Why Is Lowe's (LOW) Up 12.6% Since the Last Earnings Report?

A month has gone by since the last earnings report for Lowe's Companies, Inc. LOW. Shares have added about 12.6% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Lowe’s Q3 Earnings & Sales Top Estimates, View Intact

Lowe’s, a home improvement retailer, posted better-than-expected third-quarter fiscal 2017 results, after witnessing negative surprises in both the top and bottom lines during the preceding two quarters.

The company posted quarterly earnings of $1.05 per share that beat the Zacks Consensus Estimate of $1.02. Bottom line improved 19.3% from 88 cents delivered in the year-ago quarter – following an increase of 14.6% and 18.4% registered in the second and first quarter, respectively. Higher net sales and lower SG&A expenses aided the bottom line.

Net sales of $16,770 million also came ahead of the Zacks Consensus Estimate of $16,568 million. Top line jumped 6.5% year over year after increasing 6.8% and 10.7% in the second and first quarter, respectively. Hurricane-related sales stood at approximately $200 million.

The company’s sales increase can be attributed to its efforts to provide a better omni-channel customer experience and an improvement in the housing market. Rise in demand for building materials post hurricanes also supported the top line. The buyout of Maintenance Supply Headquarters and Central Wholesalers contributed 70 basis points to the growth, while new stores contributed 50 basis points.

Comparable sales (comps) rose 5.7% during the quarter under review, following an increase of 4.5% and 1.9% recorded in the second and first quarter, respectively. Comps improve on the back of 0.9% improvement in transaction and a 4.8% increase in average ticket. Comps for the U.S. business climbed 5.1%, after increasing 4.6% and 2% in the respective quarters. Comps were up 3.9% in August, 8.2% in September and 4.5% in October.

Gross profit increased 5.7% year over year to $5,713 million, however, gross profit margin contracted roughly 28 basis points to 34.1%.

Other Financial Aspects

Lowe’s ended the quarter with cash and cash equivalents of $743 million, long-term debt (excluding current maturities) of $15,570 million and shareholders’ equity of $5,742 million. The company generated operating cash flow of $5.4 billion and free cash flow of $4.6 billion in the quarter.

The company expects to generate cash flow from operations of approximately $5.4 billion and incur capital expenditures of about $1.2 billion, resulting in free cash flow of roughly $4.2 billion in fiscal 2017.

During the quarter, the company kept its promise of returning surplus cash to stockholders as it repurchased shares worth $500 million and distributed $344 million as dividends. The company still had approximately $2.1 billion remaining under share buyback program. In total, management expects to repurchase shares worth $3.5 billion in fiscal 2017.

Outlook

Management continues to project total sales growth of approximately 5% with comps increase of about 3.5% during fiscal 2017. The RONA acquisition is likely to contribute 2% growth due to its full year results. In addition, new stores and acquisitions of Maintenance Supply Headquarters and Central Wholesalers are expected to add approximately 1% to the sales growth.

Lowe’s envisions operating margin to increase approximately 80 to 100 basis points in the fiscal year. The company continues to envision earnings in the band of $4.20-$4.30 per share. 

Moreover, the company intends to open 25 home improvement and hardware stores during fiscal 2017. As of November 3, 2017, the company operated 2,144 stores in the United States, Canada and Mexico.

How Have Estimates Been Moving Since Then?

Following the release, investors witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter in the last 30 days.

Lowe's Companies, Inc. Price and Consensus

 

Lowe's Companies, Inc. Price and Consensus | Lowe's Companies, Inc. Quote

VGM Scores

At this time, Lowe's stock has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

While estimates have been broadly trending downward for the stock, the magnitude of these revisions has been net zero. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.

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