Analyst Note| Jaime M. Katz, CFA |
We plan to raise our $165 fair value estimate for wide-moat Lowe’s by a mid-single-digit percentage to account for time value and better-than-expected second-quarter profitability. Lowe’s reported a 15% operating margin, above the 14% we had forecast and marking the best quarterly metric for the business over the past decade. Most impressive is that the record profitability was generated on a 1.6% same-store sales decline and just 1% top-line growth. The gross margin was in line with our expectation at 33.8%, down 30 basis points versus last year but up 165 basis points over the second quarter of 2019, as Lowe’s benefited from higher product margin rates. The selling, general, and administrative ratio improved more than our outlook, shrinking 140 basis points to 17%, a low-water mark for the metric, as COVID-19-related costs dropped materially to $25 million in the quarter from $430 million in the year-ago period. All in, this allowed Lowe’s to capture 13% EPS growth to $4.25, an impressive feat lapping 75% growth in the year-ago period.