Lowe's stock spikes as profits, margins offset DIY slowdown

Lowe's (LOW) stock gained as much as 3.5% on Tuesday after the home improvement retailer's profits topped Wall Street expectations as growth in its professional contractor segment and online unit helped partially offset softness in DIY spending and falling lumber prices.

Adjusted earnings per share came in at $4.56 during Lowe's second quarter, beating Wall Street forecasts for $4.50, according to Bloomberg data. Same store sales fell 1.6%, less than the 2.5% drop that was forecast, while revenues were light of estimates, totaling $24.96 billion against expectations for $25.02 billion.

"Consumer sentiment has also improved slightly, but remains below pre-pandemic based levels," said CEO Marvin Ellison during the company's earnings call. "As a result, home improvement shoppers remain cautious with their spend, especially big-ticket discretionary purchases."

Lowes was able to increase gross margin during the quarter to 33.7% from 33.2% a year ago, topping estimates of 33.2%. The company also reiterated its full-year guidance and expects to see continued growth from its Pro business.

Analysts at Jefferies called out the company's margin improvements amid a DIY environment that remains "soft" in the firm's view.

"In-home improvement spend as a percentage of home equity is below the historical average, a positive indicator for medium-term demand as consumer sentiment improves," Ellison told analysts on Tuesday.

"The aging housing stock will also drive remodel and repairs, combined with other favorable trends like millennial household formation, aging in place and persistent remote work."

Following Lowe's results, Smead Capital Management CEO Cole Smead told Yahoo Finance he sees millennial customers serving as a tailwind for Lowe's and its peer Home Depot (HD) for years to come.

"We've busted one of the biggest myths of all times, and that is that millennials were never going to buy houses," said Smead. "And now that they own them that's such a huge customer base to those retailers."

Wall Street was prepared for a weaker quarter after both Lowe's and Home Depot cut their top and bottom line forecasts in the spring over concerns sticky inflation would cut into discretionary spending.

“[Lowe's] put up a solid quarter," Citi analysts wrote in a note to clients on Tuesday.

"In our view, this is another clean 2Q print for the home improvement sector showing the FY23 guidance cut that both HD & LOW took back in May de-risked the year. The demand environment remains uncertain, but the margin execution continues to be best in class," the firm added.

Last week Home Depot reiterated its outlook for full-year sales as CEO Ted Decker was optimistic, but measured, about the second half of the year.

"Fears of a recession, or at least a severe recession, have largely subsided, and the consumer is generally healthy," Decker told analysts after the company's latest earnings report.

"But given all those positives ... uncertainties remain."

Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.

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