Why Lowe's Earnings Could Spell Disaster

Chris Lange

Lowe’s Companies Inc. (NYSE: LOW) reported its fiscal third-quarter financial results before the markets opened on Wednesday. Although shares of this home improvement giant have recently been making a push to do better this year, this earnings report was a resounding step backward. Guidance also proved to seal Lowe’s fate what looks to be a weak 2016.

The company said that it had $0.88 in earnings per share (EPS) and $15.74 billion in revenue. The consensus estimates from Thomson Reuters called for $0.96 in EPS and revenue of $15.86 billion. The same period of last year reportedly had EPS of $0.80 and $14.36 billion in revenue.

Comparable sales for the U.S. home improvement business increased 2.6% for the third quarter and 3.9% for the past nine months.

Rival Home Depot Inc. (NYSE: HD) said that it had $1.60 in EPS and $23.15 billion in revenue, compared with consensus estimates of $1.58 in EPS and revenue of $23.05 billion. In the same period of last year, the specialty retailer posted EPS of $1.36 and $21.82 billion in revenue. Comparable store sales for the third quarter of fiscal 2016 were positive 5.5%, and comp sales for U.S. stores were positive 5.9%.

Despite these relatively positive results, investors sent Home Depot shares lower by roughly 2.5% in the wake of its report.

In terms of the guidance for 2016, Lowe’s expects EPS to be roughly $3.52 and for total sales to increase by 9% to 10%, with comparable sales increasing between 3% and 4%. The consensus estimates are $4.00 in EPS and $64.8 billion in revenue for this fiscal year.

During the most recent quarter, the company repurchased $550 million of stock under its share repurchase program and paid $309 million in dividends.

On the books, Lowe’s cash, cash equivalents and short-term investments totaled $1.08 billion at the end of the quarter, down from $1.39 billion in the same period from last year.

Robert A. Niblock, Lowe’s chairman, president and CEO, commented:

Our third quarter operating results were below our expectations due to slower sales in the first two months of the quarter. While we expected moderation in the second half of the year, traffic slowed more than we anticipated in August and September before improving in October, which put pressure on our profitability in the quarter.

Niblock added:

While we have made progress in driving productivity in recent years, we are in the process of evaluating meaningful incremental opportunities to drive shareholder value while continuing to meet customers’ needs in an omni-channel environment.

Shares of Lowe’s closed Tuesday at $69.05, with a consensus analyst price target of $82.73 and a 52-week trading range of $62.62 to $83.65. Following the release of the earnings report, the stock was down over 4% at $66.00 in early trading indications Wednesday.