Can Lowe’s Lead Discretionary Stocks Lower In 2023?

Key Points

• Lowe's report confirms a shift in consumer spending that is not good for discretionary names. 
• Ignore the XLY's outlook, driven almost entirely by Amazon and Tesla. 
• Home Depot and Foot Locker report suggest darker times are coming for discretionary spending. 
• Lowe's is a Dividend King, a move to lower prices is the entry point patient long-term investors have been waiting for.

The Consumer Discretionary Sector ETF NYSEARCA: XLY is set up for a reversal, and the outlook is certainly in line with that, but a growing number of reports, including the Q1 report from Lowe’s NYSE: LOW, suggests that the rebound is over. The report from Lowe’s confirms a shift in consumer spending that points to rapidly receding demand for discretionary items as consumer spend their money on food and healthcare products.

Lowe’s is not the bulk of the holdings, but it is the 6th largest and competitor Home is the 3rd, making about 12.70% of the total. That, along with Foot Locker NYSE: FL, which gave a terrible report, is enough to pull this market down, but the question is how low. Names like Amazon NASDAQ: AMZN and Tesla dominate the ETFs holdings, and those stocks are rising on trends that have nothing to do with discretionary spending. Ex-Tesla and Amazon, the outlook for discretionary spending are not only receding but declining, and the decline is accelerating. The takeaway is the XLY will probably move sideways from here, and Lowe’s will be one of the heaviest weights for the market to bear. 

Lowe’s: Solid Company, Weak Guidance 

Lowe’s is a solid company and is in fine shape. Still, economic conditions impact results, including high consumer inflation and rapidly deflating lumber prices (relative to the COVID bubble). The company reported a strong quarter in Q1 relative to the analysts' estimates, but revenue fell 5.5% nonetheless, and the guidance is weak. Comp sales, adjusted for last year’s extra fiscal week, fell -4.3% due to lumber prices, weather and unexpected weakness in DIY discretionary products. These results echo HD, which provided weak guidance for the year. 

The margin was better than expected, leaving the adjusted earnings at $3.67 or $0.22 better than the Marketbeat.com consensus estimates. This would be good news, except that guidance is weaker than consensus, including the Q1 strength, making the coming few quarters much worse than the analysts expected. The analysts were already trimming their forecasts for the company and price targets for the stock, investors should assume this trend will continue, and that will cap the upward potential for the market. 

As it is, the 25 analysts with current ratings have the stock pegged at a Firm Hold verging on Buy, so a pullback in prices is a likely buying opportunity for this Dividend King. The consensus price target at the time of the earnings release was $222.40, about 10% above the pre-release closing price, but that target is down compared to last year, last quarter, and last month and should be expected to fall below the top of Lowe’s stock trading range. 

Is This A Buying Opportunity For Lowe’s? 

Given Lowe’s status as a Dividend King and its disciplined approach to capital returns, long-term-oriented income investors could view the price pullback as a buying opportunity. The stock offers value at these levels and yields about 2.1%, with the expectation that dividend increases will continue. The company also buys back shares, which will help support the price over the next few quarters. The company bought back $2.1 billion worth of shares while paying $0.633 billion in dividends and maintaining its healthy balance sheet. 

The chart of LOW is nearly identical to HD, which is reminiscent of Kroger NYSE: KR. The takeaway is that the LOW market is consolidating within a long-term trading range and above critical support toward a major up-trend line. The up-trend line marks “economic reality” versus the pandemic bubble, which Lowe’s and Home Depot are recovering from. The difference is that HD appears closer to the trend and may form a solid bounce sooner, while Lowe’s stock price recovery may take longer.