At face value, Lowe’s Companies (NYSE: LOW) had a rough Q4 compared to competitor Home Depot, but the details within the report belie that assessment. Comps were weak, but the company is building leverage, generating cash, and returning capital to investors meaningfully.
The combination of leverage, cash flow and capital returns supported shares in 2023 and will lift them in 2024 because the company is nearing an inflection point. Demand for DIY and Professional materials is sluggish but expected to rebound in the 2nd half. The only question is when the Fed will make the first interest rate cut; until then, sufficient business to keep the capital returns flowing is expected.
Lowe’s has a good quarter despite a YOY decline
Lowe’s reported $18.68 billion in net revenue for a decline of 17% YOY. This is much worse than the 3% decline posted by Home Depot (NYSE: HD), but it is better than expected and includes some one-offs that make the comp to HD meaningless.
Among the factors impacting the top line is an extra week in the previous year and loss associated with divestiture. Adding those back into the mix, Lowe’s revenue is down a low-single-digit figure, aligning more closely with HD. On a comp basis, sales are down 6.2% YOY due to poor weather in January and a slowdown in DIY. The pro-business, which also carried Home Depot, was flattish.
The margin news is good. Lowe’s is building leverage by controlling costs despite the slowdown in sales and deleveraging fixed costs. The gross margin widened by less than 50 bps but was compounded by reduced SG&A, leaving the operating margin up nearly 150 bps. GAAP and adjusted earnings are down YOY, but adjusted are $0.10 better than forecast, outpacing the top-line strength by more than 400 bps.
Guidance is a little weak but likely cautious, given the operating environment. The company expects 2024 revenue to range from $84 to $85 billion, down 2.3% YOY and short of consensus by 1.0%, with earnings expected in a comparable range. The takeaway is that low-end earnings of $12.00 are sufficient to maintain a robust capital return outlook.
Capital returns in 2023 topped $8.9 billion, including the 1.9% dividend and share repurchases. The dividend can be expected to increase by a mid-to-high single-digit amount, but share repurchases may slow; repurchases reduced the share count by 5% in 2023 and are expected to reduce the count by a low to mid-single-digit figure in 2024.
Analysts put upward pressure on Lowe’s stock price
The analysts’ sentiment slipped to Hold from Moderate Buy for this Dividend King, but the price target continues to rise. The price target increased by 6% over the last year, including numerous regions in January and February, leading the market, and upward revisions may continue this year. Among the most recent is a double upgrade from JPMorgan Chase to Neutral to Overweight with a price target of $265, a new all-time high.
The price action is favorable. The market for Lowe’s stock is up 2% following the release and trading at what would be a fresh closing high. Assuming the market can continue upward, a move to new multi-year highs would open the door to $260. The $260 level is critical resistance and may cap gains until later in the year. Potential catalysts for higher prices will be Q1 results, updated guidance, housing data and the Fed. When the Fed indicates the first cut is coming, this and other housing stocks should see their markets advance strongly.
