Lowe’s Q3 Earnings Preview: Can the House Advancement Retailer Extend Earnings Margins?

The calendar year 2020 was a phenomenal 12 months for Lowe’s (NYSE:Low). The corporation thrived by serving a population caught at residence indefinitely. All of a unexpected, folks had to do extra matters at property that they were being accustomed to executing elsewhere feel working out, remote finding out, and distant working.

All the alterations needed adapting your home with fixtures and additions that Lowe’s offered extremely well. Shopper desire has remained elevated even as economies reopen, and 1 of the new worries for Lowe’s is to supply on that demand. Which is starting to be more and more far more challenging as supply chain disruptions and rising charges are hitting firms globally. That’s why working earnings margin is just one point investors will concentrate on when Lowe’s experiences 3rd-quarter earnings on Nov. 17. 

Lowe’s inventory is up 46% in 2021. Image resource: Getty Images.

Productiveness improvement is increasing earnings for Lowe’s

Apparently, for the fiscal yr 2021, Lowe’s administration guided investors that it would run its enterprise with an running profit margin of 12.2%. The corporation has historically trailed its major competitor, Property Depot (NYSE:High definition), in that metric. Thus, it has been a emphasis of administration of late to near the hole versus its rival. 

A chart comparing Home Depot and Lowe's operating profit margin.

Knowledge by YCharts.

So significantly, in the initial two quarters of 2021, Lowe’s is exceeding its focus on. Working cash flow as a percentage of sales is 14.34%, a total of 210 basis factors forward of program. Administration attributed the outperformance to a focus on strengthening productivity. Just one these types of enhancement the firm has implemented is electronic pricing labels storewide. That way, associates no for a longer period have to walk through the shop switching costs. This aspect is more and more paying out dividends as volatile selling price fluctuations on lumber and other commodities lead to recurrent rate changes. The expense for staff time is also increasing, as rising wages are hitting corporations broadly.

Source chain disruptions and commodity value inflation have been perfectly publicized in latest months. Management talked about dealing with the problems in its next-quarter conference call: 

Offer chain charges also pressured margin by 35 foundation details as we absorbed some elevated distribution expenses and continued increasing our omnichannel capabilities. Our source chain crew carries on to leverage our scale and carrier interactions to lower the effect of these distribution prices skilled throughout the retail industry.

Indeed, with greater paying for power, Lowe’s can hold sway in negotiations with suppliers. A merchant can make additional revenue offering to Lowe’s at decrease costs due to the fact Lowe’s buys substantial quantities. As these kinds of, a supplier is not apt to danger getting rid of Lowe’s as a consumer and is a lot more keen to take up greater costs. 

Will a very good performance in Q3 raise Lowe’s inventory?  

Analysts on Wall Avenue anticipate Lowe’s to report profits of $21.7 billion in Q3 and earnings per share (EPS) of $2.30. The EPS estimate signifies an improve of 16% from the figure in the exact quarter previous yr. It appears that Wall Road expects efficiency improvements for Lowe’s to movement to the bottom line in a meaningful way.

Lowe’s inventory is previously up 46% year to date, so it’s uncertain if ongoing advancement on functioning earnings margin has place to improve it bigger. But if anything can ship a inventory that is now scorching even higher, it is increasing gains.

This post represents the opinion of the writer, who may disagree with the “official” recommendation situation of a Motley Fool high quality advisory provider. We’re motley! Questioning an investing thesis — even just one of our individual — will help us all assume critically about investing and make conclusions that aid us come to be smarter, happier, and richer.


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