Will Lowe's Live Up to the Promise of Its Raised Outlook?

Lowe’s Companies Inc. (NYSE: LOW) reported third-quarter 2019 results before markets opened Wednesday. The home improvement retailer posted adjusted diluted earnings per share (EPS) of $1.41 and $17.39 billion in revenues. In the same period a year ago, Lowe’s reported EPS of $1.04 on revenue of $17.42 billion. Third-quarter results also compare to consensus estimates for EPS of $1.35 and $17.62 billion in revenue.

What drove the shares higher in Wednesday’s premarket trading was raised EPS guidance. The company now says it expects adjusted EPS in a range of $5.63 to $5.70 for the 2019 fiscal year. The prior estimate called for $5.45 to $5.65 per share. Lowe’s also raised its adjusted operating margin from a prior range of 20 to 50 basis points to a new range of 40 to 60.

The company did not change its revenue estimate for the year (up around 2% compared with fiscal year 2018), nor did it change its same-store sales estimate (up approximately 3% year over year).

Same-store sales for the third quarter rose by 2.2% on a consolidated basis and by 3% in the United States.

Competitor Home Depot Inc. (NYSE: HD) reported results on Tuesday that included a lowered outlook. The company revised its 2019 sales growth forecast from a prior level of 2.3% to about 1.8% and its same-store sales growth from a prior estimate of 4% to approximately 3.5%. Shares dropped nearly 5.5% when the closing bell finally sounded.

CEO Marvin Ellison commented:

We were pleased with the performance of our U.S. home improvement stores, which reflects a solid macroeconomic backdrop and continued progress in our transformation driven by investments in customer experience, improved merchandise category performance, and continued growth of our Pro business. … We are committed to the Canadian market and are taking decisive action to improve the performance and profitability of our Canadian operations.  We also have a detailed roadmap and a very experienced team in place to repair our business.

Lowe’s will close 34 Canadian stores in the fourth quarter and took a $53 million noncash third-quarter charge related to the impairment of “long-lived” assets and a management overhaul. The company expects pretax charges and operating costs of $175 to $225 million in the fourth quarter.

On a GAAP basis, the company’s full-year EPS estimate fell from $5.54 to $5.74 to a new range of $5.35 to $5.47. Similarly, the outlook for operating margin fell from an increase of 310 to 340 basis points to a new range of 290 to 320.

Lowe’s repurchased $835 million in stock and paid dividends of $428 million during the quarter.

Analysts have forecast fourth-quarter adjusted EPS of $0.93 and revenues of $16.13 billion. For the full 2019 fiscal year, analysts are looking for EPS of $5.67 and revenues of $72.53 billion.

The raised profit outlook pushed the stock up by about 5.4% in Wednesday’s premarket session to $119.03, above the 52-week range of $85.90 to $118.23. The consensus 12-month price target on the stock is $125.71.