Source – investopedia.com
Lowe’s has revised its full-year financial forecast downward, citing a decline in quarterly sales and anticipated weak home improvement spending in the latter half of the year. The retailer now projects total sales between $82.7 billion and $83.2 billion, down from the previous forecast of $84 billion to $85 billion. Comparable sales are expected to fall by 3.5% to 4%, a more significant decline than the earlier estimate of 2% to 3%. Adjusted earnings per share are projected to be between $11.70 and $11.90, lower than the previous range of $12 to $12.30.
Impact of Economic Conditions
CEO Marvin Ellison attributed the sales decline to consumers’ reluctance to make large purchases amid high inflation and anticipated interest rate cuts by the Federal Reserve. He noted that consumers are delaying big-ticket items, such as major home projects, in anticipation of lower rates. “Inflation remains high,” Ellison said, adding that the economic climate is impacting consumer spending patterns.
Approximately 90% of Lowe’s customers are homeowners with fixed-rate mortgages below 4%, which contributes to their hesitance to undertake new projects or secure new loans at higher interest rates. Despite not observing a significant shift in consumer sentiment, Ellison is waiting for an uptick in housing turnover to drive growth.
Quarterly Performance Review
In the three-month period ending August 2, Lowe’s net income dropped to $2.38 billion, or $4.17 per share, compared to $2.67 billion, or $4.56 per share, in the same period last year. The company had benefitted from a $43 million pretax gain from selling its Canadian retail business in 2022, which bolstered earnings by 7 cents per share. Excluding this gain, earnings were $4.10 per share.
Net sales fell from $24.96 billion in the prior year, marking the sixth consecutive quarter of sales declines. Comparable sales fell by 5.1%, driven by reduced discretionary home projects and adverse weather affecting outdoor and seasonal item sales. However, growth in Lowe’s online business and sales to home professionals somewhat mitigated these declines. Sales to home professionals increased by mid-single digits, and online sales rose by 2.9%.
Lowe’s cuts full-year outlook as it expects home improvement sales to weaken
Strategic Shifts and Market Position
Lowe’s has been focusing on attracting home professionals, who now represent about 25% of sales, compared to 50% at Home Depot. The retailer has tailored its offerings, improved delivery to job sites, and implemented a loyalty program to appeal to these steady and lucrative customers. This segment has become the strongest part of Lowe’s business, according to Ellison.
Broader Economic Context
Lowe’s update comes as investors and economists closely monitor consumer spending and economic conditions. Despite a lower-than-expected jobs growth in July, other indicators suggest consumer health remains relatively stable. Walmart’s CFO reported no additional decline in consumer health, and Goldman Sachs has reduced recession odds to 20%. However, both Lowe’s and its rival Home Depot are experiencing a “deferral mindset” among consumers due to higher mortgage rates and economic uncertainty.
Home Depot, which reported better-than-expected earnings and revenue, also anticipates weaker performance in the second half of the year. CFO Richard McPhail highlighted customers’ uncertainty about the economy as a factor in delaying home improvement projects.
Future Outlook
Ellison remains optimistic about the long-term prospects for the home improvement industry, citing factors such as aging housing stock, increasing household formations by millennials, and Baby Boomers opting to renovate rather than move. “We’re just waiting for that inflection to happen, and when it happens, we believe that we’re in a great position to take [market] share,” he said.
As of the latest close, Lowe’s shares were trading at $243.21, up about 9% year-to-date, though trailing behind the S&P 500’s nearly 18% gain.
