Factors Setting the Tone for Lowe's (LOW) in Q1 Earnings

Lowe's Companies, Inc.LOW is scheduled to report first-quarter fiscal 2018 results on May 23. In the preceding quarter, the company's earnings lagged the Zacks Consensus Estimate by 15.9%. This home improvement retailer failed to beat the consensus mark in the trailing four quarters, the average being a negative 4.9%.

Which Way Are Estimates Treading?

After registering an earnings decline of 14% in the final quarter of fiscal 2017, Lowe's Companies is expected to record year-over-year growth of more than 18% in the first quarter of fiscal 2018. The Zacks Consensus Estimate for the quarter under review is pegged at $1.22 compared with $1.03 reported in the year-ago quarter. Analysts polled by Zacks expect revenues of $17,457 million, up 3.6% year over year.

Factors at Play

An improving job scenario, housing market recovery and merchandising initiatives along with efforts to enhance omni-channel capabilities bode well for Lowe's. Moreover, the company's focus on strengthening its relationship with Pro customers is encouraging.

Lowe's Companies, Inc. Price, Consensus and EPS Surprise

Lowe's Companies, Inc. Price, Consensus and EPS Surprise | Lowe's Companies, Inc. Quote

The buyout of Maintenance Supply Headquarters is enhancing the company's relationship with Pro customers. Further, Lowe's has refurbished its pro-service business website,, in order to cater to the needs of its Pro customers. The company's Canadian and Mexican businesses has been doing pretty well. Meanwhile, the buyout of RONA has been fortifying the company's position in the Canadian market.

Lowe's Canada entered into a strategic partnership with Solar Brokers Canada to provide solar energy installation services to homeowners under Lowe's Solar banner. Of late, the company has been focusing on maintenance, repair and operations products, evident from its acquisition of Maintenance Supply Headquarters and also the earlier buyout of Central Wholesalers.

In fact, the reflection of these endeavors is quite evident from a 4.1% rise in fourth-quarter comparable sales (comps), following an increase of 5.7%, 4.5% and 1.9% recorded in the third, second and first quarter, respectively.

Undoubtedly, the above discussion makes us optimistic about Lowe's performance in the soon-to-be-reported quarter. However, threats emerging from cannibalization and stiff competition cannot be ignored. Also, we observed that the company's gross margin has been under pressure for quite some time now. Moreover, higher SG&A expenses may act as a headwind too. Evidently, Lowe's gross margin in the first, second, third and fourth quarters of fiscal 2017, declined a respective 64, 23, 28 and 70 basis points to 34.4%, 34.2%, 34.1% and 33.7%.

Meanwhile, the Zacks Consensus Estimate for the quarter under review has witnessed a downward revision of roughly 5.7% in the past 30 days. Estimates have been trending down lately ahead of first-quarter fiscal 2018 earnings release, as analysts polled by Zacks also remain apprehensive about unfavorable weather that might result in lower spring seasonal spending, and in turn could hurt the company's top line.

We note that Home Depot's HD top line for the first quarter of fiscal 2018 were short of consensus mark mainly due to softness in the spring season categories as the weather across the United States was colder than normal. The extreme winter weather in the quarter negatively impacted its garden categories, which usually represent 15-20% of sales in the first quarter.

What the Zacks Model Unveils

Our proven model shows that Lowe's is not likely to beat estimates this quarter. This is because the stock doesn't have the right combination of two ingredients - a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP . You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Lowe's has an Earnings ESP of -1.10% and a Zacks Rank #4 (Sell).

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Best Buy BBY has an Earnings ESP of +2.01% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

Costco Wholesale Corporation COST has an Earnings ESP of +1.39% and a Zacks Rank #3.

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

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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