Lowe’s fourth quarter earnings: Increasing profit margins will be vital

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Lowe’s (NYSE: LOW) is expected to release its fiscal 2021 fourth quarter results on February 23. The home improvement retailer has been booming since the pandemic began. The house has become an integral part of people’s lives, and they are spending accordingly.

Demand for home improvement is proving resilient even as the economy reopens. Investors will focus on Lowe’s operating profit margins with sales near peak levels.

Image source: Getty Images.

Market factors in favor of Lowe

Interestingly, when Lowe’s released results for its third quarter ended Oct. 29, it showed an overall sales increase of 2.7% over the same quarter a year earlier. Likewise, same-store sales, which exclude the effect of new store openings and closings, increased by 2.6%. Investors may be further encouraged by two facts from Lowe’s third-quarter sales: Earnings improved every month of the quarter, and this year’s growth adds about 30% to last year.

Despite the economic reopening, people are still spending a lot of time working, learning and playing at home. This creates more wear and a need for maintenance. Additionally, soaring home prices and limited inventory for sale are great for the home improvement industry. People who need larger spaces find it cheaper and more practical to add to an existing home than to move. Lowe’s expects these forces to remain palpable and keep sales relatively stable through 2022, forecasting revenue declines for the year between 0% and 3%.

Lowe’s expects this to be enough to keep the operating profit margin in double digits for 2022. In the nine months ended Oct. 29, its operating profit margin was 13.67%. In 2012, Lowe’s didn’t achieve an operating profit margin above 9.6% until 2021, when it has a quarter left to report.

Management has implemented a “continuous productivity improvement program” to help increase efficiency. One component of the program focuses on paying customers. The company changed the interface to a more streamlined version, making it easier to train cashiers on the system and simultaneously improving the customer experience.

While focusing on customer payment, Lowe’s also developed its own self-service payment system with home improvement customers in mind. The widespread trend of labor shortages makes these changes essential to keep costs anchored while meeting strong customer demand.

What this could mean for Lowe’s investors

Wall Street analysts expect Lowe’s to report fourth-quarter revenue of $20.83 billion and earnings per share of $1.70. If it meets those projections, it would mark increases of 2.50% and 27.8%, respectively, over the same period a year ago.

Lowe’s stock is down 12.4% so far in 2022. The decline may be in anticipation of a possible drop in consumer home improvement spending, a trend that has yet to materialize. . If the fourth quarter goes better than expected and management revises its 2022 guidance upwards — a reasonably plausible scenario — it would likely drive Lowe’s stock higher.

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Parkev Tatevosian has no position in the stocks mentioned. The Motley Fool recommends Lowe’s. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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