2023-11-15 12:09:01 ET
Summary
- Lowe's will publish its Q3 results on the 21st of November.
- We highlight some of the major themes surrounding the event, coupled with some commentary about conditions within the broader industry.
- We close with our view on the valuations and the technicals.
Upcoming Earnings Event - Notable Themes
Home improvement retailer- Lowe's Companies, Inc. ( LOW ), will publish its Q3-24 results on the 21st of November. Based on LOW's track record during earnings season, stakeholders are unlikely to feel too perturbed ahead of the upcoming event, at least as far as the headlines are concerned.
For context, note that this is a business that has managed to beat EPS estimates for 16 consecutive quarters, with the average quarterly beat coming in at around 10% on average (although over the last 7 quarters, the magnitude of the EPS beat has halved).
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For Q3, the two key numbers to watch out for are an EPS figure of $3.03 and a revenue figure of $20.86bn.
Whilst LOW may end up beating street estimates, the more pertinent takeaway is that this will likely be yet another quarter which reiterates the growing slowdown in the broad home improvement market. The NAHB's remodeling index , a useful proxy to gauge momentum in this market, fell to its lowest point in 14 quarters.
For LOW this will be reflected in the adverse trend of weaker revenue (YoY revenue declines could cross the double-digit mark, from the -9% decline seen in Q2) and EPS run rates (implied decline of -7% in Q3 vs -2% in Q2).
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As far as comp sales are concerned, some investors may think that the worst was over in Q2, as this metric had improved from -4% seen in Q1 to -1.6% in the following quarter, but do consider that this was largely just a timing related shift, with Q2 benefitting from 125bps of delayed Spring-related sales. Rather we would focus on the exit rate in Q2 (July comp sales had worsened to -2%), and management's guidance for the full year which is comp sales decline of -2% to -4%. We feel it would be wise to expect comp sales in Q3 to come in closer to the -4% levels, as LOW's US business will also be up against a rather strong base effect (Q3 last year saw +3% growth). Also note that close peer- Home Depot's ( HD ) comp sales got worse as the quarter progressed (-2.1% in August, -3.4% in Sep, and -3.7% in October) so expect similar trends here as well.
Looking ahead, we wouldn't be prepared to call a bottom as yet, as the future indicator sub-index of the remodeling report suggested that leads and enquires for business continue to drop.
The report points to reduced appetite for larger remodeling projects (something which even HD flagged on their recent earnings call), With consumer sentiment on the slide for 5th straight months, it's difficult to imagine ample appetite for spending here, and the expectation is that we could see an -8% drop in spending on home improvement and repairs through the next 4 quarters.
Having said that it isn't all doom and gloom, and we still see a few silver linings worth highlighting. Consider something like lumber deflation which was leaving a pretty egregious mark on the topline in Q1 (-350bps impact); in Q2 the impact had slowed to -160bps, and in Q3 the impact on the topline is expected to be markedly lower at less than -100bps. It's still early days, but in Q4 it looks like the trend of lumber deflation may well ebb. On account of supply challenges, lumber prices have slowly crept up by 4% this month and 5% from last week.
We would also flag LOW's relative success in negating the challenge of shrinkage, by implementing RFID tech and the like. LOW has been an exception in that it is one of the few retailers who have noted that shrinkage had no impact on sales and margins, and a couple of months back management sounded confident that it wouldn't be an issue all through H2 of this year.
Lowe's management will likely also talk up its impetus with the "PRO" segment of its sales mix (only 25% of the sales mix). There's a high probability that this segment will continue to deliver decent traction in Q3; Note that LOW predominantly caters to the small and medium-sized segment of the overall market, and HD implied that smaller-sized projects continued to witness good customer dynamics.
On the earnings call, LOW management will most certainly point to the positive effects of their PPI (Perpetual Productivity Improvement) initiatives which are playing a key role in holding up margins, even as volumes decline. By focusing on productivity and effective merchandising, LOW is better positioned to manage expenses in the face of volatile demand conditions. In H1 PPI played a key role in helping EBIT margins expand by over 40bps and hit levels of 15.16%, but we think the volume slowdown in H2 could be too strong to keep these margins at these levels. Note that the FY expectation for EBIT margins is at a lower threshold of 13.4-13.6% which implies a slowdown in H2.
Closing Thoughts - Valuation And Technical Considerations
When it comes to the charts and the valuations we have a mixed perspective.
The last time we wrote about Lowe's, the stock's forward P/E valuations (based on the Feb-24 EPS) didn't look particularly cheap coming in at 9% premium over its long-term average Now if we spread our horizons to the next year and consider the estimates for Feb-25, we can see that valuations are in line with the long-term average.
However, what also needs to be considered is that it does not look like LOW will witness a manifold expansion in the EPS next year, despite a potentially lower base effect; you're basically only getting 6% earnings growth.
Then, on LOW's standalone weekly chart, we acknowledge that the risk-reward looks a lot better than it did back in July, but conversely, we've also seen a breakdown from the trendline support that held strong for 16 odd months.
Also consider that LOW's relative strength ratio as a function of the broader consumer discretionary universe is still around 15-18% off the mid-point of its long-term range and could still mean-revert further.
All in all, given the subdued industry backdrop, and the weak short-term outlook we don't see any pressing need to buy into this story now. Reiterating our HOLD rating on LOW.
For further details see:
Lowe's: Another Challenging Quarter, But A Few Silver Linings