Weak Housing Backdrop Doesn’t Change Our Long-Term Thesis on Lowe’s

Although wide-moat Lowe’s LOW fourth-quarter results came in line with our expectations (sales of $22.4 billion and adjusted diluted EPS of $2.28 versus our $22.4 billion and $2.20, respectively), shares slid roughly 6% on the print. We contend the pessimistic market sentiment stems from a fiscal 2023 sales outlook that is normalizing (net sales of $88 billion-$90 billion, below our $91 billion preprint forecast, which includes the loss of the divested Canadian business) and the near-term macro uncertainties, despite secular industry tailwinds that remain solid. Impressively, Lowe’s 2023 operating margin goal of 13.6%-13.8% is largely unchanged, despite lower sales, set to benefit from perpetual productivity initiatives. We plan to lift our $212 fair value estimate by a low-single-digit rate to account for time value and view shares as undervalued.

In the quarter, Lowe’s comparable sales in the U.S. declined 0.7%, as a 5.5% drop in comparable transactions (partially driven by softness in discretionary categories and normalizing DIY demand) was only partially offset by 4.8% comparable average ticket growth (aided by product inflation and a 10% pro sales growth). But we are encouraged by the healthy pro business, with a still-robust backlog, as more than 70% of pros reported similar or higher workloads relative to last year. Lowe’s continued investments in this cohort serve as a key growth factor for the business, in our view.

Despite 60 basis points drag (two thirds of which we view as transitory) in its gross margin (to 32.3%) in the quarter, Lowe’s operating margin improved 88 basis points to 9.6%. We think this emphasizes Lowe’s strong execution on its productivity initiatives (including IT upgrades and simplification of roles, to name a few) despite slowing sales momentum. Looking ahead, we see incremental operating leverage from ongoing efficiency efforts and additional rollouts of the market delivery model, which bases our above 14% operating margins longer term.