• Fri. May 27th, 2022

How Will Lowe’s Deal With Slowing Home Improvement Spending?

Lowe’s (LOW -2.33%) plans to report fiscal 2022 first-quarter earnings on May 18. The second-largest home improvement company in the world is expecting sales growth to moderate in the coming year.

Lowe’s thrived as millions of homeowners took economic lockdowns as an opportunity for long overdue home-improvement projects. Understandably, sales would slow down after such a boost. After all, there are only so many rooms you can paint. The question on investors’ minds is: How will Lowe’s cope with moderating consumer spending?

Image source: Getty Images.

Profits are forecast to expand even with flat sales

Fiscal year 2021, which ended on Jan. 28, was remarkable for Lowe’s. Sales increased by 24.2% from the year before. To put that outperformance into context, consider that Lowe’s grew revenue at a compound annual rate of just 6.7% in the last decade.   

LOW Revenue (Annual YoY Growth) Chart

LOW revenue (annual year-over-year growth). Data by YCharts.

CEO Marvin R. Ellison said the company delivered “outstanding” performance last year, gaining market share with do-it-yourselfers and professionals. Ellison said: “In 2021, we increased comparable sales by 6.9% while generating over 170 basis points of operating margin improvement, with our relentless focus on productivity and enhanced pricing strategies. We remain confident in the long-term strength of the home improvement market, and our ability to expand operating margin.”

Indeed, rising revenue flowed to profits, and Lowe’s operating profit margin of 10.8% in 2021 was the highest in the past decade. That’s especially impressive, considering 2021 was a year full of inflationary pressure for businesses worldwide. Lowe’s expects to build on that momentum in 2022 and is forecasting it will end the year with an operating profit margin of 12.9% at the midpoint of the estimate.

That’s despite the slowdown in revenue it’s forecasting. For 2022, it targets revenue in the range of $97 billion to $99 billion. In other words, it expects comparable-store sales to register anywhere from a 1% loss to a 1% gain. The considerable deceleration of revenue growth was expected and should not alarm shareholders.

The confluence of macroeconomic factors that worked in the company’s favor in 2021 is reversing. A myriad of fiscal stimuli boosted consumer spending. Folks were still spending most of their time working, learning, and entertaining at home, which created a greater need for home improvement. Lastly, record-low interest rates were spurring home refinancing and buying, which tends to be followed by an increase in home improvement spending. 

Worried about rising inflation, governments are no longer looking to stimulate consumer spending. Similarly, the Federal Reserve is raising interest rates to combat rising prices. And a growing number of the world’s economies are reopening. 

Against that backdrop and tough comparisons from 2021, if Lowe’s can keep revenue from falling and expand operating profit margins as expected, 2022 can be considered a success. 

What this could mean for Lowe’s investors

Analysts on Wall Street expect Lowe’s to report revenue of $23.77 billion and earnings per share of $3.24, a decrease of 0.40% and an increase of 0.93%, respectively, from the same period the year before.

LOW Price to Free Cash Flow Chart

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

Lowe’s is trading at the lower end of its historical valuation when measured by price to earnings and price to free cash flow. Suppose the company delivers revenue and earnings in line with expectations, and the stock crashes anyway. In that case, that could be an opportunity for long-term investors to scoop up shares.