Lowe's Companies

Lowe's runs 1,761 warehouse-sized stores across the United States, each carrying about 37,000 products — lumber, plumbing, electrical supplies, tools, paint, flooring, kitchens and bathrooms, appliances and everything for the garden. Roughly 70% of its sales go to do-it-yourself homeowners and 30% to "Pros": the electricians, plumbers, handymen and property managers who buy materials for a living. It also installs what it sells, through independent contractors, and since 2025 it owns two distributors that supply larger contractors directly: Artisan Design Group (ADG), which fits out new homes, and Foundation Building Materials (FBM), which sells drywall, ceilings and metal framing. A ten-year-old's version: when something in your house breaks or your parents want a new kitchen, Lowe's sells the parts — and, more and more, the builder's supplies too.

It is a good business in an awkward moment. Americans spend on their homes when they buy them, sell them, or feel richer because their value has gone up. In 2026 almost none of those is happening: existing-home sales are running at about 4 million a year, near multi-decade lows; the 30-year mortgage rate was 7.40% on 8 October, up from under 6% in January; and on 16 September the Federal Reserve raised its policy rate by a quarter-point, to 3.75–4%. Lowe's comparable sales have been flat for three years, and in the second quarter customers made 2.7% fewer trips.

The shares, at $186.00 on 9 October, are 35% below their February high and close to their 52-week low — a deeper fall than Home Depot's (−26%) over the same months, while the S&P 500 rose 14%. This report asks how much of that is the housing market, how much is Lowe's, and what the business is worth through the cycle.

Two lessons for an owner. The first is that Lowe's has always been a follower: Home Depot invented the format, built the Pro business first, bought the big Pro distributor first (SRS in 2024, GMS in 2025), and has run at higher margins for most of the last twenty years. Following a great competitor can be a fine business; it is rarely the best one. The second is that Ellison's Lowe's is genuinely better run than the one he inherited — the operating margin went from ~9% to 13.4% in five years — but he spent the proceeds of that improvement on buybacks at prices above today's, and then borrowed for an acquisition just as the housing market's false spring was ending. Over his tenure the shares have returned about 10.3% a year, better than his old employer's 7.5% but well behind the S&P 500's 15%.

The arithmetic of a home centre. Lowe's buys goods and sells them at a gross margin of about 33% — 33.5% in fiscal 2025, a little helped by its credit-card programme and lower theft. Out of that it pays wages, rent, utilities and advertising (selling, general and administrative costs, 19.5% of sales in fiscal 2025, up from 18.0% two years earlier as wages rose faster than sales) and depreciation, leaving an operating margin of 11.8%. The business needs ~$2.2bn of capital spending a year and turns most of its profit into cash: free cash flow was $7.65bn in fiscal 2025.

Why flat sales squeeze it. Wages and rents rise every year. With comparable sales flat, those costs grow faster than the sales that cover them, and the operating margin falls — from 13.4% in fiscal 2023 to 11.8% in 2025 and 11.2% guided for 2026. Lowe's has said each point of comparable-sales growth adds roughly ten basis points of margin, which is why a housing recovery would lift profits quickly; the reverse is also true.

Where the money will come from. Ellison's "Total Home" plan has five parts: more Pro customers (from ~19% of sales in 2019 to ~30% in 2025), online sales, installation services, a single loyalty programme for DIY and Pro, and more productive store space. FBM and ADG are the leap to large Pros. Home Depot, for comparison, gets more than half of its sales from Pros and earned a 14.3% operating margin in its latest quarter against Lowe's 13.7%.

Buffett has always been wary of retailers. In the 1995 letter, buying R.C. Willey, he wrote that "retailing is a tough business" and that a retailer's "competitor is always copying and then topping whatever you do." Home improvement is the exception that proves the rule: two national chains split the market, the goods are bulky and urgent, and online retailers have made little progress at the heavy end. Lowe's moat against everyone else is real. Its problem is the competitor it shares the moat with — Home Depot copies and tops Lowe's at least as often as the reverse, and has done so in the Pro market for two decades. We score the moat 7: wide against outsiders, merely equal against the one rival that matters.

The rate. In early January 2026 the White House directed $200bn of mortgage-bond purchases by Fannie Mae and Freddie Mac to push rates down; the 30-year rate briefly fell below 6% for the first time in about three years, and Lowe's shares jumped to a February high of $287. The relief did not last. By September the ten-year Treasury yield had passed 5%, the Fed raised its policy rate by a quarter-point to 3.75–4% on 16 September, and Freddie Mac's 30-year rate reached 7.40% on 8 October. Existing-home sales ran at 3.98 million a year in August, and the supply of homes for sale reached its highest in more than a decade. Every listed home-related retailer is struggling: Home Depot comped +1.7% in its latest quarter, Floor & Decor −2.1%, Tractor Supply −1.5%; the homebuilder ETF is down 22% since February.

