Late last year, Lowe’s (NYSE:LOW), the world’s second largest home improvement chain, decided to move away from promotions to everyday low prices to establish itself as the retailer offering most competitive prices. However, despite the strategy, sales continue to struggle more than they already would have in a depressed housing market as customers continue to seek discounts, particularly for discretionary and big-ticket purchases. At the same time, its bigger competitor Home Depot (NYSE:HD) has been grabbing market share from Lowe’s due to better pricing models, among other things.
Everyday Low Prices Strategy Subdues Sales
Last quarter, even though Lowe’s benefited from warmer winter sales, it posted same store sales growth of 2.6%, much lower compared to 6% for Home Depot. With a widened comps gap of more than three percentage points, it was the 12th straight quarter that Lowe’s trailed Home Depot in same store sales. The main reason behind the lower comps was its disruptive decision to move away from promotions and discounts on expensive items like appliances, and instead offer ‘everyday low prices’. The new pricing strategy aimed to establish itself as the retailer offering most competitive prices was adopted late last year, but is yet to gain traction among customers who are strongly inclined to look for discounts, particularly for big-ticket purchases like appliances.
While the company and investors may be excited about the new strategy, customers have been slow to pick up on changes and nuances of a new pricing strategy. While Lowe’s ‘Everyday Low Prices’ is yet to grab sufficient customer attention, Home Depot has outpaced Lowe’s in terms of pricing strategy with promotions and discounts. Also, while Lowe’s might take time to popularize itself as a competitively priced retailer continuing with its everyday low prices, the biggest driver that brings customers to make big-ticket and discretionary purchases is still discounts, and Lowe’s needs to sharpen its promotional strategy around big-ticket sales in order to defend its market share.
We have a $31 Trefis price estimate for Lowe’s stock, almost in line with the current market price.