LOW

3 Must-Know Facts About Lowe's Before You Buy the Stock

Lowe's (NYSE: LOW) just reported revenue and earnings for its fiscal 2024 first quarter (ended May 3) that exceeded Wall Street estimates. However, shares were down about 6% two days following that announcement. Investors clearly weren't pleased.

This top retail stock recently traded 17% below its peak price. It might be a good business to take a closer look at adding to your portfolio. But before doing so, learn these three must-know facts about Lowe's.

Serving two customer groups

Through its 1,700 stores nationwide, Lowe's sells home improvement products to both DIY and professional customers. The latter group includes contractors, electricians, plumbers, and the like, people who typically tackle larger projects on behalf of homeowners.

Lowe's generates the bulk of its total revenue, about 75%, from DIY shoppers. They tend to be more sensitive to economic factors. The other 25% of sales come from pros, a segment that saw positive comparable sales in the last fiscal quarter.

Under the leadership of CEO Marvin Ellison, Lowe's has focused on boosting the pro business to catch Home Depot, which makes half of its revenue from the lucrative customer cohort. Lowe's has a pro loyalty program, as well as various perks and benefits, to drive greater interest from professionals.

These customers spend a lot more than DIYers, which can raise profitability and store-level sales metrics. Plus, there's probably a bit of brand loyalty, as pros start to depend on Lowe's as their mission-critical supplier partner.

Recent challenges

I mentioned earlier how Lowe's beat consensus analyst estimates in the latest quarter. Revenue totaled $21.4 billion, while diluted earnings per share came in at $3.06. Perhaps the market was disappointed these two headline figures represented year-over-year declines.

In fact, Lowe's has now reported a revenue drop in five straight quarters. That's certainly not an encouraging sign for shareholders.

The business continues to struggle in the current macro environment. Higher interest rates and ongoing inflationary pressures don't really spur increased spending on big-ticket items and expensive home renovation projects. During the quarter, transaction counts and average ticket sizes were down 3.1% and 1%, respectively.

"Uncertainty around interest rate cuts, stubborn inflationary pressures, and a consumer still showing a preference toward spending on discretionary services and experiences continue to weigh on the DIY home improvement demand," Ellison said on the Q1 2024 earnings call.

For all of fiscal 2024, executives believe same-store sales will fall 2% to 3%. It looks like the challenges aren't going away anytime soon.

Focused on shareholders

Despite the latest issues, Lowe's is still a financially sound enterprise. It's consistently profitable, as the operating margin has averaged 11.2% in the past five years. On an annual basis, the operating margin actually expanded during this time, demonstrating an improved earnings profile.

Even after investing in opening new stores and bolstering the existing locations, Lowe's is able to generate lots of free cash flow. This allows the management team to adopt an extremely favorable capital allocation policy.

In fiscal 2023, Lowe's spent $6.3 billion to buy back its outstanding stock. In the past two years, the share count was reduced by 14%. This means that over time, remaining investors own a bigger piece of the business.

Dividends are also important to the leadership team. Lowe's not only increased its quarterly payout for a jaw-dropping 25 straight years, but it has paid a dividend every quarter since 1961. There aren't many companies that have this type of track record, putting Lowe's in the category of Dividend Kings.

If this stock is on your radar, learning about the customer groups, latest struggles, and capital allocation strategy can give you the info you need to make an informed decision.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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