Lowe's Companies

Lowe's second-quarter sales grew 8%, to $26 billion, as 0.2% same-store sales growth was bolstered by strength in pro sales stemming from the Artisan Design Group and FBM acquisitions. The adjusted operating margin contracted 62 basis points, to 14%, hurt by higher fuel and transportation costs.

 

Why it matters: Lowe's second-quarter report largely echoed wide-moat Home Depot's results, with consumers shunning big ticket projects for now. However, Lowe's saw incrementally more pressure in DIY demand because of heightened price competitiveness. Fortunately, it appears most of the recent price investments were a result of tariff refunds, which have largely been digested. As such, we expect fewer promotions in the second half, which should result in less operating margin compression toward the end of the year. Unfortunately, Lowe's has printed transaction declines for the past five years, as consumers have been fatigued by inflation and economic uncertainty, while new home construction has been hurt by higher interest rates. Given the current environment, we don’t expect this to inflect until 2027.

The bottom line: We don’t plan any material change to our $256 per share fair value estimate for wide-moat Lowe's. Although the firm lowered its full-year outlook to the low end of its previous guidance (sales of $92 billion and EPS of $12.25), this downtick is largely offset by time value. Even after a 3% uptick, we view shares as attractive. We think investors are too bearish on Lowe's long-term potential. To reach the market price, we would have to forecast 2% same-store sales and sub-teens operating margins over the long term, below our 3% and 13.7% terminal estimates. We contend Lowe's is making the appropriate investments to drive sales and profit growth, including in its Total Home Strategy (to be a home solutions provider), loyalty program, fulfilment capabilities, category expansions (pet, work wear), among others, to protect the brand.

Our fair value estimate is $255 per share. Second-quarter sales of $26 billion were upheld by 0.2% same-store sales growth. Underlying this was a same-store sales ticket that rose 2.3% and transactions that fell 2.1%. The gross margin contracted nearly 80 basis points to 33%, held back by the dilutive impact of FBM and ADG, leading to adjusted operating margin of 14%. The company adjusted its 2026 guidance to include sales of $92 billion (from $92 billion-$94 billion prior) and adjusted operating margin of 11.6% (from 11.6%-11.8%). Our updated 2026 forecast includes sales of $92 billion ($93 billion prior) and 11.6% adjusted operating margin (11.7% prior).

Our long-term outlook for Lowe's is bolstered by continual improvement in customer experience, pro customer expansion, and productivity initiatives, which support a wide moat. We expect that, when near-term housing market pressures and macro uncertainty subside, Lowe's will be able to achieve an average sales growth rate of 4%.

We hold long-term gross margins just below 2025’s level (33.5%) as we expect Lowe's to continue to pass excess savings to consumers through everyday low pricing tactics. We model the selling, general, and administrative expense ratio to decline to around 17.7% from 19.5% in 2025 as Lowe's continues to spend to protect its competitive position while continuing to scale. This investment leads to operating margins that reach nearly 14% over our forecast. We project a 24% average adjusted ROIC including goodwill over the next five years, versus our 8% cost of capital estimate, supporting a wide economic moat.

Lowe's profitability has already benefited from institutionalized processes that were previously inefficient, including labor management, reset efforts, and inventory controls, helping squeeze additional operating margin expansion out of the business ahead. Our medium-term outlook incorporates improvements to the supply chain, inventory management, and technology, bolstered by further investment in those categories. Lowe's still has opportunities to capitalize on product lines with weak market share leaders, as it has previously done, for example, in appliances. Having additional product lines to cross-sell adds incremental sales potential without a tremendous threat from an online competitor, given shipping and return difficulties.

We assign Lowe’s a Wide Morningstar Economic Moat Rating. As the second-largest global home improvement retailer, Lowe’s should continue to gain incremental share in the North American home improvement retail segment (which it has estimated at around a $1 trillion market), given its extensive distribution network and economies of scale as well as the brand awareness it has built with consumers and professionals. With the acquisitions of FBM and Artisan Design Group complete, Lowe's has also gained wider exposure to the large pro consumer focused on new-home construction.

Lowe's has been able to capture economic rents from its brand, offering an important intangible asset. This is evidenced in consistent same-store sales growth, which has been flat over the past five fiscal years even as demand has normalized after the postpandemic boom. Furthermore, continued improvements in merchandising strategy, the supply chain, and a focus on meeting pro consumer demands should support the brand, driving both additional same-store sales growth (3% on average in the long term) and adjusted operating margin expansion (to almost 14% by 2035, near wide-moat Home Depot and up almost 500 basis points relative to the average margin in the five years preceding the pandemic).

