Retail

Why Lowe's Stock Was Hammered After Earnings

Lowe’s Companies Inc. (NYSE: LOW) reported third-quarter 2020 results before markets opened Wednesday. The home improvement store posted diluted net earnings per share (EPS) of $0.91 in the quarter on revenues of $22.3 billion. In the same quarter last year, the company reported EPS of $1.36 and revenues of $17.4 billion. Consensus estimates called for EPS of $1.99 and revenues of $21.3 billion.

On an adjusted basis, EPS for the quarter totaled $1.98, up from $1.41 in the prior-year quarter. Lowe’s booked a $1.1 billion pretax charge for reflecting a cash tender offer of $3 billion to repay high-coupon bonds.

Lowe’s reinstated its share buyback program and repurchased 3.6 million shares for $621 million in the third quarter. The company also paid $416 million in cash dividends. In its outlook for the fourth quarter, Lowe’s said it expects to repurchase $3 billion worth of its common stock during the current quarter.

Same-store sales rose by 30.1% year over year and 30.4% in the U.S. home improvement segment. CEO Marvin Ellison also noted that the company had invested $100 million during the quarter to “reset the layout” of its U.S. stores, “making them easier to shop with improved product adjacencies, especially for Pro customers.”

Attracting more professional customers (contractors) has been one of Ellison’s primary goals since he became CEO in July of 2018.

The $3 billion in high-coupon notes that Lowe’s bought back were replaced by an issue of $4 billion of senior secured notes with a weighted average interest rate of 2.17%, a record low for the company. Lowe’s had $8.2 billion in cash and equivalents at the end of the quarter and $3 billion in undrawn capacity on its revolving credit facilities.

Lowe’s withdrew fiscal 2020 guidance in May but did provide a fourth-quarter outlook. The company expects total and comparable store sales to increase by 15% to 20%. Adjusted operating margin is forecast to be flat given the impact of the COVID-19 pandemic, another $150 million investment in resetting store layouts, and other investments in the supply chain. Diluted EPS is forecast at $1.10 to $1.20, up from $0.94 in the fourth quarter of last year.

Based on the company’s outlook and fourth-quarter 2019 results, fourth-quarter revenue should total $18.4 billion to $19.2 billion. Added to revenue totaling $69.3 billion for the first nine months of the year, fiscal year 2020 revenue should range between $79.7 billion and $83.2 billion.

Consensus estimates call for fourth-quarter EPS of $1.16 on revenue of $18 billion. Sales totaled $16 billion in the year-ago quarter. For the full year, analysts expect EPS of $8.69 on revenue of $86 billion.

Shares were knocked down in Wednesday’s premarket, likely due to the weak revenue forecast. The company reported net cash flow from operations of $11.5 billion for the first nine months of the year, about $300 million less than net operating cash flow in the first six months of the year. The big difference was a $1.9 billion increase in net merchandise inventory.

Shares of Lowe’s traded down as much as 8% in Wednesday’s premarket before coming back slightly to trade down about 6.5%, at $149.40 in a 52-week range of $60.00 to $180.67. The consensus 12-month price target on the stock is $184.33 and the dividend yield is 1.5%.

On Tuesday, rival Home Depot Inc. (NYSE: HD) reported third-quarter results that beat estimates but investors sliced off 2.5% of the stock’s value when the company said it planned to make permanent recent changes to employee pay and benefits that it had instituted due to the pandemic. Those changes are expected to cost about $1 billion a year.