Lowe’s Companies, Inc. (LOW, Financial) recently reported earnings results that easily topped Wall Street analysts' estimates. Year-over-year numbers were down slightly, but this was primarily due to strong numbers in the prior year period. The two-year stacked rates were excellent.
Shares of Lowe’s, which also boasts an excellent shareholder return track record, are elevated slightly against the historical average, but the company is executing at a high level. Let’s look closer as to why Lowe’s is my favorite name in home improvement right now.
Earnings highlights
Lowe’s reported second-quarter earnings results on Aug. 18. Revenue grew 1% to $27.6 billion, which was $810 million more than expected. The company had net earnings of $3 billion, or $4.25 per share, compared to net earnings of $2.8 billion, or $3.74 per share, in the prior year. Earnings per share was 30 cents above estimates.
Same-store sales fell 1.6%, but this was less than the expected decrease of 1.9%. U.S. stores had a comparable sales decrease of 2.2%, but were up 32% on a two-year stacked basis.
The total number of transactions was lower by 12.5% from the prior year, though up 8% over the last two years. Even with the decline in total transactions, average ticket size grew more than 10% to $93.68.
Looking closer at ticket size, purchases below $50 fell 14% while those in a range of $50 to $500 were lower by 10.4%. Customers appear to be purchasing fewer smaller ticket items. However, big ticket items, which are those above $500, continue to see robust demand. This ticket size category grew 17.2% year-over-year, which was on top of 24% growth last year.
The company’s pro business continues to perform well, with sales growing 21% for this channel over the past year and 49% over the last two years. Installations grew double-digits, which goes along with the gains seen in larger ticket sizes. All of the company’s regions had at least 19% growth over the last two years, with each product category improving at least 15%.
Lowe’s offered revised guidance for the remainder of the year as well. The company expects revenue of $92 billion for 2021, which was above consensus estimates of $91.5 billion and higher than Lowe’s prior forecast of $86 billion. This would be a slight improvement from last year, but a 30% increase from 2019. Analysts expect earnings per share to increase 28% from 2020 to $11.31. If achieved, this would represent a nearly 100% increase from 2019.
Takeaways and valuation analysis
Fewer customers shopped at Lowe’s during the second quarter, but they spent more, especially on higher priced items. In addition, the company had immense broad-based gains over the last two years in every region and product category, all of which speaks to the overall strength of the consumer and the popularity of the products Lowe’s offers.
While smaller tickets did decline year-over-year, the larger tickets recorded high double-digit gains. Growth here was due to increases in the categories of appliances, décor, flooring and kitchen and bath. These categories all had year-over-year growth, which is impressive since they all had at least 20% gains in the prior year.
Positive results in these categories show that the consumer continues to focus on updating their homes. Leadership stated on the conference call that the demand for homes greatly outweighs the supply, which has driven housing prices to very high levels. Many consumers, as seen by the gains made in the home improvement industry, are choosing to instead invest in their homes, which should continue to bode well for Lowe’s.
One area that Lowe’s really excelled at last year was its e-commerce business. Considering the social distancing requirements of that period, Lowe’s acted swiftly to leverage its online shopping business to meet the demand of customers. Lowes.com growth was 135% last year as customers used this channel to acquire the products they needed. Not only has the company managed to sustain its e-commerce business during the past quarter, Lowe’s has actually seen an uptick in this channel’s performance. Even with most, if not all, stores operating on a more normalized business, e-commerce sales improved 7% from last year. Add in a 9% increase in sales penetration and e-commerce sales grew 151% on a two-year basis as the demand for online shopping remains high.
Investors should recall that the second quarter of 2020 had very high levels of growth for the company. U.S. same-store sales comps for May, June and July of last year were 41.5%, 34.4% and 28.2%, respectively. These same months for the most recent quarter were down 6.4%, down 1.8% and up 2.6%, respectively. Considering the very tough comparisons, Lowe’s performance looks better. Just as important, year-over-year growth improved each month of the quarter.
If Lowe’s can perform as well as this against its toughest comparable period from last year, then perhaps the next two quarters will be better than expected. Leadership’s increased revenue guidance appears to speak to this, as does the analyst response. While comparable numbers to last year were mostly down, the analyst community remains very bullish on Lowe’s. This can be seen in the earnings per share estimates for the year, which are almost double that of actual results for 2019.
In addition to a stellar business performance, Lowe’s returns high levels of capital to shareholders. The company repurchased 16.4 million shares at an average price of $189 during the quarter. This is not a one-off occurrence with Lowe’s as the company retired more than 5% of its share count annually from 2011 to 2020. The company expects to repurchase $9 billion worth of stock this year.
Lowe’s has also increased its dividend for 58 consecutive years, giving the company one of the longest dividend growth streaks in the market. The dividend has a compound annual growth rate of nearly 16% over the last decade, but Lowe’s raised its dividend 33% for the Aug. 4 payment, marking one of the highest increases in company history.
Even with all of these positives going for the company, shares don’t trade at a significant premium to the long-term average valuation. Using Friday’s closing price of $208.21 and analysts' estimates for the year, Lowe’s trades with a forward price-earnings ratio of 18.4. According to Value Line, shares have an average price-earnings ratio of 18.1 and 17.4 over the past five- and 10-year periods of time, respectively.
Quality companies don’t often trade at a low valuation, and Lowe’s is no different, though the forward price-earnings ratio isn’t outrageous in my view. With a strong business, tailwinds to provide future growth and a long track record of shareholder returns, I continue to view Lowe’s as a buy.
