Lowe’s Q3 Earnings Report Raises Red Flags — Don’t Buy the Drop Yet

Big box home improvement chain Lowe’s Companies Inc (NYSE:) reported some solid numbers in the third quarter, beating revenue and earnings estimates and raising its sales guidance for the full year.

Typically, that is a combination of results that investors tend to like, but they provided no bounce for Lowe’s stock after earnings were released Tuesday morning. Instead, shares fell 4.47% to $259.61 per share as of Tuesday afternoon.

There were a few red flags within the results that could have caused the selloff.

Sales declined year-over-year

Perhaps the primary reason investors were not all that impressed with the results is because revenue and earnings were still down year-over-year, despite beating estimates.

Lowe’s generated net sales of $20.2 billion in Q3, which was down about 1.5% from the same quarter a year ago. However, it was better than the $19.95 billion that Wall Street analysts had anticipated.

Also, Lowe’s reported net earnings of $1.69 billion, down roughly 4% from Q3 of 2023. Lowe’s recorded earnings per share of $2.99 in the quarter, which was lower than the $3.06 EPS from Q3 of 2023. Adjusted EPS, which excludes a $54 million pre-tax gain associated with the 2022 sale of the Canadian retail business, came in at $2.89, which topped estimates of $2.82 per share.

Another red flag for investors was comparable, or same store sales, which dropped 1.1% in Q3. The primary culprit was big ticket items, as discretionary demand for larger do-it-yourself projects has remained low.

However, online sales were a bright spot, as comparable online sales were up in the quarter. Also, its Lowe’s Pro membership rewards program saw a sales increase.

“Our results this quarter were modestly better-than-expected, even excluding storm-related activity, driven by high-single-digit positive comps in Pro, strong online sales and smaller-ticket outdoor DIY projects,” Marvin Ellison, Lowe’s chairman, president and CEO, said in the release.

The company did manage expenses fairly well, as the cost of sales were down 1.5% to $13.4 billion, while selling, general and administrative expenses rose just 1.7% to $3.8 billion.

Guidance is raised, but still below 2023

Lowe’s also raised its guidance for 2024, boosting sales for the year to a range of $83.0 to $83.5 billion, up from the previous range of $82.7 billion to $83.2 billion.

But there are a few things to note here. The raised guidance would still be 3% lower than 2023 at the high end of the estimate. In addition, the new range is still below the $84 billion to $85 billion range at the start of the year, as it was adjusted down after the second quarter.

In addition, guidance improved for comparable store sales, but they will still be down 3.0% to 3.5%, compared to previous guidance that of a 3.5% to 4.0% drop. But again, the guidance was lowered in Q2 from the 2% to 3% comparable store sales decline at the start of the year.

Also, the guidance for adjusted operating income as a percentage of sales was 12.3% to 12.4%, down from previous guidance of 12.4% to 12.5%.

Finally, Lowe’s calls for adjusted diluted earnings per share of $11.80 to $11.90, up at the low end from the former guidance of $11.70 to $11.90.

Is Lowe’s stock a buy?

In the earnings report, the CEO Ellison said he will discuss the company’s new growth and productivity initiatives at its analyst and investor conference in December. Ellison said the initiatives “underscore our confidence that we are well-positioned to capitalize on the expected recovery in home improvement.”

Overall, it was a fairly sluggish quarter and outlook, given that the guidance had been lowered after Q3. Investors picked up on that, which is why we saw the selloff.

The median price target among analysts for Lowe’s is $285 per share, which is only about 5% higher than the current price.

Lowe’s stock has been on a solid run this year, up 18% YTD, but the valuation has ticked up, as it is now trading at 22 times earnings, up from 16 at the start of the year.

It is also one of the most reliable dividend stocks you can buy, as it has increased its pay out for 61 straight years, making it a Dividend King.

But given the outlook, investors may want to wait for some details on its growth and productivity initiative when it is discussed at the investor conference.

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