Home improvement retailer Lowe’s (NYSE:LOW) was in line with analysts' expectations in Q2 FY2023, with revenue down 9.17% year on year to $25 billion. The company's outlook for the full year was also close to analysts' estimates with revenue guided to $88 billion at the midpoint. Lowe's made a GAAP profit of $2.67 billion, down from its profit of $2.99 billion in the same quarter last year.
Lowe's (LOW) Q2 FY2023 Highlights:
- Revenue: $25 billion vs analyst estimates of $25 billion (small miss)
- EPS: $4.56 vs analyst estimates of $4.48 (1.76% beat)
- The company reconfirmed revenue guidance for the full year of $88 billion at the midpoint
- Free Cash Flow of $3.48 billion, up 29.2% from the same quarter last year
- Gross Margin (GAAP): 33.7%, up from 33.2% in the same quarter last year
- Same-Store Sales were down 1.6% year on year
- Store Locations: 1,700 at quarter end, decreasing by 269 over the last 12 months
Founded in North Carolina as Lowe's North Wilkesboro Hardware, the company is a home improvement retailer that sells everything from paint to tools to building materials.
The core Lowe’s customer is the do-it-yourself (DIY) homeowner, often shopping for design, remodeling, or home decor needs. The company also serves professional contractors as well. Like its closest competitor Home Depot, Lowe’s has a broad range of home improvement and design products at competitive prices. For the DIY shopper, Lowe’s offers installation services for products such as cabinets and flooring as well as design consultation services. For the professional contractor, Lowe’s has loyalty programs and volume discounts. There is also a Pro Desk in most stores, where contractors can place large or custom orders and consult with specialists trained to specifically assist professionals.
Since Lowe’s and Home Depot are the two largest home improvement retailers in North America with many similarities, a common question is how they differ. One difference is that Home Depot has a larger selection of appliances and power tools, while Lowe's may have a better selection of home decor and seasonal items. Another difference is the store aesthetic. When you walk into a Home Depot, it looks like a sprawling warehouse, and the feel is very utilitarian. Lowe’s stores, on the other hand, are slightly smaller and have a more traditional retail aesthetic with brighter colors.
Home improvement retailers serve the maintenance and repair needs of do-it-yourself homeowners as well as professional contractors. Home is where the heart is, so any homeowner will want to keep that home in good shape by maintaining the yard, fixing leaks, or improving lighting fixtures, for example. Home improvement stores win with depth and breadth of product, in-store consultations for customers who need help, and services that cater to professionals. It is hard for non-focused retailers and e-commerce competitors to match these. However, the research, convenience, and prices of online platforms means they can’t be fully written off, either.
Home improvement retail competitors include Home Depot (NYSE:HD) and private company Ace Hardware. Amazon.com (NASDAQ:AMZN) and Wayfair (NYSE:W) also offer some home improvement products.Sales Growth
Lowe's is a behemoth in the consumer retail sector and benefits from economies of scale, an important advantage giving the business an edge in distribution and more negotiating power with suppliers.
As you can see below, the company's annualized revenue growth rate of 6.75% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre despite closing stores.
This quarter, Lowe's reported a rather uninspiring 9.17% year-on-year revenue decline, in line with analysts' expectations. Looking ahead, Wall Street expects revenue to decline 4.17% over the next 12 months.
Number of Stores
A retailer's store count often determines on how much revenue it can generate.
When a retailer like Lowe's is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. Lowe's store count shrank by 269 locations, or 13.7%, over the last 12 months to 1,700 total retail locations in the most recently reported quarter.
Taking a step back, the company has generally closed its stores over the last two years, averaging a 8.76% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.
Same-Store Sales
Lowe's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 0.29% year on year. The company has been reducing its store count as fewer locations sometimes lead to higher same-store sales, but that hasn't been the case here.
