Lowe's (LOW) Q3 Earnings & Sales Beat, Soft Q4 View Hurts
Lowe’s Companies, Inc. LOW has reported robust third-quarter fiscal 2020 results, wherein both earnings and sales have outpaced the Zacks Consensus Estimate and have grown year over year. Notably, the company delivered the sixth-straight earnings beat and the third-consecutive sales surprise.
Results benefited from its focus on the execution of its strategies to meet the strong demand across the board. Backed by the strong demand, the company recorded sales growth of more than 15% across all merchandise segments, more than 20% in all geographies and triple-digits in e-commerce. Apparently, sales at lowes.com increased 106% in the fiscal third quarter.
On May 20, management withdrew the guidance for fiscal 2020 due to the lack of visibility about future trends, owing to the coronavirus outbreak. However, it outlined the outlook for fourth-quarter fiscal 2020, wherein earnings guidance appeared to be below analysts’ expectations.
For the fiscal fourth quarter, the company expects total sales and comparable sales (comps) of 15-20%. It expects adjusted operating margin to be almost flat with the prior-year quarter, owing to the pandemic-related operating expenses, cost of $150 million related to store layout resets in the United States, and investments to expand the supply chain network. Effective tax rate is anticipated to be 27%.
Moreover, the company estimates earnings per share, both on GAAP and adjusted basis, of $1.10-$1.20, the mid-point being below the Zacks Consensus Estimate of $1.17.
Shares of the home-improvement retailer declined 6.2% in the pre-market session despite the robust quarterly results. Probably, the softer-than-expected earnings forecast for the holiday quarter and increased pandemic-related costs hurt investors’ sentiments.
Over the past three months, this Zacks Rank #3 (Hold) stock gained 2.3% compared with the industry’s growth of 0.5%.
Q3 in Detail
Adjusted earnings of $1.98 per share surpassed the Zacks Consensus Estimate of $1.97 and rose 40.4% year over year.
Lowes Companies, Inc. Price, Consensus and EPS Surprise
Lowes Companies, Inc. price-consensus-eps-surprise-chart | Lowes Companies, Inc. Quote
Net sales of $22,309 million rose 28.3% year over year and surpassed the Zacks Consensus Estimate of $21,076.3 million. Notably, comparable sales increased 30.1% during the quarter under review. Comparable sales for the U.S. home-improvement business reflected a robust rise of 30.4% in the quarter.
Gross profit improved 29.4% year over year to $7,300 million, while gross margin expanded 28 basis points to 32.7%, driven by strong top-line growth.
Other Financial Aspects
Management has been making investments in omni-channel capabilities, including Lowes.com and its supply chain, to drive growth. In the fiscal third quarter, the company also invested $100 million toward its efforts to reset the layout of stores in the United States to ease shopping with improved product adjacencies, particularly for Pro customers.
Moreover, the company has been investing in providing pandemic-related support to frontline hourly associates through bonuses and incentives. In the fiscal third quarter, the company invested $245 million for providing support to associates. With this, the company has spent more than $800 million for pandemic-related support to hourly associates so far this year. Additionally, it invested more than $1.1 billion for pandemic-related support for associates, store safety and community relief efforts in the first nine months of fiscal 2020. Moreover, it provided a "Winning Together" profit-sharing bonus worth $104 million to all hourly associates in all stores in the reported quarter, which marked the third straight quarter of distribution of such bonus.
The company ended the fiscal third quarter with cash and cash equivalents of $8,249 million, long-term debt (excluding current maturities) of $21,185 million, and shareholders’ equity of $4,073 million. Moreover, its revolving credit facility had $3 billion of undrawn capacity at the end of the fiscal third quarter. This provides the company with adequate liquidity to meet future contingencies.
In the fiscal third quarter, it further strengthened its balance sheet by lowering its annual interest expenses through a cash tender offer for $3 billion of higher-coupon bonds and issuance of $4 billion of senior unsecured notes, with a weighted average interest rate of 2.17%.
Lowe’s generated cash flow from operations of $11,485 million as of Oct 30, 2020. Moreover, it spent $1,172 million toward capital expenditure in the first nine months of fiscal 2020.
During the fiscal third quarter, Lowe’s restored its previously suspended share repurchase program and bought back 3.6 million shares for $621 million. Additionally, it paid out dividends of $416 million in the reported quarter. In the first nine months of fiscal 2020, which includes share repurchases made before suspension and in the reported quarter, the company repurchased shares worth $1,528 million. Moreover, it distributed $1,252 million as dividends in the first nine months of fiscal 2020.
For fourth-quarter fiscal 2020, the company expects to buy back shares worth $3 billion. It plans to incur capital expenditure of $1.7 billion for fiscal 2020.
As of Oct 30, 2020, the company operated 1,969 home-improvement and hardware stores across the United States and Canada.
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