Shares of Lowe's (LOW) managed to stay in the green in Wednesday's trading session after the home improvement retailer announced its first-quarter results before the market open.
Initially shares were trading with sizable losses in pre-market trading, but the fact that the company sticks with its full-year targets comforted investors. This came after the company reported a slightly disappointing set of first-quarter results.
Lowe's generated first-quarter revenues of $13.1 billion, down 0.5% on the year before, driven by a 0.7% decrease in comparable sales. Revenues severely missed consensus estimates of $13.46 billion.
Net earnings came in at $540 million, up 2.5% on the year despite the fall in revenues. Earnings per share advanced by a more impressive 14% following the company's aggressive share repurchase program. Earnings came in at $0.49 per share, missing consensus estimates of $0.51 per share.
CEO and Chairman Robert A. Niblock commented on the first quarter developments, "Results for indoor categories were solid for the quarter, a testament to the team's continued focus on improving our core business through cross-functional collaboration and consistent execution in stores and across other selling channels."
Looking Into The Results...
Overall there were no large surprises throughout the income statement. Lowe's managed to boost gross margins by 10 basis points to 34.8%. Selling, general and administrative expense fell by 3 basis points to 24.62%, while depreciation charges fell by 12 basis points.
All in all, net earnings came in at 4.13% of total sales, a modest improvement of 12 basis points on the year before.
... And The Rest Of The Year
Despite the weaker revenues, Lowe's still guides for a 4% increase in full-year sales for 2013, driven by a 3.5% increase in comparable sales. This implies that full-year revenues are expected to come in around $52.5 billion.
Full-year earnings per share are expected to come in at $2.05 per share, which compares to last year's earnings of $1.69 per share. The earnings guidance is slightly soft compared with consensus estimates of $2.08 per share, while projected revenues are in line with consensus estimates of $52.38 billion.
Lowe's ended its first quarter with $1.20 billion in cash, equivalents and short-term investments. The company operates with $9.07 billion in short- and long-term debt, for a net debt position of around $7.9 billion.
Lowe's generated annual revenues of $50.5 billion for its fiscal 2012, up 0.6% on the year before. The company reported net earnings of $1.96 billion, up 6.5% on the year before.
Factoring in a 1% gain in Wednesday's trading session, the market values Lowe's around $46.5 billion. This values the company at 0.9 times 2012's annual revenues and 23 times annual earnings.
Lowe's currently pays a quarterly dividend of $0.16 per share, for an annual dividend yield of 1.5%.
Some Historical Perspective
Long-term holders of Lowe's have seen decent returns, although they did not keep pace with its major competitor Home Depot, especially in recent years.
Shares traded in their mid-30s in 2007 to fall to lows of $13 during the financial crisis. From that point in time, a gradual recovery of the economy, and the housing market in particular, have pushed shares forward to $43 in Wednesday's trading session.
Between 2009 and 2012, Lowe's has managed to increase its revenues by a cumulative 7% towards $50.5 billion. Net earnings increased by some 10% in the meantime, coming in just under the $2 billion mark last year. Earnings per share growth was far move impressive, following sizable repurchase programs. Lowe's retired more than 20% of its number of shares outstanding over the past four years.
While Lowe's was negatively impacted by cold spring weather it is obvious that the company is suffering from stiff competition from Home Depot.
Its larger competitor reported a 7.4% increase in first-quarter sales to $19.1 billion, driven by a solid 4.3% increase in comparable sales. While gross margins of 34.9% are almost identical to margins reported by Lowe's, it is much more profitable on the bottom line. The company reported net earnings of $1.23 billion, for a net profit margin of around 6.4%.
At the same time, Lowe's reported a 0.5% decline in revenues as comparable sales fell by 0.7%, marking a large 5% gap between the companies. The lack of positive sales leverage and higher expense ratio results in net margins for Lowe's of around 4.1% in the first quarter.
Both companies are valued around 23 times last year's earnings. While Home Depot mainly relies on operating excellence as well as share repurchases to boost earnings per share growth, earnings growth at Lowe's are entirely driven by sizable share buybacks.
The main difference in the valuation is the 0.9 times annual revenue multiplier for Lowe's, while Home Depot is valued at 1.5 times annual revenues. If Lowe's either can boost comparable sales growth, like it said it would, and boost net margins it could close the revenue valuation gap with Home Depot. If the company manages to completely close the gap, shares have some 50% upside potential from current levels versus the valuation of Home Depot.
Lowe's remains confident it can boost the comparable sales growth to 3.5% for the full year, thereby roughly closing the growth gap with its larger competitor. Still Lowe's does not anticipate to boost its net margins in the coming year, thereby keep the valuation disconnect intact for now.
While the reiteration of the full-year outlook is a sign of confidence after this weak quarter, it is obvious that 2013 will be a challenging year for the company. Yet Lowe's is putting its money where it mouth is, preferring share repurchase agreements over dividends, indicating it thinks it is undervalued in the long run. In the first quarter alone, Lowe's repurchased $1 billion worth of its own shares, repurchasing shares at a rate of almost 10% per annum.
While Lowe's is suffering from stiff competition from Home Depot, the long-term potential versus its competitor remains, if Lowe's can deliver on its promise to boost comparable sales. Opportunistic investors could set up a long Lowe's, short Home Depot spread to cover general market risks.