Lowe’s earnings: Expect more margin improvement, analyst says

Lowe’s (LOW) reported mixed results for its second quarter. TD Cowen Director Max Rakhlenko joins Yahoo Finance Live to discuss the company’s earnings. “Lowe’s had good numbers” and “overall, the company is doing a really nice job of executing in a very mixed to tough backdrop,” Rakhlenko says.

Lowe’s “pro environment remains better than DIY and we are seeing pro continue to outperform,” Rakhlenko notes. “Lowe’s has done a really nice job with the pro business for the last several years. They’re really looking to take market share with the smaller pros, whereas” Home Depot (HD) is “really focused on those large and much more complex pros,” Rakhlenko explains. Lowe’s pro business “is doing well, but the size of the business today does remain much smaller than where Home Depot is,” Rakhlenko says.

Rakhlenko says for Lowe’s margins, “management has done a great job over the last handful of years, of really improving operations, both at the store level as well as HQ… but we still think that they have several years more to go.” “We are seeing an improvement in margins” and we think some of the company’s “initiatives that they’ve got going… are going to help margins in the back half of the year,” Rakhlenko says.

Video transcript

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- We continue to track shares of Lowe's today. Right now, they're up more than 3 and 1/2% after the company's results came in mixed. They fell slightly short of expected sales on lower DIY demand. The company, though, did stick by its full-year forecast, having already predicted that sales will slow this year as pandemic-era demand cools.

Lowe's outlook for the year echoes that a rival Home Depot both bracing for a slowdown in home improvement. And we should say Lowe's Comp sales fell but not as much as estimated. Joining us now is Max Rakhlenko, TD Cowen director on these Lowe's numbers. What stood out to you from Lowe's in terms of execution here maybe that helped it edge out the estimates considering that the macro environment is a little dicey right now?

MAX RAKHLENKO: Yeah. Thanks a lot for having me on this morning. Lowe's had good numbers. Overall they were better than expected both, with same-store sales coming in ahead, down 1.6% but better than what ourselves and others modeled, as well as event margin, which also did quite well. The company, to your point, did reiterate guidance. So all these things are positives, and the stock is reacting nicely.

Overall the company is doing a really nice job of executing in a very mixed to top backdrop. You mentioned that the pro-environment remains better than DIY. And we are seeing pro continue to outperform.

- So what does this spell out for where the company is going to be able to also maintain margins? They talked a little bit about that and what they were doing in trying to reduce expenses and making sure that they're not kind of missing out on just driving a good customer experience. But at the same time, investors want to hear about the margins, and even in an environment like this where there is a macro concern still securitizing some of those margins top of mind.

MAX RAKHLENKO: Yeah, management has done a great job over the last handful of years of really improving operations both at the store level as well as HQ. They're well on their way, but we still think that they have several years more to go. They previously would under-invested times in some of their stores, some of the IT.

And these are some of the major areas where they've been investing. And we are seeing an improvement in margins. Gross margin did quite well, and we're excited about some of the other initiatives that they've got going, which we think are going to help margins in the back half of the year.

- When it comes to the pro-business at Lowe's, they seem to have done a little bit better in contrast with what we heard from Home Depot. What do you think is going on there?

MAX RAKHLENKO: Sure. So Lowe's has done a really nice job with the pro-business for the last several years. They're really looking to take market share with the smaller pros. Whereas, at this point Home Depot and their initiatives are really focused on those large and much more complex pros.

So Lowe's is doing a really nice job. But at the end of the day, their pro-business today does remain roughly 25% of mix versus Home Depot that's at about 50%. So Lowe's is doing well, but the size of the business today does remain much smaller than where Home Depot is.