The house. Within that, Lowe's has done worse than its rival on three measures. Its traffic fell 2.1% in the second quarter against about 1% at Home Depot; its operating margin, 11.2% guided for 2026, is more than a point below Home Depot's; and its shares have fallen 35% against 26%. Some of the gap is mix — Lowe's sells more to DIY homeowners deferring big projects, and DIY is where demand is weakest. In May Ellison called it "the most difficult housing market that I have faced in this business since the financial crisis", and in August Lowe's guided third-quarter adjusted EPS about 7% below last year. Some is the acquisitions, which added sales but no profit yet.

Our reading: about three-quarters the rate, one-quarter the house. Nothing in Lowe's numbers suggests a business in decline: it still earns a 25% return on invested capital, its gross margin is stable, online sales grow 15%, and its stores are as well placed as ever for the repairs an ageing housing stock will demand. What it suggests is a cyclical retailer at the bottom of a long housing slump, made more fragile by a balance sheet it chose to lever twice — first for buybacks at the 2021–22 peak, then for FBM in 2025. That fragility is why the shares fell further than Home Depot's. It is also why they would rise faster if mortgage rates fall: management's own rule of thumb is ten basis points of margin per point of comparable growth. The test is not the next quarter but the next spring selling season, and the direction of the ten-year Treasury yield.

The pattern. Lowe's competitive problem is a single company. Against Menards, specialists and online retailers its scale and store network are decisive; against Home Depot it is smaller (about $86bn of sales against $160bn-plus), less exposed to the steadier Pro customer, and less profitable. The 2025 acquisitions mirror Home Depot's almost exactly — Home Depot's SRS bought the drywall and ceilings distributor GMS for about $5.5bn in June 2025; seven weeks later Lowe's agreed to pay $8.8bn for FBM, which sells the same products — and they will be judged by whether Lowe's can run them as well. The read-across is in our Home Depot X-Ray of September.

Integrity: no veto. Lowe's guidance has been cut but never obscured, and its proxy states plainly that executive performance shares paid nothing because returns missed their targets. Capital allocation: the weak point. Buffett's 1999 letter warned that buybacks are "all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price." Lowe's spent $27bn buying its own shares at the top of a cycle, then stopped buying when they became cheap, because it had borrowed to buy FBM. That sequence — buy high, stop low — is the opposite of the one that creates value. Operations: excellent. Ellison has made Lowe's a much better retailer. We score management and capital 6.

Why the equity is negative, and why it does not mean insolvency. When a company buys back its shares for more than their book value, the excess comes off its equity. Lowe's has bought back about $64bn of stock since 2014, mostly at many times book value, so its accounting equity went from +$10bn in 2015 to −$15bn in 2024. The business still earns a 25% return on the capital actually invested in it and generates $7bn a year of free cash. What the negative equity does mean is that the balance sheet was levered on purpose, and that the cushion against a long downturn is thinner than a 2.7% yield and a single-A-minus credit rating suggest.

Adjusted versus reported. From 2026 Lowe's excludes ~$0.50 a share of amortisation of the intangibles it bought with FBM and ADG from its adjusted figures — exactly as Home Depot does with SRS and GMS. The amortisation is non-cash, but it is the accounting record of $10bn of real money spent; we use reported earnings and free cash flow alongside the adjusted figure.

The verdict on the dividend: safe, and growing at the pace of earnings — which is to say slowly, for now. Lowe's has paid a dividend every quarter since it listed in 1961 and, by the count of dividend trackers, raised it every year for more than six decades (Lowe's itself claims only "more than 25 consecutive years"). The yield is 2.7% on $5.00, and the payout takes about 40% of earnings and 38% of free cash flow — leaving room even with the balance sheet stretched. The fast raises of 2021–22 came from catching the payout ratio up toward its target; with earnings flat for three years, the raises have fallen to about 4%. They should quicken when the housing market does. The comparison on our board is Home Depot, whose 3.2% yield takes a larger share of its earnings and was raised just 1.3% this year.

What is it worth? We discounted owner earnings of about $12.25 a share at 10% for ten years. If housing turnover recovers slowly from 2027 and earnings grow ~6% a year for five years (comparable sales, margin recovery and, from 2027, buybacks again) and 4% thereafter, ending at 15 times, Lowe's is worth about $213. If high rates last for years and the acquisitions disappoint — $11.00 growing 2%, 12 times — about $136. If rates fall and the cycle turns hard — $12.75 growing 9% then 6%, 18 times — about $299, near February's high.

At $186 the price sits about 13% below our central value, at a multiple Lowe's has rarely seen outside a downturn, on earnings that are themselves at a cyclical low. We are not buying a bargain on peak earnings; we are buying trough earnings at a trough multiple. But the balance sheet is stretched and the rate cycle is moving the wrong way, so our advice matches what we said of Home Depot: begin accumulating slowly, and buy more near $160 — about 25% below our central value — if the housing slump deepens. Patience will probably be rewarded; leverage means it may also be tested.