Lowe’s (NYSE: LOW) Q2 results may look weaker than Home Depot’s (NYSE: HD) at first glance but there is a meaningful difference in the guidance. Where Home Depot’s outlook was improved it is only in line with the consensus and projects a weakening in the 2nd half, Lowe’s was much stronger. Lowe’s reduced its guidance for revenue but raised its outlook for earnings and both figures are above the consensus estimate with inventory positions in much better shape as well. The takeaway is that not all is lost in retail land and Lowe’s look’s like a winner, the only caveat is that general weakness in the retail sector could cap gains in the short to mid-term.
Lowe’s Rises On Mixed Quarter
Lowe’s results were weaker than Home Depot’s largely due to the mix. Lowe’s has a 75% DIY mix compared to a much lower ratio for Home Depot and there was some weakness in that channel. The takeaway, however, is that outlook for growth on a channel basis favors the DIY market which has Lowe’s in a better position. Until then, the Q2 revenue of $27.48 billion is down by 0.3% compared to the mid-single-digit gain put in by Home Depot and it missed the consensus by 240 bps compared to outperformance on the part of its competitor. The revenue was driven by a -0.3% decline in comp sales which was driven by a 0.2% increase in DIY and a stronger 13% increase in Pro customer sales.
Moving down to the earnings, the company was able to post a slim 13 basis point improvement in the market which is consistent with Home Depot’s improvement but also 40 bps better than expected. The margin gains come on the back of internal efforts to control costs that include inventory control as well. The result is GAAP EPS of $4.67 which is up $0.42 or 9.8% and $0.07 better than expected but the truly good news is in the outlook.
Lowe’s altered its guidance for the full year to reflect a lower expectation for sales and an improved expectation for margin. The company says to expect revenue at the low end of the $97 to $99 billion range and for EPS at the high end of its $13.10 to $13.60 range which has revenue in line with consensus and EPS above with a chance for outperformance in each.
Lowe’s Is In A Better Position With Inventory
The story within the retail sector right now is inventory and Lowe’s appears to be in a better position than most. Rising inventory levels led Target (NYSE: TGT) to discounting and other means of control that cut deeply into the bottom line and the story does not end there. Not only did Target report that inventory reduction cut deeply into its results but it also reported a 35% YOY increase in inventory that suggests discounting is not over. The company says it invested in higher-demand items but that is no guarantee demand will match the new inventory levels and others are reporting similar increases. Home Depot inventory is up 35% as well and Target competitor Walmart (NYSE: WMT) reports a 25% increase. The takeaway is that Lowe’s inventory grew by only 11% YOY and will have less margin pressure because of it.
Capital Returns Help Lowe’s Nail Down Higher Prices
Lowe does not only pay a safe and growing 1.6% dividend yield but it is also buying back shares. The company bought back $4 billion worth in the 2nd quarter which is an amount equal to 2.9% of the market cap and repurchases should continue into future quarters. In regard to the dividend, the company is only paying out 26% of its earnings and has been increasing for 58 years so there is little fear of it getting cut or discontinued, only an expectation for additional growth.
The price action in Lowe’s is moving higher in the wake of the Q2 report and leading the retail sector higher. The move has the shares at a 4-month high and in a position to break above a potentially strong resistance level. Resistance may be at the $220 level and if so, it could keep shares from moving higher. 
