Lowe's Q2 Earnings on the Deck: Key Factors to Note

As Lowe's Companies, Inc. LOW prepares to unveil its second-quarter fiscal 2024 earnings on Aug 20 before the opening bell, investors are keenly observing the company's performance. With a projected decline in both the top and bottom-line figures, the upcoming earnings release prompts a critical question: can Lowe's meet or exceed expectations despite these anticipated decreases in profitability?

The Zacks Consensus Estimate for the to-be-reported quarter's revenues is pegged at $24 billion, which suggests a drop of 4% from the prior year's levels. However, the rate of decline shows a slight deceleration from a 4.4% decrease witnessed in the preceding quarter.

The consensus mark for quarterly earnings has fallen by a couple of cents over the past 30 days at $3.96 per share, which calls for a decline of 13.2% from the year-ago quarter's reported figure.

Factors at Play

A primary area of concern for Lowe's remains the Do-It-Yourself (DIY) home improvement segment. In the first quarter of fiscal 2024, the company reported a 4.1% decline in comparable sales, with much of the weakness attributed to a drop in big-ticket purchases and fewer transactions. The trend is expected to have persisted into the second quarter as consumers continue to shy away from large, discretionary home projects.

Underlying inflationary pressure and economic challenges have made consumers more cautious with their spending, leading to a focus on essential purchases rather than costly renovations or home upgrades. Given these challenges, we anticipate continued pressure on comparable sales, with a projected year-over-year decrease of 4.2% in the second quarter.

Margins will be another critical area to watch in Lowe's second-quarter earnings. Ongoing cost challenges, coupled with a possible increase in promotional spending to drive sales, may have squeezed margins. We foresee a gross margin contraction of 40 basis points in the quarter under discussion.

Additionally, higher SG&A expenses may have further weighed on profitability, especially as Lowe's continues to invest in store operations and customer experience. We expect SG&A expenses, as a percentage of sales, to deleverage by 100 basis points in the second quarter, which is likely to contribute to an anticipated 150-basis point contraction in the operating margin.

Despite these headwinds, Lowe's has been proactive in responding to evolving consumer behaviors and market dynamics. The company has recalibrated its strategies to focus on smaller, non-discretionary projects and enhance value propositions for customers. Initiatives such as MyLowe's Rewards loyalty program and investments in omnichannel experiences highlight Lowe's commitment to meet changing consumer needs.

The Pro segment remains a significant growth driver for Lowe's as the company continues to execute its multi-year strategy to improve product offerings, fulfillment options and the overall shopping experience for professional customers. Furthermore, strategic investments in the Total Home strategy, including modernizing the supply chain and IT infrastructure and enhancing merchandising assortments, position the company to navigate the current challenges.

The Zacks Model

Our proven model does not conclusively predict an earnings beat for Lowe's this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. However, that's not the case here.

Lowe's has a Zacks Rank #4 (Sell) and an Earnings ESP of -0.44%.

Stocks With the Favorable Combination

Here are three companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this season:

Ollie's Bargain OLLI currently has an Earnings ESP of +2.38% and a Zacks Rank of 3. The company is likely to register an increase in the bottom line when it reports second-quarter fiscal 2024 numbers. The Zacks Consensus Estimate for quarterly earnings per share of 78 cents implies a rise of 16.4% from the year-ago reported number.

Ollie's Bargain's top line is expected to have ascended year over year. The Zacks Consensus Estimate for quarterly revenues is pegged at $562.4 million, which suggests an increase of 9.3% from the prior-year quarter. OLLI has a trailing four-quarter earnings surprise of 10.4%, on average.

Target TGT has an Earnings ESP of +0.37% and currently carries a Zacks Rank of 3. TGT's top line is anticipated to have advanced year over year when it reports second-quarter fiscal 2024 results. The Zacks Consensus Estimate for its quarterly revenues is pegged at $25.3 billion, which suggests a 1.9% rise from the figure reported in the year-ago quarter.

The company is expected to register an increase in the bottom line. The consensus estimate for Target's second-quarter earnings is pegged at $2.18 per share, up 21.1% from the year-ago quarter. TGT has a trailing four-quarter earnings surprise of 22.4%, on average.

Costco Wholesale Corporation currently has an Earnings ESP of +0.67% and a Zacks Rank of 3. The company is expected to register top and bottom-line growth when it reports fourth-quarter fiscal 2024 numbers. The Zacks Consensus Estimate for COST's quarterly revenues is pegged at $80.1 billion, which implies a rise of 1.4% from the year-ago quarter's reported figure.

The consensus estimate for Costco's earnings has increased by a penny in the past 30 days to $5.02 per share. The consensus mark for earnings suggests growth of 3.3% from the year-ago quarter's reported figure. COST delivered an earnings beat of 2.3%, on average, in the trailing four quarters.

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