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Why Is Lowe's (LOW) Up 8.9% Since Last Earnings Report?

Zacks Equity Research
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It has been about a month since the last earnings report for Lowe's (LOW). Shares have added about 8.9% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Lowe's Trims View Despite Q2 Earnings Beat

Lowe’s reported second-quarter fiscal 2018 results, wherein the top and the bottom line improved year over year and came ahead of the Zacks Consensus Estimate. However, management’s trimmed outlook for fiscal 2018.

Incidentally, Lowe’s incurred non-cash pre-tax charges of nearly $230 million related to its strategic review of Orchard Supply Hardware, which, in turn, resulted in long-lived asset impairments and discontinued projects during the second quarter. Moreover, the company decided to exit these operations last week to increase focus on key home improvement business. To this end, Lowe’s anticipates shutting down all 99 Orchard Supply Hardware stores (situated in California, Florida and Oregon) and also plans to wind up the related distribution facility by the end of fiscal 2018. In this regard, the company plans to undertake store closing sales and collaborated with Hilco Merchant Services to carry out the process seamlessly.

Well, management expects to incur incremental pre-tax costs of $390-$475 million in the second half of fiscal 2018 in connection with severance and lease obligations as well as accelerated depreciation and amortization costs. These factors along with management’s plan to rationalize inventory levels weighed on outlook for fiscal 2018.

Q2 Performance

Excluding the aforementioned charges incurred in the second quarter (related to Orchard Supply), this home improvement retailer’s adjusted earnings came in at $2.07 per share, which surpassed the Zacks Consensus Estimate of $2.02. Moreover, the bottom line increased 31.8% from $1.57 in the year-ago quarter, following a rise of 15.5% in the previous quarter.

Further, net sales of $20.9 billion beat the Zacks Consensus Estimate of $20.8 billion. Sales included the impact from the new revenue recognition accounting standard of ASU No. 2014-09, which was adopted in the first quarter of fiscal 2018.

Notably, sales in the second quarter advanced 7.1% year over year after posting improvement of 3% in the preceding period. Prior to that, the company posted sales growth of 1.8%, 6.5%, 6.8% and 10.7% in the fourth, third, second and first quarters of fiscal 2017, respectively.
 
Comparable sales (comps) rose 5.2% in the quarter under review, after 0.6% rise recorded in the preceding quarter. Comps increased 4.1%, 5.7%, 4.5% and 1.9% in the fourth, third, second and first quarters of fiscal 2017, respectively. Comps for the U.S. business jumped 5.3%, after increasing 0.5% in the first quarter of fiscal 2018. Comps for the U.S. business grew 4.7%, 5.1%, 4.6% and 2% in the fourth, third, second and first quarters of fiscal 2017, respectively.

Moving on, gross profit increased 7.9% year over year to $7,199 million and gross profit margin expanded roughly 25 basis points (bps) to 34.5%. However, operating income declined 9.2% to $2,163 million, thanks to higher SG&A expenses.

Other Financial Aspects

Lowe’s, which competes with Home Depot, ended the quarter with cash and cash equivalents of $2,251 million, long-term debt (excluding current maturities) of $14,937 million and shareholders’ equity of $5,781 million. Cash flow from operations amounted to $5,787 million in the first six months of fiscal 2018.

In the reported quarter, the company kept its promise of returning surplus cash to stockholders as it repurchased shares worth $1.1 billion and distributed $338 million as dividends.

Outlook

Management remains impressed with Lowe’s robust second-quarter show, which was fueled by delayed spring season demand. Going ahead, the company remains committed toward delivering an even better performance by strengthening its retail fundamentals and putting greater focus on its core plan to become a solid omni-channel home improvement retailer.

While the company decided to exit Orchard Supply Hardware, it also remains strongly focused on rationalizing inventory levels. Both these factors led to a curtailed outlook for fiscal 2018.

For fiscal 2018, management now projects total sales growth of approximately 4.5%, down from the prior estimate of a rise of 5%. Further, comps for fiscal 2018 are now expected to rise about 3% compared with 3.5% anticipated earlier.

Additionally, Lowe’s now envisions operating margin to decline approximately 180 bps in fiscal 2018 compared with a 40-bp contraction expected earlier. The updated view takes into consideration the impact from non-cash charges as well as incremental costs associated with plans to exit Orchard Supply Hardware. These costs are anticipated to be incurred in the second half of fiscal 2018.

Further, effective tax rate is envisioned to be roughly 25%. Earnings are now anticipated in a band of $4.50-$4.60, considerably lower than the previously guided range of $5.40-$5.50.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -17.76% due to these changes.

VGM Scores

At this time, Lowe's has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, 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 B. 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 these revisions indicates a downward shift. 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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