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Why Is Lowe's (LOW) Up 2.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Lowe's (LOW). Shares have added about 2.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Lowe's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Lowe's Q3 Earnings Beat, Decline Y/Y

Lowe's reported third-quarter fiscal 2018 results, wherein both the top and bottom lines came ahead of their respective Zacks Consensus Estimate. Further, sales improved year over year. However, the company posted lower-than-expected comparable store sales. The company is also planning to exit certain non-core businesses. Moreover, margin came under pressure during the reported quarter. Management also trimmed fiscal 2018 outlook.

Incidentally, Lowe's 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, Mexico and inventory write-down related to the intention to exit non-core activities during the third quarter.

The company had earlier stated that it will close 99 Orchard Supply Hardware stores by year-end. It also informed that it will shutter 20 Lowe's stores in the United States and 31 in Canada.

Q3 Performance

This home improvement retailer's adjusted earnings came in at $1.04 per share, which surpassed the Zacks Consensus Estimate of 97 cents. However, the bottom line decreased approximately by 1% from $1.05 in the year-ago quarter.

Net sales of $17.4 billion beat the Zacks Consensus Estimate of $17.3 billion. Sales included the impact from the new revenue recognition accounting standard of ASU No. 2014-09, which was adopted in the first quarter of fiscal 2018. Notably, sales in the third quarter advanced 3.8% year over year. Prior to that, the company reported sales growth of 7.1% and 3% in the second and first quarter, respectively.

Comparable sales (comps) rose 1.5% in the quarter under review, following an increase of 5.2% and 0.6% recorded in the second and first quarter, respectively. Comps for the U.S. business jumped 2%. Comps for the U.S. business grew 5.3% and 0.5% in the second and first quarter, respectively.

Gross profit decreased 0.9% year over year to $5,660 million, while gross margin contracted around 157 basis points (bps) to 32.5%. Moreover, operating income declined 38.1% to $957 million, owing to higher SG&A expenses while operating margin contracted 373 bps to 5.5%.

Other Financial Aspects

Lowe's, which competes with Home Depot, ended the quarter with cash and cash equivalents of $1,668 million, long-term debt (excluding current maturities) of $14,460 million and shareholders' equity of $5,394 million.

Cash flow from operations amounted to $6,798 million in the first nine months of fiscal 2018. In the reported quarter, the company repurchased shares worth $620 million and distributed $390 million as dividends.

Outlook

For fiscal 2018, management now projects total sales growth of approximately 4%, down from the prior estimate of a rise of 4.5%. Further, comps for fiscal 2018 are now expected to rise about 2.5% compared with 3% anticipated earlier.

Additionally, Lowe's now envisions operating margin to decline in the range of 240-255 bps in fiscal 2018 compared with 180 bps contraction expected earlier. The updated view takes into consideration the impact from non-cash charges as well as incremental costs associated with plans to exit Orchard Supply Hardware. These costs are anticipated to be incurred in the fourth quarter.

Further, effective tax rate is envisioned to be roughly 24%. Earnings are now anticipated in a band of $4.08-$4.24, considerably lower than the previously guided range of $4.50-$4.60. The company expects adjusted earnings per share of $5.08-$5.13.

Moreover, the company intends to inaugurate roughly eight home improvement stores in fiscal 2018. As of Nov 2, 2018, the company operated 2,133 home improvement and hardware store in the United States, Canada and Mexico.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -12.73% due to these changes.

VGM Scores

Currently, Lowe's has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lowe's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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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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