Lowe’s, a leading home improvement retailer, has demonstrated its resilience during a challenging economic period and is poised for further growth. Despite a 9% surge since our recommendation on Jan. 25, the stock remains an attractive investment opportunity.
While the most recent quarter might not have appeared particularly remarkable at first glance, there are several positive takeaways. Sales, totaling approximately $25 billion, matched analysts’ estimates, reflecting a 9.2% year-over-year decline. The housing market was impacted by higher mortgage rates, resulting in a decrease in demand for related products. However, Lowe’s (LOW) was able to exceed earnings-per-share expectations due to improved gross profit margins, driven by lower transportation costs, and ongoing share buybacks. Surpassing forecasts, the company reported earnings of $4.56 per share compared to the estimated $4.47.
Moreover, Lowe’s reaffirmed its full-year guidance, projecting sales of $88 billion and earnings of $13.40 per share. While some may view the decision not to revise these figures as cause for concern, this is not necessarily the case. In fact, it suggests that management is being conservative in their estimations given the current economic conditions. Considering the company’s stronger quarter-over-quarter growth rate relative to last year, it can be inferred that Lowe’s has potential to surpass expectations later in the year.
Brian Yarbrough, an analyst at Edward Jones, emphasizes the significance of the cautious approach taken by Lowe’s management. Yarbrough explains, “The near term is so choppy—it makes no sense to say, ‘Hey, we’re going to raise full-year guidance.’ You’d rather…underpromise and overdeliver.”
Lowe’s has proven its ability to navigate through economic challenges while sustaining growth. Despite the recent surge in stock value, Lowe’s remains a favorable investment option. With resilient fiscal performance and ongoing strategic measures, the company is well-positioned to exceed expectations in the coming months.
Lowe’s Focuses on “Pro” Sales Growth
Lowe’s, a leading home improvement retailer, has experienced growth in its “pro” sales, catering to home-improvement contractors. This segment has traditionally been dominated by Home Depot. Unlike the do-it-yourself (DIY) customers, whose sales dropped by more than 9% this past quarter, the demand from professionals remains steady.
Jefferies analyst Jonathan Matuszewski highlights the continuation of Lowe’s “powerful pro initiatives.” By capturing market share from smaller companies and stabilizing the DIY segment, Lowe’s aims to drive sales growth and boost earnings. Analysts predict an annualized sales growth rate of just over 3% for the three years ending in 2026, reaching a total of approximately $97 billion.
Operating margins are expected to rise, aligning them with Home Depot’s levels. Combined with share buybacks, this growth trajectory could result in a 12% annual increase in earnings per share, expected to reach around $18.62 in 2026.
While Lowe’s stock is currently trading at a price-to-earnings ratio of approximately 16.5 times the next twelve months’ earnings, slightly lower than Home Depot’s 20.8 times ratio, as Lowe’s successfully navigates the challenges in the DIY market and implements its strategic plans, the stock may command a higher valuation.
According to Yarbrough, if Lowe’s can achieve double-digit earnings growth, it has the potential to become a 20% compounder, offering both earnings growth and multiple expansion.
Lowe’s not only improves homes but also has the potential to bolster investment portfolios.