Lowe’s Earnings: Strong Profitability Despite Weak Discretionary Spending

Key Morningstar Metrics for Lowe’s Companies

• Fair Value Estimate: $213.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Lowe’s Companies’ Earnings

Lowe’s LOW third-quarter results included $20.5 billion in net sales and $3.06 in diluted earnings per share, edging our respective estimates of $20.2 billion and $2.97. More critically, gross and adjusted operating margins expanded 36 and 46 basis points to 33.7% and 13.2%, respectively, despite a 7.4% decline in comparable sales.

We think these marks show the firm’s focus on expense management, as well as its ability to pull diverse levers to blunt sales deleverage. However, management’s tempered full-year outlook for $86 billion in net sales (from $87 billion-$89 billion) and $13 in adjusted EPS (from $13.20-$13.60) suggests comparable sales will decelerate further in the fourth quarter. As we incorporate these results, the weaker full-year guidance, and time value, we plan to trim our $213 fair value estimate by a low-single-digit percentage, in line with the market’s reaction, rendering the shares a tad undervalued.

The key narrative was analogous to Home Depot’s HD recent report, as soft do-it-yourself discretionary spending was the major drag on comparable sales. Comp transactions and comp average ticket dropped 6.9% and 0.5%, respectively, with big tickets (purchases above $500) falling 9.8%, softening from the 4.6% decline a quarter ago.

While we don’t anticipate a turnaround in sales momentum until mid-2024, we see no reason to change our long-term view. On top of Lowe’s low-cost position (thanks to its robust scale, which underpins our wide moat rating), we believe efforts to expand higher-margin private-label offerings, leverage strategic pricing tactics, and unlock store productivity and greater wallet share through a localization strategy in rural areas—roughly 17% of its store base—should bear fruit. We believe Lowe’s can reach a nearly 15% operating margin in the longer term, from 13% in fiscal 2022, and that it’s poised to take incremental share in the fragmented North American home improvement market.