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Lowe's Leaves Its 2017 Outlook Unchanged

Demitrios Kalogeropoulos, The Motley Fool

Lowe's (NYSE: LOW) this week announced earnings results that included a sharp sales jump as hurricane recovery efforts lifted demand for home improvement products. Yet the retailer couldn't keep up with the growth pace and profitability that Home Depot (NYSE: HD) revealed earlier in the month. Meanwhile, Lowe's left its full-year operating outlook unchanged despite the surprisingly strong third quarter.

More on that forecast in a moment. First, here's how the headline results stacked up against the prior-year period:

 Metric

Q3 2017

Q3 2016

Year-Over-Year Growth

Revenue

$16.77 billion

$15.74 billion

6.5%

Net income

$872 million

$379 million

130%

Earnings per share

$1.05

$0.43

144%

Data source: Lowe's financial filings.

What happened with Lowe's this quarter?

Lowe's sales growth pace improved for the third straight quarter thanks to a short-term bump from natural disasters and management's successful initiatives aimed at driving customer traffic. Reported profits more than doubled, but that spike was powered by one-time charges that reduced earnings in the prior-year period. Adjusted profits rose by a still healthy 17%.

An empty cart sits in a home improvement store aisle.

Image source: Getty Images.

The key highlights of the quarter:

  • Comparable-store sales were up 5.7% versus a 4.5% increase in the prior quarter. That result kept the retailer far behind Home Depot, which announced a 6.9% third-quarter comps spike a week ago.
  • Overall sales rose 6.5% as the company added 25 new locations to its base over the past year.
  • Gross profit ticked down to 34% of sales from 34.35%, likely because the $200 million of hurricane sales Lowe's booked during the quarter occurred at lower profit margins.
  • Operating margin soared to 9.2% of sales from 5.97%, but the prior-year figure was held down due to one-time charges. Lowe's remains less profitable than Home Depot, which has an operating margin of 15%.
  • Lowe's returned $844 million to shareholders through dividends and stock repurchases.

What management had to say

Lowe's executives highlighted several wins they managed despite the logistical challenges posed by a string of natural disasters impacting parts of the U.S. and Mexico. "We drove traffic in-store and online," CEO Robert Niblock said in a press release, "with compelling messaging and integrated customer experiences." Lowe's didn't release specific traffic numbers, but management's comments suggest the company saw modest growth on this metric after shrinking slightly through the first half of 2017.

"I am also pleased with the progress we've made to enhance our product and service offering for the Pro customer," Niblock continued. That market niche grew at a faster pace than the company average, management noted.

Looking forward

Lowe's left all its full-year forecasts unchanged despite the hurricane-fueled sales increase. Comps are still projected to rise by about 3.5% for the full year as earnings come in at between $4.20 and $4.30 per share. Home Depot, on the other hand, took the opportunity last week to raise its comps forecast by a full percentage point and now believes it will grow at a 6.5% pace for the year. Home Depot also raised its profit outlook and predicted that recovery efforts will lift results through at least the first half of 2018.

Speaking about Lowe's guidance, CFO Marshall Croom said during the conference call with analysts:

We think that our guidance for the quarter [and] for the year is appropriate and balanced as we look to invest in running the business and continue to invest in our ongoing capabilities. We are confident in our ability to drive traffic in Q4. We do expect some benefit from the hurricanes as we move into Q4 and into 2018. ... But again, recognize Q4, we have tough comparisons to last year. So as we mentioned, weather can be kind of [a] wildcard in the fourth quarter. ... As far as where we are quarter-to-date, we're just slightly ahead of our expectations for the quarter.


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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short January 2018 $170 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.