Source: Company reports

2Q 2016 RESULTS

EPS was $1.31, compared to $1.20 in the year-ago quarter, up 9.2% and below the consensus. The foreign currency hedge negatively impacted earnings by $0.06 per share. Lowe’s reported 2Q 2016 revenues of $18.3 billion, up 5.3% year over year, but missed the consensus estimate of $18.4 billion. This is the first quarter that Lowe’s included RONA in its financial results. The foreign currency hedge in advance of the RONA acquisition decreased pre-tax earnings by $84 million and EPS by $0.06. Management characterized the results as solid and positioned the firm to capitalize on a favorable macroeconomic backdrop for home improvement in the second half of this year. Lowe’s achieved +2% comps for the quarter. Transactions grew 3.7%; RONA accounted for about 75% of the increase, partially offset by a total average ticket increase of 1.6% to $68.91. The sales increase was driven by the addition of RONA and increasing comp sales and new stores. Strength in indoor project demand led to positive comps in lumber building materials, kitchens, tools and hardware, and fashion fixtures. The seasonal business also performed well, driven by strength in air-conditioning and patio furniture sales. From a geographic perspective, the south and west regions had positive reports, partially offset by weakness in northern regions due to below normal temperatures which hindered the sales of outdoor goods. The company saw softer comps in May, down 2.8%, driven by unfavorable weather. Comps rebounded in June (+5%) and July (+3.8%) due to stronger demand for indoor projects and a desire to invest in homes. The timing of Memorial Day and the July 4 holidays affected comps. Adjusted for the timing of the holidays, comps would have been 1.7% in May, 2% in June and 2.3% in July. Categories related to indoor projects reported positive comps. Comps were led by kitchens, which reported above-average comps. Fashion fixtures reported strong comps due to increased product offerings. Categories related to the seasonal living business performed well, driven by air-conditioner sales due to warmer-than-average temperatures and patio furniture sales. Tools and hardware benefited from increased project activity from both DIY and Pro customers. The Pro business grew faster than the corporate average, led by the higher spending of Pro customers. Account Executive ProServices (AEPs) serve the Pro customer by working with larger regional customer to help them order and replenish products across both geography and locations. Comp AEPs saw double-digit growth in sales, which contributed to the strong Pro comp growth in the quarter. In the international markets, the performance of the Canadian and Mexican businesses reported double-digit comps. The acquisition of RONA’s 539 store locations significantly enhanced the firm’s competitiveness and profitability in Canada. Inventory was $10.6 billion at the end of 2Q 2016, up $900 million or 9.3% year over year. Approximately 85% of the increase relates to the addition of RONA. Inventory turned 3.9 times in the quarter, at roughly the same rate it did in the year-ago quarter. The company launched its new Lowes.com site during the quarter. The new site focuses on a better mobile experience, improved product and content recommendations, refined search algorithms, improved click-to-chat capabilities, larger project images and expanded product views, including video content.

2016 OUTLOOK

The company lowered its full-year guidance for EPS from $4.11 to $4.06, based on expected revenue growth of 10% driven by a variety of factors that include a contribution from RONA of 4% and an extra week (this is a 53-week year compared to a 52-week year in 2015) that will contribute 1.5% to sales. The company also expects to open approximately 45 stores, which would contribute 0.5%. Management reaffirmed its comp sales increase of 4%. In the macro environment, management said they continue to see positive signs in the home improvement industry—ultimately driven by solid growth in consumer spending—which creates a tailwind for the company’s business.