Home-improvement retailer Lowe’s (LOW) reported poor third-quarter results that revealed over a 45% decline in net earnings, as the big-box retailer continues to be weighed down by store closings and discontinued projects. We’re sticking with our low $20s fair value estimate and are considering widening our margin of safety on the company’s shares given the longer-than-expected turnaround.
The firm’s top line expanded 2.3%, while comps nudged up slightly (0.7%) and topped the aggregate performance through the first nine months of the year (-1%). Lowe’s expects this positive same-store-sales trend to continue into the fourth quarter, as management guided for meager expansion (flat to 1%) for the period. Investors should expect increased top-line growth rates in the fourth quarter for Lowes, but only because it will have an extra week included in results than last year. We’re not impressed.
The company’s operating margin should decline on a year-over-year basis in its fourth quarter as Lowe’s continues to struggle to close underperforming stores (its pre-tax earnings margin fell over 350 basis points in the most recently reported quarter). Though the outlook is less-than-impressive, management did guide to profitability, with diluted earnings per share expected in the range of $0.20 to $0.23 in the fourth quarter, about in line with what we’d been expecting. And we have little concern about Lowe’s cash-flow generating capacity with cash from operations coming in well north of twice that of net earnings through the first nine months of the year.
That said, we think a turnaround for Lowe’s is still far in the future, and even considering such optimistic performance, we think the shares are fairly valued at today’s levels.