(Bloomberg) -- Lowe's Cos Inc. analysts still see opportunity for the home-improvement retailer, even after an unexpected first-quarter earnings miss sparked the worst intraday stock tumble in more than a decade.
"We view the quarter's gross margin miss as a classic early turnaround stumble," Loop Capital Markets analyst Laura Champine wrote. "Lowe's has a new CEO and an even newer CFO, so we are not alarmed that the company is struggling to manage cost pressures."
Shares dropped as much as 12% Wednesday, eating away at the stock's year-to-date gains, which had reached ~27% by mid-April. Lowe's posted its first-quarter results before the market opened Wednesday.
Champine said she expects the company's margin issues to be short term and kept a hold rating with a $102 price target. Although its business in Canada will likely continue to drag on the company, she said management seems focused on the U.S. locations and has faith that "Lowe's new management team will eventually be successful in tightening the company's execution gap."
Analysts are broadly bullish on the home-improvement retailer, with Bloomberg data showing 22 buy recommendations, 10 holds and no sells. The average analyst price target of $117 implies potential return of ~19%.
Here's what others on Wall Street are saying:
Baird, Peter Benedict
Weakness is a "good long-term buying opportunity" after the company posted lower-than-expected gross margins as cost pressures converge, likely because of tariffs, promotional activity and ineffective legacy pricing processes.
Rates outperform; Price target $133
RBC Capital Markets, Scot Ciccarelli
Lowe's was dragged on by "cost pressures, merchandising team transitions and less-effective pricing tools" during the quarter, likely due to heavy promotions and clearance activity. Ciccarelli expects investors to be tuned in to "Lowe's ability to gain market share vs. Home Depot given its better comp performance in the quarter." Still, it may not be sustainable given an easier comparison for Lowe's, support from better in-stocks and inventory loading, and a promotional stance.
Rates outperform; Price target $120
Morgan Stanley, Simeon Gutman
Lowe's was likely highly promotional in the first quarter, didn't fully understand its product acquisition costs and also "did not realize how promotional it was being due to outdated technology." The results are a "meaningful setback for the transformation story" and investors will be wondering how fast the company can solve the gross margin issue and how badly it will hurt sales.
Rates overweight; Price target $123
Here's what Bloomberg Intelligence says:
"Lowe's failure to drive gross-margin expansion in 1Q, despite 3.5% same-store sales growth, highlights the severity of the issues it could face as it continues its turnaround. Management's lack of visibility and understanding of certain business processes established by prior leadership may pose problems that will delay and hinder margin flowthrough."--Seema Shah, Senior retail analyst
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