Lowe’s has long relied on customer service, expertise, and innovation to build a high-single-digit share of the fragmented $93 billion home improvement market. Its associate knowledge remains hard for rivals to match; only Home Depot offers comparable expertise, while Tractor Supply delivers strong service in its niche.

Management has prioritized labor quality and deployment. Since 2018, Lowe’s shifted staffing toward customer service—60% of labor hours versus 40% previously—and improved retention through tuition assistance for trade certifications, encouraging employees to build practical skills. Technology investments have reduced redundant tasks, accelerated cross-training, and improved workforce allocation.

These efforts have supported strong financial performance: Lowe’s has generated a 28% average adjusted return on invested capital over the past five years, well above its 8% cost of capital. We expect ROIC to stay above the cost of capital for decades and reach 32% by 2035, reinforcing the wide moat.

Lowe’s drives brand strength through national brands, private labels, and services, using each for distinct customer segments. Alongside major national brands like Whirlpool, Samsung, GE, and DeWalt, Lowe’s operates more than a dozen private labels—allen + roth, Kobalt, Origin 21—that enhance loyalty and deliver higher-margin sales (typically a few hundred basis points above national brands).

Its strategy is bifurcated: expand national brands for professional customers, who rely on them for project reliability, while growing private labels for DIY and do-it-for-me customers, who are largely brand-agnostic. Strong brand familiarity, product quality, and Lowe’s knowledgeable associates keep the retailer top of mind and help insulate it from mass merchants and large online competitors. Evidence of recent brand strength stems from average ticket growth of 4% on average over the past five fiscal years.

Lowe’s scale (more than 1,760 US stores) gives it meaningful vendor leverage across sourcing, advertising, and logistics. As a low-cost one-stop shop, it passes part of these savings to customers through everyday low pricing, a model enabled by bulk purchase bargaining power. EDLP reinforces a flywheel: Clear value keeps customers returning, which further strengthens scale. This strategy shows up in performance. The average ticket rose 54% from $68.82 (2016) to $106.17 (2025), while gross margins have held near 33% since 2018—levels likely to persist as scale benefits continue flowing directly to consumers under EDLP.

We think the company can build on its cost advantage through increasing speed in the supply chain, leveraging payroll, lowering operating expenses by improving inventory management (turns), and consolidating the procurement of some goods and services across the corporate and store channels. These efforts should compress selling, general, and administrative spending to 17.7% of sales by the end of our forecast, from 19.5% in 2025. These factors should lead to an adjusted operating margin of just under 14% in 2035 (up from 12.1% in 2025).

With consumers increasingly favoring retailers with a seamless omnichannel presence, manufacturers without the capability to offer a frictionless shopping experience could struggle to attract customers. We think around half of e-commerce transactions (which we estimate represented a low-double-digit percentage of 2025 sales) at Lowe’s were ordered online and picked up in store, implying more than $10 billion worth of goods from an omnichannel transaction over the year. Online penetration was just around 5% in 2018, but we expect it can continue to expand to a low- to mid-teens rate in the near term as buy online, pickup in store and other omnichannel efforts are adopted more widely by the professional consumer base, which could prompt further market share gains.

In our opinion, it would be difficult for another retailer to enter the market and threaten Lowe’s position, as smaller retailers would have a hard time building vendor relationships strong enough to undermine the company’s pricing prowess. While the threat of manufacturers creating their own retail network could jeopardize the availability of product in Lowe’s retail channel, we doubt such an endeavor would be successful in the longer term. In our opinion, manufacturers would be poised to move more product by maintaining a beneficial relationship with a wholesale network like Lowe’s, rather than on their own; additionally, we expect that consumers would still prefer to save time and effort by visiting one shop for all a project’s needs, rather than purchasing products separately from each manufacturer.

Investments in technology and the supply chain should improve productivity and allow store employees to better service customers, enhancing the retail experience and bolstering Lowe's brand intangible asset and competitive market position.

Higher home prices and aging housing stock support demand, helping Lowe’s to generate an expected free cash flow to the firm of roughly $43 billion over the next five years.

The push into the large pro business with the addition of FBM and ADG could grow sales faster than we currently anticipate if cross-selling and tuck-in opportunities arise.

The consolidation of smaller distribution peers may intermittently lead to competitive pricing pressures at Lowe's, constraining ROIC expansion and limiting sales growth.

Higher interest rates, flat housing price growth, or tighter lending standards could reduce inventory turnover, postponing home improvement projects and hindering Lowe's sales.

Lower sales could pressure profitability if lower-margin acquired businesses—like those that compose the Lowe's Pro Supply line—operate less than optimally. Further margin pressure could ensue if growing pro and MRO demand becomes difficult.