Lowe’s Earnings: Strong Profitability on Display Despite Weak Discretionary Spending

Wide-moat Lowe’s third-quarter results included $20.5 billion in net sales and $3.06 in diluted earnings per share, edging our respective $20.2 billion and $2.97 estimates. More critically, gross and adjusted operating margins expanded 36 and 46 basis points to 33.7% and 13.2%, respectively, despite a 7.4% decline in comparable sales. We think these marks show the firm’s focus on expense management and ability to pull diverse levers to blunt sales deleverage. However, management's tempered full-year outlook for $86 billion in net sales (from $87 billion-$89 billion) and $13 in adjusted EPS (from $13.20-$13.60) suggests that comparable sales will decelerate further in the fourth quarter. As we incorporate these results, the weaker full-year guidance, and time value, we plan to trim our $213 fair value estimate by a low-single-digit percentage, in line with the market’s reaction, rendering the shares a tad undervalued.