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Summary

  • Lowe's reports soft first quarter, just like Home Depot.
  • Spring sales will be largely recouped in the current quarter.
  • Valuation is not appealing at this point in the cycle.

Investors in Lowe's (NYSE:LOW) are slightly disappointed with the company's first-quarter results. The US 2nd-largest home retailer witnessed a relatively soft first quarter as a result of the harsh weather circumstances.

Despite the confident outlook for the remainder of the year, I am not a huge fan of the shares at the moment, based on the relatively high leverage position and a fairly high valuation at this favorable point in the economic cycle.

First-Quarter Numbers

Lowe's reported revenues of $13.40 billion for the first quarter, up 2.4% on the year before.

On the back of margin expansion, Lowe's managed to report a 15.6% jump in its net earnings, which came in at $624 million. Thanks to sizable share repurchases, Lowe's managed to report a 24.5% jump in earnings per share, which came in at $0.62 per share.

Diving Into The Operations

Reported sales growth was supported by a merely 0.9% increase in comparable sales, as Lowe's suffered from a harsh weather and a late spring as well during the quarter. Poor performance of the exterior categories was offset by a strong performance of the interiors business.

Lowe's managed to boost gross margins by 70 basis points to 35.5% of sales. These margin gains were partially offset by a 30 basis point increase in operating expenses, which rose to 28.5% of sales.

The company reported an effective tax rate of 32.4% versus a 37.8% rate last year, which provided a big boost to net earnings.

Confidence Into The Year

For its current fiscal year of 2014, Lowe's now expects to report sales growth of around 5% on the back of a 4% increase in comparable sales growth and the opening of 10 home improvement stores, as well as 5 hardware stores.

Operating margins are expected to increase by 65 basis points, resulting in earnings per diluted share of around $2.63 per share. This guidance is up from that previously anticipated, thanks to a lower tax rate.

Valuation Of The Company

Lowe's ended the quarter with $768 million in cash, equivalents and short-term investments. Against this stands a hefty $10.1 billion in debt, which results in a rather sizable net debt position.

Trading at $45 per share, Lowe's equity is valued at $46 billion. Based on the company's outlook, sales should be able to come in at $56 billion, valuing the business at a little over 0.8 times annual revenues, while trading at roughly 17 times annual earnings.

The company's quarterly dividend of $0.18 per share provides investors with a 1.6% dividend yield.

Similar Story As Home Depot

Lowe's results are similar to what major rival Home Depot (NYSE:HD) reported a day earlier. The company's sales fell short in the quarter due to the harsh winter, but both companies expect sales to re-accelerate in the current second quarter, thereby avoiding a "lost" spring.

Lowe's CEO, Niblock stresses that improvements in May and a solid execution allows him to reaffirm the full-year outlook with confidence.

Implications For Investors

Lowe's operational performance has long trailed that of its major rival, including the first quarter in terms of comparable store sales. Yet, the total sales outlook for the year is slightly better than that of its rival, with Lowe's anticipating total sales to grow by 5%.

While management stresses the continued focus on its operations, Lowe's continues to report much lower operating earnings compared to its rival. Operating costs actually rose by 30 basis points to 28.5% of sales, thereby being nearly 5 percent higher than those of its major rival.

While Lowe's is making improvements, the operational performance is still suboptimal. At the same time, the company carries a high debt load and trades at 17 times earnings, which is not that compelling, in my opinion, at this favorable point in the economic cycle.

I remain on the sidelines.

Source: Lowe's - Little Appeal Despite Reiterating Its Full-Year Outlook