In the latest quarter, Lowe's same-store sales fell 1.6% year on year. This decrease was a further deceleration from the 0.3% year-on-year decline it had posted 12 months ago. We hope the business can get back on track.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
As you can see below, Lowe's has averaged a paltry 33.3% gross margin over the last two years. This means that the company makes $0.33 for every $1 in revenue before accounting for its operating expenses.
Lowe's gross profit margin came in at 33.7% this quarter, relatively flat with the same quarter last year. This steady margin could stem from its efforts to keep prices consistently low or signal that it has stable input costs (such as freight expenses to transport goods).
Operating Margin
Operating margin is an important measure of profitability for retailers as it accounts for all expenses that keep the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, Lowe's generated an operating profit margin of 15.6%, in line with the same quarter last year. This indicates that the company's costs have been relatively stable.
From an operational perspective, Lowe's has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer retail business, producing an average operating margin of 12.6%. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.
The company's profitability was particularly impressive because of its low gross margin. This margin is mostly a factor of what Lowe's sells and it takes tectonic shifts to move meaningfully. Companies have more control over their operating margins, and it signals strength if they're high when gross margins are low (like for Lowe's).
EPS
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q2, Lowe's reported EPS at $4.56, down from $4.67 in the same quarter a year ago. This print beat Wall Street's estimates by 1.76%, a welcome development that should delight shareholders.
Between 2020 and 2023, Lowe's adjusted diluted EPS grew 31.5%, translating into a solid 10.5% average annual growth rate. This EPS growth is materially higher than its revenue growth over the same period, indicating that Lowe's has excelled in managing its expenses (leading to higher profitability), bought back a healthy chunk of its outstanding shares (leading to higher PER share earnings), or did some combination of both.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Lowe's free cash flow came in at $3.48 billion in Q2, up 29.2% year on year. This represents a 13.9% margin, which is 4.1 percentage points higher than its free cash flow margin in the same period last year.
Over the last two years, Lowe's has shown strong cash profitability, giving it an edge over its competitors and the option to invest organically, acquire other businesses, reduce its debt load, or return capital to shareholders via share buybacks or dividends while keeping ample cash on hand for emergencies. The company's free cash flow margin has averaged 7.29%, quite impressive for a consumer retail business. Furthermore, its margin has been flat, showing that the company's cash flows are relatively stable.
Return on Invested Capital (ROIC)
Lowe's has a strong competitive position and its management team has a stellar track record of successfully investing in profitable growth initiatives. Its five-year average return on invested capital (ROIC) is 38.3%, firmly placing it among the best consumer retail companies.
We like to track ROIC because it tells us how much return (profit) a company makes on the money it invests into its business, shedding light on its prospects and its management team's decision-making prowess. ROIC can also be used as a tool to benchmark a company's performance versus its peers, and just like how we focus on long-term investment returns, we care more about analyzing a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from Lowe's Q2 Results
With a market capitalization of $128 billion, a $3.87 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Lowe's has the resources needed to pursue a high-growth business strategy.
It was good to see Lowe's beat analysts' EPS estimates this quarter. Furthermore, the company repurchased 10.1 million shares for $2.2 billion and paid its investors $624 million in dividends. Overall, this was a mediocre quarter for Lowe's. The stock is up 2.67% after reporting and currently trades at $223.47 per share.
Is Now The Time?
When considering an investment in Lowe's, investors should take into account its valuation and business qualities as well as what happened in the latest quarter. We cheer for everyone who's improving the lives of others but in the case of Lowe's, we'll be cheering from the sidelines. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there. And while its high ROIC suggests it is well run and in a strong position for profitable growth, the downside is that its decline in physical locations suggests that its demand is shrinking and its decline in same-store sales suggests that it'll need to change its strategy to succeed.
While it's trading at a reasonable price and we've no doubt one can find things to like about Lowe's, at the moment, we think there might be better opportunities in the market.
To get the best start with StockStory, check out our most recent stock picks and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.