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Lowe's earnings: What home prices, rates mean for retailer

Home improvement retail chain Lowe's (LOW) beat earnings estimates for its first quarter, sharing revenue of $21.36 billion and gains of $3.06 per share. Lowe's saw fewer consumers roll up their sleeves and spend big on DIY home projects, but CEO Marvin Ellison isn't so worried as loyalty programs and online spending are reportedly offsetting any pull back concerns.

D.A. Davidson Managing Director and Senior Research Analyst Michael Baker joins Catalysts to talk Lowe's latest figures as the retailer managed to narrow sales declines compared to previous forecasts, while also commenting on the broader retail sector.

"One of the more important drivers of demand is home price appreciation and... we have seen that improve. I think now on a year-over-year basis, eight months in a row," Baker explains. "So that is a positive for sure, but there are also negatives. Turnover is way down, there are other pressures that the consumer is facing. So we have some positives, we have some negatives, it all mixes into, again, continued negative comps [comparable sales]."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

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This post was written by Luke Carberry Mogan.

Video transcript

All right.

Well, the weakening consumer is weighing on retailers lows seeing a 4% decline in comp sales in this latest quarter.

As do it yourself, shoppers continue to pull back their spending.

You're looking at losses of just about 2.6% here in the name.

But despite that, it did come in better than expected, slightly better than expected.

So let's talk about what exactly going on Monday is ahead here for Lowe's for that.

We wanna bring in Michael Baker, he's D A Davidson, managing director and senior research analyst.

I it's great to see you.

So when you take a look at the reaction that we're seeing to Lowe's print here this morning, com sales did beat is Lowe's making inroads.

And, and do you think this decline that we are seeing is justified here this morning?

Well, so you're right, the coms did come in a little bit better than expected down but down less than, than we thought.

And they narrowed the gap versus Home Depot, uh which is really important.

So, so that's the positives, the negatives were that the gross margins were lower than expected and the margin gap between Home Depot is actually widening and we think what really may have hurt the stock is during the call.

The company talked about the second quarter margins being impacted a little bit more than what is in consensus estimates.

So the consensus second quarter eps estimates are likely to go down and we think that took some of the wind out of the early morning sale on the better than expected.

Comp Well, I'm curious about the situation with Lowe's when it comes to home prices uh from tours and flock this m this morning showing that home prices are up 7.3% in the past 12 months, Michael should higher prices which could indicate some more demand be a bullish signal for lows or not necessarily.

Well, no, absolutely.

Uh 11 of the more important drivers of demand is home price appreciation and, and Torin is right.

Uh We have seen that improve, I think now on a year over year basis, eight months in a row.

So that is a positive for sure.

But there are also negatives, turnover is way down.

Uh There are all the pressures that the consumer is facing.

So we have some positives.

We have some negatives, it all mixes out into uh again, you know, continued negative comps but less negative in the last two quarters, less negative than expectations.

And at least their guidance suggests that we should get better in the back half of the year.

Uh So Cotter billing wins.

Is it, uh, home price appreciation?

Definitely on the positive side.

But, but again, there are offsets if we do see rates stay high for longer.

What exactly then does that mean to, for lows, just in terms of some of that pressure that we could continue to see on their business?

Yeah, that's a negative for sure.

Higher rates, less home activity, that home price appreciation that we're seeing get better.

Maybe that turns back for the worse if, uh, if turnover slows because of rates.

So, uh, the, the, the, the stocks and the businesses are definitely driven by rates, higher rates tire for longer is not a good scenario for these guys.

Uh, and so they will react positively again, both the, the sta the sales and the stock if and when rates starts to come down, uh, that's frankly what bulls are waiting for that's been delayed.

And, and that's probably why those stock is underperformed year to date, at least relatives in the market.

I'd love to take a step back and look at the overall sector here, Michael.

We know that retail stocks have seen short interest climbing over the past couple of weeks and there's a lot of pess pessimism overall on the consumer discretionary sector if we're meant to be greedy when other people are fearful, is that a buying opportunity for the sector or should investors be looking for individual names for opportunities for growth?

Yeah, I mean, I, I think it is a stock pickers market in general.

You do want to pick your spots.

Uh, but, but we are generally positive on retail just on the idea that we do think we are closer to the end of the rate cycle than the beginning.

Uh, retail stocks do perform well when rates fall, that's been pushed out a little bit.

So retail has underperformed a little bit year to date.

But eventually we do think rates are gonna come down more likely down than up from here.

Uh And we do think that will be a positive for retail stocks.

So we do see it as an opportunity to, to to buy uh names.

Those are not one of the ones we we're recommending.

There are other names that we are recommending but, but we do see opportunities out there.

One of our preferred picks, for instance, is Walmart.

Uh we just elevated Walmart to what we call our best of breed bison uh product which really highlights long term winners at good valuations.

Uh We see that as, as a name continuing to take market share in this environment and we think that stock works, for instance.