Lowe's is sinking after cutting its 2019 outlook amid a messy retail earnings season

• Lowe's shares fell early Wednesday after the company reported first-quarter earnings.
• The North Carolina-based retailer cut its full-year adjusted earnings-per-share outlook.
• The first-quarter miss was "unexpected," Morgan Stanley analysts said.
• Watch Lowe's trade live.

Lowe's shares fell early Wednesday after first-quarter earnings fell short of analysts' expectations and the company slashed its full-year outlook.

It was the convergence of "cost pressure, significant transition in our merchandising organization, and ineffective legacy pricing tools and processes" that led to a contraction in gross margin and a hit to earnings, Marvin Ellison, the president and chief executive, said in the earnings release.

"We are taking the necessary actions to more systematically analyze and implement retail price changes to mitigate cost pressure," Ellison said.

To that end, Morgan Stanley analysts said in a scathing note released on Wednesday that it appeared Lowe's may have been "highly promotional" in the first quarter, leading to its earnings hit. Otherwise, the company may not have understood its product acquisition costs or not realized how promotional it was being due to "outdated technology," the analysts said.

"The critical question on this morning's conference call will be how quickly LOW can get this gross margin issue under control and to what extent it will adversely impact sales," the firm's analysts led by Simeon Gutman wrote in a note to clients. They called the first-quarter earnings miss "unexpected."

When reached for comment, Lowe's told Markets Insider its earnings call Wednesday morning would "provide additional context" regarding Morgan Stanley's comments.

The Mooresville, North Carolina-based retailer also cut its full-year earnings-per-share guidance to a range between $5.54 and $5.74 a share, below the $6 to $6.10 it had previously forecast.

In a bright spot, the company's comparable sales topped Wall Street's hopes. Its full-year sales guidance was left unchanged, which analysts said was a positive sign.

Here's what Lowe's reported for the first quarter compared with what analysts polled by Bloomberg expected:

• Revenue: $17.74 billion ($17.64 billion expected)
• Adjusted earnings per share (EPS): $1.22 ($1.33 expected)
• Comparable sales: +3.5% (+3.2% expected)

"We presume the gross margin drag will spill into Q2 given the decrease in the EPS guidance for 2019," Stifel analysts led by John Baugh wrote in a note to clients.

"We would expect the guidance reduction to put downward pressure on the shares, though we have seen investors give Lowe's a break while changes are underway."

Lowe's shares have risen 20% so far this year through Tuesday, outperforming the S&P 500's 14% gain.

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