving measures across its stores and supply chain.

Despite the widespread pressure in the current retail landscape, shrink had a neutral impact on Lowe’s second-quarter results. We believe judicious technology investments, such as its theft protection program, have positioned the firm well to mitigate industry-wide concerns, giving us confidence in our long-term view of Lowe’s. Taken together, our long-term forecasts for 3% average top-line growth (beyond fiscal 2023) and 14%-15% operating margins by fiscal 2032 remain unchanged.