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Lowe's: Investors Are Confident before Its 1Q17 Earnings

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Part 3
Lowe's: Investors Are Confident before Its 1Q17 Earnings PART 3 OF 7

Lowe’s Net Margins Will Likely Expand in 1Q17

1Q17 expectations

In 1Q17, analysts expect Lowe’s (LOW) to post a gross margin, EBITDA (earnings before interest, tax, depreciation, and amortization) margin, and net margin of 35.0%, 11.8%, and 5.4%, respectively. In 1Q16, the company posted margins of 35.0%, 11.9%, and 5.2%, respectively.

Lowe&#8217;s Net Margins Will Likely Expand in 1Q17

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Factors impacting Lowe’s margins

Analysts expect sales from lower margin RONA stores to offset the positive effect of the lower cost of sales. Analysts expect a decline of 0.1% in EBITDA margins in 1Q17. The company’s management expects lower margin RONA sales to negatively impact Lowe’s EBITDA margins by 0.6%. However, management expects the decline in the cost of sales to offset 0.5% of the decline in EBITDA margins.

Lowe’s net margins are expected to rise from 5.2% in 1Q16 to 5.4% due to lower depreciation and amortization expenses and a lower effective tax rate. Analysts expect depreciation and amortization expenses to fall from 2.5% to 2.2% of the total revenue, while the effective tax rate is expected to fall from 38.2% to 37.9%.

Peer comparisons

In 1Q17, Home Depot (HD), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) are expected to post EBITDA margins of 8.2%, 10.2%, and 9.2%, respectively. For 1Q16, these companies posted EBITDA margins of 7.9%, 10.7%, and 10.4%, respectively.

Outlook

For 2017, analysts expect the company to post a gross margin, EBITDA margin, and net margin of 34.6%, 12.5%, and 5.7%, respectively. In 2016, the company posted a gross margin, EBITDA margin, and net margin of 34.6%, 12.2%, and 5.4%, respectively.

In the next part, we’ll look at analysts’ 1Q17 earnings estimate for Lowe’s.

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