Lowe's misses earnings estimates, forecasts slower margins growth

An employee secures the lid of a Valspar Corp. paint can for a customer inside a Lowe's store in Burbank California

Lowe's misses earnings estimates, forecasts slower margins growth

For a short while late a year ago, it nearly looked as if Lowe's Companies, Inc. That trailed Home Depot's 6.3 percent gain.

Lowe's announced that it will increase customer-facing hours in its stores at a time when Lowe's reported that it grew sales 4.5% in the second quarter.

That's not to say the numbers were disgusting. Investors are forced to wonder if that glimmer of hope that started to shine previous year was just a lucky fluke. Third, second-quarter consensus was a tad high, calling for sales of $19.6 billion and EPS of $1.63, versus our model that implied sales of $18.9 billion and EPS of $1.55, lower than actual results (sales of $19.5 billion and EPS of $1.57). Same-store sales rose 4.5%, exceeding Street forecasts. Shares have been slowly going down for the company as it faces competition against giant companies like Home Depot, who beat its second quarter earnings.

The numbers partially contrast with those from rival retailer Home Depot posted on Tuesday of last week, though the outcome was the same.

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Lowe's Cos. expects full-year earnings to be between $4.20 and $4.30 per share. "While our results were below our expectations in the first half of this year, the team remains focused on making the necessary investments to improve the customer experience and drive sales", said Robert A. Niblock, chief executive officer of the Mooresville, North Carolina-based retailer. Our long-term outlook includes same store sales that slow to a 2% pace, supporting low-single-digit revenue growth and slight annual operating margin expansion, leading to operating margins of 12% over the next decade.

After incorporating this quarter's results into our model, we don't plan any material change to our $93 fair value estimate, and we view shares as undervalued.

"This is the right strategy to more fully capitalize on strong traffic trends in what we believe is a supportive macroeconomic backdrop for home improvement", he said.

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