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What's Hindering Lowe's (LOW) Stock Performance Lately?

Lowe's Companies, Inc. LOW, once an investor favorite, is in the red territory for quite some time now. In fact, the company has been losing investors’ favor due to the dismal earnings performances, a soft outlook and weak margins, amid a tough retail industry backdrop.

Notably, Lowe’s shares dropped nearly 3.1% after the company posted lower-than-expected second-quarter fiscal 2017 results on Aug 23.

Shares of this Zacks Rank #4 (Sell) company have declined 9.8% in the last six months, wider than the Zacks Building Products industry’s fall of 2.7%. Currently, the industry is placed in the bottom 10% of the Zacks classified industries (230 out of 256). Meanwhile, the broader Retail-Wholesale sector gained 8.5% but is currently placed at the bottom end of the Zacks classified sectors (16 out of 16).

Let’s Delve Deep

Soft Q2 Results & Guidance

Lowe’s delivered dismal second-quarter results, wherein both the top and bottom lines fell short of the Zacks Consensus Estimate for the second straight quarter. In fact, both earnings and sales have lagged estimates in four of the last five quarters. This, in turn, has caused the company’s average negative earnings surprise of 1.6% in the trailing four quarters.  

Nevertheless, the company’s earnings and sales improved from the last year, albeit at a rate lower than the preceding quarter. The lower-than-expected results and investment plans compelled Lowe’s to trim fiscal 2017 earnings view. It now envisions earnings to come in the band of $4.20–$4.30 per share compared with $4.30, projected earlier. (Read: Investors Punish Lowe's on Q2 Earnings & Sales Miss)

Estimates Revisions

The Zacks Consensus Estimate for Lowe’s have declined sharply in the last seven days. Over the said time frame, 11 analysts lowered estimates for both fiscal 2017 and fiscal 2018.

The Zacks Consensus Estimate of $4.49 for fiscal 2017 and $5.10 for fiscal 2018 has moved down 11 cents and 14 cents, respectively.

Other Concerns

Lowe’s faces stiff competition from the leader in home improvement retail segment — The Home Depot, Inc. HD — which posted robust second-quarter fiscal 2017 numbers. This is Home Depot’s highest quarterly sales and earnings ever. Notably, sales at this segment surpassed estimates for the 13th straight quarter, while the company retained its five-year long trend of delivering positive earnings surprises.

Also, Lowe’s investment in customer-facing hours in stores and promotions are likely to hurt margins. We note that in the fourth, third, second and first quarters of fiscal 2016, the company’s gross margin had contracted 25, 40, 10 and 43 basis points (bps). In the first and second quarters of fiscal 2017, gross margins declined 64 and 23 bps to 34.4% and 34.2%, respectively.

Is There Any Silver Lining?

Nevertheless, Lowe’s comparable store sales (comps) showed considerable improvement in the last reported quarter, despite a tough retail landscape. Further, improving job scenario, recovery in the housing market and merchandising initiatives along with efforts to enhance omni-channel capabilities bode well. Management continues to expect sales to increase 5% with comps growth of 3.5% during fiscal 2017.

Bottom Line

Though Lowe’s has been taking strategic initiatives to spark a turnaround, it might take time. Hence, we would suggest staying away from the stock until pronounced results of the company’s ongoing initiatives are seen in its overall performance.

Want to Know About the Gems in the Retail Space?

Better-ranked stocks in the broader Retail sector include The Children's Place, Inc. PLCE and Lumber Liquidators Holdings, Inc. LL.

Children's Place, with long-term earnings growth rate of 9%, has delivered an average positive earnings surprise of 16.3% in the trailing four quarters. Also, the stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lumber Liquidators, with long-term earnings growth rate of 27.5%, has pulled off positive earnings surprise of 300% in the last reported quarter. Currently, it carries a Zacks rank #2 (Buy).

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