Lowe's waiting for investors' patience after a difficult quarter – The Fool Motley

This is not as usual to Lowe & # 39; s (NYSE: LOW) these days. Under the direction of a new CEO, who previously held the position of Senior Manager at Home Depot (NYSE: HD), the retailer is restructuring in the hope of closing the persistent operating gap between the two companies.

In the third quarter financial results released this week, Lowe did not show any progress toward this goal. Instead, the home improvement retailer reduced its outlook for 2018 despite generally favorable industry trends.

More on this prediction that worsens in a moment. First of all, here is how the last figures compare to those of the previous year:

Data source: Lowe's financial reports.

What happened last quarter?

Sales were below expectations for the second consecutive quarter, although the broader home renovation market experienced steady growth. Lowe's has been debated with fundamental sales capabilities, including setting up the right inventory at the right time. These difficulties weighed on profits and reduced profitability.

The highlights of the quarter:

• Sales at comparable stores or in stores opened at least one year ago increased 1.5%, marking a slowdown compared to the 5% increase recorded in the previous quarter. Rival Home Depot also experienced a slowdown in its pace of growth compared to the dynamic second quarter, but its 5% rate implies market share gains over its smaller competitors.
• Gross profit margin fell to 32.5% of sales, up from 34% a year earlier, while Lowe's was struggling to convert increased customer traffic into higher sales volumes. On the other hand, Home Depot's margin remained stable at 35% for the same period.
• Lowe's recorded higher selling expenses and a $ 280 million charge related to the closure of stores and the closure of several non-core business lines. These costs resulted in a significant decline in revenues despite a lower tax rate. After accounting for restructuring costs, adjusted earnings decreased by 1%.

What management had to say

In just his second quarter as CEO, Marvin Ellison had to again inform investors of the discouraging news about Lowe's retail difficulties. "The favorable macroeconomic environment, combined with great values, has generated traffic to our stores and our website," he said in a press release. "However, the persistent difficulties of out-of-stock, bad reset, and mis-matched issues in some categories weighed on our ability to turn these visits into transactions."

On the positive side, Ellison said that the management team was well advanced in its re-evaluation of activities and that with this key project behind it, "we can now focus more on the activities of retail basis ".

Looking forward to

Lowe's is becoming a lean organization, having closed all its Orchard Supply branches and now its retail operations in Mexico. The company expects these changes to help sales trends and profitability improve slowly over time. "Our transformation will take time," said Ellison, "but we have assembled an experienced team and come up with a detailed plan to make steady progress."

Meanwhile, Lowe's is narrowing its outlook for 2018 and is now seeing its sales increase by about 2.5%, instead of the 3% target set by executives three months ago and the original goal of 3.5% that they had set for the year. This trend contrasts sharply with Home Depot, which raised its growth outlook from 5% to 5.3% last week. Lowe's believes that its profitability goes even further than that of its biggest competitor, the operating margin having to fall by 2 percentage points to establish at around 8% of turnover, against 14.5% for Home Depot.

Demitrios Kalogeropoulos holds shares of Home Depot. The Motley Fool offers the following options: short February 2019, $ 185 calls on Home Depot and long calls from January 2020, $ 110 on Home Depot. The Motley Fool recommends Home Depot and Lowe's. Motley Fool has a disclosure policy.