How will Lowe’s handle the slowdown in home improvement spending?

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Lowe’s (LOW -0.29%) expects to report its results for the first quarter of fiscal 2022 on May 18. The world’s second-largest home improvement company expects sales growth to slow in the coming year.

Lowe’s has thrived as millions of homeowners have taken advantage of economic shutdowns as an opportunity for long overdue home improvement projects. Naturally, sales would slow after such a boost. After all, there are only so many parts you can paint. The question on investors’ minds is: how will Lowe’s deal with the moderation in consumer spending?

Image source: Getty Images.

Profits are expected to increase even with stable sales

Fiscal 2021, which ended Jan. 28, was a remarkable one for Lowe’s. Sales increased by 24.2% over the previous year. To put this outperformance in context, consider that Lowe’s has grown revenue at a compound annual rate of just 6.7% over the past decade.

Low income table (year-on-year growth)

LOW turnover (annual growth year over year). Data by YCharts.

CEO Marvin R. Ellison said the company performed “outstanding” last year, gaining market share from DIYers and professionals. Ellison said, “In 2021, we grew our comparable sales by 6.9% while delivering more than 170 basis points of operating margin improvement, thanks to our continued focus on productivity and strategies. improved pricing. We remain confident in the long-term strength of the home improvement market. , and our ability to increase operating margin.”

Indeed, rising revenue was passed on to earnings, and Lowe’s operating profit margin of 10.8% in 2021 was the highest in a decade. This is particularly impressive, given that 2021 has been a year full of inflationary pressures for businesses around the world. Lowe’s expects to continue this momentum in 2022 and expects to end the year with an operating profit margin of 12.9% in the middle of the estimate.

That’s despite the revenue slowdown he foresees. For 2022, it is targeting revenues between $97 billion and $99 billion. In other words, he expects comparable store sales to show a 1% loss to a 1% gain. The considerable deceleration in revenue growth was expected and should not alarm shareholders.

The confluence of macroeconomic factors that worked in favor of the company in 2021 is reversing. A myriad of fiscal stimulus measures boosted consumer spending. People still spent most of their time working, learning, and entertaining at home, which created a greater need for home improvement. Finally, historically low interest rates have spurred refinancing and home buying, which tends to be followed by an increase in home improvement spending.

Worried about rising inflation, governments no longer seek to stimulate consumer spending. Similarly, the Federal Reserve raises interest rates to fight rising prices. And a growing number of global economies are reopening.

Against this backdrop and tough comparisons from 2021 onwards, if Lowe’s can prevent the revenue slump and increase operating profit margins as expected, 2022 can be considered a success.

What this could mean for Lowe’s investors

Wall Street analysts expect Lowe’s to post revenue of $23.77 billion and earnings per share of $3.24, down 0.40% and up 0. 93%, respectively, compared to the same period the previous year.

LOW Price Free Cash Flow Statement

LOW price for free cash flow. Data by YCharts. P/E = price/earnings.

Lowe’s is trading at the lower end of its historical valuation when measured by price-to-earnings ratio and price-to-free cash flow. Suppose the company generates revenue and profits in line with expectations, and the stock crashes anyway. In this case, it could be an opportunity for long-term investors to buy stocks.

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