Lowe's One-Upped by Home Depot

Struggling with slower comps in the first two months of its third quarter (1%-2%),

Both gross margin and selling, general, and administrative metrics tracked below our expectations--both fell short by about 50 basis points, implying operating margin performance that was lower than we needed to meet our full-year outlook by about 100 basis points. Lowe’s full-year outlook includes revenue rising 9%-10% (down from 10%), comp store sales rising 3%-4% (from 3% prior), and EPS of $3.52 excluding charges (or $3.97 excluding charges, versus $4.06 prior). This puts the company’s 2017 outlook of $4.70 per share largely at risk, even when including both Rona sales and share repurchases of $2.5 billion. Our operating margin outlook for 2017 had been below the 11% offered in the past, at 10.2%, as we expected Rona’s cost structure to drag on the enterprise and Lowe’s operating margin expansion to rise more slowly than the firm expected. We plan to maintain a 2017 operating margin outlook close to 10%.

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