Lowe’s Companies, Inc. (LOW) Announces Third Quarter Sales and Earnings Results; Shares Fall 4%

Lowe’s Companies, Inc. (NYSE:LOW) reported net earnings of $379 million and diluted earnings per share of $0.43 for the quarter ended October 28, 2016, which includes certain non-cash pre-tax charges of $462 million further described below. Excluding the impact of these charges, adjusted net earnings1 for the third quarter were $775 million, a 5.3 percent increase over net earnings from the same period a year ago, and adjusted diluted earnings per share1 increased 10.0 percent to $0.88 from diluted earnings per share of $0.80 in the third quarter of 2015.

For the nine months ended October 28, 2016, net earnings were $2.4 billion and diluted earnings per share were $2.73.  Excluding the impact of the non-cash charges, as well as the net gain in the first half of the year on the settlement of a foreign currency hedge entered into in advance of the company’s acquisition of RONA, inc. (RONA), adjusted net earnings1 were $2.8 billion, an increase of 9.7 percent over net earnings from the same period a year ago, and adjusted diluted earnings per share1 increased 15.6 percent to $3.12 from diluted earnings per share of $2.70 in the same period a year ago.

The non-cash pre-tax charges referenced above consisted of the following:

  • $290 million resulting from the wind down of Hydrox, a joint venture in which Lowe’s holds a one-third ownership interest.  Woolworths, the other joint venture partner, claimed a unilateral termination of the joint venture agreement and initiated the wind down of Hydrox in August, 2016.  Hydrox operates Masters Home Improvement stores and Home Timber and Hardware Group’s retail stores in Australia.  Lowe’s will treat its claim for additional value under the joint venture agreement, above and beyond any amounts expected to be received through the wind down process, as a contingent asset and will recognize these amounts as they are realized.  This matter is currently in arbitration;
  • $96 million related to a write-off for projects that were canceled as part of the company’s ongoing review of strategic initiatives in an effort to focus on the critical projects that will drive desired outcomes; and
  • $76 million related to goodwill and long-lived asset impairments associated with the company’s Orchard Supply Hardware operations as part of a strategic reassessment of this business during the third quarter.
Adjusted net earnings and adjusted diluted earnings per share are non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures Reconciliation” section of this release for additional information as well as reconciliations between the Company’s GAAP and non-GAAP financial results.

Sales for the third quarter increased 9.6 percent to $15.7 billion from $14.4 billion in the third quarter of 2015, and comparable sales increased 2.7 percent. For the nine month period, sales were $49.2 billion, a 7.4 percent increase over the same period a year ago, and comparable sales increased 3.9 percent. Comparable sales for the U.S. home improvement business increased 2.6 percent for the third quarter and 3.9 percent for the nine month period.

“Our third quarter operating results were below our expectations due to slower sales in the first two months of the quarter,” commented Robert A. Niblock, Lowe’s chairman, president and CEO.  “While we expected moderation in the second half of the year, traffic slowed more than we anticipated in August and September before improving in October, which put pressure on our profitability in the quarter.

“While we have made progress in driving productivity in recent years, we are in the process of evaluating meaningful incremental opportunities to drive shareholder value while continuing to meet customers’ needs in an omni-channel environment,” Niblock added.

Delivering on its commitment to return excess cash to shareholders, the company repurchased $550 million of stock under its share repurchase program and paid $309 million in dividends in the third quarter. For the nine month period, the company repurchased nearly $3.0 billion of stock under its share repurchase program and paid $815 million in dividends.

As of October 28, 2016, Lowe’s operated 2,119 home improvement and hardware stores in the United States, Canada and Mexico representing 212.8 million square feet of retail selling space.

Lowe’s Business Outlook

Based on year-to-date operating performance and revised expectations for the fourth quarter, the company is updating its Fiscal Year 2016 Business Outlook.

Fiscal Year 2016 — a 53-week Year (comparisons to fiscal year 2015 — a 52-week year; based on U.S. GAAP)

  • Total sales are expected to increase 9 to 10 percent, including the 53rd week
  • The 53rd week is expected to increase total sales by approximately 1.5 percent
  • Comparable sales are expected to increase 3 to 4 percent
  • The company expects to add approximately 40 home improvement and hardware stores.
  • Earnings before interest and taxes as a percentage of sales (operating margin) are expected to increase approximately 65 basis points.2
  • The effective income tax rate is expected to be approximately 40.1%.
  • Diluted earnings per share of approximately $3.522 are expected for the fiscal year ending February 3, 2017. (Original Source)

Shares of Lowe’s are down nearly 4% to $66.60 in pre-market trading. LOW has a 1-year high of $83.65 and a 1-year low of $62.62. The stock’s 50-day moving average is $71.04 and its 200-day moving average is $76.60.

On the ratings front, LOW stock has been the subject of a number of recent research reports. In a report issued on November 10, Oppenheimer analyst Brian Nagel assigned a Buy rating on LOW, with a price target of $80, which represents a potential upside of 16% from where the stock is currently trading. Separately, on November 8, Credit Suisse’s Seth Sigman reiterated a Buy rating on the stock and has a price target of $77.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Brian Nagel and Seth Sigman have a yearly average return of 2.8% and a loss of 0.2% respectively. Nagel has a success rate of 52% and is ranked #628 out of 4223 analysts, while Sigman has a success rate of 44% and is ranked #2798.

Overall, 6 research analysts have assigned a Hold rating and 10 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $81.89 which is 18.6% above where the stock closed yesterday.

Lowe’s Cos., Inc. is engaged in the retail sale of home improvement products. It offers products for maintenance, repair, remodeling, home decorating and property maintenance. The company also offers home improvement products in the following categories: appliances, bathroom, building supply, electrical, flooring, hardware, paint, kitchen, plumbing, lighting & fans, outdoor living, windows and doors. 

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