Why Lowe’s Is One For The Future
Home improvement retailer Lowe’s (NYSE:LOW) has seen its stock prices stagnate over the last six-month period. Over the last year, the company has fared better with a 35% increase. This, however, is lower than the performance of its larger rival Home Depot which recorded a 60% increase over the past year. Lowe’s mediocre performance vis-a-vis Home Depot (NYSE:HD) can be attributed to both internal and competitive factors. However, as the company realigns its strategy to improve profitability and with the recovery in the US housing market, we expect Lowe’s performance to improve which should in turn uplift its stock value.
See our complete analysis of Lowe’s here
One may say that Lowe’s has been its own enemy. The company has followed a policy of aggressive store expansion with the number of stores increasing from around 1,300 in 2007 to more than 1,700 in 2011. This strategy seemed to be working well until the housing bust of 2008-2009. Despite clear indications of declining demand for home improvement products, the company continued with this expansion policy, leading to a stark decline in margins over the period 2009-11. Despite a u-turn on this policy, the company’s historical performance seems to be playing a significant role in weighing down its performance in the recent past. Investors in the segment clearly see a greater sense in parking their money in the more-profitable Home Depot. Intense price competition within the home improvement retailing industry, culminating in Lowe’s ‘Everyday Low Prices’ campaign, hasn’t exactly helped boost margins either.
Home Depot has posted consistent results over this financial year. The company saw a strong increase in earnings in Q1 and stable growth in Q2. It continued this trend into the third quarter, posting higher-than-expected earnings as well as profits that beat previous year’s results. Now, does this spell more bad news for Lowe’s investors or is there a silver lining to this dark cloud?
The Past Has Passed
The first thing to keep in mind while looking at Lowe’s is how much its faulty strategies of the past are weighing on it today, and how much its core strategy has changed since then. Since 2011, the company has put a halt to its capex, especially for new store openings. For the first time in eight years, the company reported a decrease in the number of total stores in 2011. [1] Although this decline is marginal, it underlines an important shift in the company’s overall strategy from in-store sales to focusing on delivering a better online experience to customers. ((Lowe’s: From Customer Data to Customer Loyalty, Information-Management.com, November 2011))
The company launched its iPhone Application in 2011 and has greatly improved upon its online ‘MyLowes’ shop, delivering an ever greater number of services to customers over the Internet. This move away from an in-store to an online model will go a long way in driving profit margins while increasing customer convenience and hence loyalty.
Riding The Housing Recovery Wave
The effect of the recovery of the US housing market also cannot be underestimated in its ability to provide a boost to home improvement retailers. The housing downturn of 2008-09 had a significant negative impact on Lowe’s, leading to a decline in top-line and increasing costs. As the real estate market recovers and new construction picks up, this will have a healthy impact on Lowe’s core profits and top-line growth in the long run. ((Home Depot gains hint at housing market recovery, CSMonitor.com, November 2012))
A Perfect Storm for Retailers
Bad news on the weather front means good news for home improvement retailers. Hurricane Irene had a positive impact on sales for both Home Depot and Lowe’s in the previous year with the provided upturn spread over a surprisingly long period of time as recovery from the disaster was slower than expected. A similar effect may be estimated for Sandy, which has caused more damage to property (estimated $20 billion) than Irene had ($16 billion). This is likely to drive demand in the short run, providing a much needed boost to top-line growth.
Investors can hence assume that the worst should be pretty much over for Lowe’s. As the company realigns its focus on long-term profitability, we could see the gradually improving performance of the company reflect in the value of its stock. Hopefully, that day will come sooner than later.
We have a $33 Trefis price estimate for Lowe’s stock, 5% ahead of the current market price.
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