Lowe’s Earnings: Consumers Outweigh Brand Power in the Near Term

Key Morningstar Metrics for Lowe’s

• Fair Value Estimate
  : $258.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Lowe’s Earnings

Lowe’s LOW second-quarter sales grew 8.0% to $26 billion, as 0.2% same-store sales growth was bolstered by strength in pro sales stemming from the Artisan Design Group and FBM acquisitions. The adjusted operating margin contracted 62 basis points to 14%, hurt by higher fuel and transportation costs.

Why it matters: Lowe’s second-quarter report largely echoed wide-moat Home Depot’s results, with consumers shunning big-ticket projects for now. However, Lowe’s saw incrementally more pressure in DIY demand due to heightened price competitiveness.

• Fortunately, it appears most of the recent price investments were a result of tariff refunds, which have largely been digested. As such, we expect fewer promotions in the second half, which should result in less operating margin compression toward the end of the year.
• Unfortunately, Lowe’s has printed transaction declines for the past five years, as consumers have been fatigued by inflation and economic uncertainty, while new home construction has been hurt by higher interest rates. Given the current environment, we don’t expect this to inflect until 2027.

The bottom line: We don’t plan any material change to our $256 per share fair value estimate for wide-moat Lowe’s. Although the firm lowered its full-year outlook to the low end of its previous guidance (sales of $92 billion and EPS of $12.25), this downtick is largely offset by time value.

• Even after a 3% uptick, we view shares as attractive. We think investors are too bearish on Lowe’s long-term potential. To reach the market price, we would have to forecast 2% same-store sales and sub-teens operating margins over the long term, below our 3.0% and 13.7% terminal estimates.
• We contend Lowe’s is making the appropriate investments to drive sales and profit growth, including in its Total Home Strategy (to be a home solutions provider), loyalty program, fulfilment capabilities, category expansions (pet, workwear), among others, to protect the brand.