LOW Lowes Companies Inc

By Sarah Nassauer and Kimberly Chin 

Lowe's Cos. outpaced rival Home Depot Inc. in sales growth for the first time since 2016, but margins declined more than expected and the home-improvement retailer trimmed its profit expectations for the year.

Lowe's said comparable sales rose 3.5% in the quarter ended May 3, 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 in the company's first quarter more than Lowe's executives and analysts expected, leading to a sharp selloff in the stock. Shares in the retailer fell 12% Wednesday.

Lowe's merchants agreed to price increases from some vendors last year without finding ways to make up for those cost increases elsewhere in the business, Mr. Ellison said during a call with analysts.

The retailer 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," Mr. Ellison said. The company is upgrading its outdated pricing tools and processes, he said.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, sales have risen at Lowe's, but at a consistently lower rate than at 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 because of 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 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, who left his role at the head of struggling department-store chain J.C. Penney Co. last year, 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, Mr. Ellison said. 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 totaled $1.05 billion, or $1.31 a share, up 5.9% from a year earlier. The company's 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. 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 17:17 ET (21:17 GMT)

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