Lowe’s Earnings: Weather and Macro Environment Impair Sales, but Solid Execution on Display
We plan to lower our fair value estimate on Lowe’s stock from $218; shares fully valued.
Lowe’s Stock at a Glance
- Fair Value Estimate: $218
- Morningstar Rating: 3 stars
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
Lowe’s Earnings Update
We believe the better-than-expected 2023 first-quarter results for wide-moat Lowe’s LOW highlight the firm’s agile execution and ability to mitigate sales deleverage and higher wage costs. The company’s net sales of $22.3 billion (down 5.5%) and adjusted EPS of $3.67 outpaced our forecasts of $21.1 billion and $3.31, respectively.
Nonetheless, we plan to reduce our $218 fair value estimate by a mid-single-digit rate after incorporating the tempered 2023 guidance, due to a lower near-term outlook (now calling for net sales of $87 billion-$89 billion and adjusted EPS of $13.20-$13.60, from $88 billion-$90 billion and $13.60-$14.00, respectively). With a 2%-3% pop on the report, shares appear fully valued, trading near our intrinsic valuation.
In the quarter, comparable sales declined 4.3% because of the combination of lumber deflation, unfavorable weather, and softer demand as customers engaged in smaller, less-discretionary projects (in line with wide-moat Home Depot’s HD commentary on its first-quarter earnings). Still, Lowe’s pro business (the firm’s primary growth vector, in our view) booked positive sales growth even after lapping 22% growth in the prior-year quarter and accounting for an 800-basis-point drag from lumber deflation. We attribute this mark to the firm’s continuous efforts to funnel resources toward merchandising, product innovation, and supply chain to elevate customer experience and drive brand loyalty. Despite the sluggish sales, Lowe’s adjusted operating margin expanded 47 basis points to 14.4% in the quarter, as diverse productivity initiatives offset higher wages and sales deleveraging.
Taken together, despite the lackluster sales momentum that we foresee in the near term, our favorable view on the underlying fundamentals of the business remains intact. As such, we maintain our long-term outlook for 3% average sales growth (beyond fiscal 2023) and midteens operating margins by 2032.
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