Lowe's Companies, Inc. (LOW, Financial) reported earning results in late May that blew away Wall Street analysts' expectations. Lowe's also announced a massive dividend increase, extending the company's dividend growth streak to nearly six decades.
Shares of Lowe's are up almost 20% year-to-date and do trade with an elevated valuation, but the company's earnings report and dividend increase were too good to pass up in my opinion, so I added to my position in the company a few days after the release.
A look at earnings results
Lowe's announced first-quarter earnings results on May 19. Revenue of $24.4 billion was a 24.1% improvement from the prior-year quarter and $670 million better than analysts had expected. Net earnings of $2.3 billion, or $3.21 per share, easily dwarfed net earnings of $1.3 billion, or $1.76 per share, in the previous year. Earnings per share were also 68 cents above estimates.
Growth was everywhere. Comparable sales grew 25.9%, above analysts' expectations of 20.3%. U.S. same-store sales were higher by 24.4%, with Canada showing higher growth than the domestic business.
Transactions improved more than 11% while the average ticket was higher by 13.1%. Comparable sales for February and March easily topped the year-over-year figures, but April's 16% gain trailed the prior year's 18.7% increase slightly.
Sales improved at least 18% in all U.S. regions and at least 15% in 13 out of 15 merchandizing departments, showing that demand for products was robust in all geographies and in nearly every category. Two-year stack comparable sales were up at least 20% for each merchandize department.
Certain categories really stood out, including lumber, which has seen severe supply tightening over the last year. In addition, baths, décor, kitchens and outdoor living were all extremely popular amongst consumers, with each category showing 30% growth.
The company's balance sheet is also well positioned to withstand any unforeseen difficultly. Total assets amounted to $51.2 billion at the end of the quarter, with current assets of $26.8 billion and cash, cash equivalents and short-term investments of $7.1 billion. Inventories of $18.4 billion was up 29% year-over-year and 14% quarter-over-quarter, but this doesn't seem unreasonable given the strength in demand that Lowe's is experiencing.
Total liabilities reached nearly $51 billion, including current liabilities of $22.9 billion. Lowe's does carry total debt of $27.7 billion, but just $1.3 billon of debt is due within the next calendar year. With cash on hand plus free cash flow of more than $4 billion in the first quarter alone, debt looks extremely manageable.
Lowe's didn't provide guidance for the remainder of the year, which did send the stock down during the following trading session. Analysts surveyed by Yahoo Finance expect the company to earn $10.96 per share in 2021, which would be a nearly 24% improvement from 2020.
Takeaways
Lowe's is the second largest home improvement retailer in the U.S. after Home Depot (HD, Financial). This puts the company in an excellent position to capitalize on higher home improvement spending.
Undoubtedly, larger items were the real driver of growth in the quarter, as ticket sizes of greater than $500 were up 47.4% compared to the prior period. In all likelihood, this was helped along by direct payments that consumers received as part of Covid-19 stimulus payments. Tickets below $50 and tickets between $50 to $500 grew 9.4% and 14.5%, respectively, so small and midsized purchases were also solid.
Big ticket items may not perform as well given that direct stimulus payments aren't expected to be extended. However, families with children under the age of 18 are going to begin to receive direct payments of up to $300 per child per month from July through December. These funds are expected to be sent to nearly 90% of families in the U.S., so further purchases of size could occur during these periods of time as well.
Lowe's investment in e-commerce is really paying off as well, with this channel producing nearly 37% growth in the quarter. The two-year comparable growth rate is almost 150%.
The company's focus on the Professional category, where its chief rival has really made its mark over the past few years, is also bearing fruit as this channel grew more than 30%. Do-it-yourself also remains strong, but the Pro business is really gaining steam.
Lowe's continues to see good gains on its margins. The gross margin was up 19 basis points to 33.3%, but the real bright spot was the operating margin, which expanded 317 basis points to 13.3%. The company has made great strides in this area as the operating margin was just 9% as recently as 2019. Lowe's expects the operating margin to be 13% for the year, a dramatic improvement in a short period of time.
Finally, Lowe's increased its quarterly dividend 33.3% to 80 cents, giving the company 59 consecutive years of dividend growth. This qualifies Lowe's as a Dividend King, of which there are approximately 30 companies that have raised dividends for at least five decades, and gives the company one of the longest dividend growth streaks in the entire market place.
Investors have become accustomed to double-digit increases as the dividend has a compound annual growth rate of 16% over the last decade, but the most recent raise can be taken as a sign that leadership expects the business to continue to perform at a high level. The annualized dividend results in an expected payout ratio of below 30%, so Lowe's has a significant cushion to continue to provide higher dividend payments. Shares yield only 1.6% at the moment, though this is superior to the average yield of the S&P 500.
Valuation
Lowe's closed Tuesday's trading session at $192, giving the stock a forward price-earnings ratio of 17.5 based on analysts' estimates for 2021. For context, Lowe's had an average price-earnings ratio of 18.1 and 18.4 over the past five- and 10-year periods of time, respectively. By this measurement, Lowe's still looks undervalued.
However, according to the GuruFocus Value chart, the stock has gotten ahead of itself. As a reminder, the GF Value uses historical multiples, past returns and expectations for future growth to determine intrinsic value.
Lowe's currently has a GF Value of $162.76, resulting in a price-to-GF-Value ratio of 1.18 using the most recent closing price. Shares would need to decline almost 17% to trade with the GF Value.
Final thoughts
Lowe's turned in a stellar first-quarter result, but the stock was held back by a lack of company guidance. This can also be chalked up to less certainty with future quarter sales compared to last year's sizeable gains.
Lowe's bested fairly high consensus estimates and saw at least mid-double-digit gains in all regions and in nearly all merchandize categories. The company increased its dividend at more than double the 10-year CAGR.
Shares are trading with a small discount to the historical average, but looks pricey using the GF Value. Despite this, I added to my position in Lowe's at $195 on May 28. The company's business easily topped estimates and analysts expect growth seen in last year to continue into the current year. Lowe's leadership position trails only its major rival in an industry that is seeing a high level of spending. The high dividend increase was just icing on the cake. I remain very bullish on Lowe's Companies and would look to add to my position on any weakness.
Author disclosure: the author has a long position in Lowe's Companies and Home Depot.
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