Yesterda, I published an article on GuruFocus reviewing Home Depot’s (HD, Financial) first quarter results, which I thought were strong. Today, competitor Lowe’s Companies (LOW, Financial) released first quarter results that I feel were even more impressive.
Shares of Lowe’s have underperformed Home Depot for a long time. Home Depot has been the better stock to own over the last year, five years and even 40 years. Due to its leadership position in the home improvement group, Home Depot often trades with a premium price-earnings multiple that the market often doesn’t award to Lowe’s.
While one strong quarter doesn’t reverse this trend, it is a sign that Lowe’s stock might be done playing second fiddle to its larger peer. Let’s look at the results to see why.
Quarterly highlights
Lowe’s reported first quarter earnings results on May 20. Revenue grew 11% to $19.7 billion, nearly $1.4 billion higher than analysts expected. Earnings per share increased 45% to $1.77, which was 45 cents higher than expected.
The bottom line did benefit from share repurchases, as 9.6 million shares were retired at an average price of ~$99 during the quarter. Net earnings were higher by 28% year-over-year after accounting for the reduction in share count.
Comparable sales growth of 11.2% easily topped estimates of a 4% increase, while U.S. same-store sales were higher by 12.3% compared to estimates of 5.3%. For comparison, Lowe’s had 3.5% comparable-store sales growth in the first quarter of 2019 and 4.2% growth in the U.S. This gives the company a two-year stacked comparable-store sales growth of 15.4% overall and 16.5% for the U.S., easily beating Home Depot’s numbers over the same period of time.
Even more striking was that Lowe’s U.S. same-store sales got stronger as the quarter went on. February sales were up 5.1%, March improved 8.9% and April grew 20.4%. As I said with regards to Home Depot, some of this sales growth may have been due to consumers stocking up ahead of stay-at-home directives, but Lowe’s said May was even stronger than April so demand for products and services has remained high.
Lowe’s had 1.6% growth in total transactions, whereas Home Depot had a decline. Average ticket size was higher by 9.6% with the majority of growth coming from the $50 to $500 ticket size category. Sales were higher year-over-year in 14 out of 15 merchandising departments, and all U.S. geographic regions had positive comparables, showing that Lowe’s strength was across the board. The one area that was weaker was the installation of kitchen and bath.
Helping to drive this growth was the early arrival of spring weather in the western and southern U.S. Cleaning supplies were also strong, but consumers were more focused on the beautification of the home. The company saw strength in refrigerators, freezers and do-it-yourself projects.
Lowe’s has taken steps over the past few years to improve its product offerings. Aiding results in the quarter was the introduction of new products such as Honda outdoor power equipment and Rejuvenate floor cleaning products. The company also made an exclusive agreement in early 2018 with the Sherwin-Williams Company (SHW, Financial) to be the lone nation-wide seller of its most popular products. Lowe’s has been late to the party with regards to e-commerce, but has made investments over the last year and a half to improve this part of the business. The company’s efforts were rewarded with 80% growth in online sales during the quarter.
Lowe’s offered employees additional benefits in light of the pandemic. The company made special payments for full and part-time associates to offset the increased hazards, increased pay for front-line associates and offered 14 days of emergency paid leave for all associates who required it. This led to an 8.6% increase in expenses for the quarter.
Even so, the company’s operating margin actually improved 210 basis points to 10.1%. Despite the additional expense, Lowe’s was actually was more profitable compared to the same quarter a year ago. This was not the case for Home Depot.
In order to preserve capital for unexpected issues that may arise related to the pandemic, Lowe’s has suspended its share repurchase program. The company is well capitalized with $6 billion in cash and equivalents on its balance sheet and $3 billion in undrawn credit.
Lowe’s will continue to pay dividends, something the company has done for a very long time. Lowe’s has raised its annual dividend for the past 57 years, a growth streak that is longer than nearly every other company in the market.
As with Home Depot and many other companies, Lowe’s pulled its guidance for the year. The company had previously had a midpoint guidance of $6.25 in EPS. Using the most recent closing price of $117, the forward price-earnings ratio using the prior guidance is 18.7. Shares of Lowe’s have averaged a price-earnings ratio of 18.4 over the last decade. Based off of the previous guidance, the valuation was nearly in-line with the longer-term average.
While management stated on the conference call that they didn’t expect rest of the year sales to even out over the remainder of the year, the lack of visibility means that the pandemic could have some impact on business results. As I did when assessing Home Depot, I assume Lowe’s will produce 80% of its previous EPS guidance to project a fair valuation. According to these estimates, Lowe’s would generate EPS $5.00, which would give the stock a forward price-earnings ratio of 23.4.
Off of my reduced expectation for earnings-per-share, shares are overvalued, but not nearly as much as Home Depot’s.
Final thoughts
Lowe’s hit it out of the park in the first quarter and really outperformed. Company-wide and U.S. same-store sales grew well ahead of expectations and were much stronger than its key competitor. The company did have additional expenses during the quarter, but still managed to improve operating margins.
I am not yet ready to buy Lowe’s, mostly due to the pulled guidance and valuation, but first quarter results have me very interested in the name. While Lowe’s has underperformed Home Depot for quite a long time, this set of results showed me that the company may be on its way to challenging for the top spot in home improvement.
Author disclosure: The author is not long any stocks discussed in this article.
Read more here:
- Home Depot Reports Solid 1st-Quarter Results
- 2 Utility Companies That Recently Raised Dividends
- 4 Dividend-Paying Companies That Recently Raised Payments
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