Note: : This report contains substantially new material. Subsequent reports will have changes highlighted.
Prev. Ed.: Feb 23, 2018; 3Q17 Earnings Update
Reason for Report:4Q17 Earnings Update
Prev. Ed.: Feb 23, 2018; 3Q17 Earnings Update
Brokers’ Recommendations:Positive: 73.1% (19); Neutral: 26.9% (7); Negative: 0% (0) Prev Ed:17; 6; 0
Brokers’ Target Price: $103.62 ( $4.36 from the last edition, 26 firms) Brokers’ Avg. Expected Return: 18.9%
*Note:Though dated May 21, 2018; share price and broker material are as of Apr 10, 2018.
Note:A flash update was done on Feb 28, 2018 on the 4Q17 Earnings Release
Note:The tables below for Revenue, Margins and Earnings per Share contain fewer broker materials than the broker material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Lowe's Companies Inc. (LOW) serves more than17 million customers a week at around 2,144 stores in the United States, Mexico and Canada. The company offers a wide range of products and services for home decoration, maintenance, repair, remodeling and property maintenance. Lowe's offers its products through retail locations as well as online.
Of the 23 firms covering the stock, 17 provided positive ratings whilesix assigned neutral ratings. None of the firms rendered a negative rating.
The outlook of the firms toward Lowe’s is dealt with in the following paragraphs:
Positive or equivalent ratings (73.1%, 19/26 firms): These firms remain bullish on Lowe’s prospects due to the easing of credit availability, a strong labor market and improving wages, whichare likely to give home improvement sales a boost, going ahead. Moreover, Lowe’s extensive merchandising initiatives will help it to make the most of the opportunity. Also, the company is extensively building its business for professionals by upgrading its website and adding more national and private brands to enrich customers’ shopping experience. The firms think that improved collaboration with key vendor partners is allowing the company to offer a more effective omni-channel experience to customers.
Further, the firms believe that Lowe’s has several opportunities to boost its revenues and subsequently increase its profits, as the company is enhancing its product availability, making buyouts and improving customers’ shopping experience.Moreover, these firms expect that Lowe’s earnings may improve at a double-digit rate, backed by cost control initiatives and sales growth. Further, its pro-focused strategy will result in increased pro-penetration, followed by an increase in sales volume.Additionally, Lowe’s efforts to increase its store base will likely improve its revenues.
Neutral or equivalent ratings (26.9%,7/26 firms):Lowe’s faces stiff competition in the home improvement retailing business from The Home Depot and other home supply retailers. Further, any deterioration in the housing business and restrictions in granting loans may dent the company’s financial performance.
However, the neutral firms remain confident on the company’s long-term prospects, which focus on increasing profits, along with boosting shareholders’ returns.Alongside, management remains committed toward pro customers, with streamlining its store portfolio and merchandising transformation.
Feb 23, 2018
Overview
The firms identified the following factors for evaluating the investment merits of Lowe’s:
Key Positive Arguments / Key Negative Arguments- An improving job scenario, gradual recovery in the housing market and merchandising initiatives along with efforts to provide better omni-channel customer experience, will boost Lowe’s performance, moving ahead.
- Lowe’s is streamlining its store portfolio, which along with the strategy of enhancing customer shopping experience, is likely to generate incremental sales.
- Lowe’s continues to maximize shareholders’ wealth through share repurchases and dividend hikes.
- Aberrant weather patterns could affect Lowe’s business, making it difficult to attain quarterly sales and profit targets.
- Any deterioration in the housing and construction market will likely affect the company’s results.
- Economic factors, such as recession, inflation, credit availability, fuel costs and irrational pricing could cause the company's results to be lower than anticipated.
Incorporated in 1952 and based in Mooresville, NC, Lowe’s Companies Inc. is a home improvement retailer,which operated approximately 2,144 stores in the United States, Mexico and Canada as of Nov 3, 2017.Also, the company caters to retail do-it-yourself (DIY) and do-it-for-me (DIFM) customers. In fact, a typical Lowe’s store stocks about36,000 items, a number of which are available through the Special Order Sales system along with a varied collection of branded merchandise.Moreover, it also trades in brands that are exclusive to Lowe’s, including Aquasource, Garden Treasures, Harbor Breeze, Kobalt, Reliabilt, Top-Choice and Utilitech.
The company provides a line of home improvement products in diverse categories, such as appliances, lumber, paint, flooring, building materials, millwork, lawn and landscape products, fashion plumbing, hardware, lighting, tools, seasonal living, rough plumbing, outdoor power equipment, cabinets and countertops, nursery, rough electrical, home environment, home organization, and windows and walls.
The company’s fiscal year ends on Feb3. Its website is
Feb 23, 2018
Long-Term Growth
Lowe’s commitment to provide superior customer experience will remain at the core of its competitive positioning, going forward. Strong omni-channel capacity and product differentiation are the two ways in which the company aims to enhance shopping experience for its customers,and these set it apart from its peers.
