Lowe's (LOW) Stock Down On Q1 Earnings Miss & Slashed Outlook

Lowe’s Companies, Inc. (NYSE:LOW) reported first-quarter fiscal 2019 results, wherein both the top and bottom lines improved year over year. However, earnings missed the Zacks Consensus Estimate. Also, gross margin contracted owing to cost pressures, among other factors. This compelled management to slash earnings guidance for fiscal 2019, hurting investors’ sentiments. Shares of the company went down 8.4% during the pre-market trading session.

This Zacks Rank #3 (Hold) stock has otherwise increased 6.3% in the past three months, outpacing the industry’s growth of 1.5%.

Earlier, Lowe’s had unveiled plans to exit Mexico retail operations and also intended to divest the operating business. Nevertheless, during the first quarter, the company decided to sell the assets of the business, which generated a tax benefit of nearly $82 million in the quarter. However, this was excluded from the adjusted results.

Q1 Performance

Lowe’s posted adjusted earnings of $1.22 a share that fell short of the Zacks Consensus Estimate of $1.33 but increased 2.5% from $1.19 reported in the year-ago quarter.

Net sales of $17.7 billion beat the Zacks Consensus Estimate of $17.6 billion. Notably, sales in the quarter under review advanced 2.2% year over year on the back of Lowe’s focus on enhancing customers’ experience and improving in-stocks, and strength of pro customers. Prior to this, the company posted sales growth of 1%, 3.8%, 7.1% and 3% in the fourth, third, second and first quarters of fiscal 2018, respectively.

Comparable sales rose 3.5% in the quarter under review, following an increase of 1.7%, 1.5%, 5.2% and 0.6% recorded in the fourth, third, second and first quarters of fiscal 2018, respectively. Comparable sales for the U.S. home improvement business improved 4.2%. Comparable sales for the U.S. business grew 2.4%, 2%, 5.3% and 0.5% in the fourth, third, second and first quarters of fiscal 2018, respectively.

Gross profit decreased 2.9% year over year to $5,581 million, while gross margin contracted around 160 basis points to 31.5%. This can be attributable to cost pressures, considerable transitions in the company’s merchandise organization and certain ineffective pricing tools.

Other Financial Aspects

Lowe’s, which competes with Home Depot (NYSE:HD) , ended the quarter with cash and cash equivalents of $2,973 million, long-term debt (excluding current maturities) of $16,542 million and shareholders’ equity of $3,236 million.

The company generated cash flow from operations of $2,137 million in the first quarter. In the reported quarter, it repurchased shares worth $818 million and distributed $385 million as dividends.

Outlook

Management is pleased with the progress of its retail fundamentals along with a healthy consumer environment. These factors along with robust strategies drove Lowe’s sales. The company is on track to undertake the necessary pricing and other actions to battle cost-related headwinds. To this end, its takeover of Retail Analytics platform is expected to help enhance the pricing approach.

For fiscal 2019, management continues to project total sales growth of approximately 2%, with comparable sales expected to increase roughly 3%.

However, the company is still in the initial stages of transformation. It revised its fiscal 2019 operating margin and earnings outlook, owing to the gross margin contraction witnessed in the first quarter.

Lowe’s now envisions adjusted operating margin to expand 20-50 basis points compared with 85-95 basis points growth anticipated earlier.

The company now projects adjusted earnings per share of $5.45-$5.65, down from the previous guidance of $6.00-$6.10. The Zacks Consensus Estimate for earnings for the fiscal year is currently pegged at $6.05.

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