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Investment Overview for Lowe's (NYSE:LOW)
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Lowe's EBITDA Margin: declined from 14.5% in 2007 to 11.9% in 2009 due to increasing expenses, declining sales and de-leveraging of SG&A expenses. The margins also suffered as Lowe's continued adding new stores despite weakening demand. In addition there was pricing pressure as Lowe's was trying to increase its market share amid the weakened demand scenario, thereby taking a hit on profit margins.
In 2010, margins slightly improved to 12.4% as it began implementing cost-cutting, supply chain optimization and other efficiency initiatives. In 2011, margins again declined to 11.3% due to the '5% off every day' promotions by Lowe's for its credit cardholders, other promotional activities, higher fuel expenses as well as inventory costs and SG&A de-leveraging related to the closing of 27 stores and discontinued projects. Going forward, we expect the margins to improve to 12.5% over the Trefis forecast period as Lowe's comps improve at 2-3%. However, there could be a 10% upside to our price estimate if the comps improve at 3-4%, thereby helping improve operating leverage. On the other hand, there may be a 15% downside to our price estimate if the comps and operating margins continue to stay flat at the current levels.
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Lowe's is the world’s second largest retailer of home improvement products after Home Depot. Through its more than 1,700 stores spread across the US, Canada and Mexico, Lowe's offers a wide range of home improvement products and installation services to individual home owners as well as professional builders. In addition to the physical stores, consumers can buy these products through the company’s dedicated website.
Lowe's has deep penetration levels in the US with a total of over 1,700 stores. It is also trying to increase its presence in Canada. Lowe's is keen to venture aggressively into Mexico's home improvement industry where it recently opened two stores. Lowe's main selling point is that it outshines its main competitor Home Depot in terms of in-store shopping experience for the consumers. This has forced Home Depot to upgrade its store environment and provide better customer service.
Lowe's business is vulnerable to the housing market and the recent slowdown has affected its sales to a great extent in the past three years. In the current slow economy, attaining historical high revenue growth rates seems very difficult to replicate in the near future.
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The Plumbing, Electrical & Kitchen and Hardware and Seasonal products divisions are more valuable than Lowe's other divisions for the following reasons:
Plumbing, Electrical & Kitchen have a larger total market than the Hardware & Seasonal, Paint & Flooring markets
The Plumbing, Electrical, Kitchen and Appliances market size is more than twice the Hardware & Seasonal market and Paint & Flooring market combined. Consumers are more likely to buy home plumbing, electrical and kitchen products owing to their important in their daily lives. For example, products like electrical lights, kitchen appliances, water pipes, wash basins, toilets, and showers are basic requirements for every household. These products become necessary for consumers to carry out repair projects. Lowe's occupies much higher market share in the Seasonal & Hardware Tools category, compared to the Plumbing, Electrical and Kitchen division.
Smaller market size but greater market share than the Building Materials, Lumber & Millwork segment
Though the Building Materials, Lumber & Millwork market is twice the size of the Plumbing, Electrical & Kitchen market, it is a very fragmented market and Lowe's currently captures only around 4% of it. In comparison, Home Depot's share in Plumbing, Electrical & Kitchen goods is about 12% and in Seasonal & Hardware Tools is close to 35%.
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Consistently trailing Home Depot in terms of comps
Q1 2012 was the 12th straight quarter that Home Depot outpaced Lowe's in terms of same store sales growth due to significant improvements in service levels and efficiency as well as a more successful pricing strategy. We expect this trend to continue. In December 2011, Lowe's decided to move away from promotions to everyday low prices to establish itself as the retailer offering the most competitive prices. However, Lowe's new pricing strategy is yet to catch customer attention and sales have struggled more than they already would have in a depressed housing market as customers continued to seek discounts, particularly for discretionary and big-ticket purchases. Home Depot has been grabbing market share from Lowe's due to better pricing models.
MyLowes and emerging competition from online retailers
Online retail has been an emerging threat to the market share of brick and mortar home improvement retailers like Home Depot and Lowe's. For this reason both companies have made significant investments in the online strategies, including small acquisitions and improvements in the web experience for its customers.
Lowe’s has been trying to turnaround its game with its improved online sales platform 'MyLowes', newly launched smartphone apps and its new campaign 'Never Stop Improving' which replaces the older 'Lets Build Something Together' one. The online tool 'MyLowes' will allow customers to manage their home improvement projects from conception and planning to execution via extensive interactive content and state-of-the-art technology. Customers can view and manage room-by-room profiles of their homes and experiment with different styles virtually. Lowe's expects 'MyLowes' to help it regain market share through improved customer engagement with customized and personalized offerings.
Lowe's smaller international footprint
Lowe's international presence (outside US) is limited compared to Home Depot. While Home Depot operated 276 stores outside the US in 2011, Lowe's had only 33 stores. After Canada, Lowe's has entered into Mexico's home improvement industry by opening 2 retail stores in February 2010. It has 31 stores in Canada. The company has now planned that about one-third of Lowe's anticipated store growth over the next five years will be in Canada and Mexico.
Lowe's has tied up with Woolworths (an Australian retailer chain) to open hardware retail stores in Australia. Lowe's is a 1/3rd owner of the JV. The venture opened its first seven stores under the name "Masters" in 2011, and expects to open 15 to 20 stores in 2012. They plan to open 150 stores in the next five years.
Do it Yourself (DIY) activity will drive the home improvement industry growth in the near future
Until the housing market situation in the US improves, more buying action is anticipated from DIY customers. Repair & maintenance of small house projects will dominate DIY activity. The North American Retail Hardware Association (NRHA) forecasts that plumbing & electrical products will be a major part of consumer spending in the near future. The spending will come mainly from DIY consumers who will demand more selection and information & service from the retailers.
Shift in consumer preferences will impact traditional range of home improvement products
A recent survey from NRHA suggests a change in the buying patterns among US home improvement consumers. People are no longer loyal to only products made in the US. Consumer demand is driven more by price and quality. Consumers may find foreign products which are better suited to their needs more appealing than products made in the US. Another observable trend is the shift in consumers toward buying green or eco-friendly products such as water saving flushes and electricity saving appliances.
Aging baby boomers will increase Do it For Me (DIFM) customers in the US
With the change in US demographics due to the aging of the 77 million baby boomers (represent 28% of the U.S. population and account for 77% of all financial assets), we expect an increase in Do it For Me (DIFM) customers. This is good for retailers such as Lowe's as they can reap additional revenue by providing installation services, unlike in the case of Do it Yourself (DIY) customers.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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