Changes Under Way at Lowe's, Market Applauds

With Marvin Ellison taking the helm at the beginning of July and a massive overhaul of the C-suite, we aren’t surprised that changes are underway at

Expenses of $230 million from the wind-down cost Lowe’s $0.21 per share in the second quarter, and another $390 million-$475 million is expected in the second half of 2018, leading to one-time charges around $0.60-$0.65 per share for the full year, by our estimate. The remainder of Lowe’s GAAP earnings guidance downgrade (to $4.50-$4.60 per share from $5.40-$5.50) comes from inventory management initiatives. These two efforts should better streamline the business and lead to improved operating metrics over time as a focus on faster inventory and cash conversion metrics could generate meaningfully better cash flow. We expect Lowe's will lay out a more detailed road map of changes ahead and the potential benefit these efforts could have on the longer-term operating margin profile at the company's investor day later this year.

We don’t plan any immediate change to our five-year outlook, which calls for comparable-store sales growth that averages 3%, a top line that rises slightly faster than comps, and low-double-digit operating margins. As a result, we don’t plan to materially alter our $94 fair value estimate and view the shares as modestly overvalued.

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