Lowe's Cuts Profit Outlook for Year -- WSJ
May 23 2019 - 3:02AM
Dow Jones News
By Sarah Nassauer and Kimberly Chin
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 23, 2019).
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] than 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outdated pricing tools and processes, he said.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 23, 2019 02:47 ET (06:47 GMT)
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