Home improvement store Lowe’s (NYSE: LOW) recently reported results for its third quarter of 2017 that beat revenue and profit expectations. Despite the great report card, though, the stock fell slightly, as the recent trend in sales may not be sustainable.
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What happened during the quarter?
Lowe’s sales were on a tear in the late summer and early fall due to Hurricanes Harvey and Irma battering the Southeast. The company said that hurricane-related activity tallied up to around $200 million and helped provide a big boost to same-store sales, which combine foot traffic and average customer purchase size.
|
Metric |
Q3 2017 |
Change (YOY) |
|---|---|---|
|
Revenue |
$16.8 billion |
7% |
|
Earnings per share |
$1.05 |
144% |
|
Same-store sales increase |
5.7% |
N/A |
Even more impressive than the sales figure was the bottom line. Lowe’s earnings per share more than doubled from a year ago and bested analyst expectations. The increase could be chalked up to better-than-expected store traffic, the company’s efforts in promoting online sales, and a reduction in general and administrative expenses.
Why the numbers don’t matter
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With such a big improvement in business, why didn’t shares jump? The first reason is that the big boost in profit was expected and full-year expectations were not lifted. Full-year guidance is for earnings per share to be between $4.20 and $4.30, a 21% to 24% increase over 2016. Even though third-quarter earnings were up sharply and beat the average analyst estimate by a couple cents, the company didn’t upgrade that outlook.
Second, a significant portion of the extra store traffic was due to post-hurricane activity. With $200 million of sales attributable to Hurricane Harvey and Hurricane Irma, over 1 percentage point of the revenue increase over last year could be traced back to those natural disasters. When removing those one-time events, the annual sales increase drops to less than 6% rather than 7%.
While the third-quarter figures looked like a boon for investors, much of that performance depended on one-time events that can’t be counted on happening again. Thus, with the rest of the increase already accounted for in current share prices, the market merely shrugged its shoulders at Lowe’s report.
Lagging behind the competition
It was an unprecedented summer for natural disasters. Multiple hurricanes, fires on the West Coast, and earthquakes in Mexico have all provided a boost to the home improvement industry. In fact, according to the U.S. Census Bureau, home improvement industry sales were up 7.8% in 2017 through October. As a result, share prices have gone up dramatically in the last 12-month stretch.
Natural disasters aren’t the reason that Lowe’s business is growing, though. Same-store sales were positive before the summer months — up 4% on the year. However, management said to expect the full-year number to be only 3.5%. That implies a slowdown during the fourth quarter.
That is, nevertheless, a respectable increase, but it lags behind the competition. In contrast, Home Depot‘s (NYSE: HD) same-store sales were up 7.9% during the third quarter, and the company thinks its full-year number will finish up around 6.5%.
Despite record-breaking sales in 2017, I find it hard to get excited about Lowe’s stock (or the broader home improvement industry, for that matter). With high growth already priced in, I’m passing on picking up any shares for the time being.
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Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool has the following options: short January 2018 $170 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe’s. The Motley Fool has a disclosure policy.
