Lowe's (LOW 79.37, -2.10, -2.6%) reported its third quarter results this morning and showed that there is plenty of business to go around for the home improvement retailers. The company also provided its investors with a lot of good news.
Sales for the quarter increased 6.5% to $16.8 billion, exceeding analysts' average expectation; comparable sales, paced by a 5.1% gain in the U.S. business, increased 5.7%, exceeding analysts' average expectation; and diluted earnings per share increased 19.3% to $1.05, exceeding analysts' average expectation.
It is clear to see, then, that Lowe's was full of positive surprises. What might be less clear is why its stock is trading 2.6% lower after the otherwise solid report.
There are two explanations that resonate:
- Shares of LOW had jumped 5.1% since competitor Home Depot (HD 170.45) reported some encouraging results of its own before the open on November 14, implying that the good news from Lowe's had already been priced in; and
- The comparable sales results from Lowe's were comparatively weaker versus Home Depot, which reported a 7.9% increase in third quarter comparable sales off a larger comp base, paced by a 7.7% increase in the U.S. business
That's how it works sometimes in the investment world. A company's results might be good in an absolute sense, but if they are not as strong as their competitor's results, the stock can get penalized.
Lowe's in its own right is doing fine, capitalizing on hurricane-related activity in the third quarter and an overall trend of increased consumer spending on home improvement projects as limited inventory and high prices, which have boosted home equity levels, have compelled many existing home owners to stay put and renovate their homes.
Lowe's did a commendable job of curtailing SG&A expenses in the third quarter, which showed up in an expansion of its operating margin rate from 5.97% to 9.23%. Still, that trailed Home Depot's third quarter operating margin of 14.7%, which was up 40 basis points from the year-ago period.
Looking at fiscal 2017, Lowe's reiterated that it expects total sales to increase approximately 5%, comparable sales to increase approximately 3.5%, and diluted earnings per share to be between $4.20 and $4.30.
The affirmation is reassuring, but once again, it paled in comparison to Home Depot, which said it expects total sales for fiscal 2017 to be up approximately 6.3%, comparable sales to increase approximately 6.5%, and diluted earnings per share to be $7.36, up approximately 14% from its prior guidance.
Shares of LOW were up 14.5% for the year as of Monday's close. That's a solid return and an enviable one for a lot of other retail stocks, yet it is comparatively weak to the 27.1% increase seen in HD shares.