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Here's Why Lowe's Lacking Luster: Can the Stock Rebound?

Zacks Equity Research

Lowe's Companies, Inc.’s LOW back to back lower-than-expected results, weak margins and a soft outlook for fiscal 2017 have been major concerns for quite some time. In addition, a tough retail landscape and stiff competition from The Home Depot, Inc. HD have been weighing upon this Zacks Rank #4 (Sell) company’s performance.

If we look at the performance of Lowe's in the past six months it shows a sharp contrast from that of Home Depot. In the said time frame, Lowe's shares have dipped 0.6%, as against Home Depot’s gain of 12.2%.

Meanwhile, the industry’s performance reveals that it has rallied 6.6%, while the broader Retail-Wholesale sector gained 11%. Notably, Lowe’s dismal run in the bourses is quite evident from its Momentum Score of F.

Comparative Analysis

Let’s Take a Closer Look

Negative Earnings Surprise Trend

A look at Lowe’s bottom-line performance shows that it has missed the Zacks Consensus Estimate in four of the trailing five quarters. The company also delivered average negative earnings surprise of 1.6% in the last four quarters, including a 3.1% negative surprise witnessed in the second quarter of fiscal 2017.

In the second quarter, this home improvement retailer posted adjusted earnings of $1.57 per share that missed the Zacks Consensus Estimate of $1.62. Net sales of $19,495 million also came below the Zacks Consensus Estimate of $19,524 million. Nevertheless, both sales and earnings grew year over year, albeit at a rate lower than the preceding quarter.

Margins Have Been Under Pressure

Markedly, Lowe's has been posting weak margins since past few quarters. 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), respectively. Also, margins declined 64 and 23 bps to 34.4% and 34.2%, correspondingly, in the first and second quarters of fiscal 2017.

Going forward, Lowe’s is expected to concentrate on consumer messaging and invest in incremental customer-facing hours in its stores that are likely to weigh on margins.

Drab Outlook Hurt Investor’s Sentiment

Waning margins and negative earnings surprise trend compelled management to take somewhat conservative stance while issuing earnings and operating margin guidance.

In fact, the company envisions earnings in the band of $4.20–$4.30 per share for fiscal 2017 versus $4.30, projected earlier. However, the Zacks Consensus Estimate for the current year is pegged higher at $4.51. Furthermore, operating margin is anticipated to increase about 80 to 100 bps down from 120 bps, expected earlier.

Can the Tables Turn for Lowe's?

We believe that an improving job scenario, housing market recovery, merchandising initiatives and post hurricane construction activities along with efforts to enhance omni-channel capabilities bode well for Lowe’s. Also, the buyout of Maintenance Supply Headquarters is expected to help strengthen relationship with the pro customers.

Moreover, Lowe’s strategic initiatives to make a turnaround cannot be ignored. We believe that these ongoing strategies will take time to deliver pronounced results. Meanwhile, investors can consider some better-ranked stocks such as Zumiez Inc. ZUMZ and Lumber Liquidators Holdings, Inc. LL.

Zumiez, with a long-term earnings growth rate of 18%, has pulled off an average positive earnings surprise of 27.1% in the last four quarters. Currently, 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 holds a Zacks Rank #2 (Buy) and has a long-term earnings growth rate of 27.5%. Also, the company delivered an average positive earnings surprise of 24.2% in the trailing four quarters.

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Home Depot, Inc. (The) (HD) : Free Stock Analysis Report
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