Oppenheimer Shares Two Cents on Lowe’s (LOW) as Late Spring Hurts Q1 Results

Though Oppenheimer's Brian Nagel sees a company that feel "victim" to weather in the first quarter, here's why the analyst continues to bet on LOW:

Lowe’s (NYSE:LOW) sales got hit with a dose of bad weather in its first quarter earnings show for the year, acknowledges a bull, who sees a slow-to-start Spring as the culprit for weaker earnings. Investors took notice, with shares dipping just under 3% in pre-market trading yesterday once Wall Street caught word of the print’s release.

Yet, with new leadership around the corner, even with a bit of a first quarter stumble in results, the home improvement retailer still has the bullish vote of Oppenheimer analyst Brian Nagel.

Though “weather takes a toll on sales at LOW” the analyst reiterates an Outperform rating on the stock with a $115 price target, which implies a close to 22% upside from current levels. (To watch Nagel’s track record, click here)

For the first quarter, amid a “late Spring,” earnings per share rose roughly 16% to $1.19 from an adjusted $1.03 in the same time last year, coming up short of the Street’s estimate angling for $1.23. “A weaker top line largely outweighed the benefits of improved margins and a lower tax rate in the quarter. Our client conversations indicate expectations softened into the print,” explains the analyst.

Comps took a dent from unfavorable weather conditions that were cold and wet, which likewise aligns with other top chains in the industry, pointing to a merely +0.6% comp at Low. For context, this marks the company’s “weakest” quarterly number seen in five years. U.S. comps of +0.5% likewise underwhelmed HD’s +3.9% gain. The LOW management team indicated sustained robust performance in indoor categories, and made sure to underscore better sales in May as soon as Spring-like conditions started to bloom.

On a positive note, margins jumped for the retailer and beat out the Street, with gross margins rising from 34.4% in the first quarter of last year up to 34.6%, against the Street’s 34.1% estimate. Nagel boils down “at least” part of this strength to the company’s new accounting standard.

The LOW management team maintains its full-year comparable store sales guide that calls for a 3.5% rise, even withstanding a lackluster beginning to 2018. Moreover, Low maintains  expectations for adjusted earnings to reach between $5.40 and $5.50 for the full year against consensus of $5.45.

Nagel asserts, “As we dig through the somewhat weaker than expected Q1 (Apr.) results that Lowe’s (LOW) reported today, we come away with the view that the chain, similar to many other retailers, fell victim to a late Spring, in markets across the US. Comp sales at LOW in Q1 rose just 0.6% vs. Street expectations for +2-3%. Management indicated that sales rebounded in May as weather normalized. Looking beyond today’s quarterly report, we are decidedly encouraged by news yesterday that former Home Depot (HD) exec Marvin Ellison has agreed to join LOW as CEO. In our view, the experience and success of Marvin running home improvement stores will prove pivotal in the efforts of LOW to improve results, and close a now historically wide profitability gap with HD.”

In reaction to the print, the analyst is adjusting his model, taking his full-year earnings estimate down from $5.46 to $5.44. That said, the analyst maintains his full-year 2019 EPS projection of $6.10.

TipRanks underscores strong enthusiasm on Wall Street on this home improvement retailer, with 12 out of 16 analysts polled in the last 3 months rating a Buy on LOW and just 4 maintaining a Hold. With a solid return potential of 10%, the stock’s consensus target price stands tall at $104.53.

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