Shares of Lowe's Companies, Inc . LOW have declined, underperforming the industry in the past month. Evidently, the stock has lost roughly 10.2% in the said time frame, wider than the industry 's decline of 6.7%. This may be attributable to management's trimmed outlook for fiscal 2018, owing to its planned business exits. Also, a decelerating comps growth trend along with soft margins seems to be marring investors' confidence.
Nevertheless, Lowe's strong digital presence and the booming U.S. home improvements market bode well. This is likely to aid this Zacks Rank #3 (Hold) company's top line and help it battle the aforementioned hurdles.
What's Pulling the Stock Down?
Lowe's is on track with its plans to exit Mexico retail operations, Orchard Supply Hardware business and certain non-core businesses in U.S. home improvements. The company also intends to shutter 20 Lowe's stores in the United States and 31 in Canada. Although this decision is expected to enable the company to focus more on prospective areas like home improvements, it does entail a downside. In the third quarter of fiscal 2018, the company incurred non-cash pre-tax charges of nearly $280 million related to its strategic review of shutting all Orchard Supply Hardware locations and long-lived asset impairments. It also includes severance obligations related to the company's intention of closing underperforming stores in the United States, Canada and Mexico, and inventory write-down related to the intention to exit non-core activities.
Moreover, management expects to incur incremental pre-tax costs of $460-$580 million in the fourth quarter of fiscal 2018. Such business reassessment efforts weighed on the outlook for fiscal 2018. The company now projects total sales growth of approximately 4%, down from the prior estimate of a rise of 4.5%. Earnings are now anticipated to be $4.08-$4.24 per share, considerably lower than the previous guidance of $4.50-$4.60. Adjusted earnings per share, however, are expected to be $5.08-$5.13.
Further, the company is witnessing decelerating comps growth trend for the past few quarters. The metric inched up 1.5% in the third quarter, following an increase of 5.2% recorded in the second quarter. Taking a look at the monthly trends, comps remained flat in October, following growth of 0.6% in February, 1.1% in March, 0.1% in April, 8.2% in May, 4.2% in June, 3% in July, 4% in August and 0.7% in September. Further, management lowered comps for fiscal 2018 and now expects it to rise about 2.5% compared with 3% anticipated earlier.
Moreover, dismal margins are a concern. During third-quarter fiscal 2018, gross margin contracted around 157 basis points (bps), owing to inventory rationalization, and elimination of slow-moving or underperforming SKUs. Gross margin also remained dismal in the second and first quarters of fiscal 2018, due to product mix shifts and higher transportation costs. Also, operating income declined 38.1% in the third quarter, owing to higher SG&A expenses. Operating margin contracted 373 bps. Lowe's now envisions operating margin to decline 240-255 bps in fiscal 2018 compared with 180 bps contraction expected earlier.
Efforts to Counter Hurdles
Lowe's is benefiting from impressive growth in home improvements market. We note that home improvements business remained strong in the third quarter, driven by strong real residential investments and rising home prices. Moreover, an improving job scenario, gradual recovery in the housing market and merchandising initiatives bode well.
Strong digital presence has also been fueling growth. During the third quarter, the company achieved 12% comps growth on Lowes.com. Going ahead, management continues to augment omni-channel capabilities and enhance consumers' digital shopping experience. Such efforts are likely to aid top line. Further, management unveiled plans to improve merchandise through brand additions, localization, reduced reliance on third-party labor and innovation.
All said, we hope the aforementioned initiatives to help Lowe's return to growth trajectory.
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