Financial Performance

Lowe’s Falling Margins Drive 5% Stock Slide

The retailer spent heavily in Q4 to convert store traffic into sales but gross margins fell 68 basis points to 33.73%.
Matthew HellerFebruary 28, 2018

Lowe’s Companies on Wednesday reported better-than-expected quarterly sales but profits disappointed Wall Street as heavy promotional spending squeezed margins.

The home improvement retailer’s shares tumbled 5% after it also forecast operating margin this year would decline by about 30 basis points. In the fourth quarter, gross margins fell 68 basis points to 33.73%, missing analysts estimates of 34.27%.

“Despite a booming home improvement business in the U.S., Lowe’s has consistently struggled to keep pace with its primary competitor Home Depot and the fourth quarter was no exception,” U.S. News & World Report said.

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For the quarter ended Feb. 2, Lowe’s posted adjusted earnings per share of 74 cents, below analysts’ estimates of 87 cents. But revenue of $15.5 billion and same-store sales growth of 4.1% both beat estimates.

Comparable sales were boosted by Lowe’s heavy spending on advertising and home delivery to convert shoppers’ visits into sales. The company has also reinvested capital in its workforce and opened its first direct-to-consumer fulfillment center in Nashville, Tenn.

“We made an investment in the third quarter to bolster conversion rates … We need to make the incremental investments to ensure that we convert that traffic into transactions,” CEO Robert Niblock said on an earnings call.

But while the spending pulled in more shoppers, customer transactions fell 0.8% in the fourth quarter, compared with a 0.7% rise in the prior period. Sales of appliances, lumber, and building materials were up but those are typically low-margin products, according to BTIG analyst Alan Rifkin.

Home Depot reported 7% comp sales growth in the fourth quarter, as well as higher customer transactions and average spend.

“Home Depot is a much better run company,” Oppenheimer & Co. analyst Brian Nagel told CNBC. “But as the dust clears today, I think there could be a positive in this [earnings report].”

Activist investor D.E. Shaw & Co. has targeted Lowe’s for under-performing relative to its competition and, according to Nagel, that outside pressure should move it toward being “a much more aggressive” company, as it repositions itself in the market and the home improvement category.