Lowe's Cuts Outlook as Profit Get Squeezed -- Update
May 22 2019 - 12:28PM
Dow Jones News
By Sarah Nassauer and Kimberly Chin
Sales growth at Lowe's Cos. outpaced rival Home Depot Inc. for
the first time since 2016, but margins fell more than expected and
the home-improvement retailer trimmed its profit expectations for
the year.
Comparable sales climbed 3.5% in the latest quarter, picking up
later in the period after a rainy February curbed demand.
Chief Executive Marvin Ellison on Wednesday attributed the gains
to strong sales for seasonal and outdoor products, better customer
service and improved store operations that kept shelves well
stocked.
"Our focus on retail fundamentals is gaining traction," said Mr.
Ellison, who took the helm of the company last year.
At the same time, missteps around product price increases
squeezed profit margins more than company executives and analysts
expected, leading to a sharp selloff in the stock. Shares of the
retailer fell 10.7% in morning trading.
Merchants agreed to price increases from some vendors last year
without finding ways to replace the profit loss elsewhere in the
business, said Mr. Ellison in a call with analysts.
Lowe's also replaced in recent months 13 key merchandising
executives while preparing for the busy spring selling season.
"There was much more disruption in [the first quarter] then we
anticipated," said Mr. Ellison. The company is upgrading its
outdated pricing tools and processes, he said.
Lowe's executives are doing a "systematic review of every single
thing we can imagine so as not to have another unexpected event
like we experienced" in the first quarter, he said.
In recent years, Lowe's has seen sales rise, but consistently
less than Home Depot. The relatively weak results led to an
executive shake-up that culminated in Mr. Ellison's hiring last
May. On Tuesday, Home Depot posted a weaker-than-expected 2.5% rise
in comparable sales due to rainy weather and a drop in lumber
prices. Comparable sales are a common metric in retail based on
revenue at stores and websites operating for at least one year.
For the year, Lowe's now expects adjusted earnings between $5.45
and $5.65 a share, lower than its previous guidance of $6.00 to
$6.10 a share.
The guidance cut is likely the biggest issue driving the stock
lower, said Budd Bugatch, retail analyst at Raymond James.
"Apparently, new management is finding that getting Lowe's to where
it believes it can be is still very much a work in progress," he
said in a note.
Mr. Ellison has called for vast improvements in the company's
inventory, customer service and work processes. Lowe's is now
stocking more faster-selling items while reducing inventory of
lower-performing ones, he said.
Those steps, along with cost pressure, also led to margin
compression, said Mr. Ellison. The company's gross margin was
31.46% of sales in the latest quarter, compared with 33.11% a year
earlier, which weighs on profitability.
Earlier this week, Lowe's agreed to buy a retail-analytics
platform from Boomerang Commerce, a move that the company expects
would help bolster its strategic and data-driven pricing and
merchandise assortment decisions.
Lowe's has said it decided to sell the assets of its businesses
in Mexico rather than exit the retail operations as initially
planned. This resulted in a tax benefit of $82 million in the
period, the company said.
Net income for the quarter was $1.05 billion, or $1.31 a share,
up 5.9% from the comparable quarter a year earlier. Its bottom line
benefited from lower expenses and taxes. Analysts polled by
Refinitiv were expecting a profit of $1.31 a share.
Excluding special items, Lowe's said earnings were $1.22 a
share. Analysts had expected $1.33 a share.
Net sales rose 2.2% to $17.74 billion from a year ago. Analysts
estimated revenue of $17.66 billion.
Write to Sarah Nassauer at sarah.nassauer@wsj.com and Kimberly
Chin at kimberly.chin@wsj.com
(END) Dow Jones Newswires
May 22, 2019 12:13 ET (16:13 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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