Lowe’s has continued with the execution of a proven strategy for success in the home improvement retail sector: invest in people, processes, systems and stores.The company has slowly metamorphosed from a single channelretailer to an omni-channel one. It has been upgrading its website to enrich customers’ shopping experience. The company is stressing on improved search capability, filtering, product content, presentation, and providing online delivery scheduling.
The company is now focusing on its Proservices business more than ever.Lowe’s has refurbished its pro-service business website, LowesForPros.com, in order to cater to the needs of its pro-customers. Further, the company has entered into an agreement with Sherwin-William, one of the leading paint brands in the country, to boost sales of the paint products.
Additionally, Lowe’s is benefiting from its strategic acquisitions. This is evident from the buyout of Orchard Supply Hardware Stores that is aiding comps growth. We believe the Orchard acquisition is a crucial move on Lowe’s part as increasing square footage in the key California market brings significant opportunities for the company to improve its top line and profitability. Orchard’s smaller-format stores located at prime locations of the region are also likely to bolster the company’s market position and capitalize on under-penetrated markets.
Again, Lowe’s acquisition of ATG Stores, one of the leading online retailers of home improvement and lifestyle products, highlights its dedication to expand product offering. Further, ATG Stores’ robust online retailing platform is expected to help Lowe's target new customers and provide them with better service, while expanding the range of items on Lowes.com. Lowe’s also acquired RONA, a key Canadian retailer and supplier of hardware, building materials as well as home renovation products for $2.4 billion. This will help further augment its position in the Canadian market.
Also, Lowe’s long-term strategic plans that focuses on improving profitability; developing abilities tocater thecustomers in a better wayand enhance shareholders’ returns remain impressive. Further, the company expects Return on Invested Capital to go beyond 22% by 2019. This represents an increase of over 500 basis points (bps) in the next three years.
Moreover, the company has acquired former Target locations across Canada, in a bid to penetrate into the Canadian market more. The buyout of RONA is likely to help further augment its position in the Canadian market. Meanwhile, the company has made substantial development in integrating RONA and has witnessed double-digit online sales growth. In fact, it has not only rolled out appliances to nearly 100 locations but has also implemented five RONA big-box conversions. Further, Lowe's Canada entered into a strategic partnership with Solar Brokers Canada to provide solar energy installation services to homeowners under Lowe's Solar banner. Per the company, it will continue to register growth in Canadian business and expects the operating profitability from the region to double by 2021.
Firms expect the company’s earnings to grow at a double-digit rate banking on higher sales as the housing market continue to recover.
May 21, 2018
Target Price/Valuation
Rating DistributionPositive / 73.1%
Neutral / 26.9%
Negative / 0.0%
Avg. Target Price / $103.62
Maximum Target / $129.00
Minimum Target / $85.00
No. of Analysts with Target Price/Total / 21/26
The firms believe that risks in achieving the target price include inability to find appropriate real estate for future store expansion, disruption in the flow of goods resulting from a change in the distribution platform, rising interest rates, rising gasoline prices, decelerating growth in existing home sales, declining benefits from lumber inflation, and increasing dependence on the cyclical appliance business.
Recent Events
On Feb 28, 2018, Lowe’s posted 4Q17 results wherein its adjusted earnings of 74 cents per share fell short of the Zacks Consensus Estimate of 88 cents and also declined 14% year over year (y/y). However, net sales of $15,494 million came ahead of the Zacks Consensus Estimate of $15,288 million butdecreased 1.8% y/y.
On Feb 5, 2018, Lowe's Canada plans to hire more than 7,000 full-time, part-time and seasonal workers this spring season.
On Feb 1, 2018, Lowe’s announced a one-time bonus up to $1,000 for its employees, besides expanding maternity and parental leave.
Revenues
Provided below is a summary of revenues as compiled by Zacks Digest:
Revenue ($M) / 4Q16A / 2016A / 3Q17A / 4Q17A / 2017A / 1Q18E / 2018E / 2019EDigest High / $15,784.0 / $65,017.0 / $16,770.0 / $15,494.0 / $68,619.0 / $17,759.0 / $71,501.0 / $74,241.0
Digest Low / $15,784.0 / $65,017.0 / $16,770.0 / $15,494.0 / $68,619.0 / $17,654.0 / $71,238.0 / $73,551.0
Total Revenue / $15,784.0 / $65,017.0 / $16,770.0 / $15,494.0 / $68,619.0 / $17,698.2 / $71,367.6 / $74,004.0
Y-o-Y Growth / 19.3% / 10.1% / 6.6% / -1.8% / 5.5% / 5.0% / 4.0% / 3.7%
Q-o-Q Growth / 0.3% / -14.0% / -7.6% / 14.2%
The Zacks Digest average total revenues were $15,494 million in 4Q17, reflecting a decrease of 1.8% from 4Q16.
