Lowes Stock Is On The Rise After Earnings, Despite Housing Market Dip

Key Takeaways

• As the housing market slows, more homeowners are choosing to improve their current homes.
• Online sales and purchases of $500 or more continue to increase for Lowe’s.
• The company is working to improve efficiency and market penetration to help grow its business.

Lowe’s has been Home Depot’s little, perhaps understated, brother in the home improvement marketplace for some time. While management has tried to replace its rival as the top retailer in the space, it has consistently come up short.

This holiday season, there is renewed hope that Lowe’s can overcome its standing as the second-largest home improvement retailer. Here is what investors should know.

Lowe’s stock in the news

Lowe’s earnings report for the third quarter of the 2022 fiscal year shows that it’s one of the few retailers that hasn’t been hurt by the recession or the slowdown in home sales. It reported an increase in sales for a total of $23.5 billion versus $22.9 billion in Q3 of 2021.

Lowe’s stock closed at $210.97, down 17.43% year-t0-date. Home Depot is down 20.13% YTD.

Why are Lowe’s sales so strong suddenly?

The primary reason for the company’s resistance to inflationary pressures is that it’s a home improvement and repair center that targets the DIY and contractor markets. These are two areas that aren’t as affected by changes in the federal funds rate.

The slowing housing market positively impacts stores like Lowe’s and Home Depot by keeping people in their homes for longer and encouraging them to renovate their current living space. In turn, they go to home improvement stores to update their homes.

In addition, homeowners who are less handy with power tools turn to contractors to get work done. These contractors go to Lowe’s to buy their supplies in bulk and get a lower price.

Many people own their homes outright or have a fixed-rate mortgage that makes the monthly payment predictable. These factors make it easier for them to budget for renovations and small home improvements.

Another reason Lowe’s is succeeding is that more people are working from home and want to improve their home offices or rearrange the layout of their home to include an office. This bring the homeowner back to Lowe’s or Home Depot for supplies.

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Federal Reserve data shows that the total balance of the home equity line of credit (HELOC) grew by $3 billion. This could be interpreted as homeowners choosing to stay in their current homes and renovate instead of trading up.

However, this is tempered by the fact that homeowners frequently improve their homes to increase resale value. If home values decline, homeowners may pull back on updates.

That said, this doesn’t take into consideration that many jobs have gone remote permanently, giving rise to the need to adjust the home for a new way of life.

Lowe’s reported an increase of 19% in its professional segment. Its online sales increased by 12%, which is on top of 25% growth in 2021. It also saw large items sales of $500 or more increase by over 8%.

This data further leads to the idea that people are remodeling over upgrading. It repurchased around 20.5 million shares for a total of $4 billion and paid $666 million in total dividends.

Furthermore, the home improvement retailer expects total annual sales between $97 and $98 billion by the end of 2022 and adjusted diluted earnings per share of $13.65 to $13.80 (which were previously estimated at $13.10 to $13.60).

Lowe’s Income Statement review

Lowe’s earnings for the third quarter ending on October 28, 2022, include net sales of $23.5 billion and a gross margin of $7.8 billion. Its net earnings totaled $154 million.

The company reported an operating income of $924 million and pre-tax earnings of $629 million. Its basic earnings per common share were $0.25, compared to $2.74 the previous year.

Lowe’s Balance Sheet review

Lowe’s balance sheet shows the company has $3.1 billion in cash and cash equivalents, $464 million in short-term investments, $19.8 billion in net merchandise inventory, and $1.5 billion in other current assets for a total of $24.9 billion in current assets.

In addition, it has $17.2 billion in property (less accumulated depreciation), $3.5 billion in operating lease right-of-use assets, $301 million in net deferred income taxes, and $831 million in other assets for a total of $46.9 billion in total assets.

Its current liabilities include $609 million in long-term debt, $12.2 billion in accounts payable, $1.4 billion in accrued compensation and employee benefits, deferred revenue of $1.7 billion, and other current liabilities of $4.2 billion, totaling $20.8 billion.

Lowe’s has $59.8 billion in total liabilities in Q3 2022, which is up from Q3 of 2021.

Lowe’s stock moving forward

Lowe’s raised its full-year 2022 outlook based on its steady growth for the year’s first three quarters. The big box retailer experienced less growth during the pandemic when people were stuck at home and looking for projects to do around the house.

However, people still want to make their homes a better place to live, and Lowe’s has little competition outside of Home Depot. Shoppers prefer to buy everything they need in one place, and few retailers can offer the range of home improvement products that Lowe’s does.

The stock should see a boost to its return on investment since the company recently sold its Canadian stores to a private equity firm for $400 million. Lowe’s CEO Marvin Ellison said in a statement that “the sale of our Canadian retail business is an important step toward simplifying the Lowe’s business model. While this business represents approximately seven percent of our full-year 2022 sales outlook, it also represents approximately 60 basis points of dilution on our full-year 2022 operating margin outlook.”

Lowe’s is poised for steady long-term growth and is less likely to be affected by adverse news that affects other big-box retailers. It is in the business of supplying home improvement products for needs and wants, and it has done just that while maintaining profitability and growth.

As long as the company’s management maintains its reasonable style of guidance, Lowe’s should experience stable growth moving forward. While the stock is currently lower than its recent high, it should do well outside normal market fluctuations and continue to perform well.

Bottom Line

Investors in Lowe’s should be excited about the future of this retailer. While higher inflation will impact most every company, Lowe’s should not be affected as much.

With their recent earnings, Lowe’s is working hard to improve efficiency, increase its online sales, expand installation services, and increase product assortment, so the stock should perform well moving forward.

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