Lowe’s Companies, Inc. (NYSE: LOW) announced earlier this week a strategic closing of 20 underperforming stores and letting go of 1,950 affiliated employees within the next month. The announcement was met with an immediate 1.5% increase in stock price, implying that investors see the measure as cost-cutting to add value rather than the start of a trend. CEO Robert Niblock was quick to point out that Lowe’s will continue its plan of opening new stores each year, though the number will be reduced to 10 or 15 from the originally announced 30.

Closing underperforming stores is an accepted method of lowering long-term expenses and improving profit margins. However, this reaction to the overall economic downturn could be masking a deeper struggle to compete with home improvement giant and rival Home Depot (NYSE:HD). Third-quarter retail sales overall have increased 8% from the previous year, giving no indication of an immediate economic reason for such abrupt closings. Same-store sales for Lowe’s, however, have been underperforming those of Home Depot for the last nine quarters suggesting that Lowe’s is finding it difficult to compete in the challenging environment. If this trend continues, it could indeed turn out that more stores are considered “underperforming”.

See our full analysis for Lowe’s | Home Depot here

Notably, a significant number of the closing stores are located in the northeast region of the US. By closing 10% of the stores in the region, Lowe’s has the potential to lose a large amount of its seasonal winter sales in this region. Seasonal sales and hardware account for 26% of the stock price, according to the Trefis analysis. However, the decrease in seasonal sales will not be enough to significantly lower the stock price.

Read More »