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Lowe's (LOW) Up 3.4% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Lowe's (LOW). Shares have added about 3.4% 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 catalysts.

Lowe's Q2 Earnings & Sales Beat Estimates

Lowe’s reported robust second-quarter fiscal 2019 results. Adjusted earnings of $2.15 a share exceeded the Zacks Consensus Estimate of $2.00 and increased 3.9% year over year. Including pre-tax losses related to the shutdown of Lowe’s Mexico retail operations, earnings came in at $2.14 per share compared with the year-ago period’s $1.86. We believe that bottom-line growth was backed by higher sales and lower SG&A expenses.

Net sales of $20,992 million beat the Zacks Consensus Estimate of $20,978 million. Notably, sales in the quarter under review advanced 0.5% year over year, following a 2.2% rise in the preceding quarter. The upside in the second quarter was backed by solid spring season demand, robust execution of holiday event, and improvement in Paint and Pro businesses.

Comparable sales rose 2.3% in the quarter under review, following an increase of 3.5% in the first quarter of fiscal 2019. Comparable sales for the U.S. home improvement business improved 3.2%, after a rise of 4.2% in the preceding quarter. Management stated that during the second quarter, Lowe’s saw comparable sales growth in all 15 U.S regions despite battling lumber deflation and inclement weather conditions.

Gross profit decreased 2.1% year over year to $6,740 million, while gross margin contracted around 85 basis points to 32.1%.

Other Financial Aspects

Lowe’s ended the quarter with cash and cash equivalents of $1,796 million, long-term debt (excluding current maturities) of $16,538 million and shareholders’ equity of $2,640 million.

The company generated cash flow from operations of $3,583 million in the six months ended Aug 2, 2019. In the reported quarter, it repurchased shares worth $1.96 billion and distributed $382 million as dividends.

Outlook

Management is pleased with the progress of its retail fundamentals and a robust macroeconomic consumer environment. These factors along with robust strategies drove Lowe’s sales. The company is on track with its transformation efforts and encouraged about its ongoing prospects, given the strong demand in the healthy home improvement space.

For fiscal 2019, management continues to project total sales growth of approximately 2%, with comparable sales expected to rise roughly 3%.

Lowe’s still envisions adjusted operating margin to expand 20-50 basis points in fiscal 2019.

The company projects adjusted earnings per share of $5.45-$5.65.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Lowe's has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, 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 A. 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 this revision has been net zero. 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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