Bill Ackman decided it was time to get while the getting was good.
In February, the hedge fund manager exited his position in Lowe's (LOW) after the home improvement retailer earned more than $1 billion in profits for Pershing Square Capital Management's investors, Reuters reported, citing an investor update.
"Lowe's was a highly successful investment for Pershing Square," Ackman wrote to investors, noting he cashed out after a nearly six-year holding period to free up capital for new investments.
The investment generated a net $1.3 billion for the funds, and the firm's exit came “in light of uncertain near-term earnings trajectory,” the note said.
The home improvement market is projected to take a slight downturn in 2024 but at a moderate rate.
Harvard University’s Joint Center for Housing Studies’ latest leading indicator of remodeling activity, or LIRA, indicated that homeowner spending on renovations and repairs will fall to $449 billion this year, marking a roughly 7% drop from 2023.
The center said in April that home remodeling spending was down 1.2% in the first quarter from a year earlier, marking the first annual decline in more than a decade.
Historically, annual growth in home improvement spending has averaged 5%.
Lowe's is scheduled to report first-quarter earnings on Tuesday.
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Lowe's CEO says consumers 'hesitant to spend'
“Residential remodeling is expected to benefit from the rebounding housing market and stabilizing material costs as we move into next year,” Carlos Martín, director of the center's Remodeling Futures Program.
“While home improvement and repair spending is down from pandemic-induced highs, the nation's aging homes continue to need investment in critical replacements, home performance deficiencies, as well as modernization," he added.
Lowe’s has been in the home improvement market since 1921, when Lucius Smith Lowe opened his hardware store in North Wilkesboro, N.C.
The company now operates over 1,700 stores in the U.S. and is the second-largest hardware chain in the world behind Home Depot (HD) .
In March, Lowe's reported fourth-quarter earnings of $1.77 per share, up from $1.58 per share a year earlier, beating the LSEG estimate of $1.68 per share.
Revenue totaled $18.60 billion, up $957 million from a year ago and topping Wall Street’s estimate of $18.45 billion in sales.
Marvin Ellison, chairman and CEO, told analysts during the company’s fourth-quarter earnings call in March "that comparable sales declined 6.2% as DIY customers continue to remain cautious with their home improvement spend and harsh weather impacted large parts of the U.S. in January."
"Macroeconomic factors like persistent inflation and a stagnant housing market continue to make DIY customers and consumers hesitant to spend on big-ticket purchases for their homes," he said, "and those who did engage in home improvement activities took on smaller non-discretionary projects with a heightened focus on value."
Lowe's is scheduled to report first-quarter earnings on May 21.
Analysts forecast the company's first-quarter earnings to drop 20% to $2.95 per share,, with sales totaling $21.14 billion, down more than 5% from last year.
Same-store sales are expected to decrease 5.5%.
On Monday, analysts at Bank of America maintained their buy rating and $280 price target on Lowe's, saying the company "continues to execute on its Total Home Strategy to accelerate market share gains for both Pro and DIY."
"While the DIY demand environment has been weak (a trend we expect to persist in 2024)," BofA said, "its success in the pro space has been made evident through consistent quarterly pro comp growth and LOW's target to grow pro sales at 2x the market rate over the next several years."
The firm said that it expects comparable sales to decline in the first half given continued weakness in DIY customer trends, which BofA said Lowe's is "over-indexed" at roughly 75% of sales.
In comparison, roughly half Home Depot’s sales come from professionals like landscapers, roofers and other contractors and subcontractors.
Lowe's comparable sales could also face incremental pressure from a delayed start to spring, BofA said, noting Home Depot's (HD) recent first-quarter results.
Ted Decker, Home Depot’s chairman, president and CEO, told analysts that the quarter was hurt "by a delayed start to spring and continued softness in certain larger discretionary projects."
Last week, Stifel raised the firm's price target on Lowe's to $250 from $225 and kept a hold rating on the shares.
Ahead of earnings, the firm made "modest changes" to its estimates, which put first-quarter revenue above consensus, reflecting confidence. However, it also notes that its estimates reflect peak operating margin pressure constraining EPS upside.
Given volatile interest rate sentiment, the firm continued to estimate "a tepid FY24 revenue performance" but noted an increasingly positive bias with the potential for a stronger performance through FY24 to drive increased confidence, with underlying category drivers remaining healthy.
Citi lowered the firm's price target on Lowe's to $240 from $243 and kept a neutral rating on the shares.
The firm said it expects most hardline retailers to report first-quarter results in line or slightly above Wall Street estimates with maintained fiscal year guidance.
Citi said that it sees first-quarter same-store-sales misses and potential guide-downs for categories at the "losing end of consumer spending," namely pet retail and electronics.
The firm believes a “barbell approach” is best given the uncertainty of rates.
Citi told investors to play defense with O'Reilly Automotive (ORLY) and AutoZone (AZO) and play offense with Home Depot, RH (RH) and Boot Barn (BOOT) .
