Lowe's (NYSE: LOW) Stages Breakout With Big Jump in Share Price

After the news that emerged from Home Depot NYSE: HD recently about its earnings figures, it was easy to look to Lowe's for an equally gloomy report. The two occupy the same market, after all, so why would conditions be significantly different at Lowe's NYSE: LOW? As it turns out, though, conditions were significantly different as not only did Lowe's managed to beat analyst expectations but also raised its forecast for the year's earnings. This came from perhaps the most unlikely of conditions: revenue figures that were less than projected.

A Big Day for Lowe's

No matter how you slice it, Lowe's earnings report was a welcome bit of news. Expected earnings were $1.35, but Lowe's managed to post $1.41. What's more, Lowe's even managed to expand its earnings forecast for FY 2019, going from original figures of $5.63 to new earnings per share projection of $5.70. Earlier estimates, meanwhile, put Lowe's at $5.67 per share.

This actually comes despite a shortfall in projected earnings. While consensus figured earnings of $17.68 billion, Lowe's actually managed to post $17.39 billion in earnings. Not necessarily a big divergence between projected and actual, but a divergence nonetheless. Moreover, this isn't even a first; this is said to be the second consecutive quarter that Lowe's has beat expectations on earnings.

Consolidated same-store sales also saw a bit of a drop, with analysts expecting a 3.1% gain, but seeing only a 2.2% gain. Much of that could be traced back to issues in Canadian stores, where Lowe's has already been pushing cutbacks and closing underperforming stores. For stores in the US open at least a year, sales were up 3%, a hair under projections.

The numbers were enough to drive further trading, with shares up over 4% in premarket trading. As of this writing, there's been some pullback, but still well off the previous close, trading at 119.27.

Strange Circumstances Afoot

It would be unusual enough to report that a company beat its earnings per share estimate with a shortfall in projected earnings, but a look at the circumstances surrounding that outcome proves even more unusual.

We already know that Lowe's increased its earnings per share figures in the midst of a reduced revenue total, but it's also hiking its overall estimates. It may be that Lowe's is expecting the loss of underperforming stores to improve the overall figure. While Lowe's CEO Marvin Ellison noted that the company remains “committed” to a presence in Canada, it's clear that that presence is on the decline.

Last quarter, which also proved a boon to the company's growth figures, the company noted that its move to target professional contractors had allowed it to generate growth. During that second quarter, Lowe's managed to add on around 35,000 new customers in the contractor space, which might well have given it a shot in the arm, especially with reduced overhead from fewer stores.

The gain in contractors, however, has come at a price. Reports from October noted that employee morale is pushing an “all-time low” thanks to the growing numbers of changes at the store level. One of the biggest changes involves getting rid of employees with longer tenures and also eliminating some key positions which would have been most helpful to employees like store human resources managers and maintenance staff. There's even some word about changes to employee compensation. While Lowe's didn't confirm this, a report from Business Insider suggested that this was the case via leaked document.

What This All Means in the End

Taking all these factors together suggests several possible outcomes. Lowe's is making big gains on reduced earnings, though it's also more aggressively making changes in its overall operations. It's working toward greater profitability, but also making some moves that may limit its ability to succeed. The losses of store maintenance and assembly staff, as well as the reduced number of Canadian locations, may mean gains in the short term, but might well hurt prospects in the long term.

Lowe's is a success right now, but whether or not it can continue to be one in a year or two remains to be seen.