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Why Did Lowe’s Gross Margin Decline in 1Q17?

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LOW’s 1Q17 margins

For 1Q17, Lowe’s Companies (LOW) posted a gross margin, EBITDA (earnings before interest, tax, depreciation, and amortization) margin, and net margin of 34.4%, 11.6%, and 5.2%, respectively. In 1Q16, these margins were 35%, 11.9%, and 5.2%, respectively.

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Factors that affected Lowe’s 1Q17 margins

In 1Q17, LOW’s gross margin fell 0.6%. The negative impact of product mix and RONA acquisition lowered margins by 0.35%, while the rest of the declines came from promotions, inflation in lumber, and increased investments in major product categories.

Lowe’s EBITDA margin fell 0.3% YoY (year-over-year) due to an increase in SG&A (selling, general, and administrative) expenses by 0.7%. However, some of the increase in SG&A expenses were offset by the decline in labor expenses. The new store staffing model has offset 0.4% of the decline in EBITDA margins due to lower incentive-based compensation.

In 1Q17, the company’s net margin remained same at 5.2%. The decline in gross margin was compensated by a fall in D&A (depreciation and amortization) expenses and a lower effective tax rate. The effective tax was at 35.5%, as compared to 38.2% in 1Q16.

Peer comparisons and outlook

In 1Q17, Home Depot (HD) and Williams-Sonoma (WSM) posted net margins of 8.4% and 4.0%, respectively, while Bed Bath & Beyond (BBBY) is expected to net margin of 7.6%.

For the next four quarters, analysts are expecting Lowe’s to post a gross margin, EBITDA margin, and net margin of 34.4%, 12.5%, and 5.8%, respectively. In the corresponding quarters of the previous year, the company posted margins of 34.4%, 12.1%, and 5.4%, respectively.

Continue to the next part for a closer look at Lowe’s 1Q17 earnings.

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