Lowe’s Cos Inc. slumped after reporting third-quarter earnings that narrowly missed analysts’ expectations, underscoring rising costs at home-improvement retailers that also hit rival Home Depot Inc.

Earnings per share came in at US$1.98 at Lowe’s, excluding some items, while analysts anticipated US$2, on average. That’s the first time the company has missed on that metric since the period ended May 2019, according to data compiled by Bloomberg. The outlook for the current quarter also fell short of some estimates.

The drivers for the underperformance were expenses due to store revamps and COVID-19-related expenses.

At the same time, sales at Lowe’s and Home Depot have greatly benefited from being deemed essential retailers during the pandemic, buoying their stocks since the onset of the health crisis. With better-than-expected performance now a given for investors, Wall Street is focusing on costs, and, to a certain extent, a slowdown in sales growth compared with the peak of the summer season.

“This will be a classic situation of very strong fundamental results, but short of investor expectations,” said Scot Ciccarelli, an analyst with RBC Capital Markets.

Lowe’s shares fell as much as 6.6 per cent in New York trading. The stock had risen 33 per cent this year through Tuesday’s close, one of the best performers on the S&P 500 Retailing Index this year.

High Demand

Same-store sales, a key retail metric, climbed 30.1 per cent in the quarter ended Oct. 30, outpacing the 23.4 per cent average estimate, but slower than the 35 per cent increase in the previous quarter. By comparison, Home Depot on Tuesday reported a 24 per cent gain in the period ended Nov. 1.

Lowe’s is trying to maintain its expanded consumer base this holiday season by selling more gifts. Comparable sales are expected to gain as much as 20 per cent in the fourth quarter, traditionally a slower time for home-improvement retailers. On a call with analysts, executives said furniture has been a strong category for the company.

The downside is that adjusted operating income as a percentage of sales -- or the profit margin -- is expected to be flat, with investment in the supply chain another factor adding to expenses. And adjusted earnings per share will be in the range of US$1.10 to US$1.20. The midpoint falls slightly short of analysts’ estimates, according to estimates compiled by Bloomberg.

Lowe’s is refurbishing stores partly to help customers at the pro business, which supplies professionals like contractors. It’s in the spotlight now that rival Home Depot announced plans to buy building products distributor HD Supply Holdings Inc., a big operator in the segment. Lowe’s said its pro business grew more than 20 per cent in the most recent quarter and Chief Executive Officer Marvin Ellison said in an interview that the retailer still has a great service to offer them.

Core Business

But rather than expand in adjacent markets, the chain has a multi-year plan that’s focused on improving its core business, which includes brick-and-mortar stores, its website and supply chain and technology.

“Once we get past that life cycle, we’ll start to look at other more strategic investments and acquisitions, but for now we’re laser focused on the core,” Ellison said. “We think our greatest return will come from that.”

Lowe’s will host an investor day on Dec. 9 to discuss future growth opportunities.