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Lowe's misses top line, lowers FY25 outlook as headwinds persist

AInvestTuesday, Aug 20, 2024 8:15 am ET
2min read

Lowe's Q2 earnings report delivered mixed results, as the company managed to exceed earnings expectations but fell short on revenue. Adjusted EPS came in at $4.10, surpassing the consensus estimate of $3.97. However, net sales of $23.59 billion, representing a 5.5% year-over-year decline, missed the estimated $23.9 billion. The earnings beat was partly aided by lower-than-expected tax rates, which added approximately $0.05 to the EPS. Despite the earnings outperformance, the company’s overall performance reflected the challenging macroeconomic environment it continues to navigate.

One of the most critical metrics for Lowe's, comparable store sales, showed a significant decline of 5.1% in Q2, falling short of the expected 4.43% decline. This weakness in comparable sales was primarily driven by continued pressure on DIY big-ticket discretionary spending, exacerbated by unfavorable weather conditions that negatively impacted sales in seasonal and outdoor categories. On the positive side, the company's Pro segment, which accounts for about 25% of total sales, posted mid-single-digit growth in comparable sales, showing resilience amid a broader downturn.

Lowe's also revised its full-year guidance downward, reflecting a more cautious outlook for the remainder of the fiscal year. The company now expects comparable sales to decline by 3.5% to 4%, compared to the previous forecast of a 2% to 3% decline. This adjustment is notably worse than analyst expectations, which had anticipated a decline of around 2.61%. Total sales guidance was also reduced to a range of $82.7 billion to $83.2 billion, down from the prior range of $84 billion to $85 billion. This revision highlights the ongoing challenges Lowe's faces, particularly in the DIY segment. We would note that there were growing expectations for the company to slash its guidance, which suggests this news had been priced into shares.

The company’s commentary on its DIY versus Pro business segments further underlined the current market dynamics. While DIY sales continued to struggle, especially in higher-ticket discretionary categories, the Pro segment remained a bright spot with solid performance. CEO Marvin R. Ellison emphasized that the company's Total Home strategy, which includes enhancing its Pro offerings, driving digital growth, and improving localization efforts, is positioning Lowe's well for future growth once the market environment improves.

Gross margins for the quarter were slightly better than expected, coming in at 33.5%, just above the consensus estimate of 33.3%. However, this represented a decline from the 33.7% margin reported in the same period last year. The contraction in gross margin, along with higher SG&A expenses, which increased as a percentage of revenue to 17.1% from 16.4% last year, led to a decrease in operating margin to 14.6%, down from 15.6% in the prior year.

Looking ahead, Lowe's also adjusted its full-year EPS guidance to a range of $11.70 to $11.90, down from the previous guidance of $12.00 to $12.30, which is below the consensus estimate of $12.14. This downward revision reflects the company’s anticipation of continued macroeconomic challenges, including a sluggish housing market and cautious consumer spending, particularly in the DIY segment. Despite these headwinds, Lowe's maintained its capital expenditure forecast at approximately $2 billion, signaling continued investment in its long-term growth strategies.

In summary, while Lowe's managed to beat EPS expectations in Q2, the broader financial picture remains challenged, particularly with weaker-than-expected comparable sales and a cautious outlook for the remainder of the fiscal year. The company's focus on the Pro segment and its Total Home strategy offers some optimism, but the near-term outlook remains uncertain as macroeconomic pressures and consumer caution weigh on performance.

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