LOW Earnings Preview- Investors await for comments on sluggish demand following HD results
AInvestMonday, Aug 19, 2024 2:25 pm ET
2min read
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Lowe's (LOW) is set to report its Q2 FY2024 earnings on August 20, with analysts expecting EPS of $3.96 and revenue of $23.93 billion. The company has been under scrutiny following Home Depot's (HD) recent results, which reflected a sluggish demand environment, particularly for larger home improvement projects. Home Depot's Q2 comps declined by 3.3%, and the company lowered its FY25 comp guidance, raising concerns about Lowe's upcoming performance. Analysts are predicting that Lowe's Q2 comparable sales will decline by around 5%, with RBC suggesting that this could lead to a comp miss and pressure on full-year guidance.

Lowe's management has provided guidance for FY2024, expecting EPS between $12.00 and $12.30 and total sales of $84 to $85 billion, with comparable sales expected to decline by 2-3%. However, there is growing concern that Lowe's may guide toward the lower end of these ranges, especially given the continued softness in DIY demand and challenging market conditions. Despite these headwinds, Lowe's stock has shown resilience, buoyed by expectations of interest rate cuts, which could stimulate housing market activity and, in turn, home improvement spending.

A key focus for Lowe's remains its Pro business, which has been a bright spot amid the broader slowdown. In Q1, Lowe's Pro segment delivered positive comps, outperforming the DIY segment. The company's strategy to target the small-to-medium-sized Pro market, including repair and remodel contractors, property managers, and tradespeople, contrasts with Home Depot's focus on larger contractor jobs. This strategic emphasis could provide some insulation against broader market challenges, but it may not be enough to offset the overall decline in demand.

Analysts are also paying close attention to Lowe's gross margins, which RBC estimates will decline by 35 basis points year-over-year to approximately 33.3%. This decline is attributed to continued supply chain investments and credit pressures, partially mitigated by improved PPI flow-through and timing benefits. Any further weakness in margins, particularly if Q2 comps miss expectations, could place additional pressure on Lowe's operating margin guidance of 12.6-12.7%, which RBC believes is at risk.

Lowe's reported better-than-expected Q1 FY2024 earnings, with adjusted EPS of $3.06, surpassing the FactSet consensus of $2.95. Despite a 4.4% year-over-year decline in total sales to $21.36 billion, the company outperformed expectations in comparable sales, which decreased by 4.1% compared to the forecasted 5.5% decline. This was largely due to the continued weakness in DIY big-ticket discretionary spending, partially offset by positive sales in the Pro segment and online channels. The company maintained its FY2024 guidance, expecting EPS between $12.00 and $12.30, and revenues in the range of $84 to $85 billion, with comparable sales expected to decline by 2% to 3%.

In the near term, Lowe's faces challenges from a weak housing market, cautious consumer spending, and normalization from the pandemic-driven surge in demand over the past four years. However, the company remains optimistic about its long-term prospects, particularly through its Total Home Strategy, which focuses on capturing market share by enhancing Pro services, improving digital capabilities, expanding installation services, driving localization, and refining its product assortment. The upcoming conference call will likely provide further insights into Q1 trends, the company's industry outlook, and its performance to date in Q2 FY2024.

Overall, while Lowe's has shown strength in certain areas, particularly in its Pro business and cost management, the broader challenges in the housing market and DIY segment are likely to weigh on its Q2 results. The upcoming earnings report will be crucial in determining whether Lowe's can maintain its guidance for the year or if further downward revisions will be necessary. Analysts expect that even if Lowe's meets or slightly exceeds expectations, the stock may remain range-bound until there is a clearer improvement in housing market fundamentals.

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