Home improvement retailer Lowe's (LOW) reported modestly better than anticipated fourth quarter results Monday morning. Revenue fell 5% year-over-year to $11 billion, which was a touch better than expected. Earnings were flat compared to the year-ago quarter, coming in at $0.26 per share, but that figure also exceeded the consensus expectation. Though Lowe's benefited from an extra selling week in fiscal year 2012 (ended January 2013), the results were solid.
Hurricane Sandy rebuilding efforts helped stores remain productive after a decent third quarter, with same-store sales rising 1.9%. In total, management believes hurricane-related purchases added 70 basis points to same-store sales growth, and the firm anticipates Sandy will have a positive influence on fiscal year 2013 (as rebuilding and recovery continues).
Management is optimistic that its Value Improvement program (better line designs, better in-stock positions and simplified deal structures) will help drive higher gross margins, saying:
"...the financial benefit of Value Improvement is greatest once we are past clearance and it begun selling only new assortments. For product lines in that stage, we recorded average mid-single-digits comps and over 100 basis point improvement in gross margin rate. And our customer surveys indicate that the perception of our product availability has improved over the fourth quarter of last year."
Management noted that 30% of product lines had been reset, but gross margins were up just 5 basis points year-over-year to 34.27% during the fourth quarter and roughly flat sequentially. As such, we remain skeptical about the potential for significant margin expansion at Lowe's, especially as competition, namely from rival Home Depot (HD), heats up.
Though the company's earnings per share advanced 18% compared to fiscal year 2011, cash flow from operations fell 13% to $3.76 billion. Free cash flow was basically flat at $2.5 billion during fiscal 2012 (ended January 2013), and the company hasn't done much to improve the metric during the past several years. However, a lower store count could reduce incremental capital investment, improving cash flow expansion in fiscal 2013 (ending January 2014). We'll be monitoring cash flow trends closely.
The company announced a $5 billion share repurchase program, which if acted upon at current levels, will likely be value-destructive to shareholders. Firms that repurchase overvalued stock destroy shareholder capital, while companies that buy back undervalued stock create value for shareholders (and purchases of fairly valued stock can be considered value-neutral). In 2012, Lowe's repurchased $4.35 billion worth of stock, and an additional $5 billion worth would reduce the share count by more than 10%.
Though we're not huge fans of the buyback announcement, fiscal year 2013 (ending January 2014) looks like it will be a better year for Lowe's. The company believes same-store sales will grow 3.5%, total sales will increase 4%, and it will earn $2.05 per share (as it experiences 60 basis points of EBIT improvement). Even though the forecast is rosy, we aren't interested in adding the company to the portfolio of our Best Ideas Newsletter at current prices. Its valuation is just too rich to allocate new capital to the idea at this time.