The company’s sales increase was backed by efforts to provide a better omni-channel customer experience and an improvement in the housing market. Post hurricanes, rise in demand for building materialsalso led to top-line growth. Furthermore, the buyout of Maintenance Supply Headquarters and Central Wholesalers contributed 40 bps to upside while new stores contributed 60 bps.
In the quarter under review, comps rose 4.1% following an increase of 5.7%, 4.5% and 1.9%in the third, second and first quarter, respectively. Comps increase came on the back of a 4.9% increase in average ticket, partially offset by a transaction decline of 0.8%. At the U.S. business, the metric climbed 3.7% in 4Q17, after increasing 5.1%, 4.6% and 2% in the respective quarters. Comps were up 1.1% in November, 7.7% in Decemberand 3.4% in January.
Guidance
Management projects total sales growth of approximately 4% with comps increase of about 3.5% for fiscal 2018.
Please refer to the Zacks Research Digest spreadsheet of Lowe’s for specific revenue estimates.
Margins
Provided below is a summary of margins as compiled by Zacks Digest:
Margins / 4Q16A / 2016A / 3Q17A / 4Q17A / 2017A / 1Q18E / 2018E / 2019EGross Margin / 34.4% / 34.6% / 34.1% / 33.7% / 34.1% / 34.2% / 34.0% / 34.0%
Operating Margin / 8.6% / 9.7% / 9.2% / 7.5% / 9.6% / 9.0% / 9.3% / 9.4%
Pre Tax Margin / 7.6% / 8.7% / 8.3% / 6.5% / 8.6% / 8.0% / 8.4% / 8.5%
Net Margin / 4.8% / 5.4% / 5.2% / 4.0% / 5.4% / 5.9% / 6.2% / 6.4%
The Zacks Digest average gross profit decreased3.8% y/y to $5,226 million in 4Q17. Also, the gross margin contracted 70 bps to 33.7%.
The Zacks Digest average adjusted operating profit decreased14% y/y to $1,164.1 million in 4Q17. Further, operating margin contracted110 bps to 7.5%.
Guidance
Lowe’s envisions operating margin to decline approximately 30 basis points in the fiscal year 2018.
Please refer to the Zacks Research Digest spreadsheet on Lowe’s for more details on margin estimates.
Earnings per Share
Provided below is a summary of EPS as compiled by Zacks Digest:
EPS / 4Q16A / 2016A / 3Q17A / 4Q17A / 2017A / 1Q18E / 2018E / 2019EDigest High / $0.87 / $4.01 / $1.05 / $0.74 / $4.40 / $1.30 / $5.48 / $6.10
Digest Low / $0.86 / $3.98 / $1.05 / $0.74 / $4.38 / $1.23 / $5.43 / $5.88
Digest Avg. / $0.86 / $3.99 / $1.05 / $0.74 / $4.39 / $1.27 / $5.45 / $5.99
Y-o-Y Growth / 45.5% / 21.1% / 18.9% / -14.1% / 9.9% / 22.8% / 24.1% / 10.0%
Q-o-Q Growth / -2.4% / -33.2% / -29.5% / 71.4%
The Zacks Digest average earnings per share for 4Q17 were 74 cents, down14.1% from 4Q16 and declined29.5% from 3Q17.
\Guidance
Earnings are anticipated in the band of $5.40-$5.50 per share.
Please refer to the Zacks Research Digest spreadsheet on Lowe’s for more extensive EPS figures.
Capital Structure/Solvency/Cash Flow/Governance/Other
Balance Sheet
Lowe’s, which competes with The Home Depot, Inc. (HD), ended the quarter with cash and cash equivalents of $588 million, long-term debt (excluding current maturities) of $15,564 million and shareholders’ equity of $5,873 million.
Share Repurchases and Dividend
In 4Q17, the company kept its promise of returning surplus cash to stockholders as it repurchased shares worth $133 million and distributed $341 million as dividends.
On Jan 26, 2018, Lowe’s announced a new $5 billion share buyback plan. Notably, the new program is in addition to the remaining repurchase authorization of $2.1 billion as of Nov 3, 2017. It does not have any expiry date and is expected to be made in the open market or via private off-market transactions per the Securities and Exchange Commission’s guidelines.
Store Update
The company intends to open 10 home improvement and hardware stores in fiscal 2018. As of Feb 2, 2018, the company operated 2,152 stores in the United States, Canada and Mexico.
May 21, 2018
Research Analyst / GargiSethCopy Editor / Rajani Lohia
Content Ed. / Rajani Lohia
QCA / Sumit Singh
Lead Analyst / Sumit Singh
No. of brokers reported/Total brokers / 21/26
Reason for Update / 4Q17 Earnings