Key points to remember
- As the housing market slows, more homeowners are choosing to upgrade their current home.
- Online sales and purchases of $500 or more continue to rise for Lowe’s.
- The company is striving to improve its efficiency and market penetration to help grow its business.
Lowe’s has been Home Depot’s perhaps understated little brother in the home improvement market for quite some time. While management has attempted to replace its rival as the industry’s top retailer, it has consistently failed.
This holiday season, there is renewed hope that Lowe’s can overcome its position as the second largest home improvement retailer. Here’s what investors need to know.
Lowe’s stock in the news
Lowe’s earnings report for the third quarter of fiscal 2022 shows that it is one of the few retailers not to have been affected by the recession or the slowdown in home sales. It reported an increase in sales to a total of $23.5 billion from $22.9 billion in the third quarter of 2021.
Lowe’s stock closed at $210.97, down 17.43% year-to-date. Home Depot is down 20.13% year-to-date.
Why are Lowe’s sales suddenly so strong?
The main reason for the company’s resistance to inflationary pressures is that it is a home improvement and repair center that targets the DIY and contractor markets. These are two areas that are not as affected by changes in the federal funds rate.
The downturn in the housing market is having a positive impact on stores like Lowe’s and Home Depot by keeping people in their homes longer and encouraging them to renovate their current living space. They, in turn, go to home improvement stores to update their homes.
Additionally, homeowners who are less comfortable with power tools are turning to contractors to get the job done. These contractors go to Lowe’s to buy their supplies in bulk and get a lower price.
Many people own their home 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 successful is that more and more people are working from home and want to upgrade their home office or revamp the layout of their home to include an office. This takes the owner back to Lowe’s or Home Depot for supplies.
Federal Reserve data shows that the total Home Equity Line of Credit (HELOC) balance increased by $3 billion. This could be interpreted as homeowners choosing to stay in their current home and renovate instead of swapping.
However, this is tempered by the fact that homeowners frequently upgrade their homes to increase resale value. If home values drop, homeowners can undo updates.
That said, this ignores the fact that many jobs are gone permanently, resulting in the need to adapt the home to a new way of life.
Lowe’s reports a 19% increase in its professional segment. Its online sales increased by 12%, adding to a 25% growth in 2021. It also saw sales of bulky items of $500 or more increase by more than 8%.
These data further lead to the idea that people are renovating rather than modernizing. It repurchased about 20.5 million shares for a total of $4 billion and paid $666 million in total dividends.
Additionally, the home improvement retailer expects total annual sales of $97 billion to $98 billion by the end of 2022 and adjusted diluted earnings per share of $13.65 to $13.80 (which was previously estimated between $13.10 and $13.60).
Review of Lowe’s income statement
Lowe’s earnings for the third quarter ending October 28, 2022 include net sales of $23.5 billion and gross margin of $7.8 billion. Its net profit totaled $154 million.
The company reported operating profit of $924 million and pretax profit of $629 million. Its basic earnings per common share were $0.25, compared with $2.74 a year earlier.
Review of Lowe’s balance sheet
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, he owns $17.2 billion in property (less accumulated depreciation), $3.5 billion in right-of-use operating lease assets, $301 million in taxes. net deferred and $831 million of 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 compensation and benefits payable, deferred revenue of $1.7 billion and other current liabilities of $4.2 billion, totaling $20.8 billion.
Lowe’s has total liabilities of $59.8 billion in Q3 2022, up from Q3 2021.
Lowe’s stock gains
Lowe’s raised its outlook for 2022 based on its steady growth in the first three quarters of the year. The big-box retailer saw 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 offers.
The stock should see its return on investment increase as 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 towards simplifying Lowe’s business model. While this business represents approximately 7% of our outlook of sales for the full year 2022, it also represents approximately 60% basis points of dilution on our operating margin outlook for the full year 2022.”
Lowe’s is poised for stable long-term growth and is less likely to be affected by adverse news affecting other big-box retailers. Its business is to provide home improvement products to meet 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 steady growth in the future. Although the stock is currently below its recent high, it should do well outside of normal market fluctuations and continue to perform well.
Lowe’s investors should be excited about the retailer’s future. While higher inflation will impact most businesses, Lowe’s shouldn’t be affected as much.
With recent revenue, Lowe’s is working hard to improve efficiency, increase online sales, expand installation services and increase product assortment, so the stock should do well going forward.
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