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How Lowe's is battling a 'tough macro backdrop'

Shares of Lowe's (LOW) are trading higher after the company posted its fourth-quarter report, beating revenue expectations, reporting $18.60 billion versus an expected $18.45 billion. However, the company saw its comparable sales decline 6.2% year-over-year in the quarter, with the company citing a decline in consumer home renovation projects.

D.A. Davidson Managing Director and Senior Research Analyst Michael Baker joins Yahoo Finance to discuss the company's earnings as well as the decline in interest in home renovation projects.

Baker elaborates on what Lowe's is doing well, despite headwinds: "It wasn't a bad quarter at all. As it relates to the outlook next year, we knew they'd guide to a lower number in 2024 than in 2023. It was a little bit softer than expected, but not too bad at all. We think they're doing well internally against a tough macro backdrop. For instance, their expenses were flat on a year-over-year basis relative to sales despite a really big decline in sales. So, they're controlling what they can well, gross margins up slightly. That's all good against a tough environment. I think that's why the stock, it did open down a little bit, but now it's back up. We're seeing the company control what they can pretty well."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: We're also tracking shares of Lowe's this morning. They are on the move. After its quarterly results, they are higher right now by about 2.7%. They beat on the earnings top and bottom line. Annual profit and sales missed the Street's expectations, sending shares lower here.

Shoppers taking a more cautious approach to spending on those DIY projects against a sticky inflationary backdrop. For a deeper dive into the company's latest results, we're joined by Michael Baker, DA Davidson managing director and senior research analyst.

Michael, great to have you here with us this morning. You look through this report. Ultimately, what is the takeaway as you hear Lowe's talking about unfavorable January? You hear them talking about the DIY impact that they're seeing as well, in some of those projects being pushed out.

MICHAEL BAKER: Yeah. Sure. Well, the fourth quarter was down. But we knew that. And it was actually down a little bit less than expected. And it wasn't a bad quarter at all. As it relates to the outlook next year, again, we knew they'd guide to a lower number in 2024 than in 2023.

It was a little bit softer than expected, but not too bad at all. We think they're doing well internally against a tough macro backdrop. For instance, their expenses were flat on a year-over-year basis relative to sales, despite a really big decline in sales.

So they're controlling what they can well. Gross margins up slightly. That's all good against a tough environment. So I think that's why the stock did open down a little bit. But now, it's back up because I think we're seeing the company control what they can pretty well here.

SEANA SMITH: So Michael, the company is doing what it can to control some of those costs. But when we talk about the recovery, I guess, from what we learned today from the most recent quarter, how far out does that then push this recovery timeline?

MICHAEL BAKER: Yeah. Not 2024, maybe second half of 2024. But we don't want to get too far ahead of ourselves yet. We think same-store sales will continue down, certainly, for the first half of the year, and probably even for the second half of the year.

So still, a little bit to go on the housing recovery here. Getting better, we're not looking for positive until maybe early 2025.

BRAD SMITH: And so for some of the projects that are being pushed out, it's not just the DIY. It's also that pro segment too. Where do you read into that and get a sense of where this could potentially still continue to be a lingering headwind for Lowe's?

MICHAEL BAKER: Sure. The industry is soft on both sides, for sure. Lowe's, though, is taking share on the pro side. And their pro-business was actually flat year-over-year. Not bad at all in this environment. Compare that to Lowe's-- sorry to Home Depot, who had a negative trend in their pro-business.

So Lowe's is taking share in pro. Now, to be fair, from a smaller base relative to Home Depot. But pro is probably would be considered a bright spot in Lowe's quarter. Again, positive-- or flat, I should say. Better than the industry.

SEANA SMITH: Michael, when it comes to what would be fair value here for Lowe's, given the movement that we've seen in the stock, some of that uncertainty already being priced in, has that been priced in up until this point?

MICHAEL BAKER: We think it has. We think Lowe's, again, all expectations were for a negative comp and to be negative for 2024. Again, maybe a little bit softer than expected. But no surprises here in the way the trend is going.

And the valuation is about average versus history. But we think pretty modest at this point.

BRAD SMITH: This total home strategy that the company has put forward that we've heard Marvin Ellison talk about, as well, here, where would you say that they're at in that total build out of the strategy and implementation as well right now?

MICHAEL BAKER: Yeah. They're doing-- still room to go on that. Again, as I said, they're doing well relative to a tough environment. But they still lag Home Depot in a number of areas, particularly on the pro side. And we think that's a key part of the strategy is to grow that pro-business.

In fact, that's probably the biggest difference in total sales per store between Home Depot and Lowe's. Their DIY sales per store are actually pretty similar. But the pro side, Lowe's, less than half of what Home Depot does in terms of pro sales.

So that's the biggest area where they can continue to improve.

SEANA SMITH: All right. Michael Baker, great to get your insight here this morning. DA Davidson managing director and senior